Depreciation
Depreciation
Depreciation
DEPRECIATION
Depreciation – is the reduction or fall in the value of an asset, equipment or
physical property during the course of its working life. Excluded from this
definition are properties whose values increase with time like, antiques,
paintings, land, rare coins, rare stamps, etc.
𝐶0 − 𝐶𝑛
𝑑= ; 𝐷 𝑚=𝑚𝑑 ; 𝐶 𝑚= 𝐶 0 − 𝐷𝑚
𝑛
EXAMPLE
A sawmill company purchases a new automated log planer for $95,000. The
asset is depreciated using a straight-line depreciation over a useful life of 10
years to salvage value of $5,000. the book value at the end of year six is
nearest to ____?
An asset is purchased for $9,000. It’s estimated economic life is 10 years after
which it will be sold for $1,000. find the total depreciation in the first 5 years
using straight line method.
SINKING – FUND METHOD OF COMPUTING
DEPRECIATION COST
Sinking – fund method – is a technique for depreciating an asset while generating enough
money to replace it at the end of its useful life.
Let: d = periodic deposits equal to annual depreciation
NOTE: In this method of depreciation, it is
assumed that a sinking fund is established in
which funds will accumulate for replacement
purposes.
Note: this method is based on the assumption that assets are generally more
productive when they are new and their productivity decreases as they become
old.
𝐷𝑚 =𝑡𝑜𝑡𝑎𝑙 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝑎𝑓𝑡𝑒𝑟 𝑚 𝑦𝑒𝑎𝑟𝑠
𝐶 𝑚 =𝐵𝑜𝑜𝑘𝑣𝑎𝑙𝑢𝑒 ( 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑝𝑟𝑜𝑝𝑒𝑟𝑡𝑦 𝑎𝑓𝑡𝑒𝑟 𝑚 𝑦𝑒𝑎𝑟𝑠)
𝐷𝑚 = 𝑑1 + 𝑑 2+ 𝑑 3 +…+ 𝑑 𝑚
𝐶 𝑚 =𝐶 0 −+ 𝐷𝑚
1
𝑆𝑌𝐷 =1+2+ 3+ 4+5 +…+ 𝑛→ 𝑆𝑌𝐷 = ( 𝑛) (𝑛+1)
2
Depreciation for year 1 Example:
A company purchased an asset for $10,000 and plans to keep it for 20 years. If
the salvage value is zero at the end of the 20th year, determine the depreciation
charge in the 3rd year using SYD.
An asset is purchased for $9,000. It’s estimated life is 10 years, after which it
will be sold for $1,000. Find the book value during the 3rd year if sum-of-year’s
digit (SOYD) depreciation is used.
[ ] [ ]
𝑛+ (𝑛 − 1 )+ ( 𝑛− 2 ) 10 +9+ 8
𝐷 3= ( 𝐶 0 − 𝐶 𝑛 ) =$ 9,000 − $ 1,000 = $ 3,927.27
𝑆𝑌𝐷 1
( 10 ) ( 10+1 )
2