Intermediate Accounting making detailed dep’n computation for each asset is time

consuming and costly.

Under PAS 16: PPE Therefore, it is practical to depreciate many individual assets as
Depreciation = defined as the Systematic Allocation of the though they were a single asset.
Depreciable amount of an asset over the useful life. A matter of Cost a. Group Method
Allocation in recognition of the Exhaustion of the useful life of a PPE  Similar Assets in nature and in est UL are grouped
and treated as a Single Unit
Kinds of Depreciation b. Composite Method
Physical Depreciation Functional Depreciation  Assets that are Dissimilar in nature and have
= related to the depreciable = arises from Inadequacy, different Physical Characteristics and vary widely in
asset’s wear and tear and Supersession, and UL are grouped and treated as a Single Unit.
deterioration over a period. Obsolescence
a. Wear and Tear due to frequent use a. Inadequacy = arises when the asset Note: The accounting procedure and method of computation for
b. Passage of time due to nonuse is no longer useful to the entity because the Composite and Group method are essentially the Same.
Action of the elements e.g. Wind, of an increase in the volume of
Sunshine, Rain or Dust operations.
 Depn is reported in a single AccDepn amount
d. Casualty/Accident e.g. flood, fire, b. Supersession = when a new asset  Thus, the AccDep’n is Not Related to any Specific asset
earthquake, and other natural disasters becomes available and can perform the account
e. Disease/Decay applicable to animals same function more efficiently and
and wooden buildings economically or for substantially less
cost. 1. First, the Dep’n for each asset are determined to get the
c. Obsolescence = arises when there is Composite Life and Composite Rate; These two variables will
no future demand for the product which then be used for the Subsequent depreciation of the Single unit
the asset produces
assets.
 Total Cost x Composite Rate = Dep’n
Depreciation Methods
2. When a specific Asset is retired/sold, No Gain or Loss is
 It shall be reviewed at least at every year-end.
reported. The Cost of the retired asset will be credited and the
 The method shall be changed if there is a significant change Accumulated Depreciation will serve as the balancing figure.
in the expected pattern of future economic benefits
 Such change in Depreciation method shall be accounted for
Illustration:
as PAS 8: Accounting Policies, Changes in Accounting Asset Cost RV Dep Amt UL Dep’n
Estimates and Errors. Bldg 650T 50T 600T 15 40T
Machine 220T 20T 200T 8 25T
Equipt 130T 30T 100T 4 25T
1. Equal or Uniform Charge Methods
1M 100T 900T 90T
a. Straight Line
b. Composite Method
c. Group Method Total Annual De p' n 90000
1. Composite Rate = = =
2. Variable charge or Use-factor or Activity Methods Total Cost 1M
a. Working Hours or Service Hours 0.09 or 9%
b. Output or Production Method
Dep’n Expense = 1M x 9% = 90T
3. Decreasing Charge or Accelerated or Diminishing Balance Method
a. Sum of Year’s Digits
b. Declining Balance Method Total Depreciable Amount
c. Double Declining Balance Method 2. Composite Life = ' =
Total Annual De p n
4. Other Methods 900 T
=10 years
a. Inventory or Appraisal 90 T
b. Retirement method
c. Replacement Method *Suppose the Equipt is retired for 20T: Prepare the Journal Entry

STRAIGHT LINE METHOD Cash 20T

Cost−Residual Value Acc Dep’n 110T
Annual Depreciation= Equipt 130T
Useful Life∈ years
*Suppose the Equipt is disposed with no proceeds:
*Can also use Straight Line Rate for Passage of time
100 %
SLR= Acc Dep’n 130T
Useful Life Equipt 130T
*The SLR is then multiplied to the Depreciable Amount (C-RV)
Subsequently, the remaining Total Cost of the Asset will be 870T.
Same Results, nevertheless. Applying the Composite Rate, the Dep’n on the 5th year:

