NAME: BORNALES, DALLIN SCHMID & PAJARILLO, AARON P.

DATE: JUNE 1, 2024

SECTION: BSME – 3A

SUBJECT: BES 334

INSTRUCTOR: ENGR. RAFAEL P. REBUTADA

DEPRECIATION

Depreciation is the decrease in value of physical properties with the passage of time and use. More
specifically, depreciation is an accounting concept that establishes an annual deduction against before-tax
income such that the effect of time and use on an asset’s value can be reflected in a firm’s financial
statements.

COMMON TERMS USED:

Amortization: A term sometimes used interchangeably with the term depreciation though slightly
different, it is used to reflect the decreasing value of intangibles, such as loans, mortgages, patents,
trademarks, and goodwill.

Book depreciation: Used by a corporation or business for internal financial accounting to track the value
of an asset or property over its life.

Tax depreciation: Used by a corporation or business to determine taxes due based on current tax laws of
the government entity (country, state, province, etc.).

MACRS (Modified Accelerated Cost Recovery System): It is the tax depreciation system used in the
United States to calculate asset depreciation.

Asset: A tangible item that a company owns and uses in its operations, expected to provide economic
benefits over multiple periods.

Capital Asset: A long-term asset that is not intended for sale in the regular course of the business but is
used for productive purposes.

Intangible Asset: Non-physical assets such as patents, trademarks, and copyrights, which are amortized
rather than depreciated.

Useful Life: The period over which an asset is expected to contribute directly or indirectly to future cash
flows

First cost P or unadjusted basis B: The delivered and installed cost of the asset including purchase
price, delivery and installation fees, and other depreciable direct costs incurred to prepare the asset for
use.
Book value: represents the remaining, undepreciated capital investment on the books after the total
amount of depreciation charges to date has been subtracted from the basis.

Depreciation Expense: The portion of the cost of an asset allocated as an expense in each accounting
period.

Recovery period: Is the depreciable life of the asset in years. Often there are different n values for book
and tax depreciation. Both of these values may be different from the asset’s estimated productive life.

Market value: Term also used in replacement analysis, is the estimated amount realizable
if the asset were sold on the open market.

Salvage value: is the estimated trade-in or market value at the end of the asset’s useful life.
The salvage value, expressed as an estimated dollar amount or as a percentage of the first cost,
may be positive, zero, or negative due to dismantling and carry-away costs.

Accumulated Depreciation: The total amount of depreciation expense that has been recorded for an asset
since it was acquired.

Depreciation rate or recovery rate: is the fraction of the first cost removed by depreciation each year t.
This rate may be the same each year, which is called the straight line rate d, or different for each year of
the recovery period.

Depreciable Base: The amount subject to depreciation, calculated as the cost of the asset minus its
residual value.

Depreciation Schedule: Charts the loss in value of an asset over the period you've designated as its
useful life.

Tax Depreciation: Depreciation expenses calculated according to tax laws and regulations, which may
differ from book depreciation used for financial reporting.

Bonus Depreciation: A tax incentive that allows businesses to deduct a large percentage of the purchase
price of eligible assets in the first year they are placed in service.

Personal property: one of the two types of property for which depreciation is allowed, is the income-
producing, tangible possessions of a corporation used to conduct business. Included is most
manufacturing and service industry property—vehicles, manufacturing equipment, construction assets,
and much more.

Real property: includes real estate and all improvements—office buildings, manufacturing structures,
test facilities, warehouses, apartments, and other structures. Land itself is considered real property, but it
is not depreciable.
Straight-Line Depreciation: A method of depreciation where the same amount of expense is allocated in
each period over the asset's useful life.

Declining Balance Method: An accelerated depreciation method where a larger depreciation expense is
recorded in the earlier years of the asset's useful life.

Double Declining Balance (DDB): A form of declining balance method that doubles the straightline rate
of depreciation.

Sum-of-the-Years' Digits (SYD): An accelerated depreciation method that applies a fraction based on
the sum of the years' digits to the depreciable base.

Impairment: A situation where an asset's market value falls below its book value, leading to a write-
down of the asset.

Capital Expenditure (Cap Ex): Funds used by a company to acquire or upgrade physical assets such as
property, industrial buildings, or equipment.

Revaluation: The process of re-assessing the value of an asset, which may result in an increase or
decrease in its book value.

