Depreciation Complete

Depreciation Methods
Management selects the method it believes best measures an asset’s

contribution to revenue over its useful life.
Examples include:
1. Straight-line/Original Cost method
2. Written down Value/Declining-
balance method
3. Units-of-activity method/Production
method
Illustration: Barb’s Florists purchased a small delivery truck on January 1,

2017.
Cost $13,000
Expected salvage value $1,000
Estimated useful life in years 5
Required: Compute depreciation using the following.

(a) Straight-Line
Straight-Line Method
▪ Distribute the depreciable amount equally over the life of the asset.
▪ Usage of the asset is insignificant
▪ Used for the assets which depreciate mainly with time and very
little affected due to usage.
Example: Building
Depreciation expense = Cost – residual value

Useful life (n)
Dr. Monika Dhochak 3
STRAIGHT-LINE METHOD
◆ Expense is same amount for each year.

◆ Depreciable cost = Cost less salvage value.
Illustration: (Straight-Line)
Annual
Depreciable Depreciation Accumulated Book
Year Cost x Rate = Expense Depreciation Value
2017 $ 12,000 20% $ 2,400 $ 2,400 $ 10,600 *
2018 12,000 20 2,400 4,800 8,200
2019 12,000 20 2,400 7,200 5,800
2020 12,000 20 2,400 9,600 3,400
2021 12,000 20 2,400 12,000 1,000
2017 Depreciation expense 2,400

Journal Accumulated depreciation 2,400
Entry
* Book value = Cost - Accumulated depreciation = ($13,000 - $2,400).

Depreciation Methods Partial
Year
Illustration: (Straight-Line)
Assume the delivery truck was purchased on April 1, 2017.
Annual Current
Depreciable Depreciation Partial Year Accumulated
Year Cost Rate Expense Year Expense Depreciation
2017 $ 12,000 x 20% = $ 2,400 x 9/12 = $ 1,800 $ 1,800
2018 12,000 x 20% = 2,400 2,400 4,200
2019 12,000 x 20% = 2,400 2,400 6,600
2020 12,000 x 20% = 2,400 2,400 9,000
2021 12,000 x 20% = 2,400 2,400 11,400
2022 12,000 x 20% = 2,400 x 3/12 = 600 12,000
$ 12,000
Journal entry:
Accumulated depreciation 1,800
Written-down-value method
▪ Assume that some assets are more efficient in the starting years and
the efficiency decreases for later years.
▪ Provide larger amount of depreciation in early years and smaller

amount in later years.
▪ Charging higher depreciation in early years – Matching Concept

Calculation of WDV Rate
The formula used to calculate WDV rates is –
𝑅𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑣𝑎𝑙𝑢𝑒
Rate of Depreciation (R) = 1- n√ 𝐶𝑜𝑠𝑡
or
1 – [s/c]1/n
Where,
s = scrap value at the end of period;
c = Written down value at present; and
n = useful life of the asset

WDV rate
▪ Assume that a bus costs Rs. 8,00,000 and is expected to realize Rs.
80,000 at the end of its useful life of six years.

Production-units Method/ Units-of-activity Method
• Companies estimate total units of activity to calculate

depreciation cost per unit.
• Expense varies based on units of activity or use of an asset.
• Depreciable cost is cost less salvage value.
Illustration: Barb’s Florists purchased a small delivery truck on January 1,

2017.
Cost $13,000
Expected salvage value $1,000
Estimated useful life in years 5
Estimated useful life in miles 100,000
Required: Compute depreciation using the following.

(a) Units-of-Activity
Production Unit Method
UNITS-OF-ACTIVITY METHOD
(Units-of-Activity)
Cost Annual
Miles per Depreciation Accumulated Book
Year Driven x Unit = Expense Depreciation Value
2017 15,000 $ 0.12 $ 1,800 $ 1,800 $ 11,200

2018 30,000 0.12 3,600 5,400 7,600
2019 20,000 0.12 2,400 7,800 5,200
2020 25,000 0.12 3,000 10,800 2,200
2021 10,000 0.12 1,200 12,000 1,000

Journal Accumulated depreciation 1,800
Entry
COMPARISON OF METHODS
Illustration 10-16
Some Issues in Depreciation
▪ Revising Useful life and Residual Value - Estimates
▪ Changing the Depreciation Method
▪ Disposal of Assets

Revising Periodic Depreciation
• Accounted for in the period of change and future periods (Change

in Estimate).
• No change in depreciation reported for prior years.
• Not considered an error.
Helpful Hint
Use a step-by-step approach:
(1) determine new depreciable cost;

(2) divide by remaining useful life.
Revising Periodic Depreciation
Arcadia HS, purchased equipment for $510,000 which was estimated to have a
useful life of 10 years with a salvage value of $10,000 at the end of that time.
Depreciation has been recorded for 7 years on a straight-line basis. In 2015 (year
8), it is determined that the total estimated life should be 15 years with a salvage
value of $5,000 at the end of that time.
Questions:
• What is the journal entry to correct the prior years’ No Entry
depreciation? Required
• Calculate the depreciation expense for 2015.

