DEPRECIATION

Tuesday, 1 March 2022

The monetary value of an asset decreases over
time due to use, wear and tear or obsolescence.
This decrease is measured as DEPRECIATION.
Machinery, equipment, currency are some
examples of assets that are likely to depreciate
over a specific period of time.
This is useful for estimation of property value
for taxation purposes; the less the value, the less
the tax
2
3
Length of time that the asset will be used in the
operation of business

Typically, the useful life of an asset fits somewhere

within the follow ranges:

Cars and automotive equipment: 3-6 years

Furniture: 5-12 years
Machinery and equipment: 3-20 years
Property, buildings and renovations: 10-50 years.
Amount that is expected to be recovered
upon the sale or disposal of the asset at
the end of its service life

Also known as scrap value, residual

value, trade-in value, resale value
 ACQUISITION COST
Total expense incurred by a business in
purchasing an asset

BOOK VALUE
asset's original or first cost, less any
accumulated depreciation
7
 MODIFIED
STRAIGHT-LINE ACCELERATED COST
DEPRECIATION SERVICE-HOURS RECOVERY SYSTEM
METHOD DEPRECIATION (MACRS)

1 3 5

2 4 6

UNITS-OF- DECLINING BALANCE SUM OF YEARS DIGIT

PRODUCTION (DB) AND DOUBLE DEPRECIATION
DEPRECIATION DECLINING BALANCE METHOD (SOYD)
METHOD (DDB) DEPRECIATION

8
 Assumes that the asset’s value declines by the same
amount in every period of its service life.
𝐀𝐂 −𝐒𝐕
 DEPP =
𝐧
Where:
DEPP – Depreciation expense per period
AC – Acquisition cost
SV – Salvage value (or Scrap value or Residual value)
n – Total number of periods in the Service life
9
10
 : A College Department purchased a
latest computer at a cost of Php110,000. The
estimated life of the computer is 6 years, with a
scrap value of Php20,000. Find the annual amount
of depreciation and the book value at the end of the
first year.

11
 SOLUTION:
Given: AC = Php110,000 SV= Php20,000 n = 6 years
𝑨𝑪 −𝑺𝑽 𝟏𝟏𝟎,𝟎𝟎𝟎 −𝟐𝟎,𝟎𝟎𝟎
DEPP = = = Php15,000/year
𝒏 𝟔
The computer will be depreciated evenly over the 6-year life
for an annual depreciation of Php15,000

Since the annual depreciation of Php15,000, the book value

at the end of the first year will be
BV = AC – AD = 110,000 – 15,000 = Php95,000
Where: BV = Book Value AC = Acquisition Cost
12
AD = Accumulated Depreciation
 A manufacturing enterprise expects to use a new
machine costing Php200,000 for five years. It is expected to decline
steadily in value and be sold for about Php50,000 after five years. Using
the straight-line depreciation method:
A Determine the annual depreciation expense
B Prepare the depreciation schedule
SOLUTION:
A. Given: AC = Php200,000 SV= Php50,000 n = 5 years

𝑨𝑪 −𝑺𝑽 𝟐𝟎𝟎,𝟎𝟎𝟎 −𝟓𝟎,𝟎𝟎𝟎

DEPP = = = Php30,000/year
𝒏 𝟓

The annual depreciation expense of the machine is Php30,000

13
 Year Depreciation Expense Accumulated Book Value (BV)
(DE) Depreciation (AD)
0 0.00 0.00 Php200,000.00

1 Php 30,000.00 Php30,000.00 170,000.00

2 30,000.00 (1) 60,000.00 (2) 140,000.00

3 30,000.00 90,000.00 110,000.00

4 30,000.00 120,000.00 80,000.00

5 30,000.00 150,000.00 50,000.00

(1) AD = ADEPP + CPDE = 30,000 + 30,0000 = 60,000

(2) BV = AC – AD = 200,000 – 60,000 = 140,000

BV = BVEPP – CPDE
Where:
ADEPP – Accumulated Depreciation at End of Previous Period
CPDE – Current Period’s Depreciation Expense
14
AC – Acquisition Cost
15
 #1
JAB Inc., bought a truck for Php1,500,000 with an
estimated life of 8 years. The trade-in value of the
truck is Php130,000.

Assume a straight-line method. Determine the

annual depreciation expense of the truck and
value of the truck at the end of 4 years.

16
 MODIFIED
STRAIGHT-LINE ACCELERATED COST
DEPRECIATION SERVICE-HOURS RECOVERY SYSTEM
METHOD DEPRECIATION (MACRS)

1 3 5

2 4 6

UNITS-OF- DECLINING BALANCE SUM OF YEARS DIGIT

PRODUCTION (DB) AND DOUBLE DEPRECIATION
DEPRECIATION DECLINING BALANCE METHOD (SOYD)
METHOD (DDB) DEPRECIATION

17
 The decline in the value of an asset is roughly
proportional to some measure of its use in the operation
of the business.

= Depreciation Expense Per Unit of Use or Produce

= Acquisition Cost = Salvage Value = Total Lifetime Unit
18
 A piece of equipment was purchased at a cost of
Php2,800,000. The estimated salvage value is
Php250,000 with the useful life of 7 years.
Assume a production of 75,000 units.

Compute the depreciation for the first two years

using units-of-production method with 11,5000
and 13,000 units produced, respectively.

