MODULE Carlos Hilado Memorial State College

Alijis Campus | Binalbagan Campus | Fortune Towne Campus | Talisay Campus

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(Good governance, Research-oriented, Extension-driven, Education for Sustainable Development and Nation-building)
COLLEGE OF EDUCATION
(12 Hours) 2nd Semester AY 2020-2021

MATH OF Instructor: WANNY B. JARON FB Messenger: Wanny Jaron

INVESTMENT Course: MATH OF INVESTMENT EMAIL AD: wanny.jaron@chmsc.edu.ph

INTRODUCTION
A business may buy or build an office building, and use it for many years. The
business then relocates to a newer, bigger building elsewhere. The original office building
may be a bit rundown but it still has value. The cost of the building, minus its resale value, is
spread out over the predicted life of the building, with a portion of the cost being expensed
in each accounting year. Depreciation of some fixed assets can be done on an accelerated
basis, meaning that a larger portion of the asset's value is expensed in the early years of the
asset's life. Vehicles are typically depreciated on an accelerated basis.
Depletion is another way that the cost of business assets can be established in
certain cases. It is relevant only to the valuation of natural resources. For example, an oil
well has a finite life before all of the oil is pumped out. Therefore, the oil well's setup costs
can be spread out over the predicted life of the well. Depreciation, amortization, and
depletion all are non-cash expenses. That is, no cash is spent in the years for which they are
expensed. In some countries the terms amortization and depreciation are often used
interchangeably to refer to tangible and intangible assets.
Learning Objectives
Upon completing this module, you should be able to determine:

 Asset depreciation schedule on different method

 Depreciation expenses and year- end book value for any year of declining balance
 Depletion schedule for a natural resource- based asset

ENGAGE

Depletion

Look at the pictures and tell the difference between the terms depreciation and depletion.

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EXPLORE

Man-made God-given
Explore the possibilities why the above-items are categorized under depreciation and depletion.

EXPLAIN
DEPRECIATION
Depreciation is the loss or reduction in value or service potential of a certain asset
during a period of time. It allows for the wear and tear on a fixed asset and must be
deducted from the income.
It is a non-cash expense as it does not involve any outflow of cash.

WHAT ARE FIXED ASSETS?

Fixed assets are long-term assets that a company has purchased and is using for the
production of its goods and services.
Examples:
Land, property, plant, and equipment (PP&E).
buildings, computer equipment,
software, furniture, machinery, and vehicles.

DEPRECIATION VS DEPLETION
Depreciation is the deduction of the asset value due to aging, whereas depletion is
the actual physical reduction of the company’s natural resources (accounting for
consumption).
Example:
mining, timber, petroleum, or other similar
industries

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DEPLETION
Main types of depletion calculation:

 Cost depletion (where cost of the resource allocated over the period)
 Percentage depletion (the percentage of the property’s gross income where
percentage is specified for each mineral).

Read more on the process of computing for depletion on:

Depletion Method | Explanation | Formula | Examples - PakAccountants.com

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THE DIFFERENCE BETWEEN DEPRECIATION AND DEPLETION:

FACTORS AFFECTING DEPRECIATION

Cost of Asset

The cost of acquiring an asset which includes purchase cost, installation charges, transit
cost, transit insurance, commission, registration expense, etc.

Estimated Net Residual Value

It is the presumed scrap value of the asset at the time of its disposal or selling off. This value
is estimated after deducting all the related expenses at the time of such disposal.

Depreciable Cost

The depreciable cost is the net value of the asset on which the depreciation is to be charged.
It is computed after deducting the estimated net residual value from the original cost of the
asset.

Estimated Useful Life

The estimated useful life of an asset is that period for which the asset remains in usable
condition by the company to carry out business operations.

METHODS IN DETERMINING THE DEPRECIATION OF VARIOUS ASSETS

❖ Straight Line Method
❖ Written Down Value Method
❖ Unit of Production Method
❖ Annuity Method
❖ Sinking Fund Method
❖ Double-Declining-Balance Method
❖ Sum of the Years’ Digits Method

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 1.) STRAIGHT LINE METHOD

Under the straight-line depreciation method, the amount of

reduction remains the same throughout all the accounting
years. It is also called as the fixed installment method.