After 7 years
Revising Depreciation
Equipment cost $510,000 First, establish NBV
Salvage value - 10,000 at date of change in
Depreciable base 500,000 estimate.
Useful life (original) ÷ 10 years
Annual depreciation $ 50,000 x 7 years = $350,000
Balance Sheet (Dec. 31, 2014)

Plant Assets:
Equipment $510,000
Net book value (NBV) $160,000
Revising Depreciation After 7 years
Net book value $160,000 Depreciation

Salvage value (new) - 5,000 Expense calculation
Depreciable base 155,000 for 2015.
Useful life remaining 8 years
Annual depreciation $ 19,375
Journal entry for 2015 and future years.
Depreciation Expense 19,375

Accumulated Depreciation 19,375
Change in Depreciation Method
▪ Depreciation method reflects the pattern in which enterprise expects
to consume the future economic benefits from the asset.
▪ New information can suggest the new pattern.
▪ If the pattern of consumption is changing, change the method to

reflect the new pattern.
▪ Appropriate disclosures are required.

▪ Asif bought a car for Rs. 5,00,000.
Useful Life – 6 Yrs
Residual Value – Rs. 50,000
Asif followed straight line method.
At the beginning of forth year, he decides to switch to WDV method,

as the consumption is changing. WDV rate is 43.35%. There is no
change in residual value.
Calculate the revised rate of depreciation and depreciation expense
for year 4.
▪ Step 1: Equipment cost 500,000 First, establish NBV
Salvage value - 50,000 at date of change in
Depreciable base 450,000 estimate.
Useful life (original) ÷ 6 years
Annual depreciation 75,000 x 3 years = 2,25,000
Balance Sheet (Year 3 end)

Plant Assets:
Equipment 500,000
Net book value (NBV) 275,000

Net book value 275,000 Depreciation Expense
Salvage value - 50,000 calculation for Year 4
3
WDV Rate = 1- √50,000/275000
= 1-.5667
= 43.35%
Year 4 depreciation = 2,75,000 * 43.35%

= 1,19,213
Disposal of assets

Retirement of Plant Assets
◆ No cash is received.
◆ Decrease (credit) the asset account for the original cost in the
asset.
◆ Decrease (debit) Accumulated Depreciation for the full amount

of depreciation taken over the life of the asset.
Question: What happens if a fully depreciated plant asset is still useful to

the company?
Sale of Assets
Compare the book value of the asset with the proceeds received from
the sale.
If proceeds exceed the book value, a gain on disposal occurs.
If proceeds are less than the book value, a loss on disposal occurs.
▪ On July 1, 2017, Wright Company sells office furniture for $16,000
cash. The office furniture originally cost $60,000. As of January 1,
2017, it had accumulated depreciation of $41,000. Depreciation for
the first six months of 2017 is $8,000.

GAIN ON SALE
LOSS ON SALE
Assume that instead of selling the office furniture for $16,000, Wright sells it
for $9,000.

Depreciation Complete

Uploaded by

Copyright:

Available Formats

Depreciation Complete

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Depreciation Complete

Uploaded by

Copyright:

Available Formats

Depreciation Methods

Management selects the method it believes best measures an asset’s

Illustration: Barb’s Florists purchased a small delivery truck on January 1,

Required: Compute depreciation using the following.

▪ Usage of the asset is insignificant

Depreciation expense = Cost – residual value

◆ Expense is same amount for each year.

2017 Depreciation expense 2,400

* Book value = Cost - Accumulated depreciation = ($13,000 - $2,400).

▪ Provide larger amount of depreciation in early years and smaller

▪ Charging higher depreciation in early years – Matching Concept

Dr. Monika Dhochak 7

Dr. Monika Dhochak 8

Dr. Monika Dhochak 9

• Companies estimate total units of activity to calculate

Illustration: Barb’s Florists purchased a small delivery truck on January 1,

Required: Compute depreciation using the following.

2017 15,000 $ 0.12 $ 1,800 $ 1,800 $ 11,200

2017 Depreciation expense 1,800

▪ Revising Useful life and Residual Value - Estimates

▪ Changing the Depreciation Method

Dr. Monika Dhochak 15

• Accounted for in the period of change and future periods (Change

• No change in depreciation reported for prior years.

• Not considered an error.

(1) determine new depreciable cost;

• Calculate the depreciation expense for 2015.

Balance Sheet (Dec. 31, 2014)

Net book value $160,000 Depreciation

Journal entry for 2015 and future years.

Depreciation Expense 19,375

▪ New information can suggest the new pattern.

▪ If the pattern of consumption is changing, change the method to

▪ Appropriate disclosures are required.

Dr. Monika Dhochak 20

At the beginning of forth year, he decides to switch to WDV method,

Balance Sheet (Year 3 end)

Dr. Monika Dhochak 22

Year 4 depreciation = 2,75,000 * 43.35%

Dr. Monika Dhochak 24

◆ Decrease (debit) Accumulated Depreciation for the full amount

Question: What happens if a fully depreciated plant asset is still useful to

Dr. Monika Dhochak 27

You might also like