19
 SOLUTION:
AC =Php2,800,000 SV = Php250,000 TLU = 75,000 units

AC – Acquisition Cost SV – Salvage Value

TLU – Total Lifetime Units DE – Depreciation Expense
DEPU – Depreciation Expense Per Unit of Use or Produce

𝑨𝑪 −𝑺𝑽 𝟐,𝟖𝟎𝟎,𝟎𝟎𝟎 −𝟐𝟓𝟎,𝟎𝟎𝟎

DEPU = = = Php34 per unit produced
𝑻𝑳𝑼 𝟕𝟓,𝟎𝟎𝟎

20
 SOLUTION: (cont.)
Then we need to multiply the units of production and depreciation per
unit to determine the depreciation amount for the first two years.
DE = Number of units produced x DEPU(Depreciation Expense per Unit)
= 11,500 units (Php34/unit)
= Php391,000

DE = Number of units produced x DEPU

= 13,000 units (Php34/unit)
= Php442,000

Therefore the amount of depreciation for the first two years is

21 Php391,000 and Php442,000, respectively.
 JAB Liner purchased a new passenger bus for Php3,000,000. JAB Liner
usually replaces buses after they have accumulated 250,000 km. The
estimated resale value of this bus is Php600,000.
A Determine the depreciation per 1,000 km travelled
B Construct a depreciation schedule for the first four years if the
distance driven in successive years is 45,000 km, 57,000 km, 60,000 km,
and 33,000 km

22
 SOLUTION:
AC =Php3,000,000 SV = Php600,000 TLU = 250,000 km

A unit of use is 1,000 km travelled. The useful service life is 250,000 km

which represents

𝟐𝟓𝟎,𝟎𝟎𝟎 𝒌𝒎
= 250 lifetime units
𝟏,𝟎𝟎𝟎 𝒌𝒎 𝒑𝒆𝒓 𝒖𝒏𝒊𝒕

𝑨𝑪 −𝑺𝑽 𝟑,𝟎𝟎𝟎,𝟎𝟎𝟎 −𝟔𝟎𝟎,𝟎𝟎𝟎

DEPU = 𝑻𝑳𝑼
= 𝟐𝟓𝟎
= Php 9,600 per 1,000 km travelled

23
 B Construct a depreciation schedule for the first four years if the distance
driven in successive years is 45,000 km, 57,000 km, 60,000 km, and 33,000 km
Year Depreciation Accumulated Book Value
Expense (DE) Depreciation (AD) (BV)
0 0.00 0.00 Php3,000,000

1 (1) Php 432,000 432,000 2,568,000

2 (2) 547,200 (3) 979,200 (4) 2,020,800

3 (5) 576,000 1,555,200 1,444,800

4 (6) 316,000 1,872,000 1,128,000

(1) DE = Number of units used x DEPU = (45,000km) (Php9,600/1,000km) = P432,000

(2) DE = Number of units used x DEPU = (57,000km) (Php9,600/1,000km) = P547,200
(3) AD = ADEPP + CPDE = 432,000 + 547,200 = Php979,200
(4) BV = AC – AD = 3,000,000 – 979,200 = Php2,020,800
(5) DE = Number of units used x DEPU = (60,000km) (Php9,600/1,000km) = P576,000
24
(6) DE = Number of units used x DEPU = (33,000km) (Php9,600/1,000km) = P316,800
25
 ▪ #1
Motor Trucking purchased a new dump truck
garbage disposal of the municipality for
Php4,250,000. The truck has a scrap value of
Php800,000 and an estimated life of 600,000
kilometres. Find the depreciation for a year in
which the truck is driven 57,500 km.

26
 MODIFIED
STRAIGHT-LINE ACCELERATED COST
DEPRECIATION SERVICE-HOURS RECOVERY SYSTEM
METHOD DEPRECIATION (MACRS)

1 3 5

2 4 6

UNITS-OF- DECLINING BALANCE SUM OF YEARS DIGIT

PRODUCTION (DB) AND DOUBLE DEPRECIATION
DEPRECIATION DECLINING BALANCE METHOD (SOYD)
METHOD (DDB) DEPRECIATION

27
 ▪ (3) SERVICE-HOURS DEPRECIATION

𝑴𝒂𝒄𝒉𝒊𝒏𝒆 𝑯𝒐𝒖𝒓 𝑹𝒂𝒕𝒆

𝑪𝒐𝒔𝒕 𝑨𝒄𝒒𝒖𝒊𝒓𝒆𝒅 − 𝑺𝒂𝒍𝒗𝒂𝒈𝒆 𝑽𝒂𝒍𝒖𝒆
=
𝑻𝒐𝒕𝒂𝒍 𝑬𝒔𝒕𝒊𝒎𝒂𝒕𝒆𝒅 𝑴𝒂𝒄𝒉𝒊𝒏𝒆 𝑯𝒐𝒖𝒓𝒔 𝒊𝒏 𝑴𝒂𝒄𝒉𝒊𝒏𝒆′ 𝒔 𝑳𝒊𝒇𝒆𝒕𝒊𝒎𝒆

𝑫𝒆𝒑𝒓𝒆𝒄𝒊𝒂𝒕𝒊𝒐𝒏 𝒇𝒐𝒓 𝒕𝒉𝒆 𝒚𝒆𝒂𝒓

= 𝑵𝒖𝒎𝒃𝒆𝒓 𝒐𝒇 𝒉𝒐𝒖𝒓𝒔 𝒖𝒔𝒆𝒅 𝒊𝒏 𝒕𝒉𝒆 𝒚𝒆𝒂𝒓 × 𝑴𝒂𝒄𝒉𝒊𝒏𝒆 𝑯𝒐𝒖𝒓 𝑹𝒂𝒕𝒆
28
 ▪ (3) SERVICE-HOURS DEPRECIATION
In proportion to the expected total hours of use
The White Laundry purchased new washing
machine and dryers for Php2,600,000. The machines are
expected to last 40,000 hours and have a residual value of
Php120,000.

