© All Rights Reserved

31 views

© All Rights Reserved

- Installment Request Checklist IFD Approved
- 2011 LCCI Accounting IAS Level-3 Series 2 (Code 3902)
- Chap006-Intercompany Transfers of Services and Non Current Assets
- Transactions Plant Assets
- AC305
- Stice 18e Ch11 SOL Final
- ENGECO
- countermeasure there is down payment exist for the same vendor
- Lecture 32
- Duke-Energy-Kentucky,-Inc.-Rate-OL-E,-Outdoor-Lighting-Equipment-Installation
- Bisnes Plan PAN PC
- JA_20131219_2593_RKT_EhP5_Annex16(1)
- DO_011_s2017
- Dep Cashflow 1
- Question Bank
- 157_17945_EY121_2013_1__2_1_7-_Depreciation
- Sum on Tax
- Dec 2005 - Qns Mod A
- IFRS 5
- Biaya Peralatan perbulan.pdf

You are on page 1of 29

Terminology

Depreciation is the reduction in value of an asset.

Usually the annual depreciation is tax deductible i.e. it is subtracted from income when calculating the amount of taxes due each year.

First cost (or unadjusted basis) is the delivered and installed cost of the asset including purchase price.

Depreciation Terminology

Book value (BV)

represents the remaining, undepreciated capital investment on the books after the total amount of depreciation charges to date have been subtracted from the basis. BV is usually determined at the end of each year, which is consistent with the end-of-year convention.

Depreciation Terminology

Recovery period (n)

is the depreciable life, n of the asset in years.

is the estimated trade-in or market value at the end of the assets useful life.

is the fraction of the first cost removed by depreciation each year. This rate may be same (straight line method) or different for each year of the recovery period.

Depreciation Methods

Straight Line (SL) Depreciation

derives its name from the fact that the book value decreases linearly with time. Depreciation rate (dt = 1/n = d)is the same each year of the recovery period, n. Straight line is considered the standard against which any depreciation model is compared.

The annual SL depreciation is determined by multiplying the first cost minus salvage value by d. In equation form,

where, t = year (t=1,2,n) Dt= annual depreciation charge B = first cost or unadjusted basis S = estimated salvage value n = recovery period d = depreciation rate = 1/n

BS Dt ( B S ) d n

B B o o k v a l u e S

t

time

Since the asset is depreciated by the same amount each year, the book value after t years of service (BVt) will be equal to the first cost B minus the annual depreciation times t. BVt = B tDt Earlier we defined dt as a depreciation rate for a specific year t. However, the SL model has the same rate for all years, that is d = dt = 1/n Excel function is SLN(B,S,n)

Example 16.1

If an asset has a first cost of $50,000 with a $10,000 estimated salvage value after 5 years, (a) calculate the annual depreciation and (b) compute and plot the book value of the asset after each year, using straight line (SL) depreciation Solution (a) The depreciation each year for 5 years can be found by

Example 16.1

Dt ( B S )d BS n

= (50,000 10,000)/5 = $8000 Enter SLN(50000,10000,5) in any cell to get Dt of $8000 (b) The book value after each year t is computed by using the equation BVt = B tDt.

BV1 = 50,000 1(8,000) = $42,000 BV5 = 50,000 5(8,000) = $10,000 = S

Example 16.1

The BVt values are plotted for years 1 and 5 as

50

B V , x $ 1 0 0 0

Dt=$8,000

40 30 20 10

S=$10,000

0 1 2 3 4 5

Year t

The declining balance method is commonly applied. This method is also known as the fixed percentage or uniform percentage method. DB depreciation accelerates the writeoff of asset value because

the annual depreciation is determined by multiplying the book value at the beginning of a year by a fixed (uniform) percentage d.

If d = 0.1 then 10% of the book value is removed each year. So, the depreciation amount decreases each year. The maximum annual depreciation rate for the DB method can be twice the straight line rate, that is dmax = 2/n In this case, the method is given a special title called double declining balance (DDB) method.

