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Depreciation - Part 1

Depreciation is the decrease in value of property over time. There are three main methods of computing depreciation: straight line, sinking fund, and declining balance. Straight line depreciation calculates equal depreciation amounts each year over the life of an asset. Sinking fund depreciation factors interest into calculations. Declining balance depreciation provides higher depreciation amounts in early years that decrease over time. The document provides formulas and examples to calculate depreciation under each method.

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Eissen Lois
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112 views15 pages

Depreciation - Part 1

Depreciation is the decrease in value of property over time. There are three main methods of computing depreciation: straight line, sinking fund, and declining balance. Straight line depreciation calculates equal depreciation amounts each year over the life of an asset. Sinking fund depreciation factors interest into calculations. Declining balance depreciation provides higher depreciation amounts in early years that decrease over time. The document provides formulas and examples to calculate depreciation under each method.

Uploaded by

Eissen Lois
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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DEPRECIATION

Is the decrease in value of property due to the passage


of time.
DEPRECIATION
Is the decrease in value of property due to the passage
of time.
Methods of Computing depreciation:

1. Straight line depreciation


FC  SV
A. D = annual depreciation 
n
B. Dm = total depreciation after m years = m D
C. BVm = book value after m years = FC - Dm
D. Depreciation rate = D
FC
DEPRECIATION

1. Straight line depreciation

SV
E. Salvage Rate =
FC
F. Sunk Cost = Book Value - Actual Resale value
Where:
FC = first cost
SV = salvage value
n = life of the property or equipment
Practice Problems – Straight Line Method
1. A diesel engine has a first cost of P100,000 and salvage value of
P20,000 after 10 years. Determine the annual depreciation using
straight line method.
2. The annual depreciation of P20,000 has been reserve for a
machine for a machine using straight line for 8 years. If the first
cost is P200,000, determine the salvage value of the machine.
3. A machine has a first cost of P80,000 and salvage value of 10,000
for 10 years. Using straight line, determine the book value after 6
years.
DEPRECIATION

2. Sinking Fund method


DEPRECIATION

2. Sinking Fund method


(FC  SV ) i
A. D = annual depreciation =
(1  i)n  1 (1  i)m  1
B. Dm = total depreciation after m years = D  
 i 
C. BVm = FC - Dm
D. Sunk Cost = BV - Actual resale value
Practice Problems – Sinking Fund Method
1. Water pipe has a first cost of P20,000 and no salvage value after
15 years. Using sinking fund depreciation, determine the annual
depreciation for 16% interest.
2. A gasoline engine has an annual depreciation of P10,000 for 10
years and salvage value P18,000. Using sinking fund depreciation
with 12% interest. Determine the first cost of the engine.
DEPRECIATION
3. Declining Balance Method
DEPRECIATION
3. Declining Balance Method
SV
A. k = constant ratio = 1 n
FC
B. Annual depreciation
Depreciation for the first 5 years:
D1 = k (FC)(1 – k)0 D2 = k (FC)(1 – k)1
D3 = k (FC)(1 – k)2 D4 = k (FC)(1 – k)3
D5 = k (FC)(1 – k)4
Therefore, annual depreciation for any year is:
Dn = k(FC)(1 - k)n-1
DEPRECIATION

3. Declining Balance Method

C. Total Depreciation after 5 years:


DT5 = D1 + D2 + D3 + D4 + D5

D. Book Value after 5 years

BV5  FC  DT5  FC (1  k )m
Practice Problems – Declining Balance Method
1. An equipment has a first cost of P20,000 and a salvage value of
P1000 at the end of 10 years. Determine the book value after 6
years using declining balance method.
2. An equipment has a first cost of P20,000 has a salvage value of
P2,000 after 10 years . What is the depreciation after 3 years using
declining balance method?

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