If White Laundry elects to use the service-hours

depreciation method, determine the depreciation if the
machine is used for 8,200 hours.
29
 EXAMPLE 1: The White Laundry
purchased new washing
machine and dryers for
Php2,600,000. The machines
are expected to last 40,000
hours and have a residual value
of Php120,000.
𝟐, 𝟔𝟎𝟎, 𝟎𝟎𝟎, −, 𝟏𝟐𝟎, 𝟎𝟎𝟎𝟎
𝐌𝐚𝐜𝐡𝐢𝐧𝐞 − 𝐡𝐨𝐮𝐫 𝐫𝐚𝐭𝐞 =
If White Laundry elects to use 𝟒𝟎, 𝟎𝟎𝟎
the service-hours depreciation
method, determine the = 𝐏𝐡𝐩 𝟔𝟐/𝐡𝐫
depreciation if the machine is
used for 8,200 hours. Depreciation if the machine is used for 8,200 hours

𝐏𝐡𝐩𝟔𝟐
= 𝟖𝟐𝟎𝟎 𝒉𝒐𝒖𝒓𝒔 𝐡𝐫

30
= 𝑷𝒉𝒑 𝟓𝟎𝟖, 𝟒𝟎𝟎
 (3) SERVICE-HOURS DEPRECIATION METHOD

J Ltd. purchased a machine at a cost of

Rs.99, 600. It was expected to last for 6 years with a scrap
value of Rs.3, 000.

Find out the depreciation for each of the six years under
(a) Production Units Method and (b) Machine Hour Rate
Method.

Total estimated life in units of production is 77,280 units

and total estimated life in machine hours is 19,320 hours.
31
 (3) SERVICE-HOURS DEPRECIATION METHOD

Additional data are:

Year 1 2 3 4 5 6 Total
Units 11,600 13,000 12,400 12,000 13,640 14,640 77,280
Produced
Working 2,900 3,250 3,100 3,000 3,410 3,660 19,320
Hours

32
(a) Production Method:
𝑪𝒐𝒔𝒕 𝑨𝒄𝒒𝒖𝒊𝒓𝒆𝒅 − 𝑺𝒂𝒍𝒗𝒂𝒈𝒆 𝑽𝒂𝒍𝒖𝒆 𝟗𝟗𝟔𝟎𝟎 − 𝟑𝟎𝟎𝟎
𝑫𝒆𝒑𝒓𝒆𝒄𝒊𝒂𝒕𝒊𝒐𝒏 𝑹𝒂𝒕𝒆 𝒑𝒆𝒓 𝒖𝒏𝒊𝒕 = =
𝑬𝒔𝒕𝒊𝒎𝒂𝒕𝒆𝒅 𝒍𝒊𝒇𝒆 𝒊𝒏 𝒖𝒏𝒊𝒕𝒔 𝟕𝟕, 𝟐𝟖𝟎
𝑫𝒆𝒑𝒓𝒆𝒄𝒊𝒂𝒕𝒊𝒐𝒏 𝑹𝒂𝒕𝒆 𝒑𝒆𝒓 𝒖𝒏𝒊𝒕 = 𝑹𝒔 𝟏. 𝟐𝟓
𝑪𝒐𝒎𝒑𝒖𝒕𝒂𝒕𝒊𝒐𝒏 𝒐𝒇 𝑨𝒏𝒏𝒖𝒂𝒍 𝑫𝒆𝒑𝒓𝒆𝒄𝒊𝒂𝒕𝒊𝒐𝒏
Year Units Produced Rate per unit, Rs Annual Depreciation, Rs
(1) (2) (3) 𝟐 × (𝟑)
1 11,600 1.25 14,500

2 13,000 1.25 16,250

3 12,400 1.25 15,500

4 12,000 1.25 15,000

5 13,640 1.25 17,050

6 14,640 1.25 18,300

33
(b) Machine Hours or Working Hours Method:
𝑪𝒐𝒔𝒕 𝑨𝒄𝒒𝒖𝒊𝒓𝒆𝒅 − 𝑺𝒂𝒍𝒗𝒂𝒈𝒆 𝑽𝒂𝒍𝒖𝒆 𝟗𝟗𝟔𝟎𝟎 − 𝟑𝟎𝟎𝟎
𝑫𝒆𝒑𝒓𝒆𝒄𝒊𝒂𝒕𝒊𝒐𝒏 𝑹𝒂𝒕𝒆 𝒑𝒆𝒓 𝒉𝒐𝒖𝒓 = =
𝑬𝒔𝒕𝒊𝒎𝒂𝒕𝒆𝒅 𝒍𝒊𝒇𝒆 𝒊𝒏 𝒉𝒐𝒖𝒓𝒔 𝟏𝟗, 𝟑𝟐𝟎

