FINALS II.

SINKING FUND METHOD

DEPRECIATION-DECREASE IN THE VALUE OF A
PROPERTY W/ THE PASSAGE OF TIME. ANNUAL COST OF DEPRECIATION
𝑪𝟎 − 𝑪𝒏
𝒅=
DEPRECIATION METHODS: (𝟏 + ⅈ)𝒏 − 𝟏
[ ]
1. STRAIGHT LINE DEPRECIATION ⅈ
2. SINKING FUND FORMULA
3. DECLINING BALANCE TOTAL DEPRECIATION
4. DOUBLE DECLINING BALANCE METHOD (𝟏 + ⅈ)𝒏 − 𝟏
5. SUM OF THE YEARS DIGIT 𝑫𝒏 = 𝐝 [ ]
ⅈ
6. SERVICE OUTPUT
7. WORKING HOURS BOOK VALUE
𝑪𝒏 = 𝑪𝟎 − 𝑫𝒏
I. STRAIGHT LINE DEPRECIATION
Ex.1: A hydraulic machine cost P180,000 and has a
THE ANNUAL COST OF DEPRECIATION, (d) salvage value of P15,000 at the end of its useful life,
𝑪𝟎 − 𝑪𝑳 12 years. Assume money is worth 6% annually, how
𝒅=
𝑳 much is the depreciation at the first year?

TOTAL DEPRECIATION AT THE END OF THE nth YEAR

𝒏(𝑪𝟎 − 𝑪𝑳 )
𝑫𝒏 =
𝑳

THE BOOK VALUE OF THE nth YEAR

𝑪𝒏 = 𝑪𝟎 − 𝑫𝒏

Ex.1: The first cost of a machine is P1,800,000 with a

salvage value of P300,000 at the end of its life of 5 Ex. 2 An asset has P21,000 original cost, P1,000
years. Determine the total depreciation after 3 years residual value and 5 years useful life. The annual
using the line method. interest or money is 5%. Find the annual
Given: depreciation.

Ex.2: An electronic balance cost P90,000 and has an Ex.3: A machine cost P100,000 and has a salvage
estimated salvage value of 8,000 at the end of its 10 value of P4000 at the end of 20 years. Compute the
yrs lifetime. What would be the book value after 3 book value after 8 years, if the money is worth 5%
years using the straight-line method in solving for annually.
the depreciation?

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III. SUM OF THE YEARS DIGIT METHOD (SYD) Ex.2: An asset is purchased for P90,000. Its
estimated life is 10 years. After which it will be sold
DEPRECIATION AT ANY NTH YEAR for P1,000 at the end of its life. Find the book value
𝑹𝑬𝑽𝑬𝑹𝑺𝑬 𝑫𝑰𝑮𝑰𝑻 during the first year.
𝒅𝒏 = (𝑪𝟎 − 𝑪𝑳 )
𝜮 𝑫𝑰𝑮𝑰𝑻 (𝑻𝑶𝑻𝑨𝑳)

TOTAL DEPRECIATION
𝜮 𝑹𝑬𝑽𝑬𝑹𝑺𝑬 𝑫𝑰𝑮𝑰𝑻 (𝑹𝑬𝑸′ 𝑫)
𝒅𝒏 = (𝑪𝟎 − 𝑪𝑳 )
𝜮 𝑫𝑰𝑮𝑰𝑻 (𝑻𝑶𝑻𝑨𝑳)

BOOK VALUES
𝑪𝒏 = 𝑪𝟎 − 𝑫𝒏

TOTAL DEPRECIATION AT THE OF LIFE.

𝑫𝑳 = 𝑪𝟎 − 𝑪𝑳

REVERSE DIGIT = (n-Nr) + 1

Where:
n- no. of period’s
Nr- req’d period
𝒏
𝛴 DIGITS (TOTAL) = (𝒏 + 𝟏) Ex.3: A company purchased an equipment for P6m.
𝟐 Freight and installment charges amount to 3% of the
equipment’s price. The useful life is 8 years. Salvage
EX: for a property whose life is 5 years value is 5% of the first cost. Determine the
YR YR IN REVERSE DEP. FACTOR ANNUAL DEP depreciation charge during the 5th year.
ORDER
1 5 5/15 5/15 (𝐶0 − 𝐶𝐿 )
2 4 4/15 4/15(𝐶0 − 𝐶𝐿 )
3 3 3/15 3/15(𝐶0 − 𝐶𝐿 )
4 2 2/15 2/15(𝐶0 − 𝐶𝐿 )
5 1 1/15 1/15(𝐶0 − 𝐶𝐿 )
15

Ex.1: A certain machine cost P400,000 and has a life

of 5 yrs. Salvage value is P50,000 at the end of its
life. Compute the book value at the end of 3rd yr.

