Depreciation methods

Depreciation methods. CHAPTER 16. 1.

LEARNING OUTCOMES. 2. The depreciation terms. How to apply the straight line model of depreciation . How to apply the declining balance models of depreciation ..

3. Depreciation is the reduction in value over time of an asset . Brought on by: Wear and tear, use; Deterioration; Obsolescence. First Cost or Unadjusted Basis - B Initial purchase price + all costs incurred in placing the asset in service i.e. installation, delivery, etc. Book Value - BV Remaining un-depreciated capital investment on the accounting books ..

16.1 Depreciation Terminology. Recovery Period – n Depreciable life of the asset in question . Market Value - MV The value of the asset on the open market if sold now, regardless of book value (depreciated value). Salvage Value - S Estimated trade-in value or market value at the end the asset’s useful life. Depreciation Rate - d t The rate of asset reduction each year . Personal Property All property except real estate used e.g. machinery, equipment, vehicles, telephone, computers, furniture, etc. ..

Real Property. Are the real estate possessions of a company e.g. office building, warehouses, etc..

Modified accelerated cost recovery system (MACRS).

(B. Notation: D B S year (t annual depreciation charge first cost or unadjusted basis Estim ated salvage value recovery period depreciation rate.

[Audio] B (first cost) - tDt (annual depreciation charge) Do example 16.1.

If an asset has a first cost of $50,000 with $10,000 estimated salvage value after 5 years,.

t D t BV t 1 $8,000 $42,000 2 8,000 34,000 3 8,000 26,000 4 8,000 18,000 5 8,000 10,000.

If an asset has a first cost of $200,000 and has no salvage value after 8 years..

The decline balance (DB) is an accelerated depreciation method, which is also known as the fixed percentage method..

If BV t-1 is given, apply:. abstract. 16.3 Declining Balance (DB) and Double Declining Balance (DDB) Depreciation.

The book value in year t can be determined either by:.

[Audio] It is important to understand that the book value for the DB method never goes to zero, because the book value is always decreased by a fixed percentage.

[Audio] Do example 16.2 16.3 using both approaches in second example to get Dt 1- BVt-1 is unknown, the depreciation can be calculated using the first cost Implied d = 1- (S/B)1/N Dt = dB(1-d)t-1 Then for continuous Dt-n Dt = (d)BVt- 1 2- Subtracting the current depreciation charge from the previous book value BVt=BVt-1 – Dt.

SL $. DB %. DDB %. d MAX = 2(1/n). abstract. d t =.

B-S. Example: Straight Line (SL). An asset that is book depreciated over a 5 year period by the straight line method has BV3 = $62,000 at year 3 and Dt = $26,000 per year. Determine (a) the first cost of the asset (b) the salvage value.

B-S. Example: Straight Line (SL). D3 = 26,000 BV3 = 62,000 = B – 3(26,000) B = $140,000 (b) 26,000 = (140,000 – S)/5 S = $10,000.

Example: Declining Balance (DB). A welding machine was purchased for use in a construction project. The welding machine will be DB depreciated over an expected life of 12 years . There is a first cost of $50,000 and a salvage of $500. (a) Calculate the depreciation rate. (b) Calculate the depreciation for year 5. (c) Calculate the book value for year 5. (d) Calculate the implied salvage value after 12 years..

(p. The depreciation rate, depreciation amount, and book value.

imp S. Example: Declining Balance (DB). The implied salvage value after 12 years.

Example: Straight Line (SL) and Declining Balance (DB).

B = $800,000; n = 30; S = 15% = $ 120,000. Example: Straight Line (SL) and Declining Balance (DB).

B = $800,000; n = 30; S = 15% = $ 120,000. Example: Straight Line (SL) and Declining Balance (DB).

[Audio] See example 5.2. Rectangle: Click to edit Master text styles Second level Third level Fourth level Fifth level.

Example: Straight Line (SL) and Declining Balance (DB).

a) the market value (book value) amount in year 5, using DB method..

If the machine will have BV = 0 at the end of 5 years, the SL.

B-S n. Example: Straight Line (SL) and Declining Balance (DB).

[Audio] . Summary of Important Points. Depreciation is the reduction in value over time of an asset ..