DEPRECIATION AND DEPLETION

Depreciation – the decrease in the value of property such as machinery, cars, Cm = book value at the end of “m” years
equipment, building or other structure, due to passage of time. n = life of property or asset in years
m = age of property at any time which is less than the life of property “n”
Book Value – the worth of property which is equal to the original cost less the r = depreciation rate
amount which has been charge to depreciation.
B. Sinking Fund method
Salvage Value – second hand value.
𝐢
𝐝= (𝐂 − 𝐂𝐧 )
Sunk cost – a cost which have already occurred although they may not have (𝟏 + 𝐢)𝐧 − 𝟏 𝐨
recognized as such or the amount which has been spend or capital 𝐝(𝟏 + 𝐢)𝐦 − 𝟏
𝐃𝐦 =
invested which for some reasons cannot be retrieved. 𝐢
𝐂𝐦 = 𝐂𝐨 − 𝐃𝐦
Types of Depreciation

1. Physical depreciation – due to deterioration caused by various chemical

and mechanical factors on the materials composing the property such Dm = total depreciation at the end of “m” years
rusting of metal parts of machine equipment. Cm = book value at the end of “m” years
2. Functional depreciation – due to the decrease in the demand for the
equipment for which it has designed such as obsolescence of the C. Matheson Formula/Declining Balance Method/Constant Ratio Method
equipment, or charges of methods of production.
𝐧 𝐂𝐧
Methods of Determining Depreciation Cost 𝐊=𝟏− √
𝐂𝐨
A. Straight Line Method 𝐂𝐦 = 𝐂𝐨 (𝟏 − 𝐊)𝐦

𝐂𝐨 − 𝐂𝐧 𝐂𝐦 = 𝐂𝐨 − 𝐃𝐦
𝐝=
𝐧
𝐃𝐦 = 𝐝𝐦
𝐂𝐦 = 𝐂𝐨 − 𝐃𝐦 K = ratio of depreciation in any one year to the book value at the beginning of
𝐝 that year
𝐫= Cn = salvage value of property
𝐂𝐨
Co = original cost of property
d = annual depreciation n = life of property or asset in years
Co = original cost of property Cm = book value at the end of “m” years
Cn = value at the end of life of an asset (scrap or salvage value)
Dm = total depreciation up to “m” years
 DEPRECIATION AND DEPLETION

D. Sum of the Years Digit Method (SYD method) Depreciation and Book Value in in 2nd Year

a) Add sum of the years of life of the property or asset, say n = 10 years 2
D2 = C1 ( )
n
1 + 2 + 3 + 4 + 5 + 6 + 7 + 8 + 9 + 10 = 55 2
C2 = C1 − C1 ( )
n
b) Depreciation per year is computed as follows: 2
= C1 (1 − )
n
10 2 2
1st Year = (Co − Cn ) = Co (1 − ) (1 − )
55 n n
9 2 2
2nd Year = (Co − Cn ) = Co (1 − )
55 n
8
3rd Year = (Co − Cn )
55
th
1
10 Year = (Co − Cn )
55 F. Service Output Method

E. Double-Rate Declining Balance Method 𝐂𝐨 − 𝐂𝐧

𝐝=
𝐍
2 m
Cm = Co (1 − ) d = depreciation per unit
n
2 Co = original cost of property
r=
n Cn = salvage value of property
N = total units of output during life of property
Cm = book value at the end of “m” years
Co = original cost of property
n = life of property or asset in years Depletion – consumption of exhaustible natural resources such as mines, oil,
m = age of property at any time which is less than the life of property “n” gas wells, timber lands to produce products or services. Removal of oil,
r = double rate declining balance rate timber, rock or minerals from a site decreases the value for the property.
This decrease is compensated for by a proportionate reduction in
Depreciation and Book Value in in 1st Year earnings derive the the resource.
2
D1 = Co ( )
n Present value of resources
2 Depletion charge =
C1 = Co − Co ( ) Remaining units of resource
n
2
= Co (1 − )
n
 DEPRECIATION AND DEPLETION

