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Depreciation: Depreciation Value Purpose of Depreciation Types of Depreciation

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Marcial Jr. Militante
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78 views23 pages

Depreciation: Depreciation Value Purpose of Depreciation Types of Depreciation

presentation

Uploaded by

Marcial Jr. Militante
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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DEPRECIATION

 Depreciation  Purpose of Depreciation


 Value  Types of Depreciation
 Market Value  Normal
 Utility or Use Value  Physical
(Useful Value)  Functional
 Fair Value  Depreciation due to depletion
 Book Value  Physical and Economic
 Salvage or Resale Life
Value
 Scrap Value
DEPRECIATION

Depreciable Property
1. Be used in business or held for the production of
income;
2. Have a definite service life, which must be longer
than one year; and
3. Be something that wears out, decays, gets used up,
becomes obsolete, or loses value from natural
causes.
DEPRECIATION
Properties that depreciates
 Buildings

 Machinery

 Equipment

 Vehicles

 Intangible properties (copyrights and patents; customer subscription

lists; franchises)
 Driveways

 Parking lots

 Landscaping

 Automobile for business purpose


DEPRECIATION

Cost Basis
 Includes the actual cost of an asset and all incidental

expenses, such as freight, site preparation and


installation.
 Total cost, rather than the cost of the asset only.

 As asset’s cost basis is used in figuring depreciation


deductions and in calculating the gain or loss to the firm
if the asset is ever sold or salvaged.
DEPRECIATION

Cost Basis
1. Raymond Stamping Services purchased a stamping
machine prices at $21,500. The firm had to pay a sales
tax of $1,200 on this purchase. Raymond also paid the
inbound transportation charges of $525 on the new
machine, as well as a labor cost of $1,350 to install the
machine in the factory. In addition, Raymond has to
prepare the site before installation at a cost of $2,125.
Determine the cost basis for the new machine for
depreciation purposes.
DEPRECIATION

Cost Basis

Cost of a new stamping machine $22,700


Freight 525
Installation labor 1,350
Site preparation 2,125
Cost of machine (cost basis) $26,700
Ways of DEPRECIATION

1. Book depreciation method


a. Straight Line Method
b. Sinking Fund Method
c. Declining Balance Method
d. Double Declining Balance Method
e. Sum-of-the-Year’s Digits Method
f. Units-of-Production
2. Tax depreciation method
a. MACRS Depreciation for Personal Property
b. MACRS Depreciation for Real Property
THE NATIONAL INTERNAL REVENUE
CODEOF THE PHILIPPINES
[Tax Reform Act of 1997]
Republic Act No. 8424
Tax Reform Act of 1997

TITLE II - TAX ON INCOME 


CHAPTER VII - ALLOWABLE DEDUCTIONS

SEC. 34. Deductions from Gross


Income
Tax Reform Act of 1997

(F) Depreciation. –
(1) General Rule. - There shall be allowed as a depreciation
deduction a reasonable allowance for the exhaustion, wear and tear
(including reasonable allowance for obsolescence) of property used in
the trade or business. In the case of property held by one person for
life with remainder to another person, the deduction shall be
computed as if the life tenant were the absolute owner of the property
and shall be allowed to the life tenant. In the case of property held in
trust, the allowable deduction shall be apportioned between the
income beneficiaries and the trustees in accordance with the pertinent
provisions of the instrument creating the trust, or in the absence of
such provisions, on the basis of the trust income allowable to each.
Tax Reform Act of 1997

(2) Use of Certain Methods and Rates. - The term "reasonable


allowance" as used in the preceding paragraph shall include, but not
limited to, an allowance computed in accordance with rules and
regulations prescribed by the Secretary of Finance, upon
recommendation of the Commissioner, under any of the following
methods:(a) The straight-line method; 
(b) Declining-balance method, using a rate not exceeding twice the
rate which would have been used had the annual allowance been
computed under the method described in Subsection (F) (1); 
(c) The sum-of-the-years-digit method; and 
(d) any other method which may be prescribed by the Secretary of
Finance upon recommendation of the Commissioner.
DEPRECIATION

 L : useful life of the property in years


 Co : original cost / first cost
 CL : value at the end of L / scrap value / salvage
value
 d : annual cost of depreciation / depreciation per
year
 Cn : book value at the end of n years
 Dn : depreciation up to n years / total depreciation
after n years
DEPRECIATION METHODS

1. Straight Line Method


2. Sinking Fund Method (Sinking Fund Formula)
3. Declining Balance Method
4. Double Declining Balance Method
5. Sum-of-the-Year’s Digits Method
6. Units-of-Production
DEPRECIATION METHODS

 1. Straight Line Method


DEPRECIATION

1. A man bought an equipment which cost


P524,000.00. Freight and installation expenses
cost him P31,000.00. If the life of the equipment
is 15 years with an estimated salvage value of
P120,000.00, find its book value after 8 years.
DEPRECIATION

2. A machine costs Php 8,000.00 and an estimated


life of 10 years with a salvage value of Php 500.00.
What is its book value after 8 years using straight
line method?
3. Compute the annual depreciation of an automobile
with the following data:
Cost basis of the asset = $10,000;
Useful life = 5 years;
Estimated salvage value = $2,000.
DEPRECIATION METHODS

 1.Straight Line Method


2. Sinking Fund Method
DEPRECIATION METHODS

 3.Declining Balance Method (Matheson Formula)

;
DEPRECIATION METHODS

 4. Double Declining Balance Method


DEPRECIATION METHODS

 5. Sum-of-the-Years’-Digits (SYD) Method


DEPRECIATION

1. An equipment costing P250,000 has an estimated life of 15


years with a book value of P30,000 at the end of the period.
Compute the depreciation charge and its book value after
10 years using sinking fund method at 4% interest rate.
2. An industrial plant bought a generator set for P90,000.
Other expenses including installation amounted to P10,000.
The generator set is to have a life of 17 years with a salvage
value at the end of life of P5,000. Determine the
depreciation charge during the 13th year and the book value
at the end of 13 years by the
a) declining balance method
DEPRECIATION

1. A telephone company purchased a microwave radio equipment for


P6,000,000. Freight and installation charges amounted to 3% of
the purchase price. If the equipment shall be depreciated over a
period of 8 years with a salvage value of 5%, determine the
following:
a. Annual depreciation charge using the straight line method.
b. Depreciation charge and total depreciation during the fifth year
using the sum-of-the-years-digit method.
2. An asset costing P50,000 has a life expectancy of 6 years and an
estimated salvage value of P8,000. Calculate the depreciation
charge and the book value at the end of the fourth period using
fixed-percentage method.

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