kDepreciation = Total Cost of Assets * Composite or Group Rate

- Refers to PPE
= Depreciable Amount/Useful life in yrs.
- Expense
- Cost of Goods Manufactured or operating If there is replacement, retirement of asset, the new
expense annual depreciation is = Total New Cost of Assets *
- Depreciation of asset begins when it is available Composite or Group Rate
for use
Composite Life = Total Depreciable Amount
- Depreciation ceases when asset is derecognized
- Does not cease when idle temporarily Total Annual Depreciation
- Depreciation discontinued if asset is sold

Depreciable Amount 2. VARIABLE CHARGE OR USE-FACTOR OR ACTIVITY

METHODS
- Acquisition cost – RV - Adopted when the principal cause of
Residual Value depreciation is usage.
- Machineries
- Estimated net amount currently obtainable if the
asset is at the end of the useful life a. Working hours or service hours
- Reviewed at least at each financial year-end
Formulas:
- If expectation differs from previous estimate, the
change shall be accounted for as change in an Depreciation rate/hr. = Depreciable amount
accounting estimate
Useful life in hrs.
- May increase to an amount equal or greater
than the CA = Depreciation amounting to zero Depreciation for the period
Useful life = Dep. Rate * Actual hrs. worked

- Period over w/c an asset is expected to be

available for use, or the units expected to be
obtained fr. the asset by the entity. b. Output or Production method

Formulas:

1. EQUAL OR UNIFORM CHARGE METHODS Depreciation rate/unit. =

Depreciable amount
a. Straight Line Method
- Allocates the depreciable amount equally over Useful life in units of output
the # of years of estimated useful life.
- Adopted when the principal cause of Depreciation for the period
depreciation is passage of time = Dep. Rate * Yearly output
- At the end of useful life of the asset, the CA = RV

Formulas:
3. DECREASING CHARGE OR ACCELERATED OR
Depreciable amount = Cost – RV DIMINISHING BALANCE METHODS
Annual Depreciation

= Depreciable amount/Useful life in yrs. a. Sum of Years’ Digits

= Depreciable amount * SL% Formulas:
SL% = 100% / Life in yrs. SYD = Life (Life + 1) / 2
CA = Acquisition Cost – Accumulated Depreciation Depreciable amount = Cost – RV
_________________________________________________ Depreciation for the period =
b. Composite method Depreciable amount * SYD
- Many individual assets as single asset
- Dissimilar in nature, vary in useful life
- When asset is retired in a group, no G/L
c. Group method
- Similar in nature and in useful life
b. Declining balance method

Formulas:

Fixed rate = 𝟏𝟏 − √𝑹𝑹𝑹𝑹 ÷ 𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪

𝒏𝒏

Formulas: n is the useful life

Composite or Group Rate Depreciation for the period = Fixed rate * CA

= Total Annual Depreciation / Total Cost Last period Depreciation

Depreciable amount = Cost – RV = Depreciable amount – Prev. yr CA

Annual Depreciation c. Double Declining Method

Formulas: 2. Full cost method
- All exploration costs are CAPITALIZED.
SL% = 100% / Life in yrs.
- Usually, small entities follow this method.
Fixed rate = SL%* 2

Depreciation for the period = Fixed rate * CA

c. Development Cost
Last period Depreciation = Prev. yr. CA – RV - Cost incurred to exploit or extract the natural
resource
d. 150% declining method
- Cost of tangible equipment is not capitalized as
Fixed rate = SL% * 150% cost of natural resource
- Intangible development cost is capitalized as
4. OTHER METHODS cost of the natural resource.

a. Inventory Method
- Applied to assets w/c are small and relatively
d. Estimated Restoration Cost
inexpensive
- Cost incurred in brining the property back to its
Formula original condition.
- Capitalized only when the entity incurs the
Depreciation
obligation when the asset is acquired.
= Bal. of asset account – value @ the yr. end - Must be discounted

b. Retirement Method DEPLETION METHOD

- no depreciation is recognized until the asset is
retired - Computed using the output or production
method
Formula - Depletion is classified as COGS
Depreciation Formulas:
= original cost of the asset retired – salvage proceeds Depletion rate per unit =

Depletable amount or the total cost (a to d) / estimated

units to be EXTRACTED
c. Replacement Method
- No depreciation is recognized until the asset is Depletion for the period =
retired and replaced
Depletion rate per unit * units extracted (and sold if
Formula income statement)

Depreciation Revision of Depletion Rate

= replacement cost of the asset retired – salvage Remaining Depletable Cost =

proceeds
(Original Cost + Additional Cost) – Accum. Dep.

