0 оценок0% нашли этот документ полезным (0 голосов)
393 просмотров35 страниц
This document defines depreciation and various depreciation methods. It explains that depreciation is a decrease in the value of property over time. It then defines and provides examples of straight-line depreciation, sinking fund depreciation, declining balance depreciation, double declining balance depreciation, sum-of-the-years digits depreciation, and service output depreciation. The document is intended to educate about accounting methods for allocating the cost of fixed assets over their useful lives.
This document defines depreciation and various depreciation methods. It explains that depreciation is a decrease in the value of property over time. It then defines and provides examples of straight-line depreciation, sinking fund depreciation, declining balance depreciation, double declining balance depreciation, sum-of-the-years digits depreciation, and service output depreciation. The document is intended to educate about accounting methods for allocating the cost of fixed assets over their useful lives.
This document defines depreciation and various depreciation methods. It explains that depreciation is a decrease in the value of property over time. It then defines and provides examples of straight-line depreciation, sinking fund depreciation, declining balance depreciation, double declining balance depreciation, sum-of-the-years digits depreciation, and service output depreciation. The document is intended to educate about accounting methods for allocating the cost of fixed assets over their useful lives.
the value of a property, such as machinery, equipment, building or other structure, due to the passage of time. Depreciation Value – preset worth of all future profits that are to received through ownership
Market value of a property – the amount
which a willing buyer will pay to a willing seller for the property where each has equal advantage and is under no compulsion to buy or sell Depreciation 4
Utility or use of property – is what the
property is worth to the owner as an operating unit
Fair value – the value which is determined by
a disinterested third party in order to establish a price that is fair to both seller and buyer. Depreciation 5
Book value (depreciated book value) – worth of
a property as shown on the accounting records of an enterprise
Salvage (resale) value – is the price that can be
obtained from the sale of property after it has been used
Scrap value – amount the property would sell for
if disposed off as junk Purposes of Depreciation 6
To provide for the recovery of capital which
has been invested in physical property
To enable the cost of depreciation to be
charged to the cost of producing products or services that results from the use of the property Types of Depreciation Normal depreciation Physical
Functional
Depreciation due to changes in price levels
Depletion Depreciation Cost 8
Physical Life (of a property) – is the length of
time during which it is capable of performing the function for which it was designed and manufactured
Economic Life – is the length of time during
which the property may be operated at a profit Requirements of a Depreciation Method 9
It should be simple.
It should recover profit.
The book value will be reasonably close to
the market value at any time.
The method should be accepted by the
Bureau of Internal Revenue. Depreciation Methods 10
Straight Line Method
Sinking Fund Formula Declining Balance Method Double Declining Balance (DDB) Method Sum of the Years’ Digits (SYD) Method Service Output Method Straight Line Method 11
Straight Line Method assumes that the loss
in value is directly proportional to the age of the property. Straight Line Method 12 Example 1 An electronic balance costs P90,000 and has an estimated salvage value of P8,000 a the end of its 10 years life time. What would be the book value after three years, using the straight line method? Example 2 14
A tax and duty free importation of a 30HP
sandmill (for paint manufacturing) cost P360,000, CIF Manila. Bank charges, arrastre and brokerage cost P5,000. Foundation and installation costs were P25,000. Other incidental expenses amounted to P20,000. salvage value of the mill is estimated to be P60,000 after 20 years. Find the appraisal value of the mill, using straight line depreciation , at the end of (a) 10 years and (b) 15 years. Example 3 15
A certain company makes it the policy that
for any new piece of equipment the annual depreciation cost should not exceed 10% of the original cost at any time with no salvage or scrap value. Determine the length of service life necessary if the depreciation method used is straight line formula. Sinking Fund Formula 16
This method assumes that a sinking fund is
established in which funds will accumulate for replacement.
The total depreciation that has taken place
up to any given time is assumed to be equal to the accumulated amount in the sinking fund at that time. Sinking Fund Formula 17 Example 4 A broadcasting corporation purchased equipment worth P53,000 and paid P1,500 for freight and delivery charges to the site. The equipment has a normal life of ten years with a trade-in value of P5,000 against the purchase of new equipment at the end of life. Determine the book value at the end of 7 years using sinking fund method at 6% interest. Example 5 19
Power to a remote transmitting station is
provided by a Diesel-electric generator unit. The original cost of the unit is P65,000. it costs P2,000 to ship the unit to the job site. An additional cost of P3,000 was incurred for installation. If the unit has an expected life of 10 years and a salvage value P5,000, determine: Example 5 20
a. the annual depreciation cost by the straight
line method;
b. the annual depreciation cost by the sinking
fund method (Assume that the annual charge for depreciation was deposited in a fund drawing compound interest at the rate of 5%.) Declining Balance Method (DBM) 21
It is sometimes called the constant
percentage method or the Matheson Formula.
In this method, it is assumed that the annual
cost of depreciation is a fixed percentage of the salvage value at the beginning of the year Declining Balance Method 22 Declining Balance Method Example 6 A certain type of machine loses 10% of its value each year. The machine costs P2,000 originally. Make out a schedule showing the yearly depreciation, the total depreciation and the book value at the end of each year for 5 years.
Book value at Depreciation Total
Book value at Year beginning of during the depreciation at end of year year year 10% end of year Double Declining Balance (DDB) 25 Method This method is very similar to the declining balance method except that the rate of depreciation k is replaced by 2/L. Double Declining Balance Method 26 Example 6 Determine the rate of depreciation, the total depreciation up to the end of the 8th year and the book value at the end of 8 years for an asset that costs P15,000 new and has an estimated scrap value of P2,000 at the end of 10 years by (a) the declining balance method, and (b) the double declining balance method. Sum-of-the-Years’-Digits (SYD) 28 Method Sum-of-the-Years’-Digits (SYD) Method Service-Output Method In this method, it is assumed that the total depreciation that has taken place is directly proportional to the quantity of the output of the property up to that time. Service-Output Method 31 Example 7 An asphalt and aggregate mixing plant having a capacity of 50 cu.m. every hour costs P2,500,000. It is estimated to process 800,000 cu.m. during its life. During a certain year, it processed 60,000 cu.m. if its scrap value is P100,000, determine the total depreciation during the year and the depreciation cost chargeable to each batch of 50 cu.m. using the service-output method. Example 8 33
A contractor imported a bulldozer for his job, paying
P250,000 to the manufacturer. Freight and insurance charges amounted to P18,000; customs’, broker’s fees and arrastre services, P8,500; taxes, permits and other expenses, P25,000. If the contractor estimates the life of the bulldozer to be 10 years with a salvage value of P20,000, determine the book value at the end of 6 years, using the (a) straight line formula, (b) sinking fund at 8%, (c) Matheson formula, (d) double declining balance method and (e) SYD method. Example 9 34
A machine costs P7,000, last 8 years and
has a salvage value at the end of life of P350. Determine the depreciation charge during the 4th year and the book value at the end of 4 years by the (a) straight line method, (b) declining balance method, (c) SYD method, and (d) sinking fund method with interest at 12%. Example 10 35
A machine which costs P10,000 was sold as
scrap after being used for 10 years. If the scrap value was P500, determine the depreciation charge during the fifth year and the book value at the end of 5 years using (a) constant percentage method, (b) double declining balance method, (c) SYD method and (d) straight line formula.