Example 1: A machine has a first cost of ₱ 13, 000, an estimated life of 15
years, and an estimated salvage value of ₱ 1, 000. Using the straight line
method, find
a. the annual deprecation charge
b. the annual depreciation rate expressed as percentage of cost
c. the book value at the end of 9 years
Example 6: A plant erected to manufacture socks has a first cost of ₱ 10, 000,
000 with an estimated salvage value of ₱ 100, 000 at the end of 25 years. Find
its appraised value to the nearest ₱ 100 by sinking fund method, assuming an
interest rate of 6% at the end of 10 years and 20 years, respectively.
Example 7: A certain office equipment has a first cost of ₱ 20,000 and a
salvage value of ₱ 1, 000 at the end of 10 years. Determine its book value at
the end of 6 years using

Example 2: A broadcasting corporation purchased an equipment for ₱ 53, a. straight line method
000.00 and paid ₱ 1, 500 for freight and delivery charges to the jobsite. b. sinking fund method
The equipment has a normal life of 10 years with a trade-in value of ₱ 5, c. declining balance method
000.00 against the purchase of a new equipment at the end of the life. d. d. sum of the years method

a. determine the annual depreciation cost by straight line method
b. determine the annual depreciation cost by means of sinking fund
method. Assume interest is 6% compounded annually.
Example 3: A manufacturing company buys an electric motor of ₱ 50, 000. It
estimates that the motor’s useful life is 20 years and that it can then be sold
for ₱ 5, 000. Using straight line method, what is the annual deprecation
charge?
Example 8: A company owns construction equipment that cost ₱ 90, 000.00
After 8 years, it will have estimated salvage value of ₱ 18,000.00. Compute
the depreciation charge for each for the first two years and the book value at
the end of 5 years by each of the following methods of depreciation
accounting.
a) Straight Line Method
b) Sum of the Years Digit Method
c) Double Rate Declining Balance Method

Example 4: An equipment costs ₱ 10, 000 with a salvage value of ₱ 500 at the
end of 10 years. Calculate the annual depreciation by:

a. straight line method

b. sinking fund method at 40% interest

Example 5: A certain machinery costs ₱ 50, 000 and will last for 12 years with
a salvage value of ₱ 5, 000, Monet is worth 5%. If the owner decides to sell if
after 5 years, what should his price be so that we will not lose or gain
financially in the transaction? Use Sinking Fund Method
 DEPRECIATION AND DEPLETION

A certain office equipment has a first cost of ₱ 20, 000 and a salvage value of Part 2: Sinking Fund Method at 3% Interest
₱ 1, 000 at the end of 10 years. Determine its book value at the end of 6 years
using: Given:
1. Straight Line Method Co = ₱ 20,000
2. Sinking Fund Method at 3% interest Cn = ₱ 1,000
3. Declining Balance Method n = 10 years
4. Sum of the Year Digit Method i = 3%

Part 1: Straight Line Method Annual Depreciation

Given: i
d= (C − Cn )
Co = ₱ 20,000 (1 + i)n − 1 o
Cn = ₱ 1,000 0.03
d= (₱ 20,000 − ₱ 1,000)
n = 10 years (1 + 0.03)10 − 1
d = ₱ 1,657.38
Annual Depreciation

Co − Cn Depreciation
d= Year Book Value
n d(1 + i)m − 1
₱ 20,000 − ₱ 1,000 m Dm = Cm = Co − Dm
d= i
10 0 0.00 ₱ 20,000.00
d = ₱ 1,900 1 ₱ 1,657.38 ₱ 18,342.62
2 ₱ 3,364.48 ₱ 16,635.52
Year Depreciation Book Value 3 ₱ 5,122.79 ₱ 14,877.21
m Dm = dm Cm = Co − Dm 4 ₱ 6,933.86 ₱ 13,066.14
0 0 ₱ 20, 000 5 ₱ 8,799.25 ₱ 11,200.75
1 ₱ 1, 900 ₱ 18, 100 6 ₱ 10,720.61 ₱ 9,279.39
2 ₱ 3, 800 ₱ 16, 200 7 ₱ 12,699.61 ₱ 7,300.39
3 ₱ 5, 700 ₱ 14, 300 8 ₱ 14,737.98 ₱ 5,262.02
4 ₱ 7, 600 ₱ 12, 400 9 ₱ 16,837.50 ₱ 3,162.50
5 ₱ 9, 500 ₱ 10, 500 10 ₱ 19,000.00 ₱ 1,000.00
6 ₱ 11, 400 ₱ 8, 600
7 ₱ 13, 300 ₱ 6, 700
8 ₱ 15, 200 ₱ 4, 800
9 ₱ 17, 100 ₱ 2, 900
10 ₱ 19, 000 ₱ 1, 000
 DEPRECIATION AND DEPLETION

