DEPRECIATION

Prepared by:

NEMSU
WMSU Engr. Alberto E. Lastimado Jr.
Faculty/Instructor I
Department of Mechanical Engineering
College of Engineering - NEMSU

NORTH EASTERN
WESTERNMINDANAO STATE UNIVERSITY
MINDANAO STATE UNIVERSITY
 Definition of Terms
➢ Depreciation – it is the decrease in the value of a fixed
asset, or the value of physical property, with the
passage of time.
➢ Value – is the present worth of all the future profits that
are to be received through the ownership of a particular
property.
➢ Market Value of a Property – is the amount, which a
willing buyer will pay to a willing seller for the property
where each has equal advantage and is under no
compulsion to buy and sell.
 Definition of Terms
➢ Utility or Use Value of Property – is what the property is
worth to the owner as an operating unit.
➢ Fair Value – is the value which is usually determined by the
disinterested third party in order to established a price that
is fair to both seller and buyer.
➢ Book Value – is the worth of the property as shown in the
accounting records of an enterprise. It is sometimes called
as depreciated book value.
➢ Salvage or Resale Value – is the price that can be
obtained from the property after it has been used. Salvage
Year is the year when scrap value is equal to book value.
➢ Scrap Value or Junk Value – is the price that can be
recovered if an asset is disposed as a junk.
 Purposes of Depreciation

1. To provide for the recovery of capital

which has been invested in physical
property.
2. To enable the cost of depreciation to be
charged to the cost of producing
products or services that results from
the use of property.
 Causes of Depreciation
➢ Physical Depreciation – it is due to wear
and tear of the asset.
➢ Functional Depreciation – it is due to
the obsolescence of the asset.
➢ Depletion – refers to the decrease in the
value of a property due to the gradual
extraction of its contents.
➢ Monetary Depreciation – depreciation
due to changes in price level.
 Physical and Economic Life

➢ Physical Life of a Property – is the length of

time during which it is capable of performing
the function for which it was designed and
manufactured.
➢ Economic Life or Useful Life – is the length
of time during which the property may be
operated at a profit.
 Methods Used to
Determine Depreciation

1. Straight Line Method

2. Declining Balance Method
3. Double Declining Balance Method
4. Sum-of-Years’ Digit Method
5. Sinking Fund Method
6. Hour Output Method and Service Output
Method
 Straight Line Method
The straight line method is the simplest way in
computing for depreciation. In this method, the
depreciation each year is constant and the interest
rate is being neglected.

Where:
L = useful life of the property in years
Co − 𝑪𝑳 Co = the original cost
𝐝=
𝑳 𝑪𝑳 = the value at the end of the life, the
scrap value (including gain or loss due to
n(Co − 𝑪𝑳 ) removal)
𝑫𝒏 =
𝑳 d = annual cost of depreciation
𝑫𝒏 = depreciation after n years
𝑪𝒏 = Co- 𝑫𝒏 𝑪𝒏 = the book value at the end of n years
 Sample Problems
on Straight Line Method
1. An electronic balance costs P90,000 and has an estimated salvage
value of P80,000 at the end of its 10 years life time. What would be
the book value after three years, using the straight line method in
solving for the depreciation?
1. A tax and duty free importation of a 30-horsepower sand
mill for paint manufacturing costs P360,000, CIF Manila.
Bank charges, arrester and brokerage cost P5,000.
Foundation and installation costs were P25,000. Other
incidental expenses amount to P20,000. Salvage value of
the mill is estimated to be P60,000 after 20 years. Find the
appraisal value of the mill using straight-line depreciation
at the end of
a.) 10 years,
b.) 15 years
 Sinking Fund Method
Sinking fund method presents the idea of annuity in
computing for the depreciation. The interest rate for the
worth of money is being considered so as to have the
depreciable value.

Co − 𝑪𝑳
𝐝= )
𝑭/𝑨, 𝒊%, 𝒏 𝑫𝒏 = 𝐝(𝐅/𝐀, 𝐢%, 𝐧)

𝑪𝒏 = Co- 𝑫𝒏
 Sample Problem
on Sinking Fund Method
1. A broadcasting corporation purchased an equipment
for P53,000 and paid P1,500 for freight and delivery
charges to the job site. The equipment has a normal
life of 10 years with a trade-in value of P5,000 against
the purchase of a new equipment at the end of the
life.
(a) Determine the annual depreciation cost by the
straight line method.
(b) Determine the annual depreciation cost by the
sinking fund method. Assume interest at 6-12%
compounded annually.
2. Power to a remote transmitting station is provided by a
Diesel-generator unit. The original cost of the unit is
P65,000. It costs P2,000 to ship the unit to the job site. An
additional cost of P3,000 was incurred for installation.

