5

DEPRECIATION
 TERMINOLOGY

Current Asset
Life span < 1 years
Inventory, cash, debtors

Asset

Fixed Asset/ non-current assets

Life span > 1 years
Vehicles, land, furniture
Depreciation
 TERMINOLOGY
 Assets: properties owned by the business,
including anything of monetary value and anything
that can be exchanged for cash or other property.

 Estimated life or Useful life: the number of years

an asset is expected to be useable.

 Salvage/Scrap/Residual value: an estimated amount

value of an asset at the end of the asset’s estimated
life.
 TERMINOLOGY

 Depreciation: the amount an asset decreases in value from

its original cost.

 Straight-line depreciation: a method of depreciation in which

the amount of depreciation of an asset is spread equally over
the number of years of useful life of the asset.

 Total cost: the cost of an asset including shipping and

installation charges.

 Depreciable value: the cost of an asset minus the salvage

value. (Total cost – salvage value)
 TERMINOLOGY

Straight Line Method

Based on cost of the asset

Depreciation

Reducing Balance Method

Based on book value
 STRAIGHT LINE METHOD

 Find the total cost of the asset

Total Cost = cost + shipping + installation

 Find the depreciable value

Depreciable value = Total Cost – salvage value

 Find the yearly depreciation:

1.) depreciable value ÷ years of expected life
2.) depreciation rate (%) X depreciable value @
total cost (no salvage value)
 STRAIGHT LINE METHOD

Example 1

Use the straight-line method to find the yearly depreciation for a planting machine
that has an expected useful life of 5 years. The planting machine cost RM 27,300, its
shipping costs totaled RM 250, installation charges came to RM 450.
 STRAIGHT LINE METHOD

Example 1
Use the straight-line method to find the yearly depreciation for a planting
machine that has an expected useful life of 5 years. The planting machine
cost RM 27,300, its shipping costs totaled RM 250, installation charges
came to RM 450 and its salvage value is RM 1,000.

Answers :
Total cost = 27,300 + 250 + 450 = RM 28,000
 STRAIGHT LINE METHOD

Example 1
Use the straight-line method to find the yearly depreciation for a plating
machine that has an expected useful life of 5 years. The planting machine
cost RM 27,300, its shipping costs totaled RM 250, installation charges
came to RM 450 and its salvage value is RM 1,000.

Answers :
Total cost = 27,300 + 250 + 450 = RM 28,000
Depreciable value = 28,000 – 1,000 = RM 27,000
 STRAIGHT LINE METHOD

Example 1
Use the straight-line method to find the yearly depreciation for a plating
machine that has an expected useful life of 5 years. The planting machine
cost RM 27,300, its shipping costs totaled RM 250, installation charges
came to RM 450 and its salvage value is RM 1,000.

Answers :
Total cost = 27,300 + 250 + 450 = RM 28,000
Depreciable value = 28,000 – 1,000 = RM 27,000
Depreciation value = 27,000 / 5 years = RM 5,400 (current depreciation
value)
 STRAIGHT LINE METHOD

Example 2.1
A labeling machine cost RM 43,000. Installation costs totaled RM 1,250 and
shipping costs totaled RM 2,250. It was bought at 2018. It has an expected
useful life of 10 years. Its salvage value is RM 2,000. Use the straight-line
method of depreciation to find the depreciation for the labeling machine from
2018 until 2020

Total cost = 43,000 + 1250 + 2250 = RM 46,500

Depreciable Value = 46,500 – 2000 = RM 44,500
Depreciation value = 44500 / 10 = RM 4,450
 STRAIGHT LINE METHOD

Example 2.1
A labeling machine cost RM 43,000. Installation costs totaled RM 1,250 and
shipping costs totaled RM 2,250. It was bought at 2018. It has an expected
useful life of 10 years. Its salvage value is RM 2,000. Use the straight-line
method of depreciation to find the depreciation for the labeling machine from
2018 until 2020
Total cost = RM 46,500
Depreciable value = 46,500 – 2,000 = RM 44,500
Depreciation value = 44,500 / 10 = RM 4,450
Year Total Cost Depreciation Accumulated Book Value
Value Depreciation
2018 46,500 4,450 4,450 46,500 – 4,450
= RM 42,050
2019 42,050 4,450 4,450 + 4,450 42,050 - 4450
= RM 8,900 = RM 37,600
2020 37,600 4,450 8,900 + 4,450 37,600 – 4,450
 REDUCING BALANCE METHOD

 The amount of depreciation is calculated by applying a

fixed percentage on the book value of the asset each
year.

