CONTINUOUS

COMPOUNDING
CONCEPT
Continuous compounding is based on the assumption that cash payments
occur once per year but compounding is continuous throughout the year.

𝐹 = 𝑃𝑒 𝑟𝑛

Where F = Future worth

P = Principal
r = Nominal Rate
n = period
DEPRECIATION
CONCEPT & TERMINOLOGY
Depreciation - the reduction or fall in the value of an asset or physical property
during the course of its working life and due to the passage of time.
Depreciable Property – property for which depreciation is allowed under
federal, state, or municipal income tax laws and regulations
A property is depreciable if it meets the following basic requirements:
1) It must be used in business or held to produce income.
2) It must have a determinable useful life, and the life must be longer than one year.
3) It must be something that wears out, decays, gets used up, becomes obsolete, or
loses value from natural causes.
4) It is not inventory, stock in trade, or investment property.
 CONCEPT & TERMINOLOGY
Assets such as machinery,
Personal vehicles, equipment,
furniture, etc.
Tangible
Anything that is erected on,
Depreciable Real growing on, or attached to land.
(Land itself is not depreciable)
Property
Copyright, patent,
Intangible or franchise
CONCEPT & TERMINOLOGY
A property begins to depreciate when it is placed in service for use in
the business and for the production of income.
Property is placed in service when it is ready and available for a specific
use, even if it is not actually used yet.
Depreciation stops when the cost of placing as asset in service has been
recovered or when the asset is sold, whichever comes first.
CONCEPT & TERMINOLOGY
ADJUSTED (COST) BASIS – original cost basis of the asset, adjusted by
allowable increases or decreases; used to compute depreciation
deductions.
BASIS OR COST BASIS – initial cost of acquiring an asset (purchase
price + any sales taxes), including transportation expenses and other
normal costs of making the asset serviceable for its intended use; also
called UNADJUSTED COST BASIS
BOOK VALUE (BV) – worth of depreciable property after a certain
period. It is the original cost basis of the property + adjustments, less all
allowable depreciation deductions.
CONCEPT & TERMINOLOGY
MARKET VALUE (MV) – amount that will be paid by a willing buyer to a
willing seller for a property, where each has equal advantage and is under no
compulsion to buy or sell
RECOVERY PERIOD – number of years over which the basis of a property is
recovered through the accounting process
RECOVERY RATE – a percentage for each year of the recovery period that is
utilized to compute an annual depreciation deduction
