Depreciation

Mr. Leandro S. Estadilla

Depreciation lessening of value of a certain machinery over the time of years it has been in use. Two types: 1. Normal Depreciation
a. Physical depreciation is due to the lessening of the ability of a property to produce result. Some of the cause are wear and deterioration. b. Functional depreciation is due to the lessening in the demand for the function which the property was designed to render. Common causes are inadequacy, changes in styles, population center shifts, and saturation of markets or production of more efficient machines.

2. Depreciation Due to Changes in Price Levels - inflation 3. Depletion decrease in the value due to the gradual extraction of its contents.

Terms to remember .
O = original cost S = scrap or salvage value W = wearing value n = useful or economic life of an asset in years R = periodic depreciation BV = Book value r = rate of depreciation

Four Most Common Types

1. Straight-Line Method or Age-Life Method (SLM) 2. Declining-Balance-Method or ConstantPercent-Method (DBM) 3. Sum-of-the-Years-Digit Method or Age- Life Method or Reducing-Fraction Method. (SYD) 4. Unit-Product-Method or Working-HourMethod. (UPM)

Straight-Line-Method or Age-Life-Method
This is the simplest method of allowing for depreciation and it is the most commonly used method adequately accurate for practical purposes. It spreads depreciation evenly over the useful life of the asset. It assumes that depreciation is in proportion to time. The formula for the periodic depreciation is: R=W W=O-S N

1. A steel cabinet which cost P8500 is expected to last 12 years, and at that time will have a trade-in-value of P500. Find the annual depreciation charge. Given: O=P8500 S=P500 n=12 Solution: W=O-S =P8500-P500 =P8000 R=W n =P8000 12 = P666.67

2. An item cost P5200 and after 5 years has a scrap value of P400. What is the annual depreciation using straight line method? What percent of the cost is the yearly depreciation? Given: O=P5200 S=P400 n=5 Solution: W=O-S R=W n r=R O =P5200-P400 =P4800 5 =960 4800 =P4800 =P960 =20%]

3. A machine which costs P12000 and after 6 years has a salvage value of P900. Determine the yearly depreciation and prepare a depreciation schedule. Given: O=P12000 S=P900 n=6 Solution: W=O-S R=Wn =P12000-P900 =P11000 6 =P11100 =P1850

Depreciation Schedule: Annual Depreciation 0 P1850 1850 1850 1850 1850 1850 Accumulate Depreciation 0 P1850 3700 5550 7400 9250 11100 Book Value P12000 10150 8300 6450 4600 2750 900

Year 0 1 2 3 4 5 6

Note: The accumulated depreciation charge plus book value always equals the original cost.

Declining-Balance Method or Constant-Percent Method

This method shows that an asset depreciates by the same percent of the book value. This mean that every year the depreciation charge is a fixed percentage of the preceding book value. This method has a property of bearing the largest peso depreciation during the early years and the depreciation charge becomes progressively smaller as the number of years increases.

Illustrative examples: An item which costs P5000 depreciates by 8% each year. Construct depreciation table for 8 years. Given: O=P5000 r=8% Depreciation Table Annual Total Book Year Depreciation Depreciation Value 0 0 0 P5000 1 P400 P400 4600 2 368 768 4232 3 338.56 1106.56 3893.44 4 311.48 1418.04 3581.96 5 286.56 1704.60 3295.40 6 263.63 1968.23 3031.77 7 241.54 2210.77 2789.23 2433.91 2566.09 8 223.14 Note: The total depreciation plus the book value is equal to the original cost.

2. Set up a depreciation schedule for a machine which costs P12000 and depreciates 20% of its value each year and find the book value at the end of 10 years. Given: O=P12000 r=20% Depreciation Table Annual Total Book Year Depreciation Depreciation Value 0 0 0 P12000 1 P2400 P2400 9600 2 1920 4320 7680 3 1536 5856 6144 4 1228.80 7084.80 4915.20 5 983.04 8067.84 3932.16 6 786.43 8854.27 3145.73 7 629.15 9483.42 2516.58 8 503.32 9986.74 2013.26 9 402.65 10389.391 1610.61 10711.51 1288.49 10 322.12

Sum-of-the-Years-Digit Method (SYD)

The sum-of-the-years-digit method or reducing fraction method follows the same principle as the declining-balance method. That is, the depreciation allowances are larger during the early years of the useful life of the asset and become progressively increases. Most of the cost is recovered early in the life of the assets. The depreciation each year is a fraction of the wearing value. The common denominator of the fraction is obtained by numbering the years of useful life and adding as illustrated below.

