Depreciation

Refers to decrease or loss in value of an asset from the

original cost of a long-term asset distributed accordingly to
its useful life.

Basic concepts
Total cost or Original cost – cost of an asset plus the freight cost, handling and set-up charge
buyer.
Salvage Value – value of an asset at the time it is taken out of service. Also called as Residua
in value
Useful Life – length of time an asset is expected to generate revenue.
Book Value – value of an asset at any given time.
Depreciation Schedule – chart showing the depreciation activity of an asset of each year in
e
Composite Depreciation
gly to
Composite Depreciation (or Group
Depreciation) is a method for calculat
claiming depreciation expense. The Co
method depreciates an entire group of
as a single entity rather than individual
g and set-up charges when shouldered by the

so called as Residual value,Scrap value, Trade-

set of each year in its useful life.

ion
ion (or Group
thod for calculating and
expense. The Composite
entire group of related assets
r than individually.
Straight-line Method

Where:
TD = total depreciation
TC = total cost of an asset
SV = salvage value
AD = annual depreciation
Ad = accumulated depreciation at a point of time
OC = original cost
n = useful life of an asset in years
BV = book value
Dr = depreciation rate
Year Annual Dep. Accumulated Dep.

1 ₱49,000.00 ₱49,000.00
2 ₱49,000.00 ₱98,000.00
3 ₱49,000.00 ₱147,000.00
4 ₱49,000.00 ₱196,000.00
5 ₱49,000.00 ₱245,000.00
Book Value
₱270,000.00
₱221,000.00
₱172,000.00
₱123,000.00
₱74,000.00
₱25,000.00
Suppose that Grande Corporation owns and uses a large
number of expensive resources in quite a few different
categories. Grande corporation must calculate and claim
depreciation expense for many Office Equipment items in these
categories. Find the composite life and composite rate.
Assets Original Cost Salvage Value
Computers 65,000 5,000
Fax Machine 12,000 2,000
Printers 6,000 1,000
Phone Switch Eq 93,000 3,000
Total 176,000 11,000
Total Depreciation
Annual
Depreciable Cost Usable Life (years) Depreciation
60,000 3 20000
10,000 5 2000
5,000 5 1000
90,000 9 10000
165,000 33000
Units-of-Production Method
AV Company purchases a mchine for developing a new product that will costs P10,000
and has an estimated salvage value of P1,000 when the machine can produce 12,000
units. The distribution of the number of units produce are as follows: 3,000 units for
the first year, 2,500 for the second year, 4,000 units for its third year of operation,
1,500 units and 1,000 units for the fourth year and fifth respectively. Find the annual
depreciation and construct a depreciation schedule.

Given: TC = 10,000 SV = 1,000 n = 12,000 units

(Solve for depreciation per unit)
dep. per unit = 9000/12000 = 0.75
depreciation per unit is P0.75

1 3000*0.75 2250
2 2500*0.75 1875
3 4000*0.75 3000
4 1500*0.75 1125
5 1000*0.75 750
Year Annual Dep. Accumulated Dep. Book Value
₱10,000.00
s P10,000
1 ₱2,250.00 ₱2,250.00 ₱7,750.00
ce 12,000 2 ₱1,875.00 ₱4,125.00 ₱5,875.00
units for 3 ₱3,000.00 ₱7,125.00 ₱2,875.00
operation,
he annual 4 ₱1,125.00 ₱8,250.00 ₱1,750.00
5 ₱750.00 ₱9,000.00 ₱1,000.00
Sum of the Years' Digits Method
RG Corp. purchases a machine worth P250,000, the freight cost is P5,000
and the set up charges amounting to P15,000. The machine is expected to
last for 5 years and has a salvage value of P25,000. If RG Corp. choose to
utilize the sum-of-the-years' digit method, find the total cost, total
depreciation, annual depreciation, and the book value after 3 years.
Prepare a depreciation table.