Formula:

To compute annual depreciation under the straight-line

method:

𝑨𝒄𝒒𝒖𝒊𝒔𝒊𝒕𝒊𝒐𝒏 − 𝑬𝒔𝒕𝒊𝒎𝒂𝒕𝒆𝒅 𝑺𝒄𝒓𝒂𝒑 𝑽𝒂𝒍𝒖𝒆

𝑨𝒏𝒏𝒖𝒂𝒍 𝑫𝒆𝒑𝒓𝒆𝒄𝒊𝒂𝒕𝒊𝒐𝒏 =
𝑬𝒔𝒕𝒊𝒎𝒂𝒕𝒆𝒅 𝑳𝒊𝒇𝒆 𝒊𝒏 𝒀𝒆𝒂𝒓𝒔

A similar formula:

Source: Depreciation Calculator

To determine the rate of reduction (in percentage) under the straight-line method:

𝑨𝒏𝒏𝒖𝒂𝒍 𝑫𝒆𝒑𝒓𝒆𝒄𝒊𝒂𝒕𝒊𝒐𝒏 𝑨𝒎𝒐𝒖𝒏𝒕

𝑹𝒂𝒕𝒆 𝒐𝒇 𝑫𝒆𝒑𝒓𝒆𝒄𝒊𝒂𝒕𝒊𝒐𝒏 = 𝒙 𝟏𝟎𝟎
𝑨𝒄𝒒𝒖𝒊𝒔𝒊𝒕𝒊𝒐𝒏 𝑪𝒐𝒔𝒕

Where, acquisition cost includes all the expenses incurred on purchase, transportation and
installation of the asset.

SAMPLE PROBLEM

Let us suppose that Mr. A bought a transportation truck costing Php 800,000, which has an
estimated life of 10 years and the scrap value is Php 50,000. Find out the annual
depreciation expense. Also, find out the rate of depreciation.

Given: Acquisition Cost = Php 800000

Estimated Scrap Value = Php 50000
Estimated Life in Years = 10 years

𝑨𝒄𝒒𝒖𝒊𝒔𝒊𝒕𝒊𝒐𝒏−𝑬𝒔𝒕𝒊𝒎𝒂𝒕𝒆𝒅 𝑺𝒄𝒓𝒂𝒑 𝑽𝒂𝒍𝒖𝒆

𝑨𝒏𝒏𝒖𝒂𝒍 𝑫𝒆𝒑𝒓𝒆𝒄𝒊𝒂𝒕𝒊𝒐𝒏 = 𝑬𝒔𝒕𝒊𝒎𝒂𝒕𝒆𝒅 𝑳𝒊𝒇𝒆 𝒊𝒏 𝒀𝒆𝒂𝒓𝒔

𝑨𝒏𝒏𝒖𝒂𝒍 𝑫𝒆𝒑𝒓𝒆𝒄𝒊𝒂𝒕𝒊𝒐𝒏 𝑨𝒎𝒐𝒖𝒏𝒕

𝑹𝒂𝒕𝒆 𝒐𝒇 𝑫𝒆𝒑𝒓𝒆𝒄𝒊𝒂𝒕𝒊𝒐𝒏 = 𝒙 𝟏𝟎𝟎
𝑨𝒄𝒒𝒖𝒊𝒔𝒊𝒕𝒊𝒐𝒏 𝑪𝒐𝒔𝒕

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Solution:
𝑨𝒄𝒒𝒖𝒊𝒔𝒊𝒕𝒊𝒐𝒏 − 𝑬𝒔𝒕𝒊𝒎𝒂𝒕𝒆𝒅 𝑺𝒄𝒓𝒂𝒑 𝑽𝒂𝒍𝒖𝒆
𝑨𝒏𝒏𝒖𝒂𝒍 𝑫𝒆𝒑𝒓𝒆𝒄𝒊𝒂𝒕𝒊𝒐𝒏 =
𝑬𝒔𝒕𝒊𝒎𝒂𝒕𝒆𝒅 𝑳𝒊𝒇𝒆 𝒊𝒏 𝒀𝒆𝒂𝒓𝒔

