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DEPRECIATION AND DEPLETION

Depreciation the decrease in the value of property such as machinery, cars, equipment, building or other structure, due to passage of time.

Book Value the worth of property which is equal to the original cost less the amount which has been charge to depreciation.

Salvage Value second hand value.

Sunk cost a cost which have already occurred although they may not have recognized as such or the amount which has been spend or capital invested which for some reasons cannot be retrieved.

Types of Depreciation

1. Physical depreciation due to deterioration caused by various chemical and mechanical factors on the materials composing the property such rusting of metal parts of machine equipment.

2. Functional depreciation due to the decrease in the demand for the equipment for which it has designed such as obsolescence of the equipment, or charges of methods of production.

Methods of Determining Depreciation Cost

A. Straight Line Method

=

=

=

=

d = annual depreciation

C o = original cost of property

C n = value at the end of life of an asset (scrap or salvage value)

D m = total depreciation up to “m” years

 C m = book value at the end of “m” years n = life of property or asset in years

m = age of property at any time which is less than the life of property “n”

r = depreciation rate

B. Sinking Fund method

=

( + )

( )

=

=

( + )

 D m = total depreciation at the end of “m” years C m = book value at the end of “m” years

C.

Matheson Formula/Declining Balance Method/Constant Ratio Method

= −

=

( − )

=

K

C

C

n

C

= ratio of depreciation in any one year to the book value at the beginning of that year

n = salvage value of property

o = original cost of property

= life of property or asset in years

m = book value at the end of “m” years

DEPRECIATION AND DEPLETION

D. Sum of the Years Digit Method (SYD method)

a) Add sum of the years of life of the property or asset, say n = 10 years

1 + 2 + 3 + 4 + 5 + 6 + 7 + 8 + 9 + 10 = 55

 b) Depreciation per year is computed as follows: 10 1 st Year = (C o − C n ) 55 9 2 nd Year = (C o − C n ) 55 8 3 rd Year = (C o − C n ) 55 1 10 th Year = (C o − C n ) 55 E. Double-Rate Declining Balance Method

C m = C o (1 −

2

r =

n

2

n

) m

C

C

n = life of property or asset in years m = age of property at any time which is less than the life of property “n”

r = double rate declining balance rate

m = book value at the end of “m” years

o = original cost of property

Depreciation and Book Value in in 1 st Year

D 1 = C o

(

2

n

)

C 1 = C o − C o (

2

n

= C o (1 −

2

n

)

)

Depreciation and Book Value in in 2 nd Year

D 2

C 2

= C 1 (

2

n

)

=

=

− C 1 (

2

2

n

)

C

1

C 1 (1 −

n

)

2

= C o (1 − n ) (1 −

= C o (1 −

2

n

) 2

2

n

)

F. Service Output Method

=

d = depreciation per unit

C o = original cost of property C n = salvage value of property

N = total units of output during life of property

Depletion consumption of exhaustible natural resources such as mines, oil, gas wells, timber lands to produce products or services. Removal of oil, timber, rock or minerals from a site decreases the value for the property. This decrease is compensated for by a proportionate reduction in earnings derive the the resource.

Depletion charge =

Present value of resources

Remaining units of resource

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 2: A broadcasting corporation purchased an equipment for ₱ 53, 000.00 and paid ₱ 1, 500 for freight and delivery charges to the jobsite. The equipment has a normal life of 10 years with a trade-in value of ₱ 5, 000.00 against the purchase of a new equipment at the end of the life.

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 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

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

a. straight line method

b. sinking fund method

c. declining balance method

d. d. sum of the years method

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

DEPRECIATION AND DEPLETION

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:

1. Straight Line Method

2. Sinking Fund Method at 3% interest

3. Declining Balance Method

4. Sum of the Year Digit Method

Part 1: Straight Line Method

Given:

C o = ₱ 20,000

C n = ₱

1,000

n = 10 years

Annual Depreciation

d

d

d

C o − C n

=

n

₱ 20,000 − ₱ 1,000

=

= ₱ 1,900

10

 Year Depreciation Book Value C m = C o − D m m D m = dm 0 0 ₱ 20, 000 1 ₱ 1, 900 ₱ 18, 100 2 ₱ 3, 800 ₱ 16, 200 3 ₱ 5, 700 ₱ 14, 300 4 ₱ 7, 600 ₱ 12, 400 5 ₱ 9, 500 ₱ 10, 500 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

Part 2: Sinking Fund Method at 3% Interest

Given:

C o = ₱ 20,000

C n = ₱

1,000

n = 10 years i = 3%

Annual Depreciation

i

d =

0.03

d =

d = ₱ 1,657.38

(1 + i) n − 1 (C o C n )

(1 + 0.03) 10 1 (₱ 20,000 − ₱ 1,000)