If n = 10 years, the DDB rate is 2/10 = 0.2 of the book value is removed each year. 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 one of two ways:

(1) by using the rate d and the first cost B or (2) by subtracting the current depreciation charge from the previous book value.

Declining Balance (DB) and Double Declining Balance (DDB) Depreciation The equations are BVt = B(1-d)t and BVt = BVt-1 - Dt Note that the book value for DB method never goes to zero. Why?

Declining Balance (DB) and Double Declining Balance (DDB) Depreciation The implied salvage value after n years is BVn amount. Thus, implied salvage value = Implied S = BVn = B(1-d)n If a salvage value is estimated for the asset, this estimated S value is not used in the DB or DDB method to calculate annual depreciation.

Declining Balance (DB) and Double Declining Balance (DDB) Depreciation However, if the implied S < estimated S, it is correct to stop charging further depreciation. So stop depreciating 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.

Declining Balance (DB) and Double Declining Balance (DDB) Depreciation If the fixed percentage d is not stated, it is possible to determine the implied fixed rate using the estimated S value, if S > 0. The range for d is 0 < d < 2/n. Implied d = 1- (S/B)1/n [as we

know, Implied S = BVn = B(1-d)n]

Example 16.2 A fiber optics testing device is to be DDB depreciated. It has a first cost of $25,000 and an estimated salvage value of $2500 after 12 years. (a)Calculate the depreciation and book value for years 1 and 4. (b)Calculate the implied salvage value after 12 years.

Example 16.2

Solution (a)The DDB fixed depreciation rate is d = 2/n = 2/12 = 0.1667 per year. So, for year 1, D1 = dB(1-d)1-1 = (0.1667)(25000)(1-0.1667)1-1 = $4167 BV1 = B(1-d)1 = 25,000(1-0.1667)1 = $20,833 and for year 4, D4 = dB(1-d)4-1 = (0.1667)(25000)(1-0.1667)4-1 = $2411 BV4 = B(1-d)4 = 25,000(1- 0.1667)4 = $12,054.

Example 16.2

Solution (contd)

(a)DDB function for D1 and D4 are respectively, DDB(25000,2500,12,1) and DDB(25000,2500,12,4) Assignment: Check with Excel (b)The implied salvage value after 12 years is Implied S = B(1-d)n = 25,000(1-0.1667)12 = $2803

Example 16.3

A mining company has purchased a computer-controlled gold ore grading unit for $80,000. The unit has an anticipated life of 10 years and a salvage value of $10,000. Use DB and DDB methods to compare the schedule of depreciation and book values for each year.

Example 16.3

Solution An implied DB depreciation rate is d = 1 (S/B)1/n = 1 (10,000/80,000)1/10 = 0.1877 Note: 0.1877 < 2/n = 0.2. So the DB model does not exceed twice the straight line rate.

Declining Balance

Year t 0 Dt -BVt $80,000

Double Declining

Dt -BVt $80,000

1

2 3 4

$15,016

12,197 9,908 8,048

64,084

52,787 42,879 34,831

$16,000

12,800 10,240 8,192

64,000

51,200 40,960 32,768

5

6 7 8

6,538

5,311 4,314 3,504

28,293

22,982 18,668 15,164

6,554

5,243 4,194 3,355

26,214

20,972 16,777 13,422

9

10

2,846

2,318

12,318

10,000

2,684

737

10,737

10,000

Example 16.3

Assignment: Eng Economy Solve the following problems manually and by using computer and submit by /1/2011. Straight line Depreciation

Problem # 16.6, 16.7 and 16.8

Problem # 16.11, 16.12, 16.14, 16.15

Another problem

[#16.14 Ref: Blank]

Equipment for immersion cooling of electronic components has an installed value of $182,000 with an estimated trade-in value of $50,000 after 18 years. Determine the annual depreciation charge using DDB and DB depreciation for the years 2 and 18. Ans: We need to determine the implied salvage value to verify whether the implied S is less than the estimated S (50,000) For DDB, d = 2/n = 2/18 = 0.1111 Implied S = Book value after useful life = B(1- d)n = 182,000(1- 0.1111)18 = $21,848