Reducing Balance Method

= (Net book value – Scrap value) X Depreciation rate
 REDUCING BALANCE
METHOD
Example 3
On 2018, the planting machine cost RM 27,300, its shipping
costs totaled RM 250, installation charges came to RM 45. The
depreciation rate for the planting machine is 20% on book
value. Calculate the value of the machine from 2018 until 2020.
Total cost = 27,300 + 250 + 45 = RM 27,595
Year Total cost/ Depreciation Accumulated New Book
Book value Depreciation Value
2018 27,595 27,595 x 0.2 5,519 27,595 – 5,519
=RM 5,519 = RM 22,076
2019 22,076 22,076 X 0.2 5519+ 4415 22,076 – 4,415
= RM 4,415 = RM 9,934 = RM 17,661
2020 17,661 17,661 X 0.2 9,934 + 3,532 17,661 – 3,532
= RM 3,532 = RM 13,466 = RM 14,129
 REDUCING BALANCE
METHOD

Example 3
On 2018, the planting machine cost RM 27,300, its shipping costs
totaled RM 250, installation charges came to RM 45. The depreciation
rate for the planting machine is 20% on book value. Calculate the
value of the machine from 2018 until 2020.
Year Cost Depreciation Accumulated Book Value
Depreciation
2018 27300+250+45 = 27,595 X 0.2 27,595 – 5,519
RM 27,595 = RM 5,519 RM 5,519 =RM 22,076
2019 RM 22,076 22,076 X 0.2 4415+5519 22,076 – 4415
= RM 4,415 = RM 9,934 = RM 17,661
2020 RM 17,661 17661 X 0.2 9934+3532 17,661 – 3532
= RM 3,532 = RM 13466 = RM 14,129
 REDUCING BALANCE
METHOD

Example 4
A labeling machine cost RM 43,000 was bought on January 2019.
Installation costs for labeling machine is RM 1,250 and the shipping
costs is RM 2,250 and the depreciation rate is 15% on book value. The
residual value for the machine is RM 2,000. Find the yearly depreciation
and the book value for the labeling machine for January 2021

Total cost = 43,000 +1250 + 2250 = RM 46,500

Depreciation rate = 15%
 REDUCING BALANCE
METHOD
Year Total Cost Depreciation Accumulated Book Value
Example 4 Value Depreciation
2018 machine 46,500
A labeling cost RM 43,000 4,450
was bought on 4,450 46,500 –costs
2019. Installation 4,450for
labeling machine is RM 1,250 and the shipping costs is RM 2,250 = RM 42,050
and the
depreciation
2019 rate is 42,050
15% on book value.
4,450The residual
4,450 +value
4,450for the machine
42,050 - 4450 is
RM 2,000. Find the yearly depreciation and the= book value for
RM 8,900 the37,600
= RM labeling
machine
2020until 2021 37,600 4,450 8,900 + 4,450 37,600 – 4,450
Total cost = 43,000 +1250 + 2250 = RM 46,500 = RM 13,350 = RM 33,150
Year Cost/ Depreciation Accumulated New
Book Value Depreciation Book Value
2019 46,500 (46,500 – 2,000) X 0.15 RM 6,675 46,500 – 6,675
= RM 6,675 = RM 39,825

2020 39,825 (39,825 – 2,000) X 0.15 6675+5674 39825 - 5674

= RM 5,674 = RM 12,349 = RM 34,151
2021 34,151 (34,151 -2,000) X 0.15 12,349 + 4823 34,151 – 4823
 DEPRECIATION

Tutorial
1.Balraj Company purchased a factory machine of RM 51,000 on January 2015. The
machine is expected to have a salvage value of RM 6,000 at the end of its 5 year useful
life. If the company opt to use depreciation on cost, find the depreciation value for the
machine from 2015 until 2017.
 DEPRECIATION

Tutorial
1.Balraj Company purchased a factory machine of RM 51,000 on January 2015. The
machine is expected to have a salvage value of RM 6,000 at the end of its 5 year useful
life. If the company opt to use depreciation on cost, find the depreciation value for the
machine from 2015 until 2017.
Total Cost = 51,000
Depreciable value = 51,000 – 6,000 = RM 45,000
Current Depreciation = 45,000 / 5 = RM 9,000
Year Cost/ book Depreciation Accumulated Book value
value Value depreciation
2015 51,000 (51,000 – 6,000) / 5 9000 51,000 – 9,000
= RM 9,000 = RM 42,000
2016 51,000 RM 9,000 9,000 + 9,000 51000 – 18000
=RM 18,000 = RM 33,000
2017 51,000 RM 9,000 18,000 + 9000 51,000 – 27,000
= RM 27,000 = RM 24,000
 DEPRECIATION

Tutorial
2.On 2016, Cikedis Enterprise bought a van at the price RM 75,000. The price is
excluded insurance fee RM 3,200 and stamp-duty RM 2,500. The salvage value for the
van is RM 6,000. If the depreciation rate is 15% based on book value, find the book
value of the van from 2016 until 2018. (RBM)
 DEPRECIATION

Tutorial
1.On 2016, Cikedis Enterprise bought a van at the price RM 75,000. The price is
excluded insurance fee RM 3,200 and stamp-duty RM 2,500. The salvage value for the
van is RM 1,500. If the depreciation rate is 15% based on book value, find the book
value of the van from 2016 until 2018. (RBM)
Total cost = 75,000 + 3,200 + 2,500 = RM 80,700
Current Depreciation = 15%
Year Cost/ book Depreciation Accumulated Book value
value Value depreciation
2016 80,700 (80,700 – 1500) X 15% RM 11,880 80,700 – 11,880
=RM 11,880 = RM 68,595
2017 68,820 (68,820 – 1500) X 15% 11,880 + 10,098 68,820 – 10,098
= RM 10,098 = RM 21,978 = RM 58,722
2018 58,722 (58,722 – 1500) X 15% 21,978 + 8,583 58,722 – 8,583
= RM 8,583 = RM 30,561 = RM 50,139