DEPRECIATIO

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PRE-TEST (45 SECS)
1. On January 1, 2017, XXX purchased
a training equipment for P2,120,000.
Additionally, he paid P15,000 for
delivery and installation. XXX uses the
straight line method of depreciation.
The equipment has a useful life of 10
years, and P125,000 residual value.
Assuming no changes in useful life and
depreciation method occurred, what
amount should be reported as
depreciation for 2019?
PRE-TEST (45 SECS)
2. At the beginning of 2017, YOU
acquired for P149,500 a machine that
can produce children. YOU estimated
the useful life of the machine to be 5
years. The expected number of children
to be produced by the machine are as
follows:
2017: 100 children
2018: 120 children
2019: 140 children
2020: 150 children
2021: 140 children
Using units of production method, how
much is the estimated depreciation for
2019?
PRE-TEST (1.5 MINS)
3. Packing Sheet acquired a machine
on January 1, 2017. The entity paid
the following:
Invoice price P2,500,000
Freight-in 25,000
Installation 100,000
The estimated life of the machine is 8
years or a total of 100,000 working
hours with zero residual value.
Operating hours totalled 2,700 hours,
2,500 hours, and 3,000 hours for
2017, 2018, and 2019, respectively.
Packing Sheet has been using the
working hours method of depreciation.
However, at the beginning of 2020, the
entity decided to use straight line
depreciation. What is the depreciation
for 2021?

DEPRECIATIO
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DEPRECIATION
 
APPLIES TO…

Property, Plant,
Equipment
except Land
PPE

tangible
used in business
noncurrent
PPE MEASUREMENT AT RECOGNITION

at Cost
the amount of cash
or cash equivalent and
fair value of other
consideration given
PPE MEASUREMENT AT RECOGNITION
• Purchase price, net of
trade discounts & rebates
• Directly attributable cost
-installation costs
 -professional fees
-initial delivery and handling
costs
etc.
DEPRECIATION PERIOD
Start:
when asset is available
for use

End:
-when asset is
derecognized
-when asset is classified
as held for sale
FACTORS OF DEPRECIATION
depreciable amount
residual value
useful life
DEPRECIABLE AMOUNT

cost minus residual

value
RESIDUAL VALUE

estimated net
amount currently
obtainable if the
asset is at the end of
its useful life
USEFUL LIFE
• Time periods in years
• Units of output or
production
• Service hours or
working hours
KINDS OF DEPRECIATION
• Physical Depreciation
• Functional or
Economic Depreciation
PHYSICAL DEPRECIATION

related to the asset’s wear

and tear and deterioration
over a period
PHYSICAL DEPRECIATION
Causes:
-Wear and tear (frequent
use)
-Passage of time (non-use)
-Action of the elements
(wind, rain, etc.)
-Accidents (fire,
earthquake, etc.)
-Disease (wooden
buildings)
FUNCTIONAL OR ECONOMIC
DEPRECIATION

arises from obsolescence,

inadequacy, or
supersession
FUNCTIONAL OR ECONOMIC
DEPRECIATION
Inadequacy
When the asset is no
longer useful because of an
increase in the volume of
operations

Supersession
when new asset becomes
available, and can perform
the same function more
efficiently and for
substantially less cost
FUNCTIONAL OR ECONOMIC
DEPRECIATION
Obsolescence
 encompasses inadequacy
and supersession
DEPRECIATION METHODS
Uniform charge
methods
a. Straight line
b. Composite method
c. Group method
DEPRECIATION METHODS
Variable charge or use-
factor methods
a. Working hours or
service hours
b. Output or
production method
DEPRECIATION METHODS
Decreasing charge or
accelerated or
diminishing balance
methods
a. Sum of years’
digits
b. Declining balance
method
c. Double declining
balance method
DEPRECIATION METHODS
Other methods
 a. Inventory or
appraisal
b. Retirement method
c. Replacement
method
DEPRECIATION METHODS
Focus:
a. Straight line
b. Working hours or
Service hours
c. Output or
production method
d. Double declining
balance
 e. 150% declining balance
STRAIGHT LINE
constant charge over
the number of years of
estimated useful life
WORKING HOURS OR SERVICE HOURS
 
