DEPRECIATION – PART II

VARIABLE CHARGE OR USE-FACTOR OR ACTIVITY METHODS

Sa method na ito, nakadepende ang amount ng depreciation sa nagawang trabaho ng isang asset. Ang measure ng naitranaho nito ay
depende sa measurement basis ng company. Normally, ang ginagamit ay number of units produced or and machine hour used, pero
depende pa rin sa company kung ano ang gagamitin nila.

Step sa paggamit ng Activity method

1. Kwentahin ang depreciable amount (cost less residual value)

2. Allocate the depreciable amount based sa measurement basis na ginagamit ng company .

1. Working hours method – ang gagamitin na measurement basis ay number of working hours of the asset.

On May 1, 2020, a machinery is bought amounting P400,000. It has estimated useful life of 5 years from the date of purchase. The entity
estimated its residual value at P50,000. The entity is using the activity method of depreciating its machineries using the working hours
rendered. The following are the working hours rendered by the said machine during its five-year life.

Period Working Hours

May 1, 2020 – April 30, 2021 10,000 hours
May 1, 2021 – April 30, 2022 20,000 hours
May 1, 2022 – April 30, 2023 25,000 hours
May 1, 2023 – April 30, 2024 30,000 hours
May 1, 2024 – April 30, 2025 20,000 hours

Analysis: For this particular problem, ang problema natin ay ang reporting period which is December 31. Kung mapapansin mo, ang given na period
ng working hours rendered ng machinery, ang period ay starting from May 1 up to April 30 of next year. Ang mangyayari dito ay allocation ang
gagawin natin dahil ang kukunin natin na depreciation ay from January 1 up to December 31.

Computation:
Depreciable Amount = 400,000 – 50,000 = 350,000
Period
May 1, 2020 – April 30, 2021
May 1, 2021 – April 30, 2022
May 1, 2022 – April 30, 2023
May 1, 2023 – April 30, 2024
May 1, 2024 – April 30, 2025
Total
Working Hours Ratio Allocated Depreciation Allocation to Reporting Period
10,000 10,000/100,000 = 10% 350,000*10% = 35,000 For 2020 = 35,000*8/12 = 23,333.33
For 2021 = 35,000*4/12 = 11,666.67
20,000 20,000/100,000 = 20% 350,000*20% = 70,000 For 2021 = 70,000*8/12 = 46,666.67
For 2022 = 70,000*4/12 = 23,333.33
25,000 25,000/100,000 = 25% 350,000*25% = 87,500 For 2022 = 87,500*8/12 = 58,333.33
For 2023 = 87,500*4/12 = 29,166.67
30,000 30,000/100,000 = 30% 350,000*30% = 105,000 For 2023 = 105,000*8/12 = 70,000
For 2024 = 105,000*4/12 = 35,000
15,000 15,000/100,000 = 15% 350,000*15% = 52,500 For 2024 = 52,500*8/12 = 35,000
For 2025 = 52,500*4/12 = 17,500
100,000 100% 350,000

Depreciation for 2020 = 23,333.33 Depreciation for 2025 = 17,500

Depreciation for 2021 = 11,666.67 + 46,666.67 = 58,333.34
Depreciation for 2022 = 23,333.33 + 58,333.33 = 81,666.66
Depreciation for 2023 = 29,166.67 + 70,000 = 99,166.67
Depreciation for 2024 = 35,000 + 35,000 = 70,000
Journal Entries

2020
Depreciation Expense 23,333.33
Accumulated Depreciation 23,333.33

2021
Depreciation Expense 58,333.34
Accumulated Depreciation 58,333.34

2022
Depreciation Expense 81,666.66
Accumulated Depreciation 81,666.66

2023
Depreciation Expense 99,166.67
Accumulated Depreciation 99,166.67

2024
Depreciation Expense 70,000
Accumulated Depreciation 70,000

2025
Depreciation Expense 17,500
Accumulated Depreciation 17,500

Year Carrying Amount, Depreciation for Accumulated Carrying Amount,

beg the Year Depreciation end

2020 400,000 23,333.33 23333.33 376666.67

2021 376666.67 58,333.34 81666.67 318333.33
2022 318333.33 81,666.66 163333.33 236666.67
2023 236666.67 99,166.67 262500 137500
2024 137500 70,000 332500 67500
2025 67500 17,500 350000 50000

Note: 1. The carrying amount at the beginning of the period is the carrying amount at the end of the previous period.
2. The carrying amount at the end of the life of the asset (April 30, 2025) must be equal to the residual value.