SALVAGE VALUE (SV) – estimated value of property at the end of its useful
life. It is the expected selling price of a property when the asset can no longer be
used productively by its owner
USEFUL LIFE - estimated period that a property will be used in a trade or
business to produce income. It is not how long the property will last but how
long the owner expects to productively use it
DEPRECIATION METHODS
STRAIGHT-LINE (SL) METHOD
- the simplest depreciation method. It assumes that a constant amount is depreciated
each year over the depreciable (useful) life of the asset.
(𝐶0 −𝐶𝑛 )
ANNUAL DEPRECIATION CHARGE 𝑑 =
𝑛
where 𝐶𝑂 = first cost
𝐶𝑛 = cost after “n” years (SV)
n = life of the property
BOOK VALUE AT THE END OF “m” YEARS OF USING 𝐵𝑉𝑚 = 𝐶𝑂 𝐷𝑚
where 𝐷𝑚 = total depreciation after “m” years
𝑫𝒎 = d(m)
SAMPLE PROBLEM
A machine costs ₱10 000 and an
estimated life of 5 years with a
salvage value of ₱500. Determine
the annual depreciation amounts
and the book value at the end of
each year using SL Method.
SAMPLE PROBLEM
(𝐶0 − 𝐶𝑛 ) 10000 − 500
𝑑 = = = 1900
𝑛 5
𝐷1 = 𝑑 1 = 1900 𝐵𝑉1 = 𝐶𝑜 − 𝐷1 = 10000 − 1900 = 8100
𝐷2 = 𝑑 2 = 3800 𝐵𝑉2 = 𝐶𝑜 − 𝐷2 = 10000 − 3800 = 6200
𝐷5 = 𝑑 5 = 9500 𝐵𝑉5 = 𝐶𝑜 − 𝐷5 = 10000 − 9500 = 500
Period, m Depreciation, d Book Value, BV
0 0 10,000
1 1,900 8,100
2 1,900 6,200
3 1,900 4,300
4 1,900 2,400
5 1,900 500
DEPRECIATION METHODS
SINKING FUND (SF) METHOD
- It is assumed that a sinking fund is established in which funds will accumulate for
replacement purposes
(𝐶0 −𝐶𝑛 )(𝑖)
ANNUAL DEPRECIATION CHARGE 𝑑 =
(1+𝑖)𝑛 −1
where 𝐶𝑂 = first cost
𝐶𝑛 = cost after “n” years (SV)
n = life of the property
BOOK VALUE AT THE END OF “m” YEARS OF USING 𝐵𝑉𝑚 = 𝐶𝑂 −𝐷𝑚
where 𝐷𝑚 = total depreciation after “m” years
𝒅[ 𝟏+𝒊 𝒎 −𝟏]
𝑫𝒎 =
𝒊
SAMPLE PROBLEM
A machine costs ₱10 000 and an
estimated life of 5 years with a salvage
value of ₱500. Determine the annual
depreciation amounts and the book
value at the end of each year using SF
Method. Assume 10% interest.
 SAMPLE PROBLEM
𝐶0 − 𝐶𝑛 𝑖 (10000 − 500)(0.10)
𝑑 = 𝑛
= 5
= 1,556.076
(1 + 𝑖) −1 (1 + 0.10) − 1
𝐷1 = 𝑑 = 1556.076
[(1 + 𝑖)2 − 1] Period, m Depreciation, D Book Value, BV
𝐷2 = 𝑑 𝑥 = 3267.7596
𝑖 0 0 10,000
[(1 + 0.10)2 − 1] 1 1556.076 8443.92
𝐷5 = 𝑑 𝑥 = 9500
0.10 2 3267.7596 6732.24
3 5150.61 4849.39
𝐵𝑉1 = 𝐶𝑜 − 𝐷1 = 10000 − 1556.076 = 8443.92
4 7221.75 2778.29
𝐵𝑉2 = 𝐶𝑜 − 𝐷2 = 10000 − 3267.7596 = 6732.24
5 9500 500
𝐵𝑉5 = 𝐶𝑜 − 𝐷5 = 10000 − 9500 = 500
DEPRECIATION METHODS
DECLINING BALANCE (DB) METHOD
- It is assumed that the annual cost of depreciation is a fixed percentage of the BV
at the beginning of the year; CONSTANT PERCENTAGE METHOD OR MATHESON
FORMULA
𝑛 𝐶𝑛 𝑚 𝐶𝑚
𝑘 =1− 𝑜𝑟 𝑘 = 1 −
𝐶𝑜 𝐶𝑜