𝑫𝒆𝒑𝒓𝒆𝒄𝒊𝒂𝒕𝒊𝒐𝒏 𝑹𝒂𝒕𝒆 𝒑𝒆𝒓 𝒉𝒐𝒖𝒓 = 𝑹𝒔 𝟓. 𝟎𝟎

𝑪𝒐𝒎𝒑𝒖𝒕𝒂𝒕𝒊𝒐𝒏 𝒐𝒇 𝑨𝒏𝒏𝒖𝒂𝒍 𝑫𝒆𝒑𝒓𝒆𝒄𝒊𝒂𝒕𝒊𝒐𝒏
Year Working Hours Rate per hour, Rs Annual Depreciation, Rs
(1) (2) (3) 𝟐 × (𝟑)
1 2,900 5.00 14,500

2 3,250 5.00 16,250

3 3,100 5.00 15,550

4 3,000 5.00 15,000

5 3,410 5.00 17,050

34
6 3,660 5.00 18,300
35
A Machinery was purchased for Php 5,000,000 with an
estimated working hours or machine hours of about 25,000
hours. The expected scrap value is Php 200,000 and the
estimated machine hours for 10 years is as follows. You are
required to calculate the depreciation under the machine
hours method.

Year Machine Hours

1-3 3000 Hours
4-6 2600 Hours
7-10 800 Hours
36
 MODIFIED
STRAIGHT-LINE ACCELERATED COST
DEPRECIATION SERVICE-HOURS RECOVERY SYSTEM
METHOD DEPRECIATION (MACRS)

1 3 5

2 4 6

UNITS-OF- DECLINING BALANCE SUM OF YEARS DIGIT

PRODUCTION (DB) AND DOUBLE DEPRECIATION
DEPRECIATION DECLINING BALANCE METHOD (SOYD)
METHOD (DDB) DEPRECIATION

38
 Declining Balance Method is sometimes called the Constant-
Percentage Method or the Matheson formula.
 The assumption in this depreciation method is that the annual
cost of depreciation is the fixed percentage (1 - K) of the Book
Value (BV) at the beginning of the year.
 The formulas for Declining Balance Method of Depreciation are:
Annual Rate of Depreciation(K):
SV = FC (1 - K)n ; where n= service life
Book Value = FC (1 - K)m ; where m= any year before the end of service life
Depreciation at mth year = FC (1 - K)m-1 (K)
Total Depreciation = FC - SV
39
 Depreciation at mth year = FC (1 - K)m-1 (K)

40
 The equipment bought at a price of Php 450,000 has an economic life of 5 years
and a salvage value of Php 50, 000. The cost of money is 12% per year. Compute
the first year depreciation using Declining Balance Method.
Solution:
a. Solve for the annual rate of depreciation.
SV = FC (1 - K)n Annual Rate of Depreciation(K): SV = FC (1 - K)n
50,000 = 450,000 (1 - K)5 Book Value = FC (1 - K)m
K = 0.356 Depreciation at mth year = FC (1 - K)m-1 (K)
Total Depreciation = FC - SV
b. Solve for the depreciation at the end of the first year.
Depreciation = (FC) (1 - K)(m-1) (K)
Depreciation = (450,000) (1 - 0.356)0(0.356)
Depreciation = Php 160,200
41
 Opening Rate Depreciation Closing
Year NPV, Php this year, Php NBV
(1) = (4)* (2) (3) = (1) x (2) (4)= (1) – (3)
1 450,000 0.356 160,200 289,800
2 289,800 0.356 103,169 186,631
3 186,631 0.356 66,441 120,190
4 120,190 0.356 42,788 77,402
5 77,402 0.356 27,555 49,847~50,000

NPV - Net Book Value

(4)* - Closing NBV of previous year

42
 The first cost of a machine is Php 1,800,000 with a salvage
value of Php 400,000 at the end of its life of five years.
Determine the depreciation after three years using
Constant-Percentage Method.
Solution: Annual Rate of Depreciation(K): SV = FC (1 - K)n
Book Value = FC (1 - K)m
Depreciation at mth year = FC (1 - K)m-1 (K)
a. Solve for (1 - k) Total Depreciation = FC - SV
SV = FC (1 - K)n
400,000 = 1,800,000 (1 - K)5
(1 - K) = 0.74
K = 0.26
43
 b. Solve for the book value at the end of the third year.

BV = FC (1 - K)m Annual Rate of Depreciation(K): SV = FC (1 - K)n

Book Value = FC (1 - K)m
BV = 1,800,000 (0.74)3 Depreciation at mth year = FC (1 - K)m-1 (K)
Total Depreciation = FC - SV
BV = Php 730,037.21

c. Solve for the total depreciation after three years.

Total depreciation = FC - BV
Total depreciation = 1,800,000 - 730,037.21
Total depreciation = Php 1,069,962.79
44
 Opening Rate Depreciation Closing
Year NPV, Php this year, Php NBV
(1) = (4)* (2) (3) = (1) x (2) (4)= (1) – (3)
1 1,800,000 0.26 468,000 1,332,000
2 1,332,000 0.26 346,320 985,680
3 985,680 0.26 256,277 729,403
4 729,403 0.26 189,645 539,758
5 539,758 0.26 140,337 399,421~400,000

NPV - Net Book Value

(4)* - Closing NBV of previous year

45
46
 JAB Frames bought a printing machine for
$250,000. It is expected that machine has a
residual value of $30,000. Entity uses declining
balance method of depreciation and depreciates at
20% every year.
Give a schedule showing depreciation of asset for
5 years with workings.

