DEPRECIATION

DEPRECIATION

The systematic allocation of the depreciable amount of an asset over its useful life. The objective of depreciation is to have each period benefiting from the use of the asset bear an equitable share of the asset cost. Except for land, all property should be depreciated on a systematic basis over the useful life of the asset irrespective of the earnings of the enterprise.

Depreciation period

Depreciation of an asset begins when it is available for use, meaning, when the asset is in the location and condition necessary for it to be capable of operating in the manner intended be the management. Depreciation of an asset ceases when the asset is derecognized. Therefore, depreciation does not cease when the asset becomes idle or is retired from active use and held for disposal unless the asset if fully depreciated.

earthquake and other natural disaster)  Diseases (to animals and wooden buildings) . sunshine. Caused by:  Wear and tear  Passage of time  Action of elements (wind. rain or dust)  Accidents (fire. flood.Kinds of Depreciation  Physical depreciation—is related to the asset’s wear and tear and deterioration over a period.

.Kinds of Depreciation  Functional or economic depreciation—arises from obsolescence or inadequacy of the asset to perform efficiently. May arise from:  When the no future demand for the product which the depreciable asset produces.  Inadequacy arises when the asset is no longer useful to the firm because of an increase in the volume of operation.  When the new depreciable asset becomes available and the new asset can perform the same function for substantially less cost.

after deducting the estimated cost of disposal. less residual value. if the asset were already of the age and condition expected at the end of its useful life.Factors of Depreciation    Depreciable amount—is the cost of an asset or other amount substituted for cost. Useful life—is either the period over which the an asset is expected to be available for use by the entity or the number of production or similar units expected to be obtained from the asset by the entity. Residual value—is the estimated amount that an entity would obtain from the disposal of the asset. Expressed in:  Time periods as in years  Units of output or production  Service hour or working hours .

)Equal or uniform charge methods 2.) Decreasing charge or accelerated or diminishing balance methods 4.) Other methods .) Variable charge or use-factor methods 3.METHODS OF DEPRECIATION 1.

Equal or uniform charge methods Straight line  Composite method  Group method  .

Formula: Annual Depreciation = Cost minus residual value Life in years .Straight line method  the annual depreciation charge is calculated by allocating the amount to be depreciated equally over the number of years of estimated useful life.

= 635T.) Straight line Annual dep.35T/5 = 120T Depreciation expense = 120T per year from 2011 to 2015 .Problem 25-5 a.

The asset account is credited and accumulated depreciation account is debited for the cost minus salvage proceeds. .  The composite rate is multiplied by the cost of the assets in the group to get the periodic depreciation.  When there is a replacement of similar asset.  When an asset is retired. asset account is debited and cash or other appropriate amount is credited. no gain or loss is recognized. are grouped and treated as a single unit. The balance asset account is multiplied by the composite rate to get the periodic depreciation. Procedures:  Depreciation is reported in single accumulated depreciation account.Composite Method  assets that are dissimilar in nature or assets that have different physical characteristics and vary widely in useful life.

300T a.600T 1.02% b.300T/270T = 8.) life = 2. Cost Annual Dep.500T DE 430T 400T Total 2. 60T 10T 100T 100T 270T M 310T 300T OE 110T 100T B 1.52 years c.) Entry: Dep.450T 2.Problem 25-11 Cost Dep.450T = 11.) rate = 270T/2. 270T AD 270T .

The procedures are the same as the composite method. .Group Method  assets that similar in nature and in estimated useful life grouped and treated as a single unit.

Variable charge or use-factor methods Working hours or service hours  Output or production method  .

Working Hours or Service Hours Depreciation rate per hour is computed by dividing depreciable amount by the estimated life in terms of service hours.  .  The rate is then multiplied by the actual hours worked in one period to get the depreciation for that period.

Rate per hour = 600T/60T = P10 2011 = 10 x 14T = 140T 2012 = 10 x 13T = 130T 2013 = 10 x 10T = 100T 2014 = 10 x 11T = 110T 2015 = 10 x 12T = 120T .Problem 25-5 # b service hours Dep.

Output Method Depreciation rate per hour is computed by dividing depreciable amount by the estimated life in terms of units of output.  The rate is then multiplied by the yearly output to get the annual depreciation.  .

Rate per unit = 600T/150T = 4 per unit 2011 = 4 x 34T = 136T 2012 = 4 x 32T = 128T 2013 = 4 x 25T = 100T 2014 = 4 x 29T = 116T 2015 = 4 x 30T = 120T .Problem 25-5 # c production Dep.

 The cost of using an asset includes not only depreciation but also repairs on such assets.  . Such repair cost should be allocated over the life of the asset on a systematic and uniform basis. These methods result in a decreasing depreciation charge over the useful life.DECREASING CHARGE or ACCELERATED METHODS These provide higher depreciation in the earlier years and lower depreciation in the later years of the life of the asset.

Three Decreasing Charge Methods:    Sum of Years Digits (SYD) Declining Balance Method Double declining Balance Method .

The fractions are developed by getting the sum of the digits in the life of the assets. .Sum of Years Digits (SYD)   This method provides for depreciation that is computed by multiplying the depreciable amount by a series of fractions whose numerator is the digit in the life of the asset and whose denominator is the sum of the digits in the life of the asset.

Sum of Years Digits (SYD) Formula SYD = Life [(Life + 1)/2] .

Problem 25-5 # d SYD = 5[ (5+1)/2] 2011 = 5/15 x 600T = 200T 2012 = 4/15 x 600T = 160T 2013 = 3/15 x 600T = 120T 2014 = 2/15 x 600T = 80T 2015 = 1/15 x 600T = 40T .

Declining Balance Method Under this method.  Also known as ―fixed rate‖ or ―percentage on book value method‖  . a fixed or uniform rate is multiplied by the declining book value or undepreciated cost of the asset in order to arrive at the annual depreciation.

a residual value must always be assigned to the asset. Thus.  .Declining Balance Method Refer to the textbook for the formula  The value of the asset cannot be reduced to zero and the formula cannot be used unless there is a residual value.

059 69.850 123.196 38.5623 = .895 .4377) 2014 (500T – 411.Problem 25-7 Fixed rate = 1-. 4377) 2012 (500T – 218.000) 218.105 – 50.4377) 2013 (500T – 341.4377 2011 (500T x.909 x .850 x.

 But under this method. This this method is also known as ―200% declining balance method. a fixed rate is multiplied by the declining book value of the asset to arrive at the annual depreciation.Double declining Balance Method Just as the declining balance method. the straight line rate is simply doubled to get the fixed rate.‖  .

000 2012 40% x 381.296 .000 152.296 -35.Problem 25-5 # e Double declining rate = 100%/5 x2 = 40% 2011 40% x 635T 254.160 54.440 2013 40% x 137.600 91.000 47.864 2014 82.400 2012 40% x 228.

Problem 25-6 .

 Applied to small and relatively inexpensive assets  .Inventory method Depreciation for the year= the difference between the balance of the asset account and the value at the end of the year  No accumulated depreciation account is maintained. credited directly to the asset account.

Problem 25-18 # 3 .

Retirement method No depreciation is recorded until the asset is retired  Depreciation = original cost-salvage proceeds  .

Problem 25-18 # 1 .

Replacement method No depreciation is recorded until the asset is retired and replaced.  .  Depreciation = replacement cost of the asset retired – salvage proceeds  If the asset retired is not replaced. the original cost of the asset retired but not replaced is charged off as depreciation.

Problem 25-18 # 2 .

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