Revised estimate=
WASTING ASSET
Original Cost – Remaining depletable cost
a. Acquisition Cost
Depletion Rate=
- Price paid to obtain the property containing
natural resources Remaining depletable cost / revised estimate
- Initial cost of wasting asset

Formulas:

Depletable amount =
Total Acquisition Cost – Land Value (RV)
b. Exploration Cost
- Expenditure or cost incurred in an attempt to
locate the natural resources that can
economically be extracted or exploited.
- May success or fail.
Two methods of accounting Exploration Cost
1. Successful effort method
- Directly related costs on the discovery of
commercially producible natural resources are
CAPITALIZED as cost of the resource property.
- “dry holes” or unsuccessful related costs on
exploration are EXPENSED.
- Usually, large companies follow this method.
DEPRECIATION OF MINING PROPERTY
- If the useful life of the equipment is shorter, use SL
method
- If the useful of wasting asset is shorter, use output
method
SHUTDOWN
- Follows SL method
- When operations resumed, output method
Formula for SL method:
Remaining or Revised Estimate of Deposit
Original Estimate of Deposit – Extracted
Depreciation rate per unit=
Remaining CA / Remaining or Revised Estimate of Deposit
TRUST FUND DOCTRINE - Insignificant changes = frequent or annual
revaluation are unnecessary
- Share capital is conceived/formed as a trust fund
for the protection of creditors. - 3-5 yrs. is sufficient
- Capital cannot be returned to shareholders BASIS OF REVALUATION
during corporation’s lifetime
- Dividends paid are limited to the balance of a. Fair value
retained earnings - Price received on selling an asset
- Cannot pay dividends if it has a deficit (expenses b. Depreciated replacement cost
exceed revenues) = replacement cost or purchase price –
accumulated depreciation
WASTING ASSET DOCTRINE
- Sound value of the asset
- Corporation engaged in extraction of natural
resources can legally return capital to
shareholders during corporation’s lifetime Formulas:
- Can pay dividends to the extent of retained
CA = Historical cost – accumulated depreciation
earnings and accumulated depletion
- Amount paid in excess of retained earnings is Appreciation or Revaluation increase = excess of
accounted for as a liquidating dividend or return replacement cost over historical cost
of capital
Net appreciation = appreciation – accumulated
PHILOSOPHY OF WASTING ASSET DOCTRINE depreciation

Sound value =
- If I-limit ang declaration of dividends sa retained
earnings, it would be unfair sa shareholders replacement cost or purchase price – accumulated
because the funds actually represent costs depreciation
already covered also the wasting asset is
irreplaceable. Revaluation Surplus or Increment =

FV or Sound Value – CA
Formula:
Original useful life of machinery =
Retained Earnings
Machinery @ cost / annual depreciation @ cost
Accumulated Depreciation
2 APPROACHES IN RECORDING THE REVALUATION
Total
a. Proportional approach
Less: Capital liquidated in prior years
- Preferable method
Unrealized depletion in ending inventory - Accumulated depreciation @ the date of
revaluation is restated proportionately w/the
Maximum dividend change in gross CA
- So that the CA of the asset after revaluation
equals the revalued amount

b. Elimination approach
- Accumulated depreciation is eliminated against
the gross CA of the asset
REVALUATION - And net amount restated to the revalued amount
of the asset
• Measurement of PPE
- Initially @cost
- Subsequently, either cost model or revaluation
model

Cost Model

- PPE shall be carried at

Cost – (accumulated depreciation +
accumulated impairment losses)

Revaluation Model

- PPE whose fair value can be measured reliably

shall be carried at a revalued amount

Revalued amount = fair value @ the date of revaluation -

(accumulated depreciation 1= accumulated impairment
losses)

FREQUENCY OF REVALUATION

- Significant and volatile changes = annual

revaluation