Using DDB

It is found that the implied S (21,848) < estimated S (50,000). So it will be correct to stop charging depreciation beyond $50,000. For DDB, depreciation charge, Dt = dB(1-d)t-1 For this case, d = 2/n = 2/18 = 0.1111 Depreciation charge for year 2, D2=(0.1111)(182,000)(1-0.1111)2-1 =$17,973.74

Using DDB

Similarly, D18=(0.1111)(182,000)(1-0.1111)18-1 =$2,730.77 So since after 18 years the implied salvage value is lower than the estimated salvage value, D18 should not be charged.

Using DB

For DB, d = 1/n = 1/18 = 0.05555 or We can also use d = 1- (S/B)1/n = 1- (50000/182000)1/18 = 0.0693 Implied S = B(1-d)n = 182,000(1-0.05555)18 = $65,057

Since the implied S (65,057) > estimated S (50,000), it will be correct to continue charging further depreciation.

Using DB

Given, B=182,000 S=50,000 For DB, we know Dt = dB(1-d)t-1 Now d = 1/n = 1/18 = 0.055555 Depreciation charge for year 2, D2=(0.05555)(182,000)(1-0.05555)2-1 =$9,549 Similarly, D18=(0.05555)(182,000)(1-0.05555)18-1 =$3,827 It should also be correct if someone answers by using implied d = 0.0693

- Installment Request Checklist IFD ApprovedUploaded byVivek Kankipati
- 2011 LCCI Accounting IAS Level-3 Series 2 (Code 3902)Uploaded byHon Loon Seum
- Chap006-Intercompany Transfers of Services and Non Current AssetsUploaded by_casals
- Transactions Plant AssetsUploaded byVenian
- AC305Uploaded byharish402
- Stice 18e Ch11 SOL FinalUploaded byprasetyagraha
- ENGECOUploaded bymgoldiieeee
- countermeasure there is down payment exist for the same vendorUploaded byDikky Suryadi
- Lecture 32Uploaded bysalmanshahidkhan
- Duke-Energy-Kentucky,-Inc.-Rate-OL-E,-Outdoor-Lighting-Equipment-InstallationUploaded byGenability
- Bisnes Plan PAN PCUploaded bymuiz_jojo
- JA_20131219_2593_RKT_EhP5_Annex16(1)Uploaded byAnonymous I8axPI6wkQ
- DO_011_s2017Uploaded byKaren Balisacan Segundo Ruiz
- Dep Cashflow 1Uploaded bySaurabh Agarwal
- Question BankUploaded bySuganya Nandagopal
- 157_17945_EY121_2013_1__2_1_7-_DepreciationUploaded byAnonymous 7ZYHilD
- Sum on TaxUploaded byStephanie Lee
- Dec 2005 - Qns Mod AUploaded byHubbak Khan
- IFRS 5Uploaded byrajeshvjd
- Biaya Peralatan perbulan.pdfUploaded byReza Alfarabi
- depreciation-1.pptxUploaded byfame charity porio
- MODULE 11- ExcellUploaded byJulie Fulgar Estopace
- Units of Production Method of DepreciationUploaded byPraneeth Sai
- Compilation for Final Exam 1 Converted 1Uploaded byTrending News and Technology
- CPD II SessionalUploaded byAkki Bakki
- New Microsoft Excel WorksheetUploaded byShaheena Sana
- MG 2451 EECA QBUploaded bykarthiksubramanian94
- MG1452Uploaded byRamaswamy Subbiah
- Chap 006Uploaded byGabriel Madriaga Garcia
- 2Nouman Asif Internship ReportUploaded byMuhammad Farhan

