Chapter Five

Depreciation

Course: Business Mathematics

Course Code: BAMA 1101
Specialization: Common
Department of Business Studies
Outcome 5: Prepare depreciation schedule using Straight
Line method and written down value method.

Contents
- Meaning of Depreciation
- Items that can be depreciated
- Methods of Depreciation
- Straight line method
- Written down value method

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Essential Reading
Mathematics for Business, Science, and Technology, edited by Steven T. Karris,
Orchard Publications, 2007. ProQuest Ebook Central,

URL:
https://ebookcentral.proquest.com/lib/momp/detail.action?docID=3384188.

Recommended Reading
Clendenen,G and Salzman, S.A. 2015, Business Mathematics, 13th Edition,
Pearson Publications.

Open Educational Resource

BUS 103: Introduction To Financial Accounting, OER Resource from Saylor.org,

URL: https://learn.saylor.org/pluginfile.php/41439/mod_resource/content/15/AccountingPrinciples2.pdf

3
Depreciation
Definition

A reduction in the value of an asset over time, due in

particular to wear and tear*

Depreciation is considered an expense and is listed in an

income statement under expenses

https://en.oxforddictionaries.com/definition/depreciation

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Items that can be depreciated
Capital Assets
Capital Assets: An equipment, a building, or a vehicle
used in the business (Karris, 2007)

- A capital assets is depreciated if;

- 1. It must be used in business or held to produce
income
- 2. It must be expected to last more than one year
- 3. It must be something that wears out, decays, gets
used up, becomes obsolete, or loses its value
- from natural causes.
Source (Image):
https://www.autoremarketing.com/wholesale/sporty-models-
However, land can never be depreciated. lead-weekly-depreciation-among-cars

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Methods of Depreciation

1. Straight−line depreciation

2. Sum of the Year’s Digits

3. Fixed Declining Balance

4. General Declining Balance

5. Variable−Declining Balance

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Straight line Depreciation

Straight−line
  depreciation is considered to be the most common
method of depreciating assets.
Computation is based on;
1. Initial Cost (Cost Price): Purchase price of the asset
2. Salvage Value : Value of the asset at the end of useful life.
3. Useful life : number of years the asset is expected to be used.

Annual Depreciation Expense =

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Book Value

The book value, or remaining value, of an asset at the end of

a year is the original cost minus the depreciation up to and
including that year (accumulated depreciation).

Book Value = Cost – Accumulated Depreciation.

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Example 1
A
  truck is bought for RO 30,000 which is expected to be
useful for 5 years. The company also expect that at the end
of its useful life, the truck can be sold for RO 5,000.

The annual depreciation of truck using Straight line

depreciation, will be;
Depreciation (Straight Line Method) =
= 25,000 ÷5

= RO 5,000

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Example 2
On
  1 January 2018, A heavy equipment trailer is bought by ABC
st

Company at a cost of RO75,000. The trailer has a useful life of 7

years and a salvage value of RO5,000.
Find the amount of Depreciation and book value at the end of the
year.
Answer
Depreciation (Straight Line Method) = = 70,000 ÷7
= RO 7,000
Book Value at the end of the year
= Cost - Depreciation
= 75,000-7,000
= 68,000

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Exercise (1)

A company purchased a machinery that costs RO 100,000

with an estimated salvage value of RO 25,000. It is expected
that the asset will be useful for 3 years.

Assume that the company use straight line method for

calculating depreciation, Calculate annual depreciation of the
machinery.

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Exercise (2)

On 1st of July 2017, Sohar Printing Company purchased a

printing machinery that costs RO 10,000 with an estimated
salvage value of RO 1,000. It is expected that the asset will
be useful for 6 years.

Assume that the company use straight line method for

calculating depreciation, Calculate the depreciation expense
for printing machinery during 2017 and 2018.

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Exercise (3)
On 1st of July 2015, a construction company in Oman
purchased ready-mix concrete truck at a cost of RO45,000.
with an estimated salvage value of RO 5,000. It is expected
that the asset will be useful for 8 years.

Assume that the company use straight line method for

calculating depreciation, Calculate the depreciation expense
for printing machinery during 2015 and 2016.