= (800000-50000)/10

= 75 000
𝑨𝒏𝒏𝒖𝒂𝒍 𝑫𝒆𝒑𝒓𝒆𝒄𝒊𝒂𝒕𝒊𝒐𝒏 𝑨𝒎𝒐𝒖𝒏𝒕
𝑹𝒂𝒕𝒆 𝒐𝒇 𝑫𝒆𝒑𝒓𝒆𝒄𝒊𝒂𝒕𝒊𝒐𝒏 = 𝒙 𝟏𝟎𝟎
𝑨𝒄𝒒𝒖𝒊𝒔𝒊𝒕𝒊𝒐𝒏 𝑪𝒐𝒔𝒕

= (75000/800000)100

= 9.38%

2. WRITTEN DOWN VALUE METHOD

The diminishing balance method is one

of the most efficient depreciation
methods. It is widely used for the assets
which are more productive in the initial
years and less becomes less efficient
gradually.

The essential feature of this method is

that the depreciation is charged on the
book value of the asset; and not on its
original cost.

Formula:

To calculate the annual depreciation through the written down value method:

𝑅𝑎𝑡𝑒 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛
𝐴𝑛𝑛𝑢𝑎𝑙 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 = 𝐵𝑜𝑜𝑘 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐴𝑠𝑠𝑒𝑡 𝑥
100

To find out the depreciation rate under the written down value method:
𝑛 𝑆
𝑅𝑎𝑡𝑒 𝑜𝑓 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 = [1 − √ ] 𝑥 100
𝐶

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Where n is the estimated life in years;
S is the estimated scrap value;
C is the acquisition cost.

SAMPLE PROBLEM

A soap manufacturing company purchased a machine on April 1, 2015, for Php 500,000,
which has an estimated useful life of 5 years. If its estimated scrap value is Php 100,000, determine
the rate of depreciation and annual depreciation for each year, using the written down value
method.

𝑛 𝑆
𝑅𝑎𝑡𝑒 𝑜𝑓 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 = [1 − √ ] 𝑥 100
𝐶

Let us find out the depreciation value for each year with the help of simple accounting
method:

Year 1: Annual Depreciation=500,000.00×(27.5/100)

Annual Depreciation=137,500.00
Year 2: Book Value=500,000.00-137,500.00
Book Value=362,500.00
Annual Depreciation=362,500.00×(27.5/100)
Annual Depreciation=99,687.50
Year 3: Book Value=362,500-99,687.50
Book Value=262,812.50

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 Annual Depreciation=262,812.50×(27.5/100)
Annual Depreciation=72,273.44
Year 4: Book Value=262812.50-72,273.44
Book Value=190,539.06
Annual Depreciation=190,539×(27.5/100)
Annual Depreciation=52,398.24
Year 5: Book Value=190,539.00-52,398.24
Book Value=138,140.76
Annual Depreciation=138,140.76×(27.5/100)
Annual Depreciation=37,988.71

All values and depreciation amounts are in Php.

Note: For exercises, transfer this Annual Depreciation table on a Google Sheet or Excel
using the formula given.
3. UNIT OF PRODUCTION METHOD

In the unit of production method, an asset’s life is

estimated by the number of units which can be
produced by employing it. Depreciation is
determined according to its usage, instead of a
particular period.
Formula:
To compute depreciation expense with the help
of the unit of production method:

𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑈𝑛𝑖𝑡𝑠 𝑃𝑟𝑜𝑑𝑢𝑐𝑒𝑑

𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 = 𝑥 (𝐴𝑠𝑠𝑒𝑡 𝐶𝑜𝑠𝑡 − 𝑆𝑎𝑙𝑣𝑎𝑔𝑒 𝑉𝑎𝑙𝑢𝑒)
𝐿𝑖𝑓𝑒 𝑜𝑓 𝐴𝑠𝑠𝑒𝑡 𝑖𝑛 𝑈𝑛𝑖𝑡𝑠

