Depreciation SLM (Lecture) PDF

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Summary

DEPRECIATIONDepreciation refers to the decrease in the value of an asset, due to usage of time. An asset may depreciate physically or functionallyElements of DepreciationFC = First cost SV = Salvage Value d = depreciation charge n = economic life of the property in years m = any time before n BVm = ...

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DEPRECIATION Depreciation refers to the decrease in the value of an asset, due to usage of time. An asset may depreciate physically or functionally

the equipment at the end of the 3rd year is P242,000 and the life of the equipment is assumed to be 5 years, determine the salvage value of this equipment at the end of 5 years Answer: P50,000

Elements of Depreciation

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FC = First cost SV = Salvage Value d = depreciation charge n = economic life of the property in years m = any time before n BVm = book value after m years Dm = total depreciation METHODS OF COMPUTING DEPRECIATION A. Straight Line Method (SLD) – This is the most common method used in computing depreciation. In this method, the cost of the property is assumed to vary linearly with time. The following formulas are used

d=

Dm = d x m

BVm = FC - Dm

B. Sinking Fund Method – In this method, an imaginary fund d called a sinking fund is invested at a rate of i to amount to (FC – SV) at the end of the life of the property. d=

Dm =

BVm = FC - Dm C. Sum of the Years Digit Method (SOYD) – The depreciation charge in this method is assumed to vary directly to the number of the years and inversely to the sum of the year’s digit. Sum of the year’s digit, SUM = (1 + n) dm = (FC -SV) Dm = (FC – SV)

BVm = FC - Dm D.

Declining Balance Method (Constant Percentage Method) This method is based on the compound interest formula F = P (1 + i)n, where P is the First cost(FC), F is the book value at any time, and i is the depreciation rate and is equal to K, Then SV = FC (1 – K)n Constant percentage (K), K = 1 d = FC (1 – K)m -1 K

E.

Double Declining Balance Method Depreciation charge to date = x BV at the start of year BVm = FC SV dm = BVm BVm = FC - Dm

Examples: 1. What is the book value of an asset after 8 years of use if it depreciates from its original value of P12,000 to its salvage value of 3% in 12 years Answer: P42,400 2. A man bought equipment which cost P524,000. Freight and installation expenses cost him P31,000 if the life of the equipment is 15 years with an estimated salvage value of P120,000. Find its book value after 8 years Answer: P323,000 3. The cost of the printing equipment is P500,000 and the cost

What is the value of an asset after 8 years of use if it depreciates from its original value of P120,000 to salvage value of 3% in 12 years Answer: P42,400 5. An engineer bought equipment for P500,000. Other expenses including installation amounted to P30,000. At the end of its estimated useful life of 10 years, the salvage value will be 10% of the first cost, using straight line method of depreciation, what is the book value after 5 years? Answer: P291,500 6. A piece of 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 charged and its book value after 10 years using sinking fund method assuming i = 8% Answer: d = P8,102.50, BV10 = P132,622.63 7. A plant erected to manufacture socks has a first cost of 10,000,000 with an estimated salvage value of P100,000 at the end of 25 years. Find its appraised value to the nearest P100 by the sinking fund method, assuming at an interest rate of 6%a at the end of a. 10 years, b. 20 years Answer: a = P7,621,600, b = P3,362,200 8. A certain newly created company installed a P10,000 kw electric generating plant at a cost of P430 per kw. The amount of the total cost of the plant were sold to the public were to mature in 20 years. The estimated life of the plant is 15 years. The salvage value is conservatively set at 5% of the first cost, sinking fund deposit is 3.5%. What is the sinking fund accumulation after 10 years? Answer: P2,483,595 9. A machine costs of P80,000 and has an estimated salvage value of P20,000 at the end of 20 years useful life. Compute the book value at the end of 2nd year using sinking fund method of depreciation based on 8% interest rate. Answer: P777,272.85 10. A P110,000 chemical plant had an estimated life of 6 years and a project scrap value of P10,000. After 3 years of operation an explosion made it a total loss. How much money would have to be raised to put a new plant costing P150,000, if a depreciation reserved have been maintained during its 3 years of operation by sinking fund method of 6% interest rate. Answer: P104,359.0 Assignment: 1. The book value of certain equipment after 8 years is P16,800

and a salvage value of P6,000 after 10 years. What is the initial cost of the equipment? Assume SLD 2. The total depreciation of a machine is 60,0000 after 6 years. If the machine has an initial cost of 150,000 in how many years will be the machine has no salvage value? 3. A machine has the first cost of P650,000 and an amount of P1,000 salvage value after 20 years. Determine the book value of the machine after 10 years....