No. 125 Brgy.

San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com

DEPRECIATION

I. DEFINITION

Carrying The amount at which an asset is recognized after deducting any accumulated
amount depreciation and accumulated impairment losses.

The amount of cash or cash equivalents paid or the fair value of the other consideration
given to acquire an asset at the time of its acquisition or construction or, where
Cost
applicable, the amount attributed to that asset when initially recognized in accordance
with the specific requirements of other IFRS.

Depreciable
The cost of an asset, or other amount substituted for cost, less its residual value.
amount

Depreciation The systematic allocation of the depreciable amount of an asset over its useful life.

The estimated amount that an entity would currently obtain from disposal of the asset,
Residual
after deducting the estimated costs of disposal, if the asset were already of the age
value
and in the condition expected at the end of its useful life.

(a) The period over which an asset is expected to be available for use by an entity; or
(b) The number of production or similar units expected to be obtained from the asset
Useful life
by an entity.

II. BASIC CONCEPTS

 Each part of an item of property, plant and equipment with a cost that is significant in relation to the total
cost of the item shall be depreciated separately.

 The depreciation charge for each period shall be recognized as expense in profit or loss unless it is
included in the carrying amount of another asset. For example, depreciation on factory equipment which
shall be included as overhead and cost of inventories.

III. Depreciable Amount and Depreciation Period

 The depreciable amount of an asset shall be allocated on a systematic basis over its useful life.

 The residual value and the useful life of an asset shall be reviewed at least at each financial year-end
and, if expectations differ from previous estimates, the change(s) shall be accounted for as a change in
an accounting estimate.

 Depreciation is recognized even if the fair value of the asset exceeds the carrying amount; as long as the
asset’s residual value does not exceed its carrying amount. Repair and maintenance of an asset do not
negate the need to depreciate it.

 The residual value of an asset may increase to an amount equal to or greater than the asset’s carrying
amount. If it does, the asset’s depreciation charge is zero unless and until its residual value subsequently
decreases to an amount below the asset’s carrying amount.

 Depreciation of an asset begins when it is available for use. Depreciation of an asset ceases at the
earlier of the date that the asset is classified as held for sale and the date that the asset is derecognized.
Therefore, depreciation does not cease when the asset becomes idle or is retired from active use
unless the asset is fully depreciated. However, under usage methods of depreciation the depreciation
charge can be zero while there is no production.

 Factors are considered in determining the useful life of an asset:

(a) Expected usage of the asset. Usage is assessed by reference to the asset’s expected capacity or
physical output.

1|P a g e TSIY/RSORIANO/BVILLALUZ/JBINALUYO
 No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com

(b) Expected physical wear and tear, which depends on operational factors such as the number of shifts
for which the asset is to be used and the repair and maintenance program, and the care and
maintenance of the asset while idle.

(c) Technical or commercial obsolescence arising from changes or improvements in production, or from
a change in the market demand for the product or service output of the asset.

(d) Legal or similar limits on the use of the asset, such as the expiry dates of related leases.

IV. Depreciation Method

 The depreciation method used shall reflect the pattern in which the asset’s future economic benefits are
expected to be consumed by the entity.

 The depreciation method applied to an asset shall be reviewed at least at each financial year-end and, if
there has been a significant change in the expected pattern of consumption of the future economic
benefits embodied in the asset, the method shall be changed to reflect the changed pattern. Such a
change shall be accounted for as a change in an accounting estimate

 A variety of depreciation methods can be used to allocate the depreciable amount of an asset on a
systematic basis over its useful life. These methods include the straight-line method, the diminishing
balance method and the units of production method.

V. Example:

Cost 2,200,000
Residual Value 400,000
Useful Life 5 years
Total Estimated Output 100,000 units

Actual Output Per Year:

Year 1 15,000
Year 2 20,000
Year 3 30,000
Year 4 25,000
Year 5 10,000

Straight-line SYD Double-Declining Production

DA divided by 5 Years SYD = 1+2+3+4+5 Cost x 2 over Life Rate = DA / Total
output
Or DA x SL Rate DA x (RL/SYD) BV x 2 over Life Current output x rate
BV less RV (final 1.8M / 100,000 = 18
year)
Y1 1.8M / 5 = 360,000 1.8M x 5/15 = 2.2M* x 40% = 15,000 x 18 = 270,000
600,000 880,000
Y2 1.8M / 5 = 360,000 1.8M x 4/15 = 1.32M** x 40% = 20,000 x 18 = 360,000
480,000 528,000
Y3 1.8M / 5 = 360,000 1.8M x 3/15 = 792K x 40% = 30,000 x 18 = 540,000
360,000 316,800
Y4 1.8M / 5 = 360,000 1.8M x 2/15 = 475.2K – .4M = 25,000 x 18 = 450,000
240,000 75,200
Y5 1.8M / 5 = 360,000 1.8M x 1/15 = No Depreciation 10,000 x 18 = 180,000
120,000

KEY OBSERVATIONS

 Straight-line provides uniform depreciation of 360,000 per year

 SYD and Double declining provides accelerated depreciation that decreases over time.

 The production method provides variable amount of depreciation.

 SL, SYD and Production method uses depreciable amount from beginning to end.
2|P a g e TSIY/RSORIANO/BVILLALUZ/JBINALUYO
 No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com

 Double declining ignores the residual value* in the initial year and depreciates the book value** after
that. However, maintains the principle of excluding the residual value from depreciation charges as shown
in year 4 and year 5.

