1

DEPRECIATION
Loss in valueof physical asset dueto usageor passageof time. For e.g.
building, truck, car, etc.
3 factors should beconsidered when calculating thedepreciation
o Actual cost
o Useful lifespan
o Salvage(scrap value) tradein value
2 methods to calculatethedepreciation
o Straight LineMethod
o Reducing BalanceMethod
Basic Formula
Therearetwo basic formulas involved in this chapter:
1. Total depreciation =Cost Scrap value
2. Book valueat k
th
year =Cost Total depreciation for k year
*Book value value of the base at the end of each year

Method 1: Straight Line Method

Annuol Jcprcciotion =
Iotol Jcprcciotion
uscul Iic Spon


Annuol rotc Jcprcciotion (%) =
Annuol cprcciotion
Iotol cprcciotion
100%
=
1
uscul Iicspon
100%

Example 1
1. A set of equipment for a Photo Shop was bought for RM100,000 and has a
useful life of 10 years. If the scrap value is RM10,000, calculate the
accumulated depreciation valueat the end of 4
th
year using thestraight-line
method.


2. A factory purchased a machine at price RM165,000. The machine has an
expected lifeof 15 years. It will then havea scrap valueof RM15,000. Find
thebook valueafter 5 years using thestraight-linemethod.







3. Thecost of a machineis RM7,000 and its salvage valueis RM700 at the end
of 9 years. Calculate the depreciation and the book value for the 6
th
year
using thestraight linemethod.






Method 2: Reducing Balance Method (Declining Balance Method)

\
Thebook value at theend then
th
year, BI
n
=C(1 r)
n


whereC =cost, r =rate

Scrap value, S =C(1r)
N


whereN =useful life

Annual depreciation rate, r =1 _
S
C
N




2

Example 2
1. A machinecosting RM50,000 has an estimated useful life10 years. If the
annual rateof depreciation is 5%, find (i) thescrap valueand (ii) book value
at theend of 5
th
years using reducing balancemethod.





2. A car costing RM49,000 has an estimated useful life5 years. If theannual
rateof depreciation is 7%, find (i) thescrap valueand (ii) book valueat the
end of 3
rd
years using reducing balancemethod.





3. TheIndami Co. bought a machinewhich costs RM250,000 and has a useful
lifeof 20 years. At theend of its useful life, themachineis estimated to have
a value of RM15,000. After 15 years, the company wants to sell the
machine. Calculatethepricethat should beoffered based on the book value
using thereducing balancemethod.







Exercise 9
1. The cost of a new station wagon is RM90,000. It is estimated to have a
useful life of 10 years with a scrap valueof RM20,000. Find the book value
and accumulated depreciation at the end of eight years using the declining
balancemethod.
2. A factory purchased a machine at price RM165,000. The machine has an
expected lifeof 15 years. It will then havea scrap valueof RM15,000. Find
thebook valueafter 5 years using thestraight-linemethod
3. A new machine which costs RM15,000 is expected to havea useful life of 5
years and a scrap value of RM4,000. Calculate the book value of the
machineat theend of thethird year using thestraight linemethod.
4. Motorbike.combought a motorcycle for RM30,000. The motorcycle has a
lifeexpectancy of 10 years with a scrap valueof RM8,000. After 3 years, the
motorcycle was sold for RM20,000. Calculate the difference between the
book value and the amount received from selling the motorcycle if
Motorbike.comuses (i) the straight line method, (ii) the reducing balance
method.
5. The Wirama Company bought a machine which costs RM25.000 and has a
useful life of 10 years. At the end of its useful life, the machine is estimated
to havea value of RM8,000. After 5 years, thecompany wants to sell the
machine. Calculatethepricethat should beoffered based on thebook value
using (i) thestraight linemethod, (ii) thereducing balancemethod.
6. Sedap Restaurant bought a water dispenser for RM1,500. The estimate
useful lifeof thewater dispenser is 5 years and its salvage valueis RM200.
What is theamount of depreciation at the end of the fourth year using the
straight linemethod?
7. The manager of a transport company estimates that the valueof its vehicles
will depreciateat an annual rateof 15% based on thedeclining balance. How
long does it takefor a vehicleto havea book value of RM5,000 if thecost
was RM60,000?
8. A laser printer costing RM6.000 has a life expectancy of 6 years and a
salvagevalueof RM800. Using thedeclining balancemethod, calculatethe
depreciation for thethird year.
9. Delicious Bakery bought a microwave oven at RM17,000. It is estimated to
last for 7 years and has salvagevalueof RM3,000. (i) Find thebook value
of that oven after 3 years by using straight linemethods, (ii) Find theannual
rateof depreciation by using declining balancemethods.
10. Zaidi owns a new machin that costs RM20,000. He estimates that the
machinewill depreciate at an annual rateof 20.6%. Using declining balance
methods, find how long does it takes for themachine to have book valueof
RM5,000.