The value of k is the constant percentage; k>1; 𝑆𝑉 ≠ 0

SAMPLE PROBLEM
A machine costs ₱10 000 and an
estimated life of 5 years with a
salvage value of ₱500. Determine
the annual depreciation amounts
and the book value at the end of
each year using DB Method.
 SAMPLE PROBLEM
𝑛 𝑆𝑉 5 500
𝑘 =1− =1− = 0.4507
𝐶𝑜 10000 Period, m Depreciation, D Book Value, BV
0 0 10,000
𝐷1 = 𝑘 𝑥 𝐶𝑜 = 4507 1 0.4507(10000)= 5493
𝐵𝑉1 = 𝐶𝑜 − 𝐷1 = 10000 − 4507 = 5493 4507.00

𝐷2 = 𝑘 𝑥 𝐵𝑉1 = 2475.69 2 0.4507(5493)= 3017.30

4507.00
𝐵𝑉2 = 𝐵𝑉1 − 𝐷2 = 5493 − 2475.69 = 3017.30
3 0.4507(3017.30) 1657.40
𝐷5 = 𝑘 𝑥 𝐵𝑉4 = 910.41 = 4507.00
𝐵𝑉5 = 𝐵𝑉4 − 𝐷5 = 910.41 − 410.32 = 500.09 4 0.4507(1657.40) 910.41
= 4507.00
5 0.4507(910.41)= 500.09
4507.00
DEPRECIATION METHODS
SUM-OF-YEARS DIGIT (SYD) METHOD
𝑛
FIRST YEAR 𝑑1 = (𝐶𝑂 − 𝐶𝑛 )
𝑦𝑒𝑎𝑟𝑠
𝑛−1
SECOND YEAR 𝑑2 = (𝐶𝑂 − 𝐶𝑛 )
𝑦𝑒𝑎𝑟𝑠
𝑛−2
THIRD YEAR 𝑑3 = (𝐶𝑂 − 𝐶𝑛 )
𝑦𝑒𝑎𝑟𝑠

BOOK VALUE AT THE END OF “m” YEARS

𝐶𝑚 = 𝐶𝑜 − (𝑑1 + 𝑑2 + 𝑑3 + ⋯ 𝑑𝑚 )
SUM-OF-YEARS DIGIT
𝑛(𝑛 + 1)
𝑦𝑒𝑎𝑟𝑠 =
2
SAMPLE PROBLEM
A machine costs ₱10 000 and an
estimated life of 5 years with a
salvage value of ₱500. Determine
the annual depreciation amounts
and the book value at the end of
each year using SYD Method.
 SAMPLE PROBLEM
𝑛(𝑛 + 1) 5(5 + 1)
𝑦𝑒𝑎𝑟 = = = 15
2 2
𝑛 5
𝑑1 = 𝐶𝑜 − 𝐶𝑛 = 10000 − 500 = 3,166.67
𝑦𝑒𝑎𝑟 15
4 Period, m Depreciation, D Book Value, BV
𝑑2 = 10000 − 500 = 2,533.33
15 0 0 10,000
1 1 3166.67 6833.33
𝑑5 = 10000 − 500 = 633.33
15 2 2533.33 4300
3 1900 2400
𝐵𝑉1 = 10000 − 3166.67 = 6833.33
4 1266.67 1133.33
𝐵𝑉2 = 6833.33 − 2533.33 = 4300
5 633.33 500
𝐵𝑉5 = 1133.33 − 633.33 = 500
DEPRECIATION METHODS
DOUBLE DECLINING BALANCE (DDB) METHOD
- type of declining balance depreciation method in which depreciation rate is double
the straight-line depreciation rate
1
STRAIGHT-LINE DEPRECIATION RATE 𝑟𝑆𝐿𝐷 = 𝑥100
𝑛
DOUBLE DECLINING BALANCE RATE 𝑟𝐷𝐷𝐵 = 2 𝑥 𝑟𝑆𝐿𝐷
DEPRECIATION 𝑑 = 𝐶𝑜 𝑥 𝑟𝐷𝐷𝐵
BOOK VALUE 𝐵𝑉 = 𝐶𝑜 − 𝐴𝑐𝑐𝑢𝑚𝑢𝑙𝑎𝑡𝑒𝑑 𝑑
SAMPLE PROBLEM
An asset costing ₱20,000 has
estimated useful life of 5 years and
salvage value of ₱ 4,500. Calculate
the depreciation for the first year,
second and third year of its life using
double declining balance method.
SAMPLE PROBLEM
1 1 But the depreciation calculated will
𝑟𝑆𝐿𝐷 = 𝑥100 = 𝑥100 = 20%
𝑛 5 decrease the book value of the asset
𝑟𝐷𝐷𝐵 = 2 𝑥 𝑟𝑆𝐿𝐷 = 40% below its estimated residual value (7,200
− 2,880 = 4,320 < 4,500).
𝐷1 = 𝑑 = 40% 𝑥 20000 = 8000
𝐵𝑉1 = 20000 − 8000 = 12000 Therefore depreciation would only be
allowed up to the point where book value
𝐷2 = 40% 𝑥 12000 = 4800 = salvage value.
𝐵𝑉2 = 12000 − 4800 = 7200
𝐷3 = 40% 𝑥 7200 = 2880 Thus,
Depreciation Allowed = 7,200 −
𝐵𝑉3 = 7200 − 2880 = 4320 4,500 = 2,700
DEPLETION
DEPLETION
-reduction of the value of certain natural resources such as mines, oil, timber,
quarries, etc. due to the gradual extraction of its contents

