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Module 4

The document defines various terms related to depreciation such as depreciation, value, market value, utility value, fair value, book value, salvage value, and scrap value. It then discusses the purposes and causes of depreciation. The document also distinguishes between physical life and economic life of an asset. Finally, it explains different methods that can be used to determine depreciation, including straight line method, declining balance method, double declining balance method, sum-of-years' digit method, sinking fund method, hour output method, and service output method. Sample problems are provided for some of these methods.

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Bry An Cañares
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49 views

Module 4

The document defines various terms related to depreciation such as depreciation, value, market value, utility value, fair value, book value, salvage value, and scrap value. It then discusses the purposes and causes of depreciation. The document also distinguishes between physical life and economic life of an asset. Finally, it explains different methods that can be used to determine depreciation, including straight line method, declining balance method, double declining balance method, sum-of-years' digit method, sinking fund method, hour output method, and service output method. Sample problems are provided for some of these methods.

Uploaded by

Bry An Cañares
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Module 4

DEPRECIATION
DEFINITION OF TERMS
 Depreciation – it is the decrease in the value of a fixed asset,
or the value of physical property, with the passage of time.
 Value – is the present worth of all the future profits that are
to be received through the ownership of a particular
property.
 Market Value of a Property – is the amount, which a willing
buyer will pay to a willing seller for the property where each
has equal advantage and is under no compulsion to buy and
sell.
DEFINITION OF TERMS
 Utility or Use Value of Property – is what the property is worth to the
owner as an operating unit.
 Fair Value – is the value which is usually determined by the
disinterested third party in order to established a price that is fair to
both seller and buyer.
 Book Value – is the worth of the property as shown in the accounting
records of an enterprise. It is sometimes called as depreciated book
value.
 Salvage or Resale Value – is the price that can be obtained from the
property after it has been used. Salvage Year is the year when scrap
value is equal to book value.
 Scrap Value or Junk Value – is the price that can be recovered if an
asset is disposed as a junk.
Purposes of Depreciation

1. To provide for the recovery of capital


which has been invested in physical
property.
2. To enable the cost of depreciation to be
charged to the cost of producing
products or services that results from the use
of property.
Causes of Depreciation
 Physical Depreciation – it is due to wear and tear of
the asset.
 Functional Depreciation – it is due to the
obsolescence of the asset.
 Depletion – refers to the decrease in the value of a
property due to the gradual extraction of its contents.
 Monetary Depreciation – depreciation due to changes
in price level.
Physical and Economic Life

 Physical Life of a Property – is the length


of time during which it is capable of
performing the function for which it was
designed and manufactured.
 Economic Life or Useful Life – is the
length of time during which the property
may be operated at a profit.
Methods Used to
Determine Depreciation
1. Straight Line Method
2. Declining Balance Method
3. Double Declining Balance Method
4. Sum-of-Years’ Digit Method
5. Sinking Fund Method
6. Hour Output Method
7. Service Output Method
Straight Line Method
 The straight line method is the simplest way in
computing for depreciation. In this method, the
depreciation each year is constant and the interest rate
is being neglected.
Where:
𝐅𝐂 − 𝑺𝑽
𝐝= FC = first cost/value
𝐧
SV= salvage value
BV (book value of property at anytime BV = book value
m) d = depreciation charge
D = total depreciation
𝐃 =𝐝 × 𝐦 n = economic life
m= any time before n/
depreciable year
Sample Problem
on Straight Line Method

Using straight line method, what is the


value of an asset after 8 years of use if
it depreciates from its original value of
P120, 000.00 to its salvage value of 3%
in 12 years?
Declining Balance Method or Reducing
Balance Method
 In this method, the net book value at the end of each period can be
simply computed by multiplying the original market price by a fix
percentage repeatedly until it reaches the salvage value. This
method is also called Matheson’s Formula.

𝐦 −𝟏
𝐝 𝒎= 𝐤 𝑭𝑪(𝟏− 𝐤 ) BV SV

Where:
k = depreciation factor or rate
𝐤 =𝟏−
√
𝑺𝑽
𝐧
𝑭𝑪
Sample Problems on
Declining Balance Method
An equipment costing P250,000 has an
estimated life of 15 years with a book
value of P30, 000 at the end of the
period. Compute the depreciation
charge and its book value after 10 years
using the declining balance method.
Double Declining
Balance Method
 This is the same as declining balance method except that k is
replaced by 2/n.
𝟐
𝐤=
𝐧
Sum-of-Years’ Digit Method
 This
method uses the year’s digit (in reverse order) in
computing for the depreciation.

𝐧 (𝐧 +𝟏)
d 𝐒𝐔𝐌 =
𝟐

𝒎 ( 𝟐 𝐧 −𝒎+𝟏 )
𝐃= (𝐅𝐂 − 𝐒𝐕 ) BV
𝐧 ( 𝐧 +𝟏 )
Sinking Fund Method
 Sinking fund method presents the idea of annuity in computing
for the depreciation. The interest rate for the worth of money is
being considered so as to have the depreciable value.

[
𝐝 =( 𝐅𝐂 − 𝐒𝐕 )
𝐢
𝐧
(𝟏+ 𝐢 ) −𝟏 ] 𝐃 =¿
Hour Output Method
 In this method, the functionality period and the period the
machine has been used is considered. Depreciation is computed
based on the wear and tear of the machine.

𝐡𝐚
𝐝𝐚= ( 𝐕 − 𝐕 𝐬)
𝐇
Where:
H = total hours of economic life
ha = number of hours the asset has been used
𝐕 𝐚= 𝐕 − 𝐝𝐚
Service Output method

 Similarto the hour output method, this method based


its computation on how much the asset has been used.

𝐐𝐚
𝐝𝐚=
𝐐
( 𝐕 − 𝐕𝐬 ) 𝐕 𝐚= 𝐕 − 𝐝𝐚
Where:
Q = total amount that the asset can give service
Qa = amount of the asset has been used
Sample Problems on
Service and Hour Output Method
1. An electric bulb bought for Php100 is guaranteed to be useful
for 50 hours. A certain company uses the said bulb for 10
hours a day. If there is no scrap value for the bulb. Compute
the daily depreciation and create the depreciation table
throughout its economic life.
2. A tire bought for Php1,000 is expected to be useful in
traveling 100 km after which it can be sold as scrap for Php50.
(a) If the pedometer displays a value of 85 km, what is the book
value of the tire?
(b) How much did the owner need to travel for the tire to
amount to Php80?

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