- sn-p&p-2013Uploaded bybiju
- AIG41313 - FINAL 3 (ENG-Single Pg)_tcm4009-638392Uploaded byAyesha Ralliya
- 04.chap1Uploaded byAyesha Ralliya
- 74.Burglary - Policy WordingUploaded byAyesha Ralliya
- An Introduction to Takaful – an AlternativeUploaded byalvis2ent
- Presentation AyeshaUploaded byAyesha Ralliya
- Cell Delivery Using Cell SheetUploaded byAyesha Ralliya
- artificial engineeringUploaded byAyesha Ralliya
- Engineering RenalUploaded byAyesha Ralliya
- Recycled Organic Waste as Animal Feed PFPUploaded byAyesha Ralliya
- Animal FeedUploaded byAyesha Ralliya
- Food Waste MalaysiaUploaded byAyesha Ralliya
- Cell Disruption by Homogenization 3006 01-06-2008 USUploaded byPrathi_Pal_8304
- Plant Layout DesignUploaded byAyesha Ralliya
- Safety and Loss PreventionUploaded byAyesha Ralliya
- Batch Fed BatchUploaded byAyesha Ralliya
- Bioreactor ControlUploaded byAyesha Ralliya
- Eng Econ_Cash_flow_ L3 - MME 4272Uploaded byAyesha Ralliya
- Eng Econ_ Inv an n BEP - L9Uploaded byAyesha Ralliya
- Org Struc Basic Ideas-L11Uploaded byAyesha Ralliya
- Eng Mgt II _new_POsUploaded byAyesha Ralliya
- Eng Econ Mgt Ratios L2 -MME 4272Uploaded byAyesha Ralliya
- Eng Econ Deprec L10Uploaded byAyesha Ralliya
- Eng Econ Cash Flow L4 -MME 4272Uploaded byAyesha Ralliya
- Chap 2 Polymer & Composites (1)Uploaded byAyesha Ralliya
- Revised+Chemical+KineticsUploaded byAyesha Ralliya

- imagica-1.pdfUploaded byvelusn
- Cross Border RemittancesUploaded byelamurugan07
- CosmeticsUploaded byPRAVENDRA SINGH (PGP 2015-17 Batch)
- CreditUploaded byKyzire Ddungu Styvn
- Baking Measurements and SubstitutionsUploaded bymeselipende
- Chumley's Drink MenuUploaded byNell Casey
- 60 Years of Cannes Lions Infographics: The 50sUploaded bySapientNitro
- VP SimulatorUploaded bysigmasundar
- Gauci ListUploaded bymajholx
- Payment LotUploaded byreddykma
- Welcome to Indian Railway Passenger Reservation Enquiry.pdfUploaded byRadha Krishnan
- I-215 Brochure MapUploaded bySGVNews
- Khaled Ramadan - Planning EngineerUploaded byAnonymous hPKRh9
- King 1969Uploaded byvanessa lopez
- EMA Micro Final Sample 2016Uploaded byJu Portail
- SerbiaUploaded byHaris Fadžan
- Hotel operations-1 (chapter-2).docxUploaded byVishnuNarayanan Viswanatha Pillai
- Aditya Birla Group Under Kumar Mangalam Birla (Case)Uploaded byErtania Nirmala
- Indian Standard Beams ISMBUploaded byManjunath Manjs
- CURICULUM VITAE-3 (1).pdfUploaded byCorry Masnita Sihombing
- Assignment 2 Apllied EcoUploaded byAthika Anuar
- Online Tax Payment GuideUploaded byTrishnee Munusami
- Chapter 8- Aggregate Expenditure and Equilibrium OutputUploaded bylovescent_23
- 2012 Trend Adjusted APH ProceduresUploaded byMatt Morris
- Art 0412Uploaded bykumaravajira
- Internship JournalUploaded byMirza Bake Bahor
- Omega Pie MenuUploaded byRogerRebisz
- mrw1992Uploaded byjeromeku
- Jim Bowie Profile 12-1-12Uploaded bybladebowie
- Cấu Trúc Writing Task 1_v3.1_15012018Uploaded byThu Duong