47
 MODIFIED
STRAIGHT-LINE ACCELERATED COST
DEPRECIATION SERVICE-HOURS RECOVERY SYSTEM
METHOD DEPRECIATION (MACRS)

1 3 5

2 4 6

UNITS-OF- DECLINING BALANCE SUM OF YEARS DIGIT

PRODUCTION (DB) AND DOUBLE DEPRECIATION
DEPRECIATION DECLINING BALANCE METHOD (SOYD)
METHOD (DDB) DEPRECIATION

49
 DECLINING BALANCE(DB): fixed percentage or uniform
percentage method
- Annual depreciation is determined by multiplying the book value at
the beginning of the year by a fixed percentage, d
- The maximum annual depreciation rate for the DB method is twice
the straight line: 𝒅𝒎𝒂𝒙 = 𝟐/𝒏

DOUBLE DECLINING BALANCE(DDB) : 𝒅 = 𝟐/𝒏

Example: If n=10 years, the DDB rate is 2/10 = 20%, so 20% of the book
value is removed annually.

50
  The depreciation for year t is the fixed rate d times the book value
at the end of the previous year: 𝑫𝒕 = 𝒅 𝑩𝑽𝒕−𝟏
 The actual depreciation rate for each year t , relative to the first cost
B is: 𝒅𝒕 = 𝒅(𝟏 − 𝒅)𝒕−𝟏
 If 𝑩𝑽𝒕−𝟏 is not known, the depreciation in year t can be calculated
using B and d: 𝑫𝒕 = 𝒅𝑩(𝟏 − 𝒅)𝒕−𝟏
 Book value in year t is determined in two ways:
(1) 𝑩𝑽𝒕 = 𝑩(𝟏 − 𝒅)𝒕
(2) 𝑩𝑽𝒕 = 𝑩𝑽𝒕−𝟏 − 𝑫𝒕
 The book value for the DB method never goes to zero
 The implied salvage value after n years is the BV amount:
𝑰𝒎𝒑𝒍𝒊𝒆𝒅 𝑺 = 𝑩𝑽𝒏 = B(𝟏 − 𝒅)𝒏
51
 DECLINING BALANCE (DB) AND DOUBLE
DECLINING BALANCE (DDB) DEPRECIATION
 If the salvage value is estimated for the asset, the estimated value
is not used in the DB and DDB method to calculate the annual
depreciation.
 If the implied S is less than the estimated S, it is necessary to stop
charging further depreciation when the book value is at or below
the estimated salvage value
 In most cases the estimated S is in the range of zero to the implied
S value
 If the fixed percentage d is not stated, determine the implied fixed
rate using the estimated S value, if S>0. The range for d is 0<d<n/2:
𝑺 𝟏/𝒏
𝑰𝒎𝒑𝒍𝒊𝒆𝒅 𝒅 = 𝟏 − 𝑩
52
 Underwater electroacoustic transducers were purchased
for use in SONAR applications. The equipment will be
DDB depreciated over an expected life of 12 years. There
is a first cost of $25,000 and an estimated salvage value
of $2,500.
(a) Calculate the depreciation and book value for years 1
and 4
(b) Calculate the implied salvage value after 12 years

53
 SOLUTION
𝟐 𝟐
(a)The DDB fixed depreciation rate is 𝒅 = 𝒏 = 𝟏𝟐 = 𝟎. 𝟏𝟔𝟔𝟕
Year 1: 𝑫𝟏 = (0.1667)(25,000)(𝟏 − 𝟎. 𝟏𝟔𝟔𝟕)𝟏−𝟏 = $4,167
𝑩𝑽𝟏 = 𝟐𝟓, 𝟎𝟎𝟎(𝟏 − 𝟎. 𝟏𝟔𝟔𝟕)𝟏 = $20,833
Year 4: 𝑫𝟒 = (0.1667)(25,000)(𝟏 − 𝟎. 𝟏𝟔𝟔𝟕)𝟒−𝟏= $2,411
𝑩𝑽𝟒 = 𝟐𝟓, 𝟎𝟎𝟎(𝟏 − 𝟎. 𝟏𝟔𝟔𝟕)𝟒 = $12,054
𝐈𝐦𝐩𝐥𝐢𝐞𝐝 𝐒 = 𝐁𝐕𝐧= B(𝟏 − 𝐝)𝐧

(b) Implied salvage value = 25,000(𝟏 − 𝟎. 𝟏𝟔𝟔𝟕)𝟏𝟐 = $2,803

Since the estimated S=$2,500 is less than $2,803, the asset is
not fully depreciated when its 12-year expected life is
reached.
54
 Freeport-McMoRan Copper and Gold has purchased a
new ore grading unit for $80,000. The unit has an
anticipated life of 10 years and a salvage value of
$10,000.

Use the DB and DDB methods to compare the schedule

of depreciation and book values for each year.