COMPOSITE and GROUP METHOD 870T x 9% = 78,300 = New Dep’n Expense

Large entities own various individual depreciable assets and
However, if the retirement of the Equipt is replaced with a similar Operations Hours x Exp Depn Amount
Asset costing 160T, then the total cost of assets on the 5th year Rate
would be 1030T. Acquisition 600T
Applying the Composite Rate, the subsequent dep’n would be: Year 1 14T x 10 140T 140T 460T
Year 2 13T x 10 130T 240T 330T
1030T x 9% = 92,700 = New Dep’n Expense Year 3 10T x 10 100T 370T 230T
Year 4 11T x 10 110T 480T 120T
VARIABLE CHARGE or ACTIVITY METHODS Year 5 12T x 10 120T 600T -
 More a Function of USE rather than a Passage of Time. 60T x 10 600T
 Service Life is considered in terms of the Output it
produces or the Number of Hours it works.
 Thus, depreciation is related to the est production
capability of the asset and is expressed in a rate per unit b. Output/Production Method
of output or per hour of use.
 Most Appropriate for Machineries. Depreciable Amount
Two Variable Methods: Depreciation Rate per unit=
a. Working Hours Method
Est Units of Output

Depreciable Amount
Depreciation Rate per hour = 600 T −0
Est Working Hours Depreciation Rate per unit=
150 T
*The Depreciation Rate is then multiplied to the Actual Hours
Worked to get the Depreciation Expense for that Period. Depreciation Rate per hour =P 4

b. Output/Production Method Actual Units Dep’n Acc Carrying

Operations x Rate Exp Depn Amount
Depreciable Amount Acquisition 600T
Depreciation Rate per unit= Year 1 34T x 4 136T 136T 464T
Est Units of Output Year 2 32T x 4 128T 264T 336T
Year 3 25T x 4 100T 364T 236T
*The Depreciation Rate per unit is then multiplied by the Year 4 29T x 4 116T 480T 120T
Yearly Output to get the Annual Depreciation. Year 5 30T x 4 120T 600T -
150T x 4 600T

Illustration: SUM of YEAR’s DIGIT (SYD)

Machinery 600T
RV
Est UL:
Years
none

5 years
SYD=Life ( Life+1
2 )
UL
Service Hours 60T Hours Depration Rate=
Output 150T Units SYD
Actual Operations Service Hours Units of Output Numerator = The UL of the Asset, will decrease per year
Year 1 14T 34T Denominator = The SYD
Year 2 13T 32T
Year 3 10T 25T *If UL of Asset involves Half-Year, simply multiply to two in
Year 4 11T 29T order to get the UL of assets semi-annually.
Year 5 12T 30T
60T 150T e.g. UL = 2.5yrs,
Semi-annual UL = (2.5 x 2) = 5 Semiannual years
a. Working Hours Method

Depreciation Rate per hour =

Depreciable Amount
SYD=5 ( 5+12 )=15
Est Working Hours 5
Depration Rate=
15
600 T −0
Depreciation Rate per hour =
60 T
Year Months Covered Depreciation Rate
Depreciation Rate per hour =P 10 2019 Jan – Jun 5/15
Jul - Dec 4/15
2020 Jan - Jun 3/15
Actual Service Dep’n Acc Carrying
 Jul – Dec 2/15
2021 Jan – Jun 1/15 Solution:

Illustration:
Cost of Asset 300T
DD Rate= ( 100
5 yrs )
%
x 2=40 %
Residual Value none
Date of Acquisition 4/1/2019 Year Particulars Dep’n Exp Acc Dep’n CA
Est. UL 3 yrs 1/19 500T
12/19 500T x 40% 200T 200T 300T
Solution: 12/20 300T x 40% 120T 320T 180T

( 3+12 )=6
12/21 180T x 40% 72T 392T 108T
SYD=3 12/22 108T x 40% 43,200 435,200 64,800
12/23 64,800 – 50,000 14,800 450T 50T
450T
Year Months Covered Depreciatio Cost of Dep’n
n Rate Asset Exp
The Dep’n Expense is only 450T because the remaining CA of the
Yr 1 Apr ’19 – Mar ‘20 3/6 300T 150T
Asset is equal to the Residual Value.
Yr 2 Apr ’20 – Mar ‘21 2/6 300T 100T
Yr 3 Apr ’21 – Mar ‘22 1/6 300T 50T 150% DECLINING BALANCE METHOD
 Same accounting Procedure with Double Declining
Calendar Period – Depreciation Computation Balance, the difference is using 150% instead of 200%