Part 3: Declining Balance method Part 4: Sum-of-the-Year-Digit Method

Given: 1 + 2 + 3 + 4 + 5 + 6 + 7 + 8 + 9 + 10 = 55
Co = ₱ 20,000
Cn = ₱ 1,000
n = 10 years
Year Depreciation Book Value
m Dm = (Co − Cn ) ∗ (n/∑m) Cm = Cm−1 − Dm−1
n Cn
0 0 ₱ 20, 000.00
K = 1− √ 10
Co 1 (20, 000 − 1, 000) ( ) = ₱ 3,454.55 ₱ 20, 000.00 − ₱ 3,454.55 = ₱ 16,545.45
55
10 1,000
9
2 (20, 000 − 1, 000) ( ) = ₱ 3,109.09 ₱ 16,545.45 − ₱ 3,109.09 = ₱ 13,436.36
K = 1− √ 55
20,000 8
3 (20, 000 − 1, 000) ( ) = ₱ 2,763.64 ₱ 2,763.64 − ₱ 13,436.36 = ₱ 10,672.73
K = 0.259 55
7
4 (20, 000 − 1, 000) ( ) = ₱ 2,418.18 ₱ 10,672.73 − ₱ 2,418.18 = ₱ 8,254.55
55
6
5 (20, 000 − 1, 000) ( ) = ₱ 2,072.73 ₱ 8,254.55 − ₱ 2,072.73 = ₱ 6,181.82
Year Depreciation Book Value 55
m Dm = KCm Cm = Cm−1 − Dm−1 5
6 (20, 000 − 1, 000) ( ) = ₱ 1,727.27 ₱ 6,181.82 − ₱ 1,727.27 = ₱ 4,454.55
0 0 ₱ 20, 000.00 55
1 ₱ 20, 000.00(0.259) = ₱ 5,177.31 ₱ 20, 000.00 − ₱ 5, 177.31 = ₱ 14,822.69 4
7 (20, 000 − 1, 000) ( ) = ₱ 1,381.82 ₱ 4,454.55 − ₱ 1,381.82 = ₱ 3,072.73
2 ₱ 14, 822.69(0.259) = ₱ 3,837.08 ₱ 14, 822.69 − ₱ 3 ,837.08 = ₱ 10,985.61 55
3
3 ₱ 10,985.61(0.259) = ₱ 2,843.79 ₱ 10,985.61 − ₱ 2,843.79 = ₱ 8,141.81 8 (20, 000 − 1, 000) ( ) = ₱ 1,036.36 ₱ 3,072.73 − ₱ 1,036.36 = ₱ 2,036.36
55
4 ₱ 8,141.81(0.259) = ₱ 2,107.63 ₱ 8,141.81 − ₱ 2,107.63 = ₱ 6,034.18 2
5 ₱ 6,034.18(0.259) = ₱ 1,562.04 ₱ 6,034.18 − ₱ 1,562.04 = ₱ 4,472.14 9 (20, 000 − 1, 000) ( ) = ₱ 690.91 ₱ 2,036.36 − ₱ 690.91 = ₱ 1,345.45
55
6 ₱ 4,472.14(0.259) = ₱ 1,157.68 ₱ 4,472.14 − ₱ 1,157.68 = ₱ 3,314.45 1
10 (20, 000 − 1, 000) ( ) = ₱ 345.45 ₱ 1,345.45 − ₱ 345.45 = ₱ 1,000.00
7 ₱ 3,314.45(0.259) = ₱ 858.00 ₱ 3,314.45 − ₱ 858.00 = ₱ 2,456.46 55
8 ₱ 2,456.46(0.259) = ₱ 635.89 ₱ 2,456.46 − ₱ 635.89 = ₱ 1,820.56
9 ₱ 1,820.56(0.259) = ₱ 471.28 ₱ 1,820.56 − ₱ 471.28 = ₱ 1,349.28
10 ₱ 1,349.28(0.259) = ₱ 349.28 ₱ 1,349.28 − ₱ 349.28 = ₱ 1,000.00