2. Output or Production Method – dito hahatiin natin ang depreciable amount based sa nai-produce na product ng asset.

Steps when using Production Method

1. Compute the depreciable amount
2. Compute the depreciation per unit (depreciable amount/total units produced)
3. Multiply the depreciation per unit to the total number of units produced during the period.

On May 1, 2020, a machinery is bought amounting P400,000. It has estimated useful life of 5 years from the date of purchase. The entity
estimated its residual value at P50,000. The entity is using the activity method of depreciating its machineries using the units of
production method. The following are the units produced by the said machine during its five-year life.

Period Units Produced

May 1, 2020 – December 31, 2020 40,000 units
January 1, 2021 – December 31, 2021 70,000 units
January 1, 2022 – December 31, 2022 50,000 units
January 1, 2023 – December 31, 2023 80,000 units
January 1, 2024 – December 31, 2024 70,000 units
January 1, 2025 – April 30, 2025 40,000 units
Total Units Produced 350,000 units

Analysis: Walang masyadoin problem dito dahil ang given ay patterned sa reporting period unlike doon sa unang problem kanina.
Maaari nyong gamitin ang paraan na ginamit ko sa working hours method. Pero ditp, iba ang approach na gagamitin ko para makita
nyo rin ang other way to compute:

Depreciable amount = 400,000 – 50,000 = 350,000

Depreciation per unit = 350,000/350,000 units = P1 per unit
Depreciation for 2020 = 40,000 units * P1 = 40,000
Depreciation for 2021 = 70,000 units * P1 = 70,000
Depreciation for 2022 = 50,000 units * P1 = 50,000
Depreciation for 2023 = 80,000 units * P1 = 80,000
Depreciation for 2024 = 70,000 units * P1 = 70,000
Depreciation for 2025 = 40,000 units * P1 = 40,000

Journal Entries

2020
Depreciation Expense 40,000
Accumulated Depreciation 40,000

2021
Depreciation Expense 70,000
Accumulated Depreciation 70,000

2022
Depreciation Expense 50,000
Accumulated Depreciation 50,000

2023
Depreciation Expense 80,000
Accumulated Depreciation 80,000

2024
Depreciation Expense 70,000
Accumulated Depreciation 70,000

2025
Depreciation Expense 40,000
Accumulated Depreciation 40,000

Year Carrying Amount, Depreciation for Accumulated Carrying Amount,

beg the Year Depreciation end

2020 400,000 40,000.00 40000 360000

2021 360000 70,000.00 110000 290000
2022 290000 50,000.00 160000 240000
2023 240000 80,000.00 240000 160000
2024 160000 70,000 310000 90000
2025 90000 40,000 350000 50000

Note: 1. The carrying amount at the beginning of the period is the carrying amount at the end of the previous period.

DECREASING CHARGE METHOD

Dito naman ay pababa nang pababa ang depreciation charges habang patagal nang patagl na ginagamit ang isang depreciable asset.
Mostly sa mga method na under nito ay napag-aralan na natin kaya medyo minimal na lamang ang discussion natin.

1. Sum-of-Years Digit - nakadepende sa remaining useful life ang allocation ng depreciable amount. Sa period na may mas mahaba
pang remaining useful life.

Steps in Using Sum-of-Years Digit

1. List down the remaining useful for each year.
2. Compute the ratio for each year based on the remaining useful life
3. Multiply the ratio with the depreciable amount

On May 1, 2020, an entity purchased a building for P1,000,000. It is estimated to be used for 5 years with residual value of 240,000. The
entity is using the sum-of-years digit method of depreciation.
Analysis: Medyo may problem dito dahil binili ang asset ay May 1, 2020 which is not the beginning of the period. Ang makukwenta kasi natin na
depreciation for first year covers May 1, 2020 up to April 30, 2021. Then, ang end ng reporting period ay December 31 kaya kailangan pa ng
allocation. Gagawin natin ang technique na ginamit ko sa Working Hours Method, but applying the Sum-of-Years Digit Method.