( Est100.UL ) x 1.5
Year Months Covered Year-end Dep’n Dep’n Expense
%
201 Apr – Dec 150T x 9/12 112,500 DD Rate=
9
202 Jan – Mar 150T x 3/12 37,500
0 Apr – Dec 100T x 9/12 75,000
202 Jan – Mar 100T x 3/12 25,000
1 Apr – Dec 50T x 9/12 37,500
202 Jan – Mar 50T x 3/12 12,500 INVENTORY METHOD
2
300,000 Balance of Inventory xx
Year-end Balance of Inventory (xx)
*To solve for Accumulated Depreciation, simply add the Depreciation xx
numerator up to the extent of the year asked then multiply to the
Cost of the Asset.  In recording Depreciation, No Accumulated
Depreciation account is Maintained.
Ex. Same Illustration. Accumulated Depreciation on Year 2.  The Depreciation is credited Directly to the Asset
(5/6) x 300T = 250T = Acc Depreciation on Yr2.  This Depreciation Approach is applied generally to
assets which are Small and Relatively inexpensive e.g.
Tools or Utensils.
 Major Objection: Not Systematic, no set of formula is
involved and a great deal of subjectivity is often
DOUBLE-DECLINING BALANCE encouraged in the determination of the value of the asset
 Aka 200% DECLINING BALANCE METHOD at the end of the year.
 The DD Rate is multiplied to the Declining CA of the
asset to arrive at the Annual Depreciation.
Illustration:
DD Rate=
100 %
Est .UL
x2( ) Tools – 1/19 = 100T; Acquisition = 90T; Sale of Used Tools @
Residual Value = 2T; Inventory of tools – 12/19 = 125T
NOTE: For this method, the RESIDUAL VALUE is Ignored in
computing for the Annual Depreciation.
However, in the Last Year of the Asset, the fixed rate is no longer Tools – 1/19 100T
multiplied to the Declining CA but instead the difference between Acquired Tools 90T
the CA and the Residual Value will be recorded as Dep’n Exp. Total 190T
Sold Tools @ RV 2T
Depreciable Amount 188T
Inv of Tools – 12/19 (125T)
Illustration:
Depreciation Expense 63T

Cost of Asset = 500T; Date of Acquisition = 1/1/19; Residual

Tools 90T To record the Acquisition of
Value = 50T; Est. UL = 5yrs Cash 90T Tools
Cash 2T To Record sale of Used Tools
Compute for the Dep’n Expense for the 5-year period. Tools 2T
Dep’n 63T To record Depreciation of Tools
 Tools 63T
Depletion Expense=10 x 250 T =2.5 M
NOTE: “To be Sold as Scrap” means that it will be sold as part of an JOURNAL ENTRY:
unfinished product. In recording for depreciation, it is not considered Depletion Expense 2.5M
as Residual Value of the asset or the Value at Disposal. Accumulated Depletion 2.5M

SOFP:
Resource Property 10M
WASTING ASSETS Acc Depl’n 2.5M
CA of RP 7.5M

PFRS 6: Exploration and Evaluation of Mineral Resources

 Search for Mineral Resources e.g. Minerals, Oil, Natural
*Revision of Depletion Rate
Gas and similar non-generative resources “after entity has
obtained LEGAL RIGHTS to Explore” in a specific Remaining Depletable Amount of WA
Depletion Rate=
area. Remaining est . of Productive Output

Illustration:
Acquisition Cost xx Assume that, in the preceding illustration, add’l DC of 3.75M are
Exploration Cost xx incurred in the 2nd year and recoverable deposits are estimated to
Development Cost xx be 1.25M. In the 2nd year, 300T units were extracted.
Restoration Cost xx
Total Cost xx Original cost of WA 10M
Add’l Dev’t Cost 3.75M
Cost −RV Total Cost 13.75M
Depletion Rate= Acc Depl’n 2.5M
Est . TotalOutput Remaining Depletable Amount 11.25M

