Depreciation – defined as the systematic allocation of the depreciable amount of an asset over the useful

life.
Cost xx Cost xx
Residual value (xx) Accumulated Depreciation (xx)
Depreciable Amount (DA) xx Carrying Amount xx

Changes in the salvage value, depreciation method and useful life of Property, Plant and Equipment is
accounted as change in accounting estimate (Prospective Application).

At the end of the useful life of the asset, the carrying amount should equal the residual value.

Depreciation Methods:
1. Equal or Uniform Charge methods
a. Straight line – DA / useful life = Depex
b. Composite method
Composite life = Total DA / total annual depreciation
Composite rate = Total Annual Depreciation / Total Cost
Depreciation Expense = DA x composite rate

c. Group method

2. Variable charge or use-factor or activity methods

a. Working hours or service hours = (DA/ total useful hours) x actual hours
b. Output or production method = (DA/ estimated units/outputs) x actual units

3. Decreasing charge or accelerated or diminishing balance methods

a. Sum of years’ digits – DA x fraction = Depex
b. Declining balance method (150% or 200%/double declining) – CA x % = Depex

4. Other methods
a. Inventory or appraisal
b. Retirement method
c. Replacement method

Problem 1. The following information pertains to A company:

Total Cost Residual value Estimated life Est. hours Est. Outputs
Machine A 5,500,000 500,000 20 100,000 500,000 units
Machine B 2,000,000 200,000 15 70,000 200,000 units
Machine C 400,000 5 30,000 80,000 units

Additional Information:
Actual Service hours used:
Yr 1 Yr 2 Yr 3 Yr 4 Yr5
Machine A 15,000 10,000 8,000 5,000 3,000
Machine B 10,000 8,000 5,000 3,000 1,000
Machine C 10,000 5,000 5,000 2,500 2,500

Actual Outputs in units:

Yr 1 Yr 2 Yr 3 Yr 4 Yr5
Machine A 50,000 50,000 30,000 25,000 15,000
Machine B 30,000 25,000 20,000 15,000 5,000
Machine C 25,000 20,000 15,000 10,000 10,000

1. Compute the depreciation expense using the following depreciation methods for the next 5 years:

Year 1 Year 2 Year 3 Year 4 Year 5

1. Straight line method
2. Composite method
3. Working hours method
4. Output method
5. Sum of years’ digit
6. Double declining balance method

2. Compute the accumulated depreciation using the following depreciation methods for the next 5 years:

Year 1 Year 2 Year 3 Year 4 Year 5

1. Straight line method
2. Composite method
3. Working hours method
4. Output method
5. Sum of years’ digit
6. Double declining balance method
3. Compute the Carrying Amount using the following depreciation methods for the next 5 years.:

Year 1 Year 2 Year 3 Year 4 Year 5

1. Straight line method
2. Composite method
3. Working hours method
4. Output method
5. Sum of years’ digit
6. Double declining balance method

Problem 2. Turtle Company purchased equipment on January 1,2016 for 5,000,000. The equipment had
an estimated 5 year service life. The depreciation policy for 5-year is to use the 200% double declining
balance method for the first two years and then switch to the straight line depreciation method.

On December 31,2018,compute for the following:

1. Depreciation Expense
2. Accumulated Depreciation
3. Carrying Amount

Problem 3. Spiderman Company owned a machine that was bought on January 1,2015 for 3,760,000. The
machine was estimated to have a useful life of five years and a residual value of 240,000.The entity used
the sum of years’ digits method of depreciation. On January 1,2018, the entity determined that the total
useful life of the machine should have been four years and the residual value is 352,000.

On December 31, 2018, compute for the following:

1. Depreciation Expense
2. Accumulated Depreciation
3. Carrying Amount