DEPRECIATI
ON
DEPRECIATION
Depreciation refers to the decrease in the value of an
asset, due to the usage and passage of time. An asset may
depreciate physically or functionally.
ELEMENTS OF DEPRECIATION
FC = First Cost
n = Useful or Economic Life
SV = Salvage/Trade-in/Scrap Value
d = depreciation charge
BV = Book Value
= Total Depreciation after m years
METHODS OF COMPUTING
DEPRECIATION
1. Straight Line Depreciation
2. Sinking Fund Method
3. Sum of the Year’s Digit Method
4. Declining Balance Method (Constant Percentage Method)
5. Double Declining Balance Method
METHODS OF COMPUTING
DEPRECIATION
GENERAL FORMULA:
STRAIGHT LINE DEPRECIATION
The cost of property or asset vary linearly with time. It
assumes that a constant amount is depreciated each year over
the useful life of the property.
STRAIGHT LINE DEPRECIATION
FORMULA:
EXAMPLE 1: STRAIGHT-LINE
A man bought an equipment which costs P524,000.00.
Additional expenses cost him P31,000.00. If the life of the
equipment is 15 years with an estimated salvage value of
P120,000.00, find its book value after 8 years.
EXAMPLE 1: SOLUTION
EXAMPLE 2: STRAIGHT-LINE
An equipment costing P250,000.00 has an estimated life of
15 years with a book value of P30,000.00 at the end of the
period. Compute the depreciation charge and its book value
after 10 years using straight-line method.
EXAMPLE 2: SOLUTION
EXAMPLE 3: STRAIGHT-LINE
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.
EXAMPLE 3: SOLUTION
EXAMPLE 4: STRAIGHT-LINE
A factory equipment has an initial cost of P200,000.00. Its
salvage value after 10 years is 20,000.00. As a percentage of the
initial cost, what is the straight-line depreciation rate of the
equipment?
EXAMPLE 4: SOLUTION
SINKING FUND METHOD
The sinking fund method is a technique for depreciating an
asset while generating enough money to replace it at the end of
its useful life.
SINKING FUND METHOD
FORMULA:
EXAMPLE 1: SINKING FUND
A machine costs P300,000 with a salvage value of P50,000
at the end of its life of 10 years. If money is worth 6% annually,
use Sinking Fund Method and determine the depreciation at
the 6th year.
EXAMPLE 1: SOLUTION
EXAMPLE 2: SINKING FUND
An equipment costing P250,000.00 has an estimated life of
15 years with a book value of P30,000.00 at the end of the
period. Compute the depreciation charge and its book value
after 10 years using sinking fund method assuming i = 8%.
EXAMPLE 2: SOLUTION
EXAMPLE 3: SINKING FUND
A dump truck was bought for P300,000 six years ago. It
will have a salvage value of P30,000 four years from now.
Determine the present value of the dump truck if the
depreciation method used is sinking fund at 6%.
EXAMPLE 3: SOLUTION
EXAMPLE
A company bought an equipment for P200,000. Installation cost amounted to
P10,000. The equipment is said to have a useful life of 10 years with a salvage
value of P50,000. At i = 12%, determine;
1. The book value at the end of 7 years
2. The total depreciation after 7 years and
3. The depreciation charge at the 7th year