55
 SOLUTION
An implied DB depreciation rate is
𝑺 𝟏/𝒏 𝟏𝟎,𝟎𝟎𝟎 𝟏/𝟏𝟎
𝑰𝒎𝒑𝒍𝒊𝒆𝒅 𝒅 = 𝟏 − = 𝟏 − = 0.1877 (<2/10)
𝑩 𝟖𝟎,𝟎𝟎𝟎

56
 B = $80,000
Year Declining Balance, $ (d = 0.1877) Double Declining Balance, $ (d=0.2)
t 𝑫𝒕 𝑩𝑽𝒕 𝑫𝒕 𝑩𝑽𝒕
0 - 80,000 - 80,000
1 15,016 64,948 16,000 64,000
2 12,197 52,787 12,800 51,200
3 9,908 42,879 10,240 40,960
4 8,048 34,831 8,192 32,768
5 6,538 28,293 6,554 26,214
6 5,311 22,982 5,243 20,972
7 4,314 18,668 4,194 16,777
8 3,504 15,164 3,355 13,422
9 2,846 12,318 2,684 10,737
10 2,318 10,000 737 10,000
57
58
 #1 PRACTICE PROBLEM
Software and hardware for optimizing cell design of
robotic picking lines have an installed cost of $78,000
with no residual value after 5 years. For years 2 and 4,
use DDB book depreciation to determine
(a) The depreciation charge
(b) The book value

59
 #2 PRACTICE PROBLEM
Determine the first cost of a machine that is used for
making spill-containment pallets if its book value in year
3 is $25,000. The machine has a 5-year life and the
double declining balance method is applied.

60
 MODIFIED
STRAIGHT-LINE ACCELERATED COST
DEPRECIATION SERVICE-HOURS RECOVERY SYSTEM
METHOD DEPRECIATION (MACRS)

1 3 5

2 4 6

UNITS-OF- DECLINING BALANCE SUM OF YEARS DIGIT

PRODUCTION (DB) AND DOUBLE DEPRECIATION
DEPRECIATION DECLINING BALANCE METHOD (SOYD)
METHOD (DDB) DEPRECIATION

61
 Tax depreciation method
Annual depreciation amount: 𝑫𝒕= 𝒅𝒕𝐁 𝐰𝐡𝐞𝐫𝐞 𝒅𝒕 is provided in
tabulated form and B is the first cost or unadjusted basis
 Book value in year t: 𝑩𝑽𝒕 = 𝑩𝑽𝒕−𝟏 − 𝑫𝒕
 𝑩𝑽𝒕 = unadjusted basis – sum of accumulated depreciation
 𝒋=𝒕
= B - 𝒋=𝟏 𝑫𝒋
 The basis B (or first cost P) is completely depreciated; salvage
value is always assumed to be zero, or S=$0
 Recovery periods are standardized to specific values:
n = 3,5,7,10,15,or 20 years For personal property (e.g. equipment or vehicles)
n = 27.5 or 39 years For real property (e. g. rental property or structures)
62
 Generally, the difference between book depreciation and
tax depreciation involves the "timing" of when the cost
of an asset will appear as depreciation expense on a
company's financial statements versus the depreciation
expense on the company's income tax return.

By charting the decrease in the value of an asset or

assets, depreciation reduces the amount of taxes a
company or business pays via tax deductions. The
larger the depreciation expense, the lower the taxable
income and the lower a company's tax bill.

63
 Depreciation Rate (%) for Each MACRS Recovery Periods in Years
Year for Personal Property
n=3 n=5 n=7 n=10 n=15 n=20
1 33.33 20.00 14.29 10.00 5.00 3.75
2 44.45 32.00 24.49 18.00 9.50 7.22
3 14.81 19.20 17.49 14.40 8.55 6.68
4 7.41 11.52 12.49 11.52 7.70 6.18
5 11.52 8.93 9.22 6.93 5.71
6 5.76 8.92 7.37 6.23 5.29
7 8.93 6.55 5.90 4.89
8 4.46 6.55 5.90 4.52
9 6.56 5.91 4.46
10 6.56 5.90 4.46
11 3.28 5.91 4.46
12 5.90 4.46

64
13 5.91 4.46
 Depreciation Rate (%) for Each MACRS Recovery Periods in Years
for Personal Property - continuation
Year
n=3 n=5 n=7 n=10 n=15 n=20
14 5.90 4.46

15 5.91 4.46

16 2.95 4.46

17-20 4.46

21 2.23

65
 For real property, MACRS utilizes:

Year 1 100𝒅𝟏 = 1.391%

Year 2-39 100𝒅𝒕 = 2.564%
Year 40 100𝒅𝟒𝟎 = 1.177%

66
 Chevron Philips Chemical Company in Baytown, Texas, acquired a new
equipment for its polyethylene processing line. This chemical is a resin
used in plastic pipe, retail bags, blow molding, and injection molding.
The equipment has an unadjusted basis of B = $400,000, a life of only 3
years, and a salvage value of 5% of B.
The chief engineer asked the finance director to provide an analysis of
the difference between (1) the DDB method, which is the internal book
depreciation and book value method used at the plant, and (2) the
required MACRS tax depreciation and its book value. He is especially
curious about the differences after 2 years of service for this short-
lived, but expensive asset. Determine
(a) Which method offers the larger total depreciation after 2 years
(b) The book value for each method after 2 years and at the end of the
67 recovery period
 SOLUTION
The basis B= $400,000 and the estimated S= 0.05(400,000)=$20,000.
The MACRS rates for n=3 are taken from the Table.
The depreciation rate for DDB is 𝒅𝒎𝒂𝒙 = 2/3