Depreciable Amount = 1,000,000 – 240,000 = 760,000

Period Remaining Ratio Allocated Allocation to Reporting Period

Useful Life
May 1, 2020 – April 30, 2021
May 1, 2021 – April 30, 2022
May 1, 2022 – April 30, 2023
May 1, 2023 – April 30, 2024
May 1, 2024 – April 30, 2025
Total
Depreciation
5 5/15 760,000*5/15 = For 2020 = 253,333.33*8/12 = 168,888.89
253,333.33 For 2021 = 253,333.33*4/12 = 84,444.44
4 4/15 760,000*4/15 = For 2021 = 202,666.67*8/12 = 135,111.11
202,666.67 For 2022 = 202,666.67*4/12 = 67,555.56
3 3/15 760,000*3/15 = For 2022 = 152,000*8/12 = 101,333.33
152,000 For 2023 = 152,000*4/12 = 50,666.67
2 2/15 760,000*2/15 = For 2023 = 101,333.33*8/12 = 67,555.55
101,333.33 For 2024 = 101,333.33*4/12 = 33,777.78
1 1/15 760,000*1/15 = For 2024 = 50,666.67*8/12 = 33,777.78
50,666.67 For 2025 = 50.666.67*4/12 = 16,888.89
15 760,000

Depreciation for 2020= 168,888.89

Depreciation for 2021 = 84,444.44 + 135,111.11 = 219,555.55
Depreciation for 2022 = 67,555.56 + 101,333.33 = 168,888.89
Depreciation for 2023 = 50,666.67 + 67,555.55 = 118,222.22
Depreciation for 2024 = 33,777.78 + 33,777.78 = 67,555.56
Depreciation for 2025 = 16,888.89

Journal Entries

2020
Depreciation Expense 168,888.89
Accumulated Depreciation 168,888.89

2021
Depreciation Expense 219,555.55
Accumulated Depreciation 219,555.55

2022
Depreciation Expense 168,888.89
Accumulated Depreciation 168,888.89

2023
Depreciation Expense 118,222.22
Accumulated Depreciation 118,222.22

2024
Depreciation Expense 67,555.56
Accumulated Depreciation 67,555.56

2025
Depreciation Expense 16,888.89
Accumulated Depreciation 16,888.89

Year Carrying Amount, Depreciation for Accumulated Carrying Amount,

beg the Year Depreciation end

2020 1,000,000 168,888.89 168888.89 831111.11

2021 831111.11 219,555.55 388444.44 611555.56
2022 611555.56 168,888.89 557333.33 442666.67
2023 442666.67 118,222.22 675555.55 324444.45
2024 324444.45 67,556 743111.11 256888.89
2025 256888.89 16,889 760000 240000

Note: 1. The carrying amount at the beginning of the period is the carrying amount at the end of the previous period.
Cases when the Useful Life if not exact year

Problem will arise kapag hindi eksaktong year ang life ng asset. For example, 3 and a half year ang life. Magkakaproblema dito
sapagkuha ng remaining life ng asset. So, and gagawin natin, sa halip na one year ang equivalent ng one period, gagawin natin na half
year lang ang equivalent ng isang period. So, kung 3.5 years ang life, equivalent na ito sa 7 periods. Tingnan ang illustration sa baba
para malaman kung paano ang pagkuha ng ratio.
Period Remaining Ratio
Useful Life
First Half Year 7 7/28
Second Half Year 6 6/28
Third Half Year 5 5/28
Fourth Half Year 4 4/28
Fifth Half Year 3 3/28
Sixth Half Year 2 2/28
Seventh Year 1 1/28
28

Depreciation for First Year = (7/28 + 6/28) * Depreciable Amount

Depreciation for Second Year = (5/28 + 4/28) * Depreciable Amount
Depreciation for Third Year = (3/28 + 2/28) * Depreciable Amount
Depreciation for Fourth Year (Half Year only) = (1/28) * Depreciable Amount

2. Declining Balance Method – bago itong method na ito. Kaiba ito sa double declining balance at 150% declining balance na natutunan
niyo dati. Ang pagkakatulad lang nila ay lahat ito ay pababa nang pababa ang depreciation charges habang tumatagal na itong
nagagamit.

Steps in Using Declining Balance Method

1. Compute the fixed depreciation rate

𝑛
Fixed Depreciation Rate = 1 − √𝑅𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑉𝑎𝑙𝑢𝑒/ 𝐶𝑜𝑠𝑡 , where n = useful life

2. Multiply the fixed depreciation rate with the carrying amount of the asset.

Note: Maging maingat sa depreciation na icha-charge sa last period ng useful life ng asset dahil sa rounding off ng fixed depreciation
rate. Basta ang principle, ang carrying amount ng asset after the life of the asset ay equal sa residual value.

On January 1, 2020, an entity purchased a building for P1,000,000. It is estimated to be used for 5 years with residual value of 240,000.
The entity is the declining balance method.

Analysis: Madali lang ito dahil ang sakop na period ng depreciation ay katulad lang reporting period dahil binili ang asset at beginning of the
reporting period.