 Year Depreciation d(1 + i) m − 1 Book Value C m = C o − D m m D m = i 0 0.00 ₱ 20,000.00 1 ₱ 1,657.38 ₱ 18,342.62 2 ₱ 3,364.48 ₱ 16,635.52 3 ₱ 5,122.79 ₱ 14,877.21 4 ₱ 6,933.86 ₱ 13,066.14 5 ₱ 8,799.25 ₱ 11,200.75 6 ₱ 10,720.61 ₱ 9,279.39 7 ₱ 12,699.61 ₱ 7,300.39 8 ₱ 14,737.98 ₱ 5,262.02 9 ₱ 16,837.50 ₱ 3,162.50 10 ₱ 19,000.00 ₱ 1,000.00

DEPRECIATION AND DEPLETION

Part 3: Declining Balance method

Given:

C o = ₱ 20,000

C n

= ₱

1,000

n = 10 years

K

K

K

=

=

1 −

1 −

n

C

n

C

o

10

1,000

20,000

= 0.259

 Year Depreciation Book Value m D m = KC m C m = C m−1 − D m−1 0 0 ₱ 20, 000.00 1 ₱ 20, 000.00(0.259) = ₱ 5,177.31 ₱ 20, 000.00 − ₱ 5, 177.31 = ₱ 14,822.69 2 ₱ 14, 822.69(0.259) = ₱ 3,837.08 ₱ 14, 822.69 − ₱ 3 ,837.08 = ₱ 10,985.61 3 ₱ 10,985.61(0.259) = ₱ 2,843.79 ₱ 10,985.61 − ₱ 2,843.79 = ₱ 8,141.81 4 ₱ 8,141.81(0.259) = ₱ 2,107.63 ₱ 8,141.81 − ₱ 2,107.63 = ₱ 6,034.18 5 ₱ 6,034.18(0.259) = ₱ 1,562.04 ₱ 6,034.18 − ₱ 1,562.04 = ₱ 4,472.14 6 ₱ 4,472.14(0.259) = ₱ 1,157.68 ₱ 4,472.14 − ₱ 1,157.68 = ₱ 3,314.45 7 ₱ 3,314.45(0.259) = ₱ 858.00 ₱ 3,314.45 − ₱ 858.00 = ₱ 2,456.46 8 ₱ 2,456.46(0.259) = ₱ 635.89 ₱ 635.89 = ₱ 1,820.56 2,456.46 − ₱ 9 ₱ 1,820.56(0.259) = ₱ 471.28 1,820.56 − ₱ 471.28 = ₱ 1,349.28 ₱ 10 ₱ 1,349.28(0.259) = ₱ 349.28 ₱ 349.28 = ₱ 1,000.00 1,349.28 − ₱

Part 4: Sum-of-the-Year-Digit Method

1 + 2 + 3 + 4 + 5 + 6 + 7 + 8 + 9 + 10 = 55

 Year Depreciation Book Value m D m = (C o − C n ) ∗ (n/∑m) C m = C m−1 − D m−1 0 0 ₱ 20, 000.00 (20, 000 − 1, 000) ( 10 55 ) = ₱ 3,454.55 1 ₱ 20, 000.00 − ₱ 3,454.55 = ₱ 16,545.45 2 9 (20, 000 − 1, 000) ( 55 ) = ₱ 3,109.09 ₱ 16,545.45 − ₱ 3,109.09 = ₱ 13,436.36 3 8 (20, 000 − 1, 000) ( 55 ) = ₱ 2,763.64 ₱ 2,763.64 − ₱ 13,436.36 = ₱ 10,672.73 4 7 (20, 000 − 1, 000) ( 55 ) = ₱ 2,418.18 ₱ 10,672.73 − ₱ 2,418.18 = ₱ 8,254.55 5 6 (20, 000 − 1, 000) ( 55 ) = ₱ 2,072.73 ₱ 8,254.55 − ₱ 2,072.73 = ₱ 6,181.82 6 5 (20, 000 − 1, 000) ( 55 ) = ₱ 1,727.27 ₱ 6,181.82 − ₱ 1,727.27 = ₱ 4,454.55 7 4 (20, 000 − 1, 000) ( 55 ) = ₱ 1,381.82 ₱ 4,454.55 − ₱ 1,381.82 = ₱ 3,072.73 8 3 (20, 000 − 1, 000) ( 55 ) = ₱ 1,036.36 ₱ 3,072.73 − ₱ 1,036.36 = ₱ 2,036.36 9 2 (20, 000 − 1, 000) ( 55 ) = ₱ 690.91 ₱ 690.91 = ₱ 2,036.36 − ₱ 1,345.45 10 1 (20, 000 − 1, 000) ( 55 ) = ₱ 345.45 ₱ 345.45 = ₱ 1,000.00 1,345.45 − ₱