68
 𝑫𝒕 = 𝒅𝒕 𝐁 𝑩𝑽𝒕 = 𝑩𝑽𝒕−𝟏 − 𝑫𝒕
Comparing MACRS and DDB Depreciation

Rate MACRS DDB, d = 2/3

Ye (From the Tax Book Book Book
ar Table) Depreciation, $ Value, $ Depreciation, $ Value, $
(1) (2)= B x (1) (3) = (3)*- (2) (1) = 2/3 x BV* (2) = BV* - (1)
0 400,000 400,000
1 0.3333 133,320 266,680 266,667 133,333
2 0.4445 177,800 88,880 88,889 44,444
3 0.1481 59,240 29,640 24,444 (adj) *20,000
4 0.0174 29,640 (adj) *0
NOTES:
Year 3 for DDB would be 44,444 (2/3) = $29,629 except this would make
𝑩𝑽𝟑 < $20,000. Only the remaining amount of $24,444 is removed.
69
DDB: Salvage Value = 5% of B = 0.05(400,000) = 20,000
 SOLUTION
(a) The 2-year accumulated depreciation values are

MACRS: 𝑫𝟏 + 𝑫𝟐 = $𝟏𝟑𝟑, 𝟑𝟐𝟎 + $𝟏𝟕𝟕, 𝟖𝟎𝟎 = $311,120

DDB : 𝑫𝟏 + 𝑫𝟐 = $𝟐𝟔𝟔, 𝟔𝟔𝟕 + $𝟖𝟖, 𝟖𝟖𝟗 = $355,556

The DDB depreciation is larger. (Remember that for tax purposes, the
company does not have the choice in the United States of DDB as applied
here.)

(b) After 2 years the book value for DDB at $44,444 is 50% of the MACRS book
value of $88,880. At the end of recovery (4 years for MACRS due to the built-in
half year convention, and three years for DDB, the MACRS book value is 𝑩𝑽𝟒 =
0 and for DDB, 𝑩𝑽𝟑 = 20,000. This occurs because MACRS always removes the
entire first cost, regardless of the estimated salvage value. This is a tax
depreciation advantage of the MACRS method .
70
 )

71
 Safe Windpower recently installed 50 wind turbines at a
cost of $100 million. (a) Calculate the depreciation under
MACRS method for the turbines assuming the half-year
convention is relevant. The wind power installations are a
5 year property, (b) find the book value in every recovery
period.

72
 SOLUTION
Depreciation Cumulative
Depreciation
Year Rate Depreciation Book Value, $
Cost , $
From table Cost, $
0

73
 Del Norte Brick Co., is located near the intersection of
Texas, New Mexico, and Mexico. Improved access to the
company’s property is via a small bridge across the Rio
Grande. The cost of the bridge was $770,000. Determine
the depreciation and book value for year 3 according to
the MACRS method.

75
 For real property, MACRS utilizes:

Year 1 100𝒅𝟏 = 1.391%

Year 2-39 100𝒅𝒕 = 2.564%
Year 40 100𝒅𝟒𝟎 = 1.177%
Depreciation Cumulative
Depreciation
Year Rate Depreciation Book Value, $
Cost , $
From table Cost, $

76
 MODIFIED
STRAIGHT-LINE ACCELERATED COST
DEPRECIATION SERVICE-HOURS RECOVERY SYSTEM
METHOD DEPRECIATION (MACRS)

1 3 5

2 4 6

UNITS-OF- DECLINING BALANCE SUM OF YEARS DIGIT

PRODUCTION (DB) AND DOUBLE DEPRECIATION
DEPRECIATION DECLINING BALANCE METHOD (SOYD)
METHOD (DDB) DEPRECIATION

77
Sum of the Years Digit Method is an accelerated
depreciation technique based on the assumption that
tangible properties are usually productive when they are
new, and their use decreases as they become old. The
formulas for the Sum of the Years Digit Method of
Depreciation are:
Sum of years = (n / 2) (n + 1)
Annual depreciation at 1st year = (FC - SV) (n / Sum of years)
Annual depreciation at 2nd year = (FC -SV) ((n-1) / Sum of years)
Book Value = FC - Total depreciation at the end of nth year

78
 Sum of years = (n / 2) (n + 1) = (5 / 2) (5 + 1) = 15

Value before Value after

Year Depreciation, Depreciation, Php Depreciation,
Php Php
𝟓−0
1 50,000 𝟓𝟎, 𝟎𝟎𝟎 = 𝟏𝟕, 𝟎𝟎𝟎 33,000
𝟏𝟓
5−1
2 40,000 4𝟎, 𝟎𝟎𝟎 = 𝟏𝟏, 𝟎𝟎𝟎 29,000
𝟏𝟓
5−2
3 35,000 𝟑𝟓, 𝟎𝟎𝟎 = 𝟕, 𝟎𝟎𝟎 28,000
𝟏𝟓
5−3
4 22,000 𝟐𝟐, 𝟎𝟎𝟎 = 𝟑, 𝟎𝟎𝟎 19,000
𝟏𝟓
5−4
5 15,000 𝟏𝟓, 𝟎𝟎𝟎 = 𝟏, 𝟎𝟎𝟎 14,000
𝟏𝟓
79
 An equipment costs Php 1,500,000. Solution:
At the end of its economic life of
a. Solve for the sum of years.
five years, its salvage value is Php
500,000. Sum of years = (n / 2) (n + 1)
Sum of years = (5 / 2) (5 + 1)
Using Sum of the Years Digit
Sum of years = 15 years
Method of Depreciation, what will be
its book value for the third year?

