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  • Depreciation

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    Edielyn Villaranda
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    1) Depreciation is the systematic allocation of the cost of tangible assets over their useful lives. 2) There are different methods of depreciation including straight-line, declining balance, and sum of years digits. 3) Under the declining balance method, a fixed rate is multiplied by the asset's declining carrying amount each year to calculate depreciation expense. The 150% declining balance method uses a rate that is 150% of the straight-line rate.

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    1) Depreciation is the systematic allocation of the cost of tangible assets over their useful lives. 2) There are different methods of depreciation including straight-line, declining balance, and sum of years digits. 3) Under the declining balance method, a fixed rate is multiplied by the asset's declining carrying amount each year to calculate depreciation expense. The 150% declining balance method uses a rate that is 150% of the straight-line rate.

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    21 views14 pages

    Depreciation

    Uploaded by

    Edielyn Villaranda
    1) Depreciation is the systematic allocation of the cost of tangible assets over their useful lives. 2) There are different methods of depreciation including straight-line, declining balance, and sum of years digits. 3) Under the declining balance method, a fixed rate is multiplied by the asset's declining carrying amount each year to calculate depreciation expense. The 150% declining balance method uses a rate that is 150% of the straight-line rate.

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    Depreciation

    SLIDESMANIA.COM
    It is defined as the
    systematic allocation
    of the depreciable
    amount of an asset
    over the useful life.
    SLIDESMANIA.COM
    Reminder!
    Kinds of Depreciation:
    Physical Depreciation is related to Depreciation Method
    Depreciation is an the depreciable asset’s wear and tear
    expense. and deterioration over a period. It shall reflect the pattern
    It may be part of the Functional or Economic Depreciation in which future economic
    benefits from the asset are
    cost of goods arises from inadequacy, expected to be consumed
    manufactured or an supersession and obsolescence. by the entity.

    operating expense.
    PFRS 5, paragraph 25,
    provides that if the Factors of Depreciation:
    Such change in
    Depreciable Amount or depreciable cost is the cost of
    asset is classified as an asset or other amount substituted for cost, less
    depreciation method shall
    be accounted for as
    held for sale the residual value change in accounting
    depreciation shall be Residual Value is the estimated net amount currently estimate.
    obtainable if the asset is the end of the useful life.
    discontinued.
    SLIDESMANIA.COM

    Useful Life is either the period over which an asset is


    expected to be available for use by an entity.
    STRAIGHT LINE METHOD
    Annual Depreciation = Cost minus residual value / Useful life in years
    ILLUSTRATION
    The following data relate to an equipment acquired at the beginning of the first year:
    Equipment P105,000
    Residual value 5,000
    Useful life 5 years

    YEAR PARTICULAR DEPRECIATION ACCUMULATED CARRYING AMOUNT


    DEPRECIATION
    Acquisition cost 105,000
    1 Depreciation for 1st 20,000 20,000 85,000
    year
    2 Depreciation for 2nd 20,000 40,000 65,000
    year
    3 Depreciation for 3rd 20,000 60,000 45,000
    year
    4 Depreciation for 4th 20,000 80,000 25,000
    year
    5 Depreciation for 5th 20,000 100,000 5,000
    year
    SLIDESMANIA.COM

    100,000
    COMPOSITE AND GROUP METHOD
    ASSET COST RESIDUAL DEPRECIABLE USEFUL LIFE IN ANNUAL
    VALUE AMOUNT YEARS DEPRECIATION

    Building 650,000 50,000 600,000 15 40,000

    Machinery 220,000 20,000 200,000 8 25,000

    Equipment 130,000 30,000 100,000 4 25,000

    1,000,000 100,000 900,000 90,000


    SLIDESMANIA.COM
    Working Hours Method Output or Production Method
    A depreciation rate A depreciation rate
    per hour is computed per unit is computed
    by dividing the by dividing the
    depreciable amount depreciable amount
    by the estimated by the estimated
    useful life in terms of useful life in terms
    service hours. of units of output.
    SLIDESMANIA.COM
    SLIDESMANIA.COM
    SLIDESMANIA.COM
    On April 1, 2020, KK Co. purchased a new
    machinery for P3,000,000. The new
    machinery has an estimated useful life of five
    years, and depreciation is computed by the
    sum of the years' digits method. What is the
    accumulated depreciation of the machinery
    on December 31, 2021?
    SLIDESMANIA.COM
    Declining Balance Method Formula for fixed rate
    𝑹𝒂𝒕𝒆 = 𝟏 −𝒏 𝑹𝒆𝒔𝒊𝒅𝒖𝒂𝒍 𝒗𝒂𝒍𝒖𝒆/𝑪𝒐𝒔𝒕
    ● A fixed or uniform rate is
    multiplied by the declining Illustration:
    carrying amount of the Cost of asset 500,000
    asset in order to arrive at Residual value 50,000
    the annual depreciation. Estimated useful life 5 years

    ● This is also known as fixed 𝑹𝒂𝒕𝒆 = 𝟏 −𝒏 𝑹𝒆𝒔𝒊𝒅𝒖𝒂𝒍 𝒗𝒂𝒍𝒖𝒆/𝑪𝒐𝒔𝒕


    rate on diminishing 𝟓𝟎, 𝟎𝟎𝟎
    𝐑𝐚𝐭𝐞 = 𝟏 −𝟓
    carrying amount method 𝟓𝟎𝟎, 𝟎𝟎𝟎
    𝑹𝒂𝒕𝒆 = 𝟏 −𝟓 . 𝟏𝟎
    𝑹𝒂𝒕𝒆 = 𝟏 − . 𝟔𝟑𝟐
    𝑹𝒂𝒕𝒆 =. 𝟑𝟔𝟖 𝒐𝒓 𝟑𝟔. 𝟖%
    SLIDESMANIA.COM
    Double declining balance method Illustration:
    ● The procedure is the same Cost of asset 500,000
    as the declining balance Date of acquisition Jan.1,2020
    method in that a fixed rate Residual value 50,000
    is multiplied by the Estimated useful life 5 years
    declining carrying amount Straight line rate:
    of the asset to arrive at (100%/5 years) 20%
    the annual depreciation. Double declining rate:
    (20% x 2) 40%
    SLIDESMANIA.COM
    BC Co. purchased factory equipment which
    was installed and put into service on January
    1, 2020 at a total cost of P1,280,000.
    Residual value was estimated at P80,000.
    The equipment is depreciated over 8 years
    by the double declining balance method.
    How much depreciation expense should BC
    Co. record on the equipment for 2021?
    SLIDESMANIA.COM
    150% declining balance method Illustration:
    ● In application and Cost of asset 500,000
    procedure, this method is Date of acquisition Jan.1,2020
    the same as the double Residual value 50,000
    declining method. Estimated useful life 5 years
    ● Under this method, the Straight line rate:
    fixed rate is 150% of the (100%/5 years) 20%
    straight line rate Double declining rate:
    (150% x 2) 30%
    SLIDESMANIA.COM
    BC Co. purchased factory equipment which
    was installed and put into service on January
    1, 2020 at a total cost of P1,280,000.
    Residual value was estimated at P80,000.
    The equipment is depreciated over 8 years
    by the 150% declining balance method. How
    much depreciation expense should BC Co.
    record on the equipment for 2021?
    SLIDESMANIA.COM

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