UNIT OR FACTOR METHOD

• Dependent on the initial cost of the property and the number of units in the property
• The depletion charge during any year is calculated using
𝐼𝐶
𝐷𝐶 = (𝑈𝑆) where IC = initial cost of property
𝑇𝑈
TU = total units in property
US = units sold

PERCENTAGE OR DEPLETION ALLOWANCE METHOD

• 𝐷𝑒𝑝𝑙𝑒𝑡𝑖𝑜𝑛 = 𝐹𝑖𝑥𝑒𝑑 % 𝑜𝑓 𝑔𝑟𝑜𝑠𝑠 𝑖𝑛𝑐𝑜𝑚𝑒 𝑜𝑟
• 𝐷𝑒𝑝𝑙𝑒𝑡𝑖𝑜𝑛 = 50% 𝑜𝑓 𝑛𝑒𝑡 𝑡𝑎𝑥𝑎𝑏𝑙𝑒 𝑖𝑛𝑐𝑜𝑚𝑒 (𝑤ℎ𝑖𝑐ℎ𝑒𝑣𝑒𝑟 𝑖𝑠 𝑠𝑚𝑎𝑙𝑙𝑒𝑟)
DEPLETION
FIXED PERCENTAGES ALLOWED FOR CERTAIN NATURAL RESOURCES
NATURAL RESOURCES MAXIMUM PERCENTAGE
(BASED ON GROSS INCOME
Sulfur, Cobalt, Lead, Nickel, Zinc, etc. 22
Oil and Gas wells 22
Gold, Silver, Copper, Iron ore 15
Coal, Sodium Chloride 10
Gravel, Sand, Clay 5
DEPRECIATION METHODS
UNITS-OF-PRODUCTION (UP) METHOD

𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑈𝑛𝑖𝑡𝑠 𝑃𝑟𝑜𝑑𝑢𝑐𝑒𝑑

𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 = (𝐶𝑜 − 𝐶𝑛 )
𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑙𝑖𝑓𝑒𝑡𝑖𝑚𝑒 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑢𝑛𝑖𝑡𝑠

𝐶𝑜 − 𝐶𝑛
𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 𝑜𝑓 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 =
𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑙𝑖𝑓𝑒𝑡𝑖𝑚𝑒 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑢𝑛𝑖𝑡𝑠
SAMPLE PROBLEM
A coal mine was purchased by X
Corporation for ₱16 million. It was
estimated that the mine has capacity to
produce 200,000 tones of coal. The
company extracted 46,000 tones during
its first year of operation. Calculate the
depreciation.
SAMPLE PROBLEM
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑈𝑛𝑖𝑡𝑠 𝑃𝑟𝑜𝑑𝑢𝑐𝑒𝑑
𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 = 𝐶 − 𝐶𝑛
𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑙𝑖𝑓𝑒𝑡𝑖𝑚𝑒 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑢𝑛𝑖𝑡𝑠 𝑜

46000
𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 = 𝑥16𝑀 = 𝟑. 𝟔𝟖𝐌
200000
 PRACTICE PROBLEMS
1. Mr. S purchased a mine for ₱ 50,000. Its scrap value is ₱5000
and its working life is 9 years. 90000 units were expected to be
produced during its working life. 5000 units in the first, 12,500
units in the second and 25000 units in the third year were
produced. Find out the amount of depreciation.
2. ABC Company purchases a machine for ₱ 100,000. It has an
estimated salvage value of ₱ 10,000 and a useful life of five years.
Determine the annual depreciation amounts and the book value at
the end of each year using double declining balance depreciation.