(a) Determine the annual depreciation cost by the

sinking fund method, if the unit has an expected life of 10
years. The salvage value of the unit at the end of its life
was estimated at P5000.
(b) Determine the annual depreciation cost by the
sinking fund method. Assume that the annual charge for
depreciation was deposited in a fund drawing compound
interest at the rate of 5%.
 Declining Balance Method or
Reducing Balance Method
In this method, the net book value at the end of each
period can be simply computed by multiplying the original
market price by a fix percentage repeatedly until it
reaches the salvage value.

𝐝𝒏 = Co(𝟏 − 𝐤)𝐧−𝟏 𝑲 𝑪𝑳 = Co(𝟏 − 𝐤)𝑳

𝐧 𝑪𝒏 𝐋 𝑪𝑳
𝑪𝒏 = Co(𝟏 − 𝐤)𝒏 𝐤 = 𝟏−
Co
=𝟏−
Co

Where:
k = depreciation factor or rate
Year Book value at Depreciation Book value at the end of
beginning of during the year
year year
1 Co d1 = 𝑘Co C1 = Co-d1 = Co(1-k)
2 Co(1-k) d2 = 𝑘C1 C2 = C1-d2 = Co(𝟏 − 𝐤)𝟐
3 Co(𝟏 − 𝐤)𝟐 d3 = 𝑘C2 C3 = C2-d3 = Co(𝟏 − 𝐤)𝟑
….. …. …. ….
n Co(𝟏 − 𝐤)𝒏−𝟏 d𝑛 = 𝑘Cn-1 Cn = Cn-1-d𝑛 = Co(𝟏 − 𝐤)𝒏
….. …. …. ….
L Co(𝟏 − 𝐤)𝑳−𝟏 d𝐿 = 𝑘CL−1 CL = CL−1-d𝐿 = Co(𝟏 − 𝐤)𝑳
 Sample Problems on
Declining Balance Method
1. A certain type of machine loses 10% of its value each year. The
machine costs P2000 originally. Make out a schedule showing
the yearly depreciation, the total depreciation and the book
value at the end of each year for 5 years.
1. An industrial plant bought a generator set for 90,000. Other
expenses including installation amounted to 10,000. The generator
set is to have a life of 17 years with a salvage value at the end of life
of 5,000. Determine the depreciation charge during the 13th year
and the book value at the end of 13 years by the declining balance
method.
 Double Declining
Balance Method
This is the same as declining balance method except that
k is replaced by 2/n.
𝟐
𝐤=
𝑳

𝟐 𝐧−𝟏 𝟐
𝐝𝒏 = Co(𝟏 − ) 𝑲 𝑪𝑳 = Co(𝟏 − )𝑳
𝑳 𝑳

𝟐 𝒏
𝑪𝒏 = Co(𝟏 − )
𝑳
 Sample Problems on
Double Declining Balance Method
1. An industrial plant bought a generator set for 90,000. Other
expenses including installation amounted to 10,000. The
generator set is to have a life of 17 years with a salvage
value at the end of life of 5,000. Determine the
depreciation charge during the 13th year and the book
value at the end of 13 years by the double declining
balance method.
1. Determine the rate of depreciation, the total depreciation up
to the end of the 8th year and the book value at the end of 8
years for an asset that costs P15,000 new and has an
estimated scrap value of P2000 at the end of 10 years by
(a) the declining balance method
(b) the double declining balance method.
 Sum-of-Years’ Digit Method
This method uses the year’s digit (in reverse order) in
computing for the depreciation.
Let
𝑑𝑛 = depreciation charge during the nth year

𝑑𝑛 = (depreciation factor)(total depreciation)

𝑟𝑒𝑣𝑒𝑟𝑠𝑒 𝑑𝑖𝑔𝑖𝑡
𝑑𝑛 = 𝑠𝑢𝑚 𝑜𝑓 𝑑𝑖𝑔𝑖𝑡𝑠 (Co - 𝑪𝑳 )
 Sample Problem on
Sum of Years’ Digit Method
1. A structure costs P12,000 new. It is estimated to have
a life of 5 years with salvage value at the end of life of
P1,000. Determine the book value at the end of each
year of life.
 Service Output method
This methods assumes that the total depreciation that has taken
place is directly proportional to the quantity of output of the property
up to that time. This method has the advantage of making the unit
cost of depreciation constant and giving low depreciation expense
during periods of low production.
Let
T = total units of output up to the end of life

𝑄𝑛 = total number of units of output during the nth year

Co-CL
Depreciation per unit of output =
𝑇

Co−CL
𝐝𝒏 = (𝑄𝑛 )
𝑻
 Sample Problems on
Service Output Method
1. A Television Company purchased machinery for P100,000
on July 1, 1979. It is estimated that it will have a useful line
of 10 years; scrap value of P4,000, production of
P400,000 units and working hours of 120,000.
The company uses the machinery for 14,000 hours in
1979 and 18,000 hours in 1980. The machinery produces
36,000 units in 1979 and 44,000 units in 1980. Compute the
depreciation for 1980 using each method given below:
a. Straight line
b. Working hours
c. Output Method
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