| GAAP |
|
Accounting
Research Bulletin (ARB) No. 43, Chapter 9C, Para 5 |
Depreciation is a systematic and rational process of distributing the cost
of tangible assets over the life of assets.
Depreciation is a process of allocation.
Cost to be allocated = acquisition cot - salvage
value
Allocated over the estimated useful life of
assets.
Allocation method should be systematic and
rational. |
|
|
| Depreciation
Methods |
|
Depreciation methods based on time
Straight
line method
Declining
balance
method
Sum-of-the-years'-digits method
Depreciation based on use (activity) |
|
|
| Straight
Line Depreciation Method |
|
Depreciation = (Cost - Residual value) / Useful life
[Example, Straight line depreciation]
On April 1, 2006, Company A
purchased an equipment at the cost of $140,000. This equipment
is estimated to have 5 year useful life. At the end of the 5th
year, the salvage value (residual value) will be $20,000.
Company A recognizes depreciation to the nearest whole month.
Calculate the depreciation expenses for 2006, 2007 and 2008
using straight line depreciation method.
Depreciation for 2006
=
($140,000 - $20,000) x 1/5 x 9/12 = $18,000
Depreciation for 2007
=
($140,000 - $20,000) x 1/5 x 12/12 = $24,000
Depreciation for 2008
=
($140,000 - $20,000) x 1/5 x 12/12 = $24,000 |
|
|
| Declining
Balance Depreciation Method |
|
Depreciation = Book value x Depreciation rate
Book value = Cost - Accumulated
depreciation
Depreciation rate for double
declining balance method
=
Straight line depreciation rate x 200%
Depreciation rate for 150%
declining balance method
=
Straight line depreciation rate x 150%
[Example, Double declining balance depreciation]
On April 1, 2006, Company A
purchased an equipment at the cost of $140,000. This equipment
is estimated to have 5 year useful life. At the end of the 5th
year, the salvage value (residual value) will be $20,000.
Company A recognizes depreciation to the nearest whole month.
Calculate the depreciation expenses for 2006, 2007 and 2008
using double declining balance depreciation method.
Useful life = 5 years
--> Straight line depreciation rate = 1/5 = 20% per year
Depreciation rate for double
declining balance method
=
20% x 200% = 20% x 2 = 40% per year
Depreciation for 2006
=
$140,000 x 40% x 9/12 = $42,000
Depreciation for 2007
=
($140,000 - $42,000) x 40% x 12/12 = $39,200
Depreciation for 2008
=
($140,000 - $42,000 - $39,200) x 40% x 12/12 = $23,520
Double Declining Balance Depreciation Method
| Year |
Book
Value
at the beginning |
Depreciation
Rate |
Depreciation
Expense |
Book
Value at the year-end |
| 2006 |
$140,000 |
40% |
$42,000
(*1) |
$98,000 |
| 2007 |
$98,000 |
40% |
$39,200
(*2) |
$58,800 |
| 2008 |
$58,800 |
40% |
$23,520
(*3) |
$35,280 |
| 2009 |
$35,280 |
40% |
$14,112
(*4) |
$21,168 |
| 2010 |
$21,168 |
40% |
$1,168
(*5) |
$20,000 |
(*1)
$140,000 x 40% x 9/12 = $42,000
(*2) $98,000 x 40% x 12/12 = $39,200
(*3) $58,800 x 40% x 12/12 = $23,520
(*4) $35,280 x 40% x 12/12 = $14,112
(*5) $21,168 x 40% x 12/12 = $8,467
-->
Depreciation for 2010 is $1,168 to keep book value same as salvage
value.
-->
$21,168 - $20,000 = $1,168 (At this point, depreciation stops.)
--> If
$8,467 is charged to depreciation expense, book value goes below
salvage value ($21,168 - $8,467 = $12,701).
|
|
[Example, 150%
declining balance depreciation]
On April 1, 2006, Company A
purchased an equipment at the cost of $140,000. This equipment
is estimated to have 5 year useful life. At the end of the 5th
year, the salvage value (residual value) will be $20,000.