PROBLEMS

1. Machines were acquired by Oswald Company on March 1, 2022, as follows:

Machine Cost Estimated Estimated

Residual Value Life in Years
001 P5,000,000 P600,000 5
002 2,500,000 400,000 6
003 1,800,000 400,000 8
004 800,000 50,000 6
005 600,000 None 10

What is the group depreciation rate for this group?

a. 15.75%
b. 14.86%
c. 17.19%
d. 13.33%

2. A schedule of plant assets owned by Brenda Company is presented below.

Depreciable Annual
Cost Scrap Life
cost Depreciation
Building 8,800,000 800,000 8,000,000 20 years 400,000
Machinery 3,200,000 320,000 2,880,000 15 years 192,000
Equipment . 640,000 640,000 5 years 128,000
Total 12,640,000 11,520,000 720,000

Brenda computes depreciation on the straight-line method. What is the composite life of the assets?
a. 19.8
b. 13.3
c. 18.0
d. 16.0

3. Andrei Company uses the composite method of depreciation and has a composite rate of 15%. During 2022,
it sold assets with an original cost of P500,000 and a residual value of P100,000 for P300,000 and eventually
acquired P900,000 of new assets with a residual value of P150,000. Information regarding the original group
of assets as of January 1, 2022, is presented below:

Total cost 6,000,000

Total residual value 800,000
Accumulated depreciation 1,000,000

What was the depreciation expense recorded by Andrei Company in 2022?

a. 880,000
b. 847,500
c. 960,000
d. 900,000

3|P a g e TSIY/RSORIANO/BVILLALUZ/JBINALUYO
 No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com

4. On April 1, 2022, Draymond Company bought machinery under a contract that required a down payment of
P500,000 plus 24 monthly payments of P300,000 for total payments of P7,700,000. The cash price of the
machinery was P6,500,000. The machinery has an estimated useful life of five years and estimated residual
value of P500,000. Draymond uses SYD method of depreciation. In its 2023 income statement, what amount
should Draymond report as depreciation for this machinery?
a. 1,800,000
b. 1,700,000
c. 2,000,000
d. 1,600,000

5. Lily Company purchased an equipment for P4,000,000 with a useful life of 5 years and a residual value of
P600,000 on July 1, 2021. Lily opted to depreciate this asset using the double declining balance method
of depreciation and did not foresee any changes in its estimate to occur. What is the depreciation expense
on this equipment for the calendar year ended December 31, 2024?
a. 400,000
b. 576,000
c. 420,000
d. 264,000
6. During 2020, Beagle Company purchased an equipment with a cost of P1,500,000. It is expected that this
equipment will be used for 5 years and have a residual value at the end of its useful life of P300,000. It is
also expected that this equipment can produce 200,000 units of Beagle’s products. Beagle’s policy is to take
a full year’s depreciation in the year of acquisition. In 2020, 2021 and 2022, this equipment produced 50,000,
30,000 and 40,000 units respectively. Beagle sold the equipment on January 1, 2023, for net proceeds of
P900,000. What is the gain on sale recognized in 2023?
a. 500,000
b. 320,000
c. 240,000
d. 120,000

7. In 2022, Kevin Company recorded depreciation of P144,320 for an asset on the final year of its useful life.
The asset with a P400,000 residual value originally had a 5-year useful life and was depreciated using the
double declining balance method of depreciation. Kevin Company acquired the asset on January 1, 2018.
What was the acquisition cost of the equipment?
a. 4,200,000
b. 3,800,000
c. 4,600,000
d. 5,000,000

8. Pagani Corporation’s machinery account on January 1, 2022, shows the following information:

Machinery 3,000,000
Accumulated depreciation 1,200,000

The additional information and the following transactions transpired during 2022:

• The estimated life of all machinery is 8 years with no residual value. The straight-line method is used.
• On June 10, 2022, a new machine was purchased at an invoice cost of P270,000. Additional costs of
P20,000 for freight and P30,000 for installation and testing were incurred. The machine was put into use
on June 30, 2022.
• On January 4, 2022, a machine purchased for P240,000 on January 1, 2019, was overhauled at a cost
of P60,000. As a result, the company estimated that its original life would be extended by two years.

What is the depreciation expense to be recorded by Pagani for 2022?

a. 395,000 c. 345,000
b. 425,000 d. 365,000

4|P a g e TSIY/RSORIANO/BVILLALUZ/JBINALUYO
 No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com

9. Anne Company acquired a machine on January 1, 2020, for P4,000,000. The machine has a 8 year useful
life and a P400,000 residual value, and was depreciated using the sum-of-years digits method. Anne
recorded a full year’s depreciation on the asset in 2020 and 2021. In January of 2022, Anne estimated that
the asset’s useful life from the date of acquisition should have been 6 years and its residual value reduced
to P200,000. As a result of this change in Anne’s accounting estimate, what is the accumulated depreciation
on December 31, 2022?
a. 2,420,000
b. 2,100,000
c. 2,940,000
d. 1,940,000

10. McClaren Company uses the straight-line depreciation for its property plant and equipment. The related
balances were:

December 31, 2022 December 31, 2021

Property, plant and equipment 60,000,000 65,000,000
Accumulated depreciation 19,000,000 15,000,000

McClaren purchased land during 2021 for P5,000,000 and sold machinery for P7,000,000 at a gain of
P500,000. What is the depreciation expense for 2022?
a. 6,500,000
b. 7,500,000
c. 6,000,000
d. 7,000,000

--END--

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