5
Depreciation Rate = 1 − √240,000/1,000,000 = 0.2483039842 or 24.8303942%

Year Carrying Depreciation for the Year Accumulated Depreciation Carrying

Amount, beg Amount, end

2020 1,000,000.00 1,000,000*0.2483039842 = 248,303.98 248,303.98 751,696.02

2021 751,696.02 751,696.02*0.2483039842 = 186,649.12 248,303.98 + 186,649.12 = 434,953.10 565,046.90
2022 565,046.90 566,046.90*.2483039842 = 140,303.40 434,953.10 + 140,303.40 = 575,256.50 424,743.50
2023 424,743.50 424,743.50*0.2483039842 = 105,465.50 575,256.50 + 105,465.50 = 680,722.00 319,278.00
2024 319,278.00 319,278*0.2483039842 = 79,278.00 680,722 + 79278 = 760,000.00 240,000.00

Note: 1. The carrying amount at the beginning of the period is the carrying amount at the end of the previous period.
2. The fixed depreciation rate is multiplied by the carrying amount and not by the depreciable amount
3. In my computation, hindi ako nag-round off ng fixed depreciation rate kaya wala akong magiging problem or
adjustment sa depreciation charges for the last period of the life of the asset.

3. Double Declining Balance Method – ito lang din ang natutunan ninyo dati sa basic accounting. Ang problem lamang dito ay dapat
maging aware ka sa ending balance every period dahil baka lampas na ang accumulated depreciation mo sa total depreciable amount.

Steps in Using Double Declining Balance Method

1. Compute the depreciation rate.
Depreciation rate = (100%/Useful Life)*2
2. Multiply the depreciation rate with the carrying amount
On January 1, 2020, an entity purchased P1,000,000 worth of machinery. It has estimated useful life of 4 years and salvage value of
P100,000. The entity is using the double declining balance method.

Analysis: Mas madali nating makukwenta ang depreciation charges per period kung gagawa tayo ng table kagaya ng ginawa ko sa ibang problem.

Depreciation rate = (100%/4 years)*2 = 50%

Year Carrying Depreciation for Accumulated Carrying Amount,

Amount, beg the Year Depreciation end

2020 1,000,000 500,000 500,000 500,000

2021 500,000 250,000 750,000 250,000
2022 250,000 125,000 875,000 125,000
2023 125,000 25,000 900,000 100,000

Note: 1. The depreciation for the year is computed y multiplying the carrying amount, beg with the 50% depreciation rate.
2. For 2023, the last period, we adjusted the depreciation charges. Originally, if the depreciation rate of 50% is used, the
depreciation must be 62,500 (125,000*50%). However, if this will happen, the carrying amount will be lower than the
residual value. If this is the case, we need to adjust the depreciation for the last year of the useful life of the asset so that
the ending carrying amount will be equal to the residual value of P100,000. Therefore, 25,0000 (125,000 – 100,000
residual value) will be charged during 2023 instead of 62,500

Journal Entries

2020
Depreciation Expense 500,000
Accumulated Depreciation 500,000

2021
Depreciation Expense 250,000
Accumulated Depreciation 250,000

2022
Depreciation Expense 125,000
Accumulated Depreciation 125,000

2023
Depreciation Expense 25,000
Accumulated Depreciation 25,000

4. 150% Declining Balance Method – ang kaibahan lang nito sa double declining balance ay sa pagkukuwenta ng depreciation rate.
Instead na sa 2 imumultiply ay sa 1.5 na lamang. Therefore, depreciation rate is computed as:

Depreciation rate = (100%/Useful Life)*1.5

The procedures to compute the depreciation is the same as the double declining balance method.

PROBLEMS:

On May 31, 2020 ABC Corporation purchased an equipment for 1,200,000. The entity estimated its useful life at 4 years. The salvage
value is estimate at P120,000.

The following are relevant information regarding the productive capacity of the asset:

Year Units Produced Working Hours

1st year (May 31,2020 – May 30, 2021) 180,000 units 34,000 hours
2nd Year 220,000 units 43,000 hours
3rd Year 160,000 units 28,000 hours
4th Year 230,000 units 45,000 hours

On August 1, 2022, the equipment is sold for P480,000.

Required: Compute the gain or loss on sales of the equipment using the following method of depreciation:
a. Straight Line Method
b. Sum-of-years digit Method
c. Units-Produced Method
 d. Working Hours Method
e. Double Declining Balance Method
f.150% Declining Balance Method
g. Declining Balance Method

Hint: Gain(Loss) on Sale = Selling Price – Carrying Amount of the Asset at the time of sale.