SAMPLE PROBLEM:
ABC Ltd. purchased a machine worth Php1200000, whose salvage value is 300000. The
machine can produce 100 units of a product per hour. If the whole useful life of the machine
is 40000 hours, calculate the depreciation for that annual year in which it was used for 4000
hours.
Solution:
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑈𝑛𝑖𝑡𝑠 𝑃𝑟𝑜𝑑𝑢𝑐𝑒𝑑
𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 = 𝑥 (𝐴𝑠𝑠𝑒𝑡 𝐶𝑜𝑠𝑡 − 𝑆𝑎𝑙𝑣𝑎𝑔𝑒 𝑉𝑎𝑙𝑢𝑒)
𝐿𝑖𝑓𝑒 𝑜𝑓 𝐴𝑠𝑠𝑒𝑡 𝑖𝑛 𝑈𝑛𝑖𝑡𝑠
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Number of Units Produced=Number of Hours of Usage × Units Produced Per Hour
Number of Units Produced =4,000×100
Number of Units Produced =400,000
Life of Asset in Units =Total Life in Hours × Units Produced Per Hour
Life of Asset in Units =40000×100
Life of Asset in Units =4,000,000
Depreciation Expense =(400,000/4,000,000)×(1,200,000-300,000)
Depreciation Expense =Php90,000

4. ANNUITY METHOD
This method of depreciation is based on the concept of opportunity cost. Here the
depreciation is computed in regards with the interest which the amount used to purchase
the asset would have generated if it was invested somewhere else.

𝐶. 𝑖 (1 + 𝑖)𝑛
𝐴𝑛𝑛𝑢𝑖𝑡𝑦 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 =
(1 + 𝑖)𝑛 − 1

Where:
C is the acquisition cost;
i is the interest rate (in decimal);
n is the estimated life in years.

Sample Problem:
XYZ Ltd. purchases a machine worth Php700,000, which has an estimated life
of 7 years. If this sum were invested somewhere else, it would have earned the firm interest
of 10% p.a. Calculate the annuity depreciation.

𝐶. 𝑖 (1 + 𝑖)𝑛
𝐴𝑛𝑛𝑢𝑖𝑡𝑦 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 =
(1 + 𝑖)𝑛 − 1
Solution:

Annuity Depreciation=[700,000×(0.1)×{1+(0.1)}^7]/[{1+(0.1)}^7-1]
Annuity Depreciation=136,410.20/0.9487
Annuity Depreciation=Php143,786.44

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EXTEND/ELABORATE
Assignment:
Find out more on the remaining three methods. Definition, Formula and Example.

⮚ Sinking Fund Method

⮚ Double-Declining-Balance Method

⮚ Sum of the Years’ Digits Method

EVALUATE
1. A refrigerator used by a meat processor has a cost of $93,750, an estimated residual value of
$10,000 and an estimated useful life of 25 years. What is the amount of the annual
depreciation computed by the straight-line method?
2. The Ministry of Finance published the FY2009 Tax Reform (Main Points) on December 19,
2008. Included in the Reform is the introduction of a 2-year measure allowing immediate
depreciation for investment in energy-saving facilities and appliances. If this measure
doubles the MACRS allowable depreciation for the first year, what depreciation expense
would a new energy-efficient HVAC system costing $138,500 be for the first year (assume a
15-year life class)?
3. On April 29, 2013, Quality Appliances purchased equipment for $260,000. The estimated
service life of the equipment is six years and the estimated residual value is $20,000.
Quality’s fiscal year ends on December 31.Required: Calculate depreciation for 2013 and
2014 using each of the three methods listed. Quality calculates partial year depreciation
based on the number of months the asset is in service. Round all computations to the
nearest dollar.

Straight-line.
Sum-of-the-years’ digits.
Double-declining balance.

References:
Amortization vs. Depreciation: What's the Difference? (investopedia.com)

Depreciation Calculator

Depletion Method | Explanation | Formula | Examples - PakAccountants.com

Calculate Depletion Expense | Formula | Example - Accountinginside

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