DEPRECIATION

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.
 BASIC CONCEPTS

BASIC CONCEPTS
 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.
 Salvage Value
refers to the value of an asset at the time it is
taken out of service.
 BASIC CONCEPTS

 Useful Life
refers to the length of time an asset is 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.
 Depreciation Schedule
is a chart showing the depreciation activity of
an asset of each year in its useful life.
 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.
Example: Straight-line Method

Ritz Glenn Corporation purchases a machine

worth ₱250,000, the freight cost is ₱5,000 and the
set up charges amounting to ₱15,000. The
machine is expected to last for 5 years and has a
salvage value of ₱25,000. If Ritz Glenn
Corporation chose to utilize the straight-line
method, find the total cost, total depreciation,
annual depreciation, depreciation rate, and the
book value after 3 years. Prepare a depreciation
schedule for its useful life.
Depreciation Schedule
Straight-line Method

Ritz Glenn Corporation Depreciation Schedule for 5 years

Annual Depreciation Accumulated Depreciation Book Value
YEAR
(AD) (Ad) (BV)

₱270,000
__ __
(original cost)

1 ₱49,000 ₱49,000 ₱221,000

2 ₱49,000 ₱98,000 ₱172,000

3 ₱49,000 ₱147,000 ₱123,000

4 ₱49,000 ₱196,000 ₱74,000

₱25,000
5 ₱49,000 ₱245,000
(salvage value)
 Units-of-Production Method

2. Units-of-Production Method
 The useful life of an asset is not
expressed in terms of year, rather the
useful life is given in terms of units of
production, the total amount of work
performed, or number of hours of
operation. In such case, utilize the Units-
of-Production Method.
Example: Units-of-Production Method

AV company purchases a machine for developing a

new product that will costs ₱10,000 and has an
estimated salvage value of ₱1,000 when the machine
can produce 12,000 units. The distribution of the
number of units produced are as follows: 3,000 units
for the 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 year respectively.
Find the annual depreciation and construct a
depreciation schedule.
Depreciation Schedule Units-of-Production Method

AV Depreciation Schedule for 5 years

Annual Depreciation Accumulated Depreciation Book Value
YEAR
(AD) (Ad) (BV)

₱10,000
__ __
(original cost)

1 ₱2,250 ₱2,250 ₱7,750

2 ₱1,875 ₱4,125 ₱5,875

3 ₱3,000 ₱7,125 ₱2,875

4 ₱1,125 ₱8,250 ₱1,750

₱1,000
5 ₱750 ₱9,000
(salvage value)
3. Accelerated Depreciation
There are two commonly used methods of
accelerated depreciation, the 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.
 Sum-of-the-Years’ Digits Method

a. Sum-of-the-Years’ Digits Method

Using the straight-line method, the total
amount of depreciation will be distributed
equally on the useful life of an asset. In 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
decreases each year at a proportional rate.
Example: Sum-of-the-Years’ Digits Method

Ritz Glenn Corporation purchases a machine

worth ₱250,000, the freight cost is ₱5,000 and the
set up charges amounting to ₱15,000. The
machine is expected to last for 5 years and has a
salvage value of ₱25,000. If Ritz Glenn
Corporation chose to utilize the straight-line
method, find the total cost, total depreciation,
annual depreciation, depreciation rate, and the
book value after 3 years. Prepare a depreciation
schedule for its useful life.
Depreciation Schedule Sum-of-the-Years’ Digits Method

Ritz Glenn Corporation Depreciation Schedule for 5 years

Total Annual Accumulated
Depreciation Book Value
YEAR Depreciation Depreciation Depreciation
Rate (DR) (BV)
(TD) (AD) (Ad)

₱270,000
(Original Cost)

1 ₱245,000 ₱81,666.67 ₱81,666.67 ₱188,333.33

2 ₱245,000 ₱65,333.33 ₱147,000.00 ₱123,000.00

3 ₱245,000 ₱49,000.00 ₱196,000.00 ₱74,000.00

₱32,666.67
4 ₱245,000 ₱228,666.67 ₱41,333.33

₱16,333.33 ₱25,000.00
5 ₱245,000 ₱245,000.00
(Bank Value)
 Declining Balance Method

b. Declining Balance Method

Declining balance method of accelerated
depreciation in business is similar to sum-
of-the-years’ digit method wherein the
large depreciation amount will be allocated
at the beginning of the useful life and
decreases for each succeeding years.
Example: Declining Balance Method

JVRG Company purchases 10 computer

units at a total of ₱350,000. The expected
lifetime of the computer units is 4 years.
The residual value is ₱100,000. Using the
straight-line declining balance method,
find the annual depreciation and construct
the depreciation schedule.
Depreciation Schedule Declining Balance Method

Depreciation Schedule of JVRG Company for 4 years

Total Annual Accumulated
Straight Line Book Value
YEAR Depreciation Depreciation Depreciation
Rate (SLR) (BV)
(TD) (AD) (Ad)

₱350,000
(Original Cost)

1 ₱350,000 25% ₱87,500 ₱87,500 ₱262,500

2 ₱350,000 25% ₱65,625 ₱153,125 ₱196,875

3 ₱350,000 25% ₱49,218.75 ₱202,343.75 ₱147,656.25

₱110,742.19
4 ₱350,000 25% ₱36,914.06 ₱239,257.81
(Bank Value)
 Double-Declining Balance Method

b.2) 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 rate.
Example: Double-Declining Balance Method

HG Merchandising purchases a
secondhand jeep for delivering their
merchandise worth ₱200,000 with an
estimated trade-in value of ₱16,000 after
5 years. Find the annual depreciation
using the double declining balance
method and construct a depreciation
schedule.