Company A recognizes depreciation to the nearest whole month.
Calculate the depreciation expenses for 2006, 2007 and 2008
using double declining balance depreciation method.
Useful life = 5 years
--> Straight line depreciation rate = 1/5 = 20% per year
Depreciation rate for double
declining balance method
=
20% x 150% = 20% x 1.5 = 30% per year
Depreciation for 2006
=
$140,000 x 30% x 9/12 = $31,500
Depreciation for 2007
=
($140,000 - $31,500) x 30% x 12/12 = $32,550
Depreciation for 2008
=
($140,000 - $31,500 - $32,550) x 30% x 12/12 = $22,785
Double Declining Balance Depreciation Method
| Year |
Book
Value
at the beginning |
Depreciation
Rate |
Depreciation
Expense |
Book
Value at the year-end |
| 2006 |
$140,000 |
30% |
$31,500
(*1) |
$108,500 |
| 2007 |
$108,500 |
30% |
$32,550
(*2) |
$75,950 |
| 2008 |
$75.950 |
30% |
$22,785
(*3) |
$53,165 |
| 2009 |
$53,165 |
30% |
$15,950
(*4) |
$37,216 |
| 2010 |
$37,216 |
30% |
$11,165
(*5) |
$26,051 |
| 2011 |
$37,216 |
30% |
$11,165
(*5) |
$26,051 |
(*1)
$140,000 x 30% x 9/12 = $31,500
(*2) $108,500 x 30% x 12/12 = $32,550
(*3) $75,950 x 30% x 12/12 = $22,785
(*4) $53,165 x 30% x 12/12 = $15,950
(*5) $37,216 x 30% x 12/12 = $11,165
(*6) $21,168 x 30% x 12/12 = $8,467
-->
Depreciation for 2010 is $1,168 to keep book value same as salvage
value.
-->
$21,168 - $20,000 = $1,168 (At this point, depreciation stops.)
--> If
$8,467 is charged to depreciation expense, book value goes below
salvage value ($21,168 - $8,467 = $12,701).
|
|
|
| Sum-of-the-years'-digits method |
|
Depreciation expense = (Cost - Salvage value)
x Fraction
Fraction for the first year = n / (1+2+3+...+ n)
Fraction for the second year = (n-1) / (1+2+3+...+ n)
Fraction for the third year = (n-2) / (1+2+3+...+ n)
...
Fraction for the last year = 1 / (1+2+3+...+ n)
n represents the number of years for useful life. |
[Example of Sum-of-the-years-digits method]
Company A purchased the following asset on
January 1, 2006. What is the amount of depreciation expense for the year ended
December 31, 2006?
Acquisition cost of the asset --> $100,000
Useful life of the asset -->
5 years
Residual value (or salvage
value) at the end of useful life --> $10,000
Depreciation method -->
sum-of-the-years'-digits method
Calculation of depreciation expense
Sum of the years' digits =
1+2+3+4+5 = 15
Depreciation for 2000 =
($100,000 - $10,000) x 5/15 = $30,000
Depreciation for 2001 =
($100,000 - $10,000) x 4/15 = $24,000
Depreciation for 2002 =
($100,000 - $10,000) x 3/15 = $18,000
Depreciation for 2003 =
($100,000 - $10,000) x 2/15 = $12,000
Depreciation for 2004 =
($100,000 - $10,000) x 1/15 = $6,000
Sum of the years' digits for n years
= 1 + 2 +
3 + ...... + (n-1) + n = (n+1) x (n / 2)
Sum of the years' digits for 500 years
= 1 + 2 + 3 + ...... + 499 + 500
= (500 + 1) x
(500 / 2) = (501 x 500) / 2 = 125,250 |
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Depreciation
Example 1 (pdf)
Depreciation
Example 1a (pdf)
Depreciation
Example 2 (pdf)
Depreciation
Example 2a (pdf) |
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