6 Depreciation

DEPRECIATION
DEPRECIATION
Decrease in the value of an asset due to usage or passage of time.
Properties that depreciates:
• Car
• Computer 1. Straight Line Method (SLM)
• Refrigerator 2. Sinking Fund Method (SFM)
3. Declining Balance Method (Matheson
𝐵𝑉𝑚 = 𝐹𝐶 − 𝐷𝑚 Formula Method)
4. Double Declining Balance Method (DDBM)
𝑭𝑪 = 𝑓𝑖𝑟𝑠𝑡 𝑐𝑜𝑠𝑡 5. Sum-of-the-Years Digit Method (SOYDM)
𝑺𝑽 = 𝑠𝑎𝑙𝑣𝑎𝑔𝑒 𝑣𝑎𝑙𝑢𝑒
𝒏 = 𝑒𝑐𝑜𝑛𝑜𝑚𝑖𝑐 𝑙𝑖𝑓𝑒 𝑜𝑓 𝑝𝑟𝑜𝑝𝑒𝑟𝑡𝑦 𝑖𝑛 𝑦𝑒𝑎𝑟𝑠 6. Service Output Method (SOM)
𝒎 = 𝑎𝑛𝑦 𝑡𝑖𝑚𝑒 𝑏𝑒𝑓𝑜𝑟𝑒 𝑛
𝑩𝑽𝒎 = 𝑏𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑎𝑓𝑡𝑒𝑟 𝑚 𝑦𝑒𝑎𝑟𝑠
𝑫𝒎 = 𝑡𝑜𝑡𝑎𝑙 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝑎𝑓𝑡𝑒𝑟 𝑚 𝑦𝑒𝑎𝑟𝑠
𝒅 = 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝑐ℎ𝑎𝑟𝑔𝑒 (𝑝𝑒𝑟 𝑦𝑒𝑎𝑟)
STRAIGHT LINE DEPRECIATION METHOD
It assumes uniform annual depreciation. It is the most extensively
used method of depreciation because of its simplicity.
SV
0 1 2 3 4 n
d
FC
It assumes uniform annual depreciation. It is the most extensively
used method of depreciation because of its simplicity.
𝑭𝑪 − 𝑺𝑽 0 1 2 3 4 n
𝒅=
𝒏
𝑫𝒎 = 𝒅(𝒎) d
𝑭𝑪 = 𝑓𝑖𝑟𝑠𝑡 𝑐𝑜𝑠𝑡
𝑺𝑽 = 𝑠𝑎𝑙𝑣𝑎𝑔𝑒 𝑣𝑎𝑙𝑢𝑒 FC - SV
𝒏 = 𝑒𝑐𝑜𝑛𝑜𝑚𝑖𝑐 𝑙𝑖𝑓𝑒 𝑜𝑓 𝑝𝑟𝑜𝑝𝑒𝑟𝑡𝑦 𝑖𝑛 𝑦𝑒𝑎𝑟𝑠
𝒅 = 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝑐ℎ𝑎𝑟𝑔𝑒 (𝑝𝑒𝑟 𝑦𝑒𝑎𝑟)
A 30 hp sand mill cost P410,000. Salvage value of the mill is estimated to
be P60,000 after 20 years. Find the appraisal or book value of the sand mill
using straight line depreciation method after 10 years.
SINKING FUND DEPRECIATION METHOD
It assumes uniform annual depreciation deposited in a sinking fund whose
accumulation is equal to the total depreciation up to the period considered.
SV
0 1 2 3 4 n
d
FC
It assumes uniform annual depreciation deposited in a sinking fund whose
accumulation is equal to the total depreciation up to the period considered.
𝐹𝐶 − 𝑆𝑉 𝑖 0 1 2 3 4 n
𝑑=
(1 + 𝑖)𝑛 −1
𝑚
1+𝑖 −1 d
𝐷𝑚 = 𝑑
𝑖
FC - SV
A dump truck was bought for P300,000 six years ago. It will have a
salvage value of P30,000 four years from now. Determine the present
value of the dump truck if the depreciation method used in sinking fund at
6%?
SUM OF THE YEARS DIGIT METHOD (SOYD)
The depreciation charge is computed based on the reverse digit and sum of the digits.
An asset is purchased for P9,000. Its estimate life is 10 years, after which it will be sold
for P1,000. Find the book value at the end of third year if sum-of-the-year’s digit
method (SOYDM) depreciation is used.
SUM OF THE YEARS DIGIT METHOD (SOYD)
An asset is purchased for P9,000. Its estimate life is 10 years, after which it will be sold
for P1,000. Find the book value at the end of third year if sum-of-the-year’s digit
method (SOYDM) depreciation is used.
𝑛−𝑚+1
𝑑𝑚 = 𝐹𝐶 − 𝑆𝑉
Σ𝑦𝑒𝑎𝑟𝑠
𝑚(2𝑛 − 𝑚 + 1)
𝐷𝑚 = 𝐹𝐶 − 𝑆𝑉
𝑛(𝑛 + 1)
DECLINING BALANCE METHOD
(MATHESON FORMULA METHOD/ FIXED OR CONSTANT PERCENTAGE METHOD)
This method takes depreciation charge during the year as a fixed or constant
percentage of the book value at the beginning of the year.
𝐵𝑉𝑚 = 𝐹𝐶(1 − 𝐾)𝑚 𝑛 𝑆𝑉

