Depreciation

Depreciation is the process of allocating the cost of tangible assets to

expense in a systematic and rational manner to those periods expected to
benefit from the use of the asset.

Process of cost allocation, not asset valuation.

Applies to land improvements, buildings, and
equipment, not land.
Depreciable, because the revenue-producing ability of
asset will decline over the asset’s useful life.

SO 2 Explain the concept of depreciation.

Depreciation
Factors in Computing Depreciation
Illustration 9-6

Cost Useful Life Residual Value

SO 2 Explain the concept of depreciation.

Depreciation
Depreciation Methods
Objective is to select the method that best measures an asset’s contribution
to revenue over its useful life.

Examples include:

(1) Straight-line method.

(2) Declining-balance method
(3) Double declining method.
(4) Sum of the years’ digit
(5) Production Unit Method
SO 3 Compute periodic depreciation using different methods.
Important notation:
C = Cost of the asset
S = Expected residual value
n = Expected useful life in years
W = Depreciation base
Rk = Depreciation Expense on year k
Bk = Book value on year k
Dk = Accumulated depreciation on year k

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 STRAIGHT LINE METHOD
Assumption: the usefulness of fixed assets decreases linearly or
permanently for each period during their useful life

C S D k  k Rk
Rk 
n

W
Rk  Bk  C  k R k
n

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 Example
On January 1, 2010, PT Sukamakmur purchased a machine for Rp.
40,000,000 to accelerate production. The economic life of the
machine is estimated to be 5 years and the residual value is Rp.
4,000,000. Compute:
a) Depreciation expense per year if the straight-line method is used
b) Create a depreciation table.

Answer:
C = Rp 40.000.000
S = Rp 4.000.000
n = 5 years
W = C–S
W = Rp 40.000.000 – Rp 4.000.000
W = Rp 36.000.000

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 W
Rk 
n
Rp 36 .000 .000
Rk 
5
R k  Rp 7 .200 .000

Dasar Akumulasi
Tahun Penyusutan Nilai Buku
Penyusutan Penyusutan
- - - 40.000.000
1 36.000.000 7.200.000 7.200.000 32.800.000
2 36.000.000 7.200.000 14.400.000 25.600.000
3 36.000.000 7.200.000 21.600.000 18.400.000
4 36.000.000 7.200.000 28.800.000 11.200.000
5 36.000.000 7.200.000 36.000.000 4.000.000

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 DECLINING BALANCE METHOD
• Depreciation expense declines from one period to another period,
referring to its book value
• There is depreciation rate, that is computed as follows
S
d 1 n
Bk  (1  d ) k C
C
k
R k  d Bk 1 D k  C  ( 1  d ) C
 If the last book value is known (stated), then rounding must
be made to the amount of depreciation
Depreciation
Year expense Book value
1 dC C – C d = (1 – d) C
2 d (1 – d) C (1 – d) C – d (1 – d) C = (1 – d)2 C
3 d (1 – d)2 C (1 – d)2 C – d (1 – d)2 C = (1 – d)3 C
k d (1 – d)k C (1 – d)k–1 C – d (1 – d) k–1 C = (1 – d)k C
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 Example
A car with a price of Rp.300,000,000 is depreciated using the
declining balance method at a rate of 30%.
a) Set up a depreciation table for the first 3 years
b) calculate the book value at the end of year 4
c) compute depreciation expense for year 5.

Answer:
C = Rp 300.000.000
d = 0,3

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 a. Depreciation table with double declining method:

Depreciation Accumulated
Year expense Depreciation Book Value

- - 300.000.000

1 90.000.000 90.000.000 210.000.000

2 63.000.000 153.000.000 147.000.000

3 44.100.000 197.100.000 102.900.000

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b. Book value at the end of year 4 (B4) :

B4 = (1 – d)4 C
= (1 – 0,3)4 Rp 300.000.000
= Rp 72.030.000

c. Depreciation expense at the end of year 5 :

R5 = d B5-1
= (0,3) B4
= (0,3) Rp 72.030.000
= Rp 21.609.000

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 DOUBLE DECLINING METHOD
• A declining balance using a depreciation rate of 2 times the
straight-line depreciation rate for the same useful life.
• If the useful life of a fixed asset is 5 years so that the straight-
line depreciation rate is 20%, then the double declining
depreciation rate is 40%.

Example
An equipment with a price of Rp. 410,000,000 is depreciated
over 5 years. The estimated residual value of this equipment
after the end of its useful life is Rp 10,000,000. Create a
complete depreciation table if the double declining balance
depreciation method is used.

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Answer: 1
2  100%  40%
Depreciation Rate = 5
Depreciation Accumulated
Year Expense Depreciation Book Value

- - 410.000.000

1 164.000.000 164.000.000 246.000.000

2 98.400.000 262.400.000 147.600.000

3 59.040.000 321.440.000 88.560.000

4 35.424.000 356.864.000 53.136.000

5 43.136.000* 400.000.000 10.000.000

* Rounding to get residual value as Rp 10.000.000

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