Assuming that the economic life of an asset is 5 years, the denominator=1 + 2 +3 + 4 +5 = 15. The numerator for the first year is the bigger year and each years is reduced by 1, and to find the total number of digits we apply: Total = n (n + 1) 2 = 5 (5 + 1) 2 = 5 (6) 2 = 5 (3) = 15

Illustrative Examples. 1. A machine costing P5000 has a scrap value of P500 after a useful life of 6 years. Find the annual depreciation and construct a depreciation schedule. Given: O= P5000 S=P500 n=6 years Solution: W=P5000-P500 =P4500 Total digits= 6 (6 + 1) 2 = 6 (7) 2 = 6 (3.5) = 21 Annual Depreciation Year Wearing Value Annual Dep. 1 P4500 (6 21) = P1285.71 2 4500 (5 21) = 1071.43 3 4500 (4 21) = 857.14 4 4500 (3 21) = 642.86 5 4500 (2 21) = 428.57 6 4500 (1 21) = 214.29

Depreciation Table Annual Year Depreciation 0 0

1 P1285.71

Total Book Depreciation Value 0 P5000

P1285.71 3714.29

2 3 4 5 6

1071.43 857.14 642.86 428.57 214.29

2357.14 3214.28 3857.14 4285.71 4500.00

2642.86 1785.72 1142.86 714.29 500.00

Again we notice from the above table, that the sum of the book value and total depreciation is equal to the original cost.

2. An asset valued at P7500 with trade-in-value P900 has an estimated life of 8 years. Find the yearly depreciation and make out a depreciation table. Given: O= P7500 S=P900 n= 8 years Solution: W=0 S =P7500-P900 =P6600 Total digits= 8 (8 + 1) 2 = 36 Annual Depreciation Year Wearing Value Annual Dep. 1 P6600 (8 36) = P1466.67 2 6600 (7 36) = 1283.33 3 6600 (6 36) = 1100.00 4 6600 (5 36) = 916.67 5 6600 (4 36) = 733.33 6 6600 (3 36) = 550.00 7 6600 (2 36) = 366.67 8 6600 (1 36) = 183.33

Depreciation Table Annual Depreciation 0 P1466.67 1283.33 1100.00 916.67 733.33 550.00 366.67 183.33 Total Depreciation 0 P1466.67 2750.00 3850.00 4766.67 5500.00 6050.00 6416.67 6600.00 Book Value P7500 6033.33 4750.00 3650.00 2733.33 2000.00 1450.00 1083.33 900.00

Year 0 1 2 3 4 5 6 7 8

3. An item that costs P800 has a salvage value of P50 after a useful life of 5 years. What is the 3rd year depreciation. Given: O=P800 S=P50 n=5 years Solution: W= O S Total digits = 15 =P800 P50 =P750 3rd year dep = 750 (3 15) = P150

Unit-Product-Method or Working-Hour-Method

This method is based on the number of hours an asset is used or the number of units it produces. This method allows for more depreciation during a busy period of an asset. Except in rare cases this method is inapplicable because the total operating hours and units produced cannot be estimated with any degree of accuracy.

1. A machine costs P7500 has a salvage value of P600. It is estimated that the machine can produce 25000 units. This machine has been run as follows: 1st year 2800 units 2nd year 3200 units 3rd year 4100 units 4th year 5500 units 5th year 28500 units Prepare a depreciation table. Given:
O = P7500 S=P600 n=25000 hours

Solution: W=O S = P7500-P600 =P6900 Annual Depreciation 1st year P6900 2nd year 6900 3rd year 6900 4th year 6900 5th year 6900

(2800 25000) = P772.80 (3200 25000) = 883.20 (4100 25000) = 1131.60 (5500 25000) = 1518.00 (2500 25000) = 690.00

Depreciation Table Annual Total Book Year Depreciation Depreciation Value 0 0 0 P7500 1 P772.80 P 772.80 6727.20 2 883.20 1656.00 5844.00 3 1131.60 2787.60 4712.40 4 1518.00 4305.60 3194.40 5 690.00 4995.60 2504.40 Again, we note that the sum of the book value and total depreciation is equal to the original cost.

2. A certain machine costs P12800 depreciates to P1200. this type of machine has an operating of 35500 hours, and run as follows 1st year 3400 hours 2nd year 3800 hours 3rd year 4350 hours 4th year 5160 hours 5thyear 4995 hours 6th year 7200 hours 7th year 1500 hours Prepare a depreciation table. Given: O=P12800 S=P1200 n=35500 Solution: W=O-S =P12800-P1200 =P11600

Annual Depreciation 1st year P11600 2nd year 11600 3rd year 11600 4th year 11600 5th year 11600 6th year 11600 7th year 11600

(3400 35500) = P1110.99 (3800 35500) = 1241.69 (4350 35500) = 1421.41 (5160 35500) = 1686.08 (4995 35500) = 1632.17 (7200 35500) = 2352.68 (1500 35500) = 490.14

Depreciation Table Annual Total

Year 0 Depreciation Depreciation 0 0

Book
Value P12800

1 2 3 4 5 6 7

P1110.99 1241.69 1421.41 1686.08 1632.17 2352.68 490.14

P1110.99 2352.68 3774.09 5460.17 7092.34 9445.02 9935.16

11689.01 10447.32 9025.91 7339.83 5707.66 3354.98 2864.84