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Methods of Depreciation

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33 views

Methods of Depreciation

Uploaded by

sandeepghargedsp
Copyright
© © All Rights Reserved
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Methods of Depreciation

TEACHER VERSION
Things of Value

That You Own That Businesses Own


What is Depreciation?

An expense based on the expectation


that an asset will gradually decline in
usefulness due to time, wear & tear, or
obsolescence.
Trade in Value/Salvage Value

The value after it has completed its


useful life is referred to as the trade in
value, salvage value or residual value.
Straight-Line Method

Yearly depreciation = cost of asset – trade in value


years of life

Cost = $36,000
Years of life = 5 years
Trade in value = $6,000

Calculate the yearly depreciation using the above


equation……..
Answer

$36,000 - $6,000 = $30,000 =


5 years 5 years

$6,000

How about monthly?????


Straight Line Method:
Truck with a trade in value of $6000
Y Depreciation for the Year Accumulated Depr Book Value
r
1 18000 / 5 years = 3600 3600 24000 – 3600 = 20400

2 18000 / 5 years = 3600 3600 + 3600 = 7200 24000 – 7200 = 16800

3 18000 / 5 years = 3600 7200 + 3600 = 10800 24000 – 10800 = 13200

4 18000 / 5 years = 3600 10800 + 3600 = 14400 24000 – 14400 = 9600

5 18000 / 5 years = 3600 14400 + 3600 = 18000 24000 – 18000 = 6000

total $18000
Practice Problems SL Method

1. $49,720, salvage $$6,880, life 7 years:

2. $75,000, salvage $18,900, life 7 years:

3. $45,325, salvage $1,235, life 4 years:


Double Declining Balance Method

Accelerated Depreciation Method- It depreciates


MOST in the beginning.
Trade in value/Salvage Value is not considered
Calculated using asset’s book value (original –A/D)

Follow these steps to determine the DDB rate

 1. compute the annual straight line depreciation rate


 Year/useful life – 1÷5 = 20%
 2. multiply the rate by 2. this is the DDB rate
 20% x 2 = 40%
Double Declining Balance Method
$16,000 , life of 5 years, salvage $1500

yr Depreciation for Accumulated BV = Cost – Accum


Year Depreciation Depreciation
1 16000 x 40% = 6400 6400 16000-6400=9600
2 9600 x 40% = 3840 6400 + 3840= 10240 16000-10240=5760
3 5760 x 40% = 2304 10240 + 2304 = 12544 16000-12544=3456
4 3456 x 40% = 1382.4 12544 + 1382.4 = 13926.4 16000-13926.4=2073.6
5 2073.6 x 40% = 13926.4 + 573.6 = 14500 16000-14500= 1500
829.44
Cannot exceed salvage, Salvage value
So 2073.6-1500=
573.6 is the amt of
depreciation used

1/5 = .2 x 2 = .4 x 100 = 40%


Complete the Following

Straight-line method
**Problem A1-text appendix page A-4

Double Declining method:


**Problem A2-text appendix page A-4

MACRS-
** Problem A3- Text appendix page A-4
A-1 Straight Line Depreciation
Straight-line method
**Problem A1-text appendix page A-4

Yea Depreciation for the Year Accumulated Book Value (cost –


r Depreciation A.D.)

5
Double Declining Balance Method
Double Declining method:
**Problem A2-text appendix page A-4
Yea Depreciation for the Year Accumulated Book Value (cost –
r Depreciation A.D.)

5
Modified Tax Recovery System MACRS

Property is divided into nine classes to determine the


useful years.

Under MACRS the trade in value is ignored. This


method is a combination of straight line and double
declining method.

Turn to page A-3 in the Appendix to view the property


description.
MACRS Depreciation

Which Property class is the following?

Warehouse?
Trucks?
Furniture?
Fences?

 How much would each depreciate YEARLY?

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