Depletion Expense=Depletion Rate x Actual Output for the period Remaining Depletable Amount of WA
Depletion Rate=
Remaining est . of Productive Output
11.25 M
*Journal Entry Depletion Rate= =P 9
Depletion Expense xx 1.25 M
Accumulated Depletion xx
Depletion Expense=9 x 300 T =2.7 M
*Contra-account to Resource Property
*Presentation in SOFP
Resource Property xx
Acc Depl’n xx DEPRECIATION OF MINING PROPERTY
CA of RP xx  Tangible Equipment used in Mining Operations
 The Depreciation Method of these properties depend
on the SHORTER in UL between
*Part of COGS for Minerals Sold o UL of the Equipment or
o UL of the Wasting Asset
'
COGS Depl n=Depletion Rate x Actual Tonnes SOLD
1) If UL of Equipment is 1) If UL of Wasting Asset is
SHORTER SHORTER
Illustration: WA entity has acquired right to explore a natural = Use STRAIGHT LINE = Use OUTPUT METHOD
resource. Acq cost = 3M; Related Exploration Cost = 2M; DEPRECIATION Est Total Output
UL of WA=
Developments Costs = 5M; ActualOut p ut
It is est that the resource deposit is approx. 1M. In the first year of
operations, 250T units are extracted.
' Cost −RV ' Cost −RV
De p n exp= De p n Rate=
Compute for Depletion Expense: UL Est .Total Output
Acquisition Cost 3M Depreciation Exp
Exploration Cost 2M = Dep’n Rate x Actual Output
Development Cost 5M extracted
Restoration Cost 0
Total Cost 10M However, if Mining Equipment = MOVABLE and can be used
in Future Extractive Project. Automatically, it is Depreciated
10 M −0 over its UL using STRAIGHT LINE METHOD
Depletion Rate= =P 10
1M Illustration:
 Equipment @ Cost 9,000,000
A natural resource deposit is est to contain 450T units. Heavy Acc Depreciation (Output Method) (1,888,888)
equipt necessary to extract the deposit is acquired at a cost of 9M. Carrying Amount 7,111,112
UL = 10 Yrs. It is est that 30T units will be extracted each year.
Original est of Deposit 450T
Compute for the depreciation of the Mining Property. Extracted, Yr 1 (50T)
UL of Equipt = 10 Years Remaining est of Deposit 400T
UL of WA = 450T/30T = 15 Years
1) Apply Output Method:
1) UL of Equipt < UL of WA = Use Straight Line Method ' C A−RV 7,111,112
De p n Rate= = =P 17.78
Est . Remaining Output 400T
2) Depreciation Expense = 9M/10 yrs = 900T
Dep’n Exp 900T
Depreciation Exp = 17.78 x 60T = 1,066,800
Acc Dep’n 900T

In the same illustration, If instead, it is estimated that 50T units

would be extracted each year. Then how much is the Annual
Dep’n Expense?

UL of Equipt = 10Yrs
UL of Equipt = 450T/50T = 9Yrs

1) UL of Equipt > UL of WA = Use Output Method

2)
' Cost −RV 9 M −0
De p n Rate= = =P 20
Est .Total Output 450 T

Depreciation Exp = 20 x 50T = 1M

Dep’n Exp 1M
Acc Dep’n 1M

SHUTDOWN OF MINING OPERATIONS

 When operations are shutdown, no outputs are extracted,
hence Output Method cannot be used.
 So, in depreciating Mining Equipment, Straight Line
Method should be used.
 Supposed Output Method is used in Depreciating
Mining Properties but Shutdown occurred

' C arrying Amount−RV

D e p n exp=
Remaining UL

In the preceding example, supposed a shutdown occurred in the

Second Year, the depreciation is computed as follows:
*Remaining UL = 10 yrs – 1 yr = 9 yrs

Equipment @ Cost 9M
Acc Depreciation (Output Method) (1M)
Carrying Amount 8M

' 8 M −0
D e p n exp= =888,888
9 yrs
However, if the operations are resumed after the shutdown. The
Depreciation Expense of the Mining Property is again computed
using the OUTPUT METHOD.

*Supposed 60T units are extracted, compute for the Dep’n Exp.