Also, calculate the book value of the asset at the end of

2016.
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Exercise (4)

KFC purchased a new low-fat chicken cooker at a cost of

$26,500. The estimated life of the fryer is 5 years, with a
salvage value of $3500.
Find
(a) the annual rate of depreciation,
(b) the annual amount of depreciation, and
(c) the book value at the end of the first year.

(Clendenson and Salzman 2015, p.595)

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Exercise (5)
On 2010 January 1, Jackson Company purchased equipment for USD
400,000, and installation and testing costs totaled USD 40,000. The
equipment has an estimated useful life of 10 years and an estimated
salvage value of USD 40,000.
If Jackson uses the straight-line depreciation method, the
depreciation expense for 2010 is:
a. USD 36,000.
b. USD 40,000.
c. USD 44,000.
d. USD 80,000.
e. USD 88,000.
OER Source : URL: (https://learn.saylor.org/pluginfile.php/41439/mod_resource/content/15/AccountingPrinciples2.pdf)

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Written Down Value Method

- Depreciation is charged on the book value of asset

- Also known as reducing balance method or diminishing balance
method
- The amount of depreciation reduces year after year, as the book
value of the asset also reduces by the annual charge of
depreciation.

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Example 1
A
  truck is bought for RO 30,000 and depreciation is charged
at 10% p.a. at written down value method, the amount of
depreciation will be;

Year 1
Depreciation = 30,000 = 3,000
Written Down Value (at the end of the year 1)
= 30,000-3,000 = 27,000
Year 2
Depreciation = 27,000 2,700
Written Down Value (at the end of the year 2)
= 27,000-2,700 = 24,300

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 Continued

Year Book Value (in the Depreciation Written Down

beginning on the (at10% p.a.) value (At the
year) end)
1 30,000 3,000 27,000

2 27,000 2,700 24,300

3 24,300 2,430 21,870

4 21,870 2,187 19,683

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How to find out rate of depreciation in Written Down Value
Method ?

  information related to original investment (price of the

If
asset), its useful life and the expected scrap value is given,
the rate of depreciation is calculated can be calculated using
the following equation;

S – Expected Scrap Value,

C- Cost of the Asset
n- number of years

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Example (1)

 
Calculate the rate of depreciation and the depreciation to be
charged at the end of year, using written down value method?

Life of the asset (n) 3 years

Scrap value at the end of 3 years RO 10,000
Original Investment RO 200,000
Answer
Rate of Depreciation =

=60.85%

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 Continued..

Year Book Value Depreciation Written Down

(beginning of (at 60.85%) Value (At the
the year) end of the year
1 200,000 123,680 76,320

2 76,320 45,658 30,662

3 30,662 18,657 12,005*

*The difference is due to rounding off of digits in the calculation

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Exercise (1)

Calculate the rate of depreciation and the depreciation to be

charged at the end of year, using written down value method?

Life of the asset (n) 5 years

Scrap value at the end of 3 years RO 5,000
Original Investment RO 100,000

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Exercise (2)

A machinery is bought for RO 10,000 with an estimated

useful life of 4 years. The expected scrap value at the end of
its useful life is RO 2,000.

Required

1. Calculate the WDV Rates.

2. Prepare a Depreciation Schedule for 4 years.

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Additional Questions - Links

OER Source:

https://learn.saylor.org/pluginfile.php/41439/mod_resource/content/15/Acco
untingPrinciples2.pdf

Page No. 102-119

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Reference
Karris, S.T. (2007), Mathematics for Business, Science, and Technology.
Online :
https://ebookcentral.proquest.com/lib/momp/detail.action?docID=3384188.

Clendenen,G and Salzman, S.A. (2015), Business Mathematics, 13th Edition,

Pearson Publications.

BUS 103: Introduction To Financial Accounting, OER Resource from

Saylor.org,

URL:
https://learn.saylor.org/pluginfile.php/41439/mod_resource/content/15/AccountingPrincip
les2.pdf

25
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VERSION HISTORY

Version No Date Approved Changes incorporated

01 Sem. (I) 2019/2020

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