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 U.S. GAAP Codification Accounting Topics

 Depreciation Methods

 GAAP 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, 2011, 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 2011,  2012 and 2013 using straight line depreciation method.          Depreciation for 2011            = (\$140,000 - \$20,000) x 1/5 x 9/12 = \$18,000        Depreciation for 2012            = (\$140,000 - \$20,000) x 1/5 x 12/12 = \$24,000        Depreciation for 2013            = (\$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, 2011, 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 2011,  2012 and 2013 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 2011
= \$140,000 x 40% x 9/12 = \$42,000

Depreciation for 2012
= (\$140,000 - \$42,000) x 40% x 12/12 = \$39,200

Depreciation for 2013
= (\$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 2011 \$140,000 40% \$42,000 (*1) \$98,000 2012 \$98,000 40% \$39,200 (*2) \$58,800 2013 \$58,800 40% \$23,520 (*3) \$35,280 2014 \$35,280 40% \$14,112 (*4) \$21,168 2015 \$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 2015 is \$1,168 to keep book value same as salvage value.
--> \$21,168 - \$20,000 = \$1,168 (At this point, depreciation stops.)

[Example, 150% declining balance depreciation]

On April 1, 2011, 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 2011,  2012 and 2013 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 2011
= \$140,000 x 30% x 9/12 = \$31,500

Depreciation for 2012
= (\$140,000 - \$31,500) x 30% x 12/12 = \$32,550

Depreciation for 2013
= (\$140,000 - \$31,500 - \$32,550) x 30% x 12/12 = \$22,785

150% Declining Balance Depreciation Method

 Year Book Value at the beginning Depreciation Rate Depreciation Expense Book Value at the year-end 2011 \$140,000 30% \$31,500 (*1) \$108,500 2012 \$108,500 30% \$32,550 (*2) \$75,950 2013 \$75.950 30% \$22,785 (*3) \$53,165 2014 \$53,165 30% \$15,950 (*4) \$37,216 2015 \$37,216 30% \$11,165 (*5) \$26,051 2016 \$26,051 30% \$6,051 (*6) \$20,000

(*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) \$26,051 x 30% x 12/12 = \$7,815

--> Depreciation for 2016 is \$6,051 to keep book value same as salvage value.
--> \$26,051 - \$20,000 = \$6,051 (At this point, depreciation stops.)

 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, Sum-of-the-years-digits method]   Company A purchased the following asset on January 1, 2011.     What is the amount of depreciation expense for the year ended December 31, 2011?    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 2011 = (\$100,000 - \$10,000) x 5/15 = \$30,000    Depreciation for 2012 = (\$100,000 - \$10,000) x 4/15 = \$24,000    Depreciation for 2013 = (\$100,000 - \$10,000) x 3/15 = \$18,000    Depreciation for 2014 = (\$100,000 - \$10,000) x 2/15 = \$12,000    Depreciation for 2015 = (\$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 Depreciation Example 1

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 U.S. GAAP by Codification Topic 105  GAAP Hierarchy   105  GAAP History   205  Presentation of Financial Statements   205-20 Discontinued Operations   210  Balance Sheet   210-20 Offsetting   220  Comprehensive Income   225  Income Statement   225-20 Extraordinary and Unusual Items   230  Statement of Cash Flows   250  Accounting Changes and Error Corrections   260  Earnings per Share   270  Interim Reporting    310  Impairment of a Loan  320  Investment Securities   320  Other-Than-Temporary Impairments, FSP FAS 115-2   320-10-05 Overview of Investments in Other Entities   320-10-35 Reclassification of Investments in Securities  323-10 Equity Method Investments  323-30 Investments in Partnerships and Joint Ventures   325-20 Cost Method Investments   330  Inventory  340-20 Capitalized Advertising Costs   350-20 Goodwill   350-30 Intangibles Other than Goodwill   350-40 Internal-Use Software   350-50 Website Development Costs   360  Property, Plant and Equipment  360-20 Real Estate Sales     410  Asset Retirement and Environmental Obligations   420  Exit or Disposal Cost Obligations   450  Contingencies   450-20 Loss Contingencies   450-30 Gain Contingencies  480  Redeemable Financial Instruments   505-20 Stock Dividends, Stock Splits   505-30 Treasury Stock   605  SEC Staff Accounting Bulletin, Topic 13   605-25 Revenue Recognition - Multiple Element Arrangements     715-30 Defined Benefit Plans - Pension  718  Share-Based Payment   730  Research and Development   730-20 Research and Development Arrangements   805  Business Combinations    810  Consolidation   810  Noncontrolling Interests   810  Consolidation of Variable Interest Entities, SFAS 167     815  Derivatives and Hedging Overview   820  Fair Value Measurements    820  Fair value when the markets are not active, FSP FAS 157-4  825  Fair Value Option   830  Foreign Currency Matters   830-20 Foreign Currency Transactions   830-30 Translation of Financial Statements   835  Interest   835-20 Capitalization of Interest   835-30 Imputation of Interest   840  Leases   840-20 Operating Leases   840-30 Capital Leases   840-40 Sale-Leaseback Transactions  845  Nonmonetary Transactions   855  Subsequent Events   860-20 Sale of Financial Assets, SFAS 166   860-50 Servicing Assets and Liabilities, SFAS 156   985-20 Costs of software to be sold