𝐾 =1−
𝑤ℎ𝑒𝑛 𝑚 = 𝑛 𝐹𝐶
𝐵𝑉 = 𝑆𝑉
𝑛 𝐷𝑚 = 𝐹𝐶 − 𝐵𝑉𝑚
𝑆𝑉 = 𝐹𝐶(1 − 𝐾)
Where: 𝑑𝑚 = 𝐵𝑉𝑚−1 − 𝐵𝑉𝑚
k = rate of depreciation
DECLINING BALANCE METHOD
(MATHESON FORMULA METHOD/ FIXED OR CONSTANT PERCENTAGE METHOD)
UDD purchased a new 3D projectors with a total worth of P618,000. If the equipment is
depreciated over an eight-year-period with salvage value of 5%, determine the depreciation
charge during the fifth year using declining balance method.
DOUBLE DECLINING BALANCE METHOD
Similar to the declining balance method except that k = 2/n.
2
𝐾= Where:
𝑛
k = rate of depreciation
𝐵𝑉𝑚 ≥ 𝑆𝑉
DOUBLE DECLINING BALANCE METHOD
UDD purchased a new 3D projectors with a total worth of P618,000. If the equipment is
depreciated over an eight-year-period with salvage value of 5%, determine the depreciation
charge during the fifth year using double declining balance method.
SERVICE OUTPUT METHOD
The method of depreciation that assumes the depreciation charge is directly proportional
to the number of units produced or number of hours in service.
𝐹𝐶 − 𝑆𝑉
𝑑= 𝐷𝑚 = 𝑑(𝑄𝑚 ) 𝐵𝑉𝑚 = 𝐹𝐶 − 𝐷𝑚
𝑄𝑛
𝑭𝑪 = 𝑓𝑖𝑟𝑠𝑡 𝑐𝑜𝑠𝑡
𝑺𝑽 = 𝑠𝑎𝑙𝑣𝑎𝑔𝑒 𝑣𝑎𝑙𝑢𝑒
𝒅 = 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝑐ℎ𝑎𝑟𝑔𝑒 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
𝑸𝒎 = 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑 𝑢𝑝 𝑡𝑜 𝑦𝑒𝑎𝑟 𝑚
𝑸𝒏 = 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑 𝑑𝑢𝑟𝑖𝑛𝑔 𝑒𝑐𝑜𝑛𝑜𝑚𝑖𝑐 𝑙𝑖𝑓𝑒
𝑫𝒎 = 𝑡𝑜𝑡𝑎𝑙 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝑎𝑓𝑡𝑒𝑟 𝑚 𝑦𝑒𝑎𝑟𝑠 or for producing 𝑄𝑚
SERVICE OUTPUT METHOD
A property is purchased at P100,000 with a salvage value of 10% of the original cost
after 8 years of service. If during the first 4 years of service it produces 100 units per
year and 80 units each year for the remaining years. What will be the book value after 5
years of service using service output method?

6 Depreciation

Uploaded by

Copyright:

Available Formats

6 Depreciation

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

6 Depreciation

Uploaded by

Copyright:

Available Formats

DEPRECIATION

𝐵𝑉𝑚 = 𝐹𝐶(1 − 𝐾)𝑚 𝑛 𝑆𝑉

You might also like