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Sample Problem
A new electric saw for cutting small pieces of lumber in a furniture manufacturing plant has a cost basis of P4,000 and a 10year depreciable life. The estimated SV of the saw is zero at the end of 10 years.
EOY, k
dk
4000
400
3600
400
3200
400
2800
400
2400
400
2000
400
1600
400
1200
400
800
400
400
10
400
dk = (B SVN)/N
dk* = Kdk for 1 k N
BVk = B dk*
=
=
=
=
=
=
EOY, k
BVk
dk
Sample Computations
BVk
Sample Computations
4000
800
3200
640
2560
R = 2/10 = 0.20
d6 = 4000(1 0.2) 5(0.2) = 262.14
Where:
D1 = B(R)
k-1
dk= B(1-R) (R)
k
dk* = B[1-(1-R) ]
k
BVk = B(1-R)
N
BVN = B(1-R)
R
R
=
=
512
409.60
1638.40
2048
327.68
1310.72
262.14
1048.58
209.72
838.86
167.77
671.09
134.22
536.87
10
107.37
429.50
Declining Balance / N
EOY, k
dk
BVk
Sample Computations
4000
727.27
3272.73
654.55
2618.18
581.82
2036.36
509.09
1527.27
436.36
1090.91
363.64
727.27
290.91
436.36
218.18
218.18
145.45
72.73
10
72.73
7/24/2013
Year, k
1
2
3
4
5
6
7
8
9
10
TOTAL
Beginning of
Year BV
4000
3200
2560
2048
1638.40
1310.72
1048.58
786.44
524.30
262.16
200% DB Method
800
640
512
409.60
327.68
262.14
209.72
167.77
134.22
107.37
3570.50
SL Method
400
355.56
320
292.57
273.07
262.14
262.14
262.14
262.14
262.14
Depreciation Amount
Selected
800
640
512
409.6
327.68
262.14 (SWITCH)
262.14
262.14
262.14
262.14
4000.00
A piece of equipment used in a business has a basis of P50,000 and is expected to have a P10,000 salvage value when
replaced after 30,000 hours of use. Find its depreciation rate per hour of use, and find its book value after 10,000 hours of
operation.
Solution:
Depreciation per unit of production = (50,000 10,000)/30,000 = P1.33 per hour
After 10,000 hours, BV = 50,000 (P1.33/hr)(10,000 hrs) = P36,700
Note: The switch over occurs in the year in which a larger depreciation amount is obtained from the straight-line method.
With switch over the book value at year ten is 0.00
Depletion
WGS zinc company recently bought an ore-bearing parcel of land for P2,000,000. The recovery reserves in the mine were
estimated to be 500,000 tons.
a.
b.
If 75,000 tons of ore were mined during the first year and 50,000 tons were sold, what was the depletion
allowance for year one?
Suppose at the end of year one, reserves were reevaluated and found to be only 400,000 tons. If 50,000
additional tons are sold in the second year, what is the depletion allowance for year two?
Solutions:
a.
b.
The adjusted cost basis at the beginning of year 2 = P2,000,000 P200,000 = P1,800,000
The depletion unit =P1,800,000/400,000 tons = P4.5/ton
Depletion Allowance for year 2 = 50,000 tons (P4.5/ton) = P225,000