* DEPRECIATION

&
DEPLETION
1.) The Straight-Line Formula

2.) The Sinking Fund Method

Properties of Straight-Line Formula:
 Simple & is more widely used than any other method.
 Does not need annuity tables nor computing machines.
 Gives a uniform annual charge.
 Acceptable to the Bureau of Internal Revenue.
 Does not take into account the interest or profit earned on the
accumulated depreciation fund.

Properties of Sinking Fund Formula:

 Simple, though it will require the use of annuity tables in the
absence of the electronic calculator.
 Also gives a uniform annual charge.
 Created in which funds accumulate for replacement purposes.
 All amounts in the sinking fund earn interest.
 Generally the method used for economy study purposes.
Adopt the following symbols:

 
n = useful life of the property in years
m = age of the property at any time less than or equal to ‘n’ (m > n)
d = annual cost of depreciation
= accrued or total depreciation up to ‘m’ years
= original or first cost of the property
Cm = book value of the property at the end of ‘m’ years
= book value at the end of life, n years,
(salvage or scrap value, as the case may be.)
The Straight-Line Formula

This method the loss of value is considered to be

directly proportional to the age of the property. No
interest is assumed to be paid on the amounts set aside in
the depreciation fund.

  (1)

  (2)

  Cm (3)
The Sinking Fund Formula
This method it is assumed that a sinking fund is established in
which funds will accumulate for replacement purposes and will
bear interest. The total depreciation which has occurred up to any
given time is assumed to equal the amount in the sinking fund at
that time.
  (1)

  (2)

  Cm (3)
Graphical Representation of Payments to Sinking Fund :

D  m (Co
   —Cn )
1 2 3 m n-1
0 n
d d d d d d
‘m’ periods

‘n’ periods
Example Problem:

The original cost of a certain piece of

equipment is Php.150,000 and it is depreciated by
a 10% sinking fund method. Determine the annual
depreciation charge if the book value of the
equipment after 10 years is the same as if it had
been depreciated at Php.14,000 each year by
straight-line formula.
Solutions :

Total depreciation in 10 years by straight-line formula

= 10( Php.14,000) = Php.140,000

Salvage value = Php.150,000 — Php.140,000 = Php.10,000

By the sinking fund formula,

(Php.140,000)

Php.8,784.36
 Example Problem:

A certain company makes it the policy that for any new piece of
equipment the annual depreciation cost should not exceed 10% of
the original cost at any time with no salvage or scrap value.
Determine the length of service life necessary if the depreciation
method used is
(a)The straight-line formula.
(b)The sinking fund formula at 8%.
Given:   = 0 ; d = 0.10Co

Solution:

(a) Straight-Line formula: (b) Sinking fund formula:

  i
𝑑=(Co  — C n ) 
  (1+i ) n−1 

  0.08
0.10 Co=( Co  —0 ) 
  (1+ 0.08 )n −1 

  n (1.08)n−1 =0.8
 

 n 7.64 or 8years