TC = 250,000 + 5,000 + 15,000 = 270,000

TD = 270,000 - 25,000 = 245,000
sum of the digits = 5 + 4 + 3 + 2 + 1 = 15

1 245000*5/15 81,666.67 BV at the end of 3 years

2 245000*4/15 65,333.33 BV = 270000 - (81,666.67 + 65,333.33 + 49,000)
3 245000*3/15 49,000.00 BV = 74,000
4 245000*2/15 32,666.67
5 245000*1/15 16,333.33
Year Total Dep. Dep. Rate Annual Dep. Accumulated Dep.

1 ₱245,000.00 1/3 ₱81,666.67 ₱81,666.67

2 ₱245,000.00 1/4 ₱65,333.33 ₱147,000.00
3 ₱245,000.00 1/5 ₱49,000.00 ₱196,000.00
4 ₱245,000.00 1/8 ₱32,666.67 ₱228,666.67
5 ₱245,000.00 1/9 ₱16,333.33 ₱245,000.00

6.67 + 65,333.33 + 49,000)

Book Value
₱270,000.00
₱188,333.33
₱123,000.00
₱74,000.00
₱41,333.33
₱25,000.00
Declining Balance Method
CAB Company purchases 10 computer units at a total of P350,000. The
expected lifetime of the computer units is 4 years. The residual value is
P100,000. Using the straight-line declining balance method, find the annual
depreciation and construct depreciation table.

Given: TC = 350,000 SV = 100,000 n = 4 years

SLR = 1/n = 1/4 or 25%
AD
1 350,000*0.25 87,500 350000 - 87500
2 262500*0.25 65625 265000 - 65625
3 196875*0.25 49218.75 196875 - 49218.75
4 147656.25*0.25 36914.06 1476565.25 - 36914.06
Year Total Cost SLR Annual Dep.

1 ₱350,000.00 25% ₱87,500.00

0,000. The
al value is 2 ₱350,000.00 25% ₱65,625.00
the annual 3 ₱350,000.00 25% ₱49,218.75
4 ₱350,000.00 25% ₱36,914.06

BV
262500
196875
147656.25
110742.19
Accumulated Dep. Book Value
₱350,000.00
₱87,500.00 ₱262,500.00
₱153,125.00 ₱196,875.00
₱202,343.75 ₱147,656.25
₱239,257.81 ₱110,742.19

Take note that in the declining balance

method, it is not necessary that the book
value at the end of the useful life of an asset
is equal to the salvage value. However, the
book value can be higher than the salvage
value at the end of the useful life of an asset
but it cannot be lower than the salvage value.
Double Declining Balance Method
JR Mechandising purchases a secondhand jeep for delivering their
merchandise worth P200,000 with an estimated trade-in value of P16,000
after 5 years. Find the annual depreiation using the double declining balance
method and construct a depreciation schedule.

Given: TC = 200000 SV = 16000 n = 5 years

SLR = 1/5 = 20%
DBR = 20%*2 = 40%
Year Total Cost DBR Annual Dep. Accumulated Dep.

1 ₱200,000.00 40% ₱80,000.00 ₱80,000.00

2 ₱200,000.00 40% ₱48,000.00 ₱128,000.00
3 ₱200,000.00 40% ₱28,800.00 ₱156,800.00
4 ₱200,000.00 40% ₱17,280.00 ₱174,080.00
5 ₱200,000.00 40% ₱9,920.00 ₱184,000.00

Note: P25,920 x 40% = P10,368 , the

depreciation amount for the fifth year.
However, the book value at the end of five
years is P25,920 - P10,368 = P15,552 which is
lower than the salvage value. Therefore, the
allowable amount of the depreciation for the
fifth year is only (P25,920 - P16,000 = P9,920)
so that the book value at the end of the fifth
year should not be lower than the salvage value
which is P16,000.
Book Value
₱200,000.00
₱120,000.00
₱72,000.00
₱43,200.00
₱25,920.00
₱16,000.00

, the
year.
nd of five
,552 which is
erefore, the
tion for the
000 = P9,920)
of the fifth
salvage value