80
 b. Solve for the total depreciation up to the third year.

An equipment costs Php 1,500,000. Total depreciation =

At the end of its economic life of (FC - SV) (5 + 4 + 3) /15
five years, its salvage value is Php
500,000.
Using Sum of the Years Digit Total depreciation =
Method of Depreciation, what will be (1,500,000 - 500,000) (12 / 15)
its book value for the third year?

Total depreciation =
Php 800,000

81
 c. Solve for the book value in the third year.

An equipment costs Php 1,500,000. Book Value =

At the end of its economic life of
five years, its salvage value is Php FC - Total depreciation
500,000.
Using Sum of the Years Digit Book Value =
Method of Depreciation, what will be
its book value for the third year?
1,500,000 - 800,000

Book Value =
Php 700,000

82
 SOLUTION
Depreciation Depreciation Cumulative
Year Book Value, Php
Rate Cost , Php Depreciation Cost, Php

0 0 0 0 1,500,000

1 𝟓−𝟎 𝟓 𝟓 𝟓 1,500,000 -
= 𝟏, 𝟎𝟎𝟎, 𝟎𝟎𝟎 𝟏, 𝟎𝟎𝟎, 𝟎𝟎𝟎 𝟓
𝟏𝟓 𝟏𝟓 𝟏𝟓 𝟏𝟓 𝟏, 𝟎𝟎𝟎, 𝟎𝟎𝟎 =
𝟏𝟓

2 𝟓−𝟏 𝟒 𝟒 𝟓+𝟒 1,500,000 -

= 𝟏, 𝟎𝟎𝟎, 𝟎𝟎𝟎 𝟏, 𝟎𝟎𝟎, 𝟎𝟎𝟎 𝟓+𝟒
𝟏𝟓 𝟏𝟓 𝟏𝟓 𝟏𝟓 𝟏, 𝟎𝟎𝟎, 𝟎𝟎𝟎 =
𝟏𝟓

3 𝟓−𝟐 𝟑 𝟑 𝟓+𝟒+𝟑 1,500,000 -

= 𝟏, 𝟎𝟎𝟎, 𝟎𝟎𝟎 𝟏, 𝟎𝟎𝟎, 𝟎𝟎𝟎 = 𝟓+𝟒+𝟑
𝟏𝟓 𝟏𝟓 𝟏𝟓 𝟏𝟓 𝟏, 𝟎𝟎𝟎, 𝟎𝟎𝟎 =
𝟏𝟓
𝟖𝟎𝟎, 𝟎𝟎𝟎 𝟕𝟎𝟎, 𝟎𝟎𝟎
4 𝟓−𝟑 𝟐 𝟐 𝟓+𝟒+𝟑+𝟐 1,500,000 -
= 𝟏, 𝟎𝟎𝟎, 𝟎𝟎𝟎 𝟏, 𝟎𝟎𝟎, 𝟎𝟎𝟎 𝟓+𝟒+𝟑+𝟐
𝟏𝟓 𝟏𝟓 𝟏𝟓 𝟏𝟓 𝟏, 𝟎𝟎𝟎, 𝟎𝟎𝟎
𝟏𝟓

5 𝟓−𝟒 𝟏 𝟏 𝟓+𝟒+𝟑+𝟐+𝟏 1,500,000 -

= 𝟏, 𝟎𝟎𝟎, 𝟎𝟎𝟎 𝟏, 𝟎𝟎𝟎, 𝟎𝟎𝟎 𝟓+𝟒+𝟑+𝟐+𝟏
𝟏𝟓 𝟏𝟓 𝟏𝟓 𝟏𝟓 𝟏, 𝟎𝟎𝟎, 𝟎𝟎𝟎 =
𝟏𝟓
500,000 (SV)
83
 Calculate the SOYD depreciation charges for year
2 for electro-optics equipment with B = $25,000.
S = $4000, and an 8-year recovery period
Solution:
Sum of years = (n / 2) (n + 1) = (8 / 2) (8 + 1) = 36
Annual depreciation at 2nd year
= (FC -SV) ((n-1) / Sum of years)
𝟖−𝟏 𝟕
𝐃𝟐 = 𝟑𝟔
(𝟐𝟓, 𝟎𝟎𝟎 − 𝟒, 𝟎𝟎𝟎) = 𝟑𝟔
(21,000) = $4,083
84
85
 1. The asset described below is to be depreciated using
sum-of-years-digits depreciation. Determine the book
value of the asset after three years of depreciation.
B = asset cost basis = $10,000
N = 4 years
S = salvage value = $2,000
Sum of years = (n / 2) (n + 1)
Choose an answer:
A) BV3 = $4,400
B) BV3 = $2,800
C) BV3 = $2,000
D) BV3 = $1,600
86
 AFTER-TAX
ECONOMIC ANALYSIS

Tuesday, March 1, 2022