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    ch11LO+1,2 3

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    Farghab
    The document discusses different methods of depreciation. It begins by explaining that depreciation is the process of allocating the cost of tangible assets over the periods they are expected to benefit. It then identifies three factors to consider: the depreciable base, useful life, and depreciation method. The document goes on to compare the activity method, straight-line method, and diminishing-charge methods (sum-of-the-years' digits and declining balance) of depreciation using examples and illustrations.

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    ch11LO+1,2 3

    Uploaded by

    Farghab
    28 views12 pages
    The document discusses different methods of depreciation. It begins by explaining that depreciation is the process of allocating the cost of tangible assets over the periods they are expected to benefit. It then identifies three factors to consider: the depreciable base, useful life, and depreciation method. The document goes on to compare the activity method, straight-line method, and diminishing-charge methods (sum-of-the-years' digits and declining balance) of depreciation using examples and illustrations.

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    The document discusses different methods of depreciation. It begins by explaining that depreciation is the process of allocating the cost of tangible assets over the periods they are expected to benefit. It then identifies three factors to consider: the depreciable base, useful life, and depreciation method. The document goes on to compare the activity method, straight-line method, and diminishing-charge methods (sum-of-the-years' digits and declining balance) of depreciation using examples and illustrations.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    28 views12 pages

    ch11LO+1,2 3

    Uploaded by

    Farghab
    The document discusses different methods of depreciation. It begins by explaining that depreciation is the process of allocating the cost of tangible assets over the periods they are expected to benefit. It then identifies three factors to consider: the depreciable base, useful life, and depreciation method. The document goes on to compare the activity method, straight-line method, and diminishing-charge methods (sum-of-the-years' digits and declining balance) of depreciation using examples and illustrations.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 12

    LO1: Explain the concept of depreciation

    LO2: Identify the factors involved in the depreciation


    process
    LO3: Compare activity, straight-line, and diminishing-
    charge methods of depreciation.

    11-1
    DEPRECIATION—METHOD OF COST
    ALLOCATION

    Depreciation is the accounting 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.

    Allocating costs of long-lived assets:


     Fixed assets = Depreciation expense
     Intangibles = Amortization expense
     Mineral resources = Depletion expense

    11-2 LO 1
    DEPRECIATION—COST ALLOCATION

    Factors Involved in the Depreciation Process


    Three basic questions:
    1. What depreciable base is to be used?
    2. What is the asset’s useful life?
    3. What method of cost apportionment is best?

    11-3 LO 2
    Factors Involved in Depreciation Process

    Depreciable Base for the Asset

    ILLUSTRATION 11-1
    Computation of
    Depreciation Base

    11-4 LO 2
    Factors Involved in Depreciation Process

    Estimation of Service Lives


     Service life often differs from physical life.
     Companies retire assets for two reasons:
    1. Physical factors (casualty or expiration of
    physical life).

    2. Economic factors (inadequacy, supersession,


    and obsolescence).

    11-5 LO 2
    DEPRECIATION—COST ALLOCATION

    Methods of Depreciation
    The profession requires the method employed be “systematic
    and rational.” Methods used include:

    1. Activity method (units of use or production).


    2. Straight-line method.
    3. Diminishing (accelerated)-charge methods:
    a) Sum-of-the-years’-digits.
    b) Declining-balance method.

    11-6 LO 3
    Methods of Depreciation

    Activity Method ILLUSTRATION 11-2


    Data Used to Illustrate
    Depreciation Methods

    Data for
    Stanley Coal
    Mines

    Illustration: If Stanley uses the crane for 4,000 hours the first
    year, the depreciation charge is:

    ILLUSTRATION 11-3
    Depreciation Calculation,
    Activity Method—Crane
    Example

    11-7 LO 3
    Methods of Depreciation

    Straight-Line Method ILLUSTRATION 11-2


    Data Used to Illustrate
    Depreciation Methods

    Data for
    Stanley Coal
    Mines

    Illustration: Stanley computes depreciation as follows:

    ILLUSTRATION 11-4
    Depreciation Calculation,
    Straight-Line Method—
    Crane Example

    11-8 LO 3
    Methods of Depreciation

    Diminishing-Charge Methods ILLUSTRATION 11-2


    Data Used to Illustrate
    Depreciation Methods

    Data for
    Stanley Coal
    Mines

    Sum-of-the-Years’-Digits. Each fraction uses the sum of the


    years as a denominator (5 + 4 + 3 + 2 + 1 = 15). The numerator
    is the number of years of estimated life remaining as of the
    beginning of the year.

    Alternate sum-of-the- n(n+1) 5(5+1)


    = = 15
    years’ calculation 2 2
    11-9 LO 3
    Methods of Depreciation

    Sum-of-the-Years’-Digits

    ILLUSTRATION 11-6
    Sum-of-the-Years’-Digits
    Depreciation Schedule—
    Crane Example

    11-10 LO 3
    Methods of Depreciation

    Diminishing-Charge Methods ILLUSTRATION 11-2


    Data Used to Illustrate
    Depreciation Methods

    Data for
    Stanley Coal
    Mines

    Declining-Balance Method.
     Utilizes a depreciation rate (percentage) that is some multiple
    of the straight-line method.
     Does not deduct the salvage value in computing the
    depreciation base.

    11-11 LO 3
    Methods of Depreciation

    Declining-Balance Method

    ILLUSTRATION 11-7
    Double-Declining
    Depreciation Schedule—
    Crane Example

    11-12 LO 3

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