Carrying Amount: the original cost of an asset as reflected in a company's books or balance sheet, minus
the accumulated depreciation of the asset.

Obsolescence: The decline in value of an asset due to technological advancement or changes in market
preferences, making the asset less useful or outdated.

Historical Cost: The original cost of acquiring an asset, including all expenses necessary to get the asset
ready for use.
METHOD ANALYSIS:

 Straight-Line Method

A 550,000 pesos pick-up truck was acquired by an animal organization to replace the old truck.
Expected salvage value for the truck is 55,000 pesos and its anticipated usable life is four years. Upon
two years, determine the truck's book value.

Solution:

Annual depreciation expense = (Cost - Salvage Value)

Useful Life

Annual depreciation expense: = (₱550,000 - ₱55,000) / 4 = ₱495,000 / 4 = ₱123,750

After 2 years:
2 years x ₱123,750 per year = ₱247,500
The book value of the van after 2 years would be:
Cost - Accumulated Depreciation = ₱550,000 - ₱247,500 = ₱302,500

Therefore, the book value of the truck after 2 years is ₱302,500.

 Double-Declining Balance Method

₱10,060,000 is spent by the local government unit on a natural gas generator. With a salvage
value of ₱2,500,000, the generator has an estimated twenty years of useful life. To determine
depreciation, the corporation used the double-declining balance method. Determine the first three years'
yearly depreciation expense.

Solution:

Calculate the declining depreciation rate:

Declining rate = 1 / Useful life = 1 / 20 = 5% per year
Calculate the double-declining balance rate:
Double-declining balance rate = 2 × Straight-line rate = 2 × 5% = 10% per year
Calculate the annual depreciation expense:
Year 1: ₱10,060,000 × 10% = ₱1,006,000
Year 2: (₱10,060,000 - ₱1,006,000) × 10% = ₱905,400
Year 3: [₱10,060,000 - (₱1,006,000+ ₱905,400)] × 10% = ₱814,860

Therefore, the depreciation expenses for the first 3 years using the double-declining balance method
would be:
Year 1: ₱40,000
Year 2: ₱24,000
Year 3: ₱14,400

 Sum of the Years' Digits Method

A ₱17,000 split-type air conditioner is purchased by a local church. According to estimates, the
machine will last five years and has a ₱5,000 salvage value. Use the Sum of the Years' Digits (SYD)
method to determine each annual depreciation expense.
Solution:

Depreciation Expense = Remaining Life of Asset X (Cost of Asset – Salvage value)

Sum of the Years’ Digit

Calculate the sum of the years' digits:

SYD = 5 + 4 + 3 + 2 + 1 = 15
Calculate the annual depreciation expense for each year:
Year 1: Depreciation Expense = (5/15) (₱17,000 - ₱5,000) = ₱4,000
Year 2: Depreciation Expense = (4/15) (₱17,000 - ₱5,000) = ₱3,200
Year 3: Depreciation Expense = (3/15) (₱17,000 - ₱5,000) = ₱2,400
Year 4: Depreciation Expense = (2/15) (₱17,000 - ₱5,000) = ₱1,600
Year 5: Depreciation Expense = (1/15) (₱17,000 - ₱5,000) = ₱800

Therefore, each annual depreciation expenses would be:

Year 1: ₱4,000
Year 2: ₱3,200
Year 3: ₱2,400
Year 4: ₱1,600
Year 5: ₱800

 Units of Production Method

A machine shop just invested in a universal hobbing machine for ₱4,000,000. They estimate that
this machine will be able to make around 600,000 gears throughout its lifespan. At the end of its life, they
anticipate being able to sell it for salvage at ₱875,000. In the first operational year, the machine managed
to produce 13,700 gears. How much did the machine depreciate during this first year using the Units of
Production method?
Solution:

Depreciation Expense = x Cost of Asset – Salvage value Actual Production

Total Estimated Production

Calculate the depreciation rate per unit:

Depreciation rate per unit = (₱4,000,000 - ₱875,000) / 600,000 units = ₱5.21 per unit
Calculate the depreciation expense:
Depreciation expense = 13,700 units × ₱5.21 per unit = ₱71,377

Therefore, the amount the machine depreciates during its first year would be:
Year 1: ₱71,377