 Depreci

ation
Company X purchased a new
machine for P2,000,000 on April 1,
2008. At that time, the entity expected
to use the machine for nine years and
then sell it for P200,000. The machine
was sold for P1,100,000 on September
30, 2013. The entity’s depreciation
policy is as follows:
 The straight line method is used.
 No depreciation in the year of
acquisition.
 A full year’s depreciation in the year
of disposal.

What amount should be recognized as

gain on disposal on September 30,
2013?

 Time is up!
Answer: 100,000
Cash 1,100,000
Accumulated Depreciation
1,000,000
 Machine 2,000,000
Gain on Disposal
100,000
Depreciation and the matching
principle
 Immediate recognition
 Direct association
 Systematic and rational
allocation
Definition
The systematic allocation of the
depreciable amount of an asset
over useful life
Objective
 To have each period benefiting
from the use of the asset bear
an equitable share of the asset
cost
Depreciation in the FS
Expense
May be:
- Operating Expense
- Part of Cost of Goods
Manufactured
What to depreciate
All property shall be depreciated
Exception: Nonexhaustible land
Depreciation Period
Start: when it is available for use
Continue: even when temporarily
idle
End:
• When derecognized
◦ Disposal
◦ No future economic benefits
are expected from use

• When classified as held for sale

Kinds of Depreciation
 Physical Depreciation
Functional or Economic
Depreciation
Kinds of Depreciation
Physical Depreciation
Wear and tear
Action of the elements
Passage of time
Accidents
Disease

Functional or Economic
Depreciation
Obsolence
Inadequacy
Factors of Depreciation
Depreciable amount
Residual Value
Useful Life
Depreciable Amount
Also: Depreciable Cost

= Cost of Asset – Residual

Value

Depreciable Amount
Each part of an item of PPE with
a cost that is significant in
relation to the total cost of the
 item shall be depreciated
separately.
Residual Value
Also: Salvage Value, Scrap Value

Estimated net amount (Sales

Price – Cost to Sell) currently
obtainable if the asset is at the
end of the useful life

Residual Value
Reviewed at least every year-
end
Often immaterial in practice
Useful Life
 Period over which an asset is
expected to be available for
use by the entity
 Number of production units
expected to be obtained from
the asset by the entity
 Service Life
Useful Life
Expressed as:
• Time periods as in years
 • Units of output or
production
• Service hours or working
hours
Useful Life
• Expected usage of the asset
• Expected physical wear and
tear
• Technical or commercial
obsolence
• Legal limits
Methods of Depreciation
• Equal or uniform charge
methods
• Straight line
 • Composite method
• Group method

• Variable charge or use-factor

methods
• Working hours or service
hours
• Output or production
method

Straight Line Method

Variable Charge Methods

* working hours or units of

output
Illustration
Machinery 500,000
Residual Value 200,000
Estimated useful life:
Years 5 years
Service hours 60,000 hours
Output 150,000 units
Working hours method

Depreciation:
Year 1 (5 x 12,000) 60,000
Year 2 (5 x 10,000) 50,000
Year 3 (5 x 13,000) 65,000
Output method

Depreciation:
Year 1 (2 x 29,000) 58,000
Year 2 (2 x 32,000) 64,000
Year 3 (2 x 35,000) 70,000
Changes
 Change in useful life
 Change in residual value
 Change in depreciation
method
Changes
 Accounted for as changes in
accounting estimate

 Depreciation charge for the

current and future periods
shall be adjusted.
  Past depreciation is not
corrected.
Illustration (Change in useful life)

A depreciable asset costing

P500,000 with residual value of
P100,000 is originally estimated
to have a useful life of 5 years. At
the beginning of the third year,
the original useful life is revised
to 8 years. The entity uses the
straight line method. Compute
the depreciation for the third
year.
Illustration (Change in residual
value)

A depreciable asset costing

P500,000 with residual value
of P100,000 is estimated to
have a useful life of 5 years.
At the beginning of the third
year, the residual value of the
asset was revised to P70,000.
The entity uses the straight
line method. Compute the
depreciation for the third
year.

 QUIZ
 Time is up!

• 55,000
• 55,000
• 60,500