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Depreciation
Depreciation
BLUE NOTES
20 S
L
Depreciation is the allocation of the cost of assets to periods in which the assets are used.
Methods of Depreciation
A. Straight-Line
This method spreads the cost of the fixed asset evenly over its useful life.
B. Declining-Balance
An accelerated method of depreciation, it results in higher depreciation expense in the earlier years of
ownership. Don’t deduct salvage value when figuring the depreciable base for the declining balance method
Illustration
Suppose a business has an asset with $1,000 original cost, $100 salvage value, and 5 years of useful life. First,
the straight-line depreciation rate would be 1/5, i.e. 20% per year. Under the double-declining-balance method,
double that rate, i.e. 40% depreciation rate would be used. The table below illustrates this:
Depreciation Depreciation Accumulated Book value at
rate expense depreciation end of year
original cost $1,000.00
40% 400.00 400.00 600.00
40% 240.00 640.00 360.00
40% 144.00 784.00 216.00
40% 86.40 870.40 129.60
129.60 - 100.00 29.60 900.00 scrap value 100.00
C. Sum-of-the-Years’ Digits
Compute depreciation expense by adding all years of the fixed asset’s expected useful life and factoring in
which year you are currently in, as compared to the total number of years.
Illustration
If an asset has original cost of $1000, a useful life of 5 years and a salvage value of $100, compute its
depreciation schedule.
1. Determine years' digits. Since the asset has useful life of 5 years, the years' digits are: 5, 4, 3, 2, and 1.
2. calculate the sum of the digits: 5+4+3+2+1=15
The sum of the digits can also be determined by using the formula (n2+n)/2 where n is equal to
the useful life of the asset in years. The example would be shown as (52+5)/2=15
Depreciation rates are as follows:
5/15 for the 1st year
Total
Depreciation Depreciation Accumulated Book value at
depreciable
rate expense depreciation end of year
cost
$1,000 (original
cost)
300 (900 x
900 5/15 300 700
5/15)
240 (900 x
900 4/15 540 460
4/15)
180 (900 x
900 3/15 720 280
3/15)
120 (900 x
900 2/15 840 160
2/15)
900 1/15 60 (900 x 1/15) 900 100 (scrap value)
D. Units-of-Production
The total estimated number of units the fixed asset will produce over its expected useful life
Illustration
Suppose, an asset has original cost $70,000, salvage value $10,000, and is expected to produce 6,000 units.
Depreciation per unit = ($70,000−10,000) / 6,000 = $10
Units of Depreciation Depreciation Accumulated Book value at
production cost per unit expense depreciation end of year
$70,000 (original cost)
1,000 10 10,000 10,000 60,000
1,100 10 11,000 21,000 49,000
1,200 10 12,000 33,000 37,000
1,300 10 13,000 46,000 24,000
1,400 10 14,000 60,000 10,000 (scrap value)
Composite life equals the total depreciable cost divided by the total depreciation per year. $5,900 / $1,300 =
4.5 years.
Composite depreciation rate equals depreciation per year divided by total historical cost. $1,300 / $6,500 =
0.20 = 20%
Depreciation expense equals the composite depreciation rate times the balance in the asset account (historical
cost). (0.20 * $6,500) $1,300