OUTPUT OR PRODUCTION METHOD
 
DOUBLE DECLINING BALANCE METHOD
 
150% DECLINING BALANCE METHOD
 
SUM OF THE YEARS DIGIT (SYD)
 

CHANGE IN USEFUL LIFE

significant difference from previous
estimate is accounted for as a change in
accounting estimate
Unexpected physical deterioration or
technological improvement
-useful life of asset is less than original estimate

Improved maintenance
-useful life of asset is more than original estimate
CHANGE IN DEPRECIATION METHOD
Depreciation method used shall reflect the
pattern in which the asset’s economic
benefits are expected to be consumed.
Significant change in pattern means the
method shall be changed to reflect the
new pattern
Depreciation charge for current and
future periods shall be adjusted.
IMPROVEMENT OF PPE
An improvement at a period subsequent to
the acquisition is capitalized as part of the
total cost of the asset. The improvement is
depreciated separately from the PPE itself,
using the remaining useful life as the basis
of allocation.
Sample problem ha next slide.
Mark Company provided the following
information with respect to a building.
• The building was acquired on January 1,
2011 at a cost of ₱7,800,000 with an
estimated useful life of 40 years and
residual value of ₱200,000. Yearly
depreciation was computed on the straight
line method.
• The building was renovated on January
1, 2013 for ₱760,000. This was considered
as improvement.
• On January 1, 2016, the management
decided to change the total life of the
building to 30 years.
What is the depreciation of the building for
2016?
Solution: Excel file, sheet 3.
QUIZ
1. On March 15, 2017, Cardo
Company sold a machine for
P4,500,000. The company acquired
the machine for a total cost of
P5,600,000 in 2014. The estimated
useful life of the machine is 10
years. Cardo Company has the
following depreciation policy:
No depreciation is taken in the
year of the asset’s acquisition.
A full year’s depreciation is taken
in the year of the asset’s disposal.
Straight line depreciation is used.

How much is the gain or loss on

disposal to be reported in 2017?
2. Packing Sheet acquired a machine on
January 1, 2017. The entity paid the
following:
Invoice price P3,500,000
Freight-in 25,000
Installation 120,000
The estimated life of the machine is
75,000 working hours with zero residual
value. Operating hours totalled 2,000
hours, 1,500 hours, and 2,500 hours for
2017, 2018, and 2019, respectively.
Packing Sheet uses the working hours
method of depreciation. What is the
carrying amount of the machine at the
beginning of 2019?

3. On January 2, 2015, DannyG purchased

a machine to be used for his business. He
expects to use the machine for a total
cumulative time of 5 years. He paid a total
of P1,599,040 for the machine, which has a
residual value of P100,000. Usage of the
machine was 6,000hrs, 5,500hrs, 3,800hrs,
and 4,500hrs for 2015, 2016, 2017, and
2018, respectively. DannyG uses working
hours depreciation. How much are the
depreciation expenses to be recorded for the
first 3 years of operation, respectively? (Use
360 days for 1 year.)

4. CHIU Balls is a manufacturer of

sports balls owned by Kim Chiu. The
entity purchased a machine costing
P2,500,000. The machine is depreciated
over a period of 12 years, starting
January 2017.

Using double declining balance method,

compute for the depreciation for 2018.

5. Bhebhelhubxsz Company has been using the

straight line method of depreciation for its
machine acquired in January 1, 2013 for
P4,700,000. The machine had an estimated
useful life of 15 years and a residual value of
P200,000. On January 1, 2019, Bhebhelhubxsz
decided to use the output method for the
current and subsequent years. On the same
date, the entity estimated a total of 5,000 units
to be produced by the machine for its
remaining useful life. The production for 2019
was 300, for 2020 was 500, and for 2021 was
400. How much is the depreciation expense for
2020 and 2021, respectively?

6. Bhebhelhubxsz Company has been

using the straight line method of
depreciation for its machine acquired in
January 1, 2015 for P4,700,000. The
machine had an estimated useful life of
15 years and a residual value of
P200,000. On January 1, 2019,
Bhebhelhubxsz determined that the
remaining useful life of the machine is
only 8 years. How much is the
depreciation expense 2020 and 2021,
respectively?