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Methods For Determining Depreciation

The document discusses various methods for determining depreciation including straight line, double declining balance, and modified accelerated cost recovery system (MACRS). It provides examples to calculate depreciation amounts over several years using different methods. The straight line method calculates equal depreciation amounts each year while double declining balance and MACRS methods provide larger depreciation amounts in earlier years.

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Iyer Vasundhara
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47 views16 pages

Methods For Determining Depreciation

The document discusses various methods for determining depreciation including straight line, double declining balance, and modified accelerated cost recovery system (MACRS). It provides examples to calculate depreciation amounts over several years using different methods. The straight line method calculates equal depreciation amounts each year while double declining balance and MACRS methods provide larger depreciation amounts in earlier years.

Uploaded by

Iyer Vasundhara
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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METHODS FOR

DETERMINING
DEPRECIATION
Motive of Depreciation

1) For Replacement in future

2) To save Income tax

3) To generate profit through interest

N.P. = S – C – d - i
Straight line method

where d = annual depreciation,


V = original value of the property at start of the
service-life period,
Vs = salvage value of property at end of service life,
n = service life,
Example –
The original value of a piece of equipment is
$22,000, completely installed and ready for
use. Its salvage value is estimated to be
$2000 at the end of a service life estimated to
be 10 years. Determine the asset (or book)
value of the equipment at the end of 5 years
using:
Straight line method

For year 1
100
d = ------= 10%
10
For year 2
90
d = ------= 10%
9
For year 3
80
d = ------= 10%
8
Straight line method
Year Depreciation in % Depreciation amount Book value

0 0 0 20000

1 10 2000 18000

2 10 2000 16000

3 10 2000 14000

4 10 2000 12000

5 10 2000 10000
Double Declining Balance method

d= 2(Un depreciated amount)


n
where d = annual depreciation,
n = service life,
Double Declining Balance method

For year 1
100
d =2( ------ )= 20%
10
For year 2
80
d =2( ------ )= 16%
10
For year 3
64
d =2( ------ )= 12.8%
10
Double Declining Balance method
Year Depreciation in % Depreciation amount Book value

0 0 0 20000

1 20 4000 16000

2 16 3200 12800

3 12.8 2560 10240

4 10.24 2048 8192

5 8.193 1638.4 6553.6


Modified Accelerated Cost Recovery
System (MACRS)

1) Straight line method

2)Double Declining Balance method


SL DDB

For year 1
For year 1
100
100
d =2( ------ )= 20%
d = ------= 10%
10
10
For year 2
For year 2
80
80
d =2( ------ )= 16%
d = ------= 8.889%
10
9
For year 3
For year 3
64
64
d =2( ------ )= 12.8%
d = ------= 8%
10
8
Modified Accelerated Cost Recovery System
(MACRS)
Year Depreciation Depreciation MACRS Depreciation Book value
by SL in % by DDB in % amount

0 0 0 0 0 20000

1 10 20 20 4000 16000

2 8.889 16 16 3200 12800

3 8 12.8 12.8 2560 10240

4 7.314 10.24 10.24 2048 8192

5 6.826 8.192 8.192 1638.4 6553.6

6 6.5536 6.5536 6.5536 1310.72 5242.88

7 6.5536 5.242 6.5536 1310.72 3932.16

8 6.5536 3.9321 6.5536 1310.72 2621.44

9 6.5536 2.6214 6.5536 1310.72 1310.72

10 6.5536 1.3110 6.5536 1310.72 0


Double Declining Balance method
With half year convention
For year 1
100
d =2( ------ )= 10%
2* 10
For year 2
90
d =2( ------ )= 18%
10
For year 3
72
d =2( ------ )= 14.4%
10
DDB DDB
With half year convention

For year 1 For year 1


100 100
d =2( ------ )= 10% d =2( ------ )= 20%
2* 10 10
For year 2 For year 2
90 80
d =2( ------ )= 18% d =2( ------ )= 16%
10 10
For year 3 For year 3
72 64
d =2( ------ )= 14.4% d =2( ------ )= 12.8%
10 10

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