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IV. DECLINING BALANCE METHOD OR MATHESON’S Ex.3: The first cost of a machine is P1,800,000 with a
FORMULA salvage value of P300,000 at the end of its life of 5
years. Determine the total depreciation after 3 years
THE DEPRECIATION AT ANY YEAR (dn) using declining balance method.
𝒅𝒏 = 𝑲𝑪𝟎 (𝟏 − 𝐊)𝒏−𝟏
where: K is the constant rate of decline
𝒏 𝑪𝒏 𝑳 𝑪𝑳
𝒌=𝟏− ඨ 𝒌=𝟏− ඨ
𝑪𝟎 𝑪𝟎
BOOK VALUE
𝒏
𝑪𝑳 ൗ𝑳
𝑪𝒏 = 𝑪𝟎 [ ] 𝑪𝒏 = 𝑪𝟎 (𝟏 − 𝒌)𝒏
𝑪𝟎

SCRAP VALUE
𝑪𝑳 = 𝑪𝟎 (𝟏 − 𝒌)𝑳

TOTAL DEPRECIATION
D𝒏 = 𝑪𝟎 − 𝑪𝒏

Ex.1: A machine cost P1.5m. It has a salvage value of

P600,000 at the end of its economic life. What is the
machine’s economic life if it has a book value of
P948,037.50 at the end of 2 years?

Ex.4: A machine having a certain first cost has a life

of 10 years and a salvage value of 6.633% of the first
cost at the end of 10 yrs. If it has a book value of
P58,914 at the end of 6th year. How much is the first
cost of the machine if the constant percentage of
declining value is used in the computation for its
depreciation.

Ex.2: A machine costing P720,000 is estimated to

have a life of 10 years. If the annual rate of
depreciation is 25%, determine the total
depreciation using a constant percentage of the
declining balance method.

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V. DOUBLE DECLINING BALANCE (DDB) Ex. 1: A machine has a first cost of P140,000 and has
a life of 8 years w/ a salvage value of P10,000. What
DEPRECIATION AT ANY Nth YEAR (dn) is the depreciation at the first year?
2𝐶0 2 𝑛−1
ⅆ𝑛 = [1 − ]
𝐿 𝐿

BOOK VALUE
2𝑛
𝐶𝑛 = 𝐶0 [1 − ]
𝐿

SCRAP VALUE
2𝐿
𝐶𝐿 = 𝐶0 [1 − ]
𝐿

TOTAL DEPRECIATION
D𝑛 = 𝐶0 − 𝐶𝑛

Note: Formulas in Declining becomes formula’s in

DDB if: 2
𝑘=
𝐿

Ex.2: An earth moving equipment that cost P90,000

will have an estimated value of P18,000 at the end of
8 years. Using DDB method, compute the book value
and the total depreciation at the end of the 5th year.

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VI. SERVICE OUTPUT METHOD Ex.2: An equipment cost P500,000 and has a salvage value of 15%
(𝐶0 − 𝐶𝐿 )𝑄𝑛 of its first cost. Its economic life is 36,000 hrs in 5 yrs. In the first
ⅆ𝑛 = year of service, it was used for 12,000 hrs. At the end of its 2nd
𝑄 year, it was used for 12,000 hrs. Find the depreciation at the 2nd
year.
where:
Qn- Total number of units of output during the nth term
Q- Total units of output up to the end of life

BOOK VALUE
𝐶𝑛 = 𝐶0 − 𝐷𝑛

VII. WORKING HOURS METHOD

(𝐶0 − 𝐶𝐿 )𝐻𝑛
ⅆ𝑛 =
𝐻

where:
Hn- Total number of hours of output during the nth term
H- Total number of hours up to the end of life

Ex.1: An equipment costs P40,000 and has a salvage value of 10% Ex.3: A certain machine costs P40,000 and has a life of 4 years and
of its first costs. Its economic life is 35,000 operating hours. In the a salvage value of P5,000. The production output of the machine
first year, it was used for 4,000 hours. Determine the book value per year is 800 units (1st yr), 2200 unitsn(2nd year), 3,000 units (3rd
at the end of the first year. yr) and 4,000 units (4th yrs). What is the depreciation at the 4th yr?