Depreciation: Mathematics of Investment

Depreciation
Mathematics of Investment
Definition of Terms
Depreciation or depreciation expense refers to the decrease or loss in
value of an asset from the original cost of a long-termed asset
distributed accordingly to its useful life.
Total cost or original cost refers to the cost of an asset plus the freight
cost, handling and set-up charges when shouldered by the buyer.
Definition of Terms
Useful life refers to the length of time an asset expected to

generate revenue. It is expressed in terms of time or unit of
productions.
Book Value is the value of an asset at any given time. To
compute the book value find the difference between the
original cost and the accumulated depreciation expense at a
given point of time.
Methods Used for Depreciation
1. Straight-line Method
The simplest and most widely used in business
nowadays. It provides an equal charges distributed
over the estimated useful life of an asset.
Notations
TD = Total Depreciation
TC = Total Cost of an Asset
SV = Salvage Value, Scrap Value, Residual Value or Trade-in
Value
TD = TC - SV
Notations
•AD = Annual Depreciation
Ad = Accumulated Depreciation at a point of time
n = Useful life of an asset in years, Units of production
AD =
Notations
OC = Original Cost
BV = Book Value
BV = OC - Ad
Notations
•Dr = Depreciation Rate
Dr =
Sample Problem
1. Ritz Glenn Corporation purchases a machine worth P250,000, the
freight cost is P5,000 and a 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 Ritz Glenn Corporation choose to utilize the
straight-line method, find the total depreciation , annual
depreciation, depreciation rate, and the book value after 3
years. Prepare a depreciation schedule for its useful life.
2. Units-of-Production Method
In this method, the useful life of an asset not
expressed in terms of year, rather the useful life gives in
terms of units of production, the total amount of work
performed, or number of hours operation.
Sample Problem
1. AV company purchase a machine for developing a new product
costs P 10,000 and has estimated salvage value of P1,000 when the
machine can produce 12,000 units. The distribution of the number
of units produced are as follows; 3,000 units for the 1st year, 2,500
for the second year, 4,000 units for its third year of operation and
1,500 and 1,000 units for fourth year and fifth year respectively.
Find the annual depreciation and construct a depreciation schedule.
3. Accelerated Depreciation
There are two methods of accelerated depreciation. These
methods are Sum-of-the-years’ Digit and Declining balance
method. In these methods, it is an assumption that the larger
amount of depreciation will take place at the early part of the
useful life of an asset and will decrease in the later years.
Accelerated Depreciation Method
a. Sum-of-the-Years’ Digit Method
Using the straight-line method, the total amount of
depreciation will be distributed equally on the useful life of an
asset. The sum-of-the-years’ digit method, the larger amount of
depreciation will be allocated at the beginning of the useful-life
of the asset and decrease each year at a proportional rate.
Sample Problem
3. Using the same problem in number 1.
Ritz Glenn Corporation purchases a machine worth P250,000, the
freight cost is P5,000 and a 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 Ritz Glenn Corporation choose to utilize the straight-line
method, find the total depreciation , annual depreciation,
depreciation rate, and the book value after 3 years. Prepare a
depreciation schedule for its useful life.
Accelerated Depreciation Method
b. Declining Balance Method

Declining balance method is the second type of
accelerated depreciation in business. This is similar to
sum-of-the-years’ digit method that the large depreciation
amount will be allocated at the beginning of the useful-
life and decrease for each succeeding years.
Sample Problem
4. JVRG company purchase 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
the depreciation schedule.
Declining Balance Method
Double Declining Balance Method

Using the declining balance method, the process
is just the same in straight-line declining-balance
method. The only difference is to multiply the SLR
by 2 to get the declining balance.
Sample Problem
5. HG Merchandising purchase a second hand jeep

for delivering their merchandize worth P200,000
with an estimated trade-in value of P16,000 after 5
years. Find the annual depreciation using the
double-declining balance method and construct a
depreciation schedule.

Depreciation: Mathematics of Investment

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Depreciation

Useful life refers to the length of time an asset expected to

b. Declining Balance Method

4. JVRG company purchase 10 computer units at a

Double Declining Balance Method

5. HG Merchandising purchase a second hand jeep

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