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    Example, Straight Line Depreciation

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    kinnera m
    The document discusses various depreciation methods used to allocate the cost of tangible assets over their useful lives. It describes straight-line, declining balance, and sum-of-the-years'-digits depreciation methods. For each method, it provides the calculation formula and examples showing the annual depreciation expense calculation for assets purchased over multiple years.

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    Example, Straight Line Depreciation

    Uploaded by

    kinnera m
    44 views3 pages
    The document discusses various depreciation methods used to allocate the cost of tangible assets over their useful lives. It describes straight-line, declining balance, and sum-of-the-years'-digits depreciation methods. For each method, it provides the calculation formula and examples showing the annual depreciation expense calculation for assets purchased over multiple years.

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    GAAP

    Original Title

    Gaap

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    The document discusses various depreciation methods used to allocate the cost of tangible assets over their useful lives. It describes straight-line, declining balance, and sum-of-the-years'-digits depreciation methods. For each method, it provides the calculation formula and examples showing the annual depreciation expense calculation for assets purchased over multiple years.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    44 views3 pages

    Example, Straight Line Depreciation

    Uploaded by

    kinnera m
    The document discusses various depreciation methods used to allocate the cost of tangible assets over their useful lives. It describes straight-line, declining balance, and sum-of-the-years'-digits depreciation methods. For each method, it provides the calculation formula and examples showing the annual depreciation expense calculation for assets purchased over multiple years.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 3

    GAAP

    Depreciation is a systematic and rational process of distributing the cost of tangible assets over the life of assets.
    Depreciation is a process of allocation.
    Cost to be allocated = acquisition cot - salvage value
    Allocated over the estimated useful life of assets.
    Allocation method should be systematic and rational.

    Depreciation Methods

    Depreciation methods based on time


    Straight line method
    Declining balance method
    Sum-of-the-years'-digits method

    Depreciation based on use (activity)

    Straight Line Depreciation Method

    Depreciation = (Cost - Residual value) / Useful life

    [Example, Straight line depreciation]

    On April 1, 2011, Company A purchased an equipment at the cost of $140,000. This equipment is estimated to have 5 year useful life. At the
    end of the 5th year, the salvage value (residual value) will be $20,000. Company A recognizes depreciation to the nearest whole month. Calculate
    the depreciation expenses for 2011, 2012 and 2013 using straight line depreciation method.

    Depreciation for 2011


    = ($140,000 - $20,000) x 1/5 x 9/12 = $18,000

    Depreciation for 2012


    = ($140,000 - $20,000) x 1/5 x 12/12 = $24,000

    Depreciation for 2013


    = ($140,000 - $20,000) x 1/5 x 12/12 = $24,000

    Declining Balance Depreciation Method

    Depreciation = Book value x Depreciation rate


    Book value = Cost - Accumulated depreciation

    Depreciation rate for double declining balance method


    = Straight line depreciation rate x 200%

    Depreciation rate for 150% declining balance method


    = Straight line depreciation rate x 150%

    [Example, Double declining balance depreciation]

    On April 1, 2011, Company A purchased an equipment at the cost of $140,000. This equipment is estimated to have 5 year useful life. At the
    end of the 5th year, the salvage value (residual value) will be $20,000. Company A recognizes depreciation to the nearest whole month. Calculate
    the depreciation expenses for 2011, 2012 and 2013 using double declining balance depreciation method.

    Useful life = 5 years --> Straight line depreciation rate = 1/5 = 20% per year

    Depreciation rate for double declining balance method


    = 20% x 200% = 20% x 2 = 40% per year

    Depreciation for 2011


    = $140,000 x 40% x 9/12 = $42,000

    Depreciation for 2012


    = ($140,000 - $42,000) x 40% x 12/12 = $39,200

    Depreciation for 2013


    = ($140,000 - $42,000 - $39,200) x 40% x 12/12 = $23,520

    Double Declining Balance Depreciation Method

    Book Value
    Year Depreciation Rate Depreciation Expense Book Value at the year-end
    at the beginning
    2011 $140,000 40% $42,000 (*1) $98,000
    2012 $98,000 40% $39,200 (*2) $58,800
    2013 $58,800 40% $23,520 (*3) $35,280
    2014 $35,280 40% $14,112 (*4) $21,168
    2015 $21,168 40% $1,168 (*5) $20,000

    (*1) $140,000 x 40% x 9/12 = $42,000


    (*2) $98,000 x 40% x 12/12 = $39,200
    (*3) $58,800 x 40% x 12/12 = $23,520
    (*4) $35,280 x 40% x 12/12 = $14,112
    (*5) $21,168 x 40% x 12/12 = $8,467

    --> Depreciation for 2015 is $1,168 to keep book value same as salvage value.
    --> $21,168 - $20,000 = $1,168 (At this point, depreciation stops.)

    [Example, 150% declining balance depreciation]

    On April 1, 2011, Company A purchased an equipment at the cost of $140,000. This equipment is estimated to have 5 year useful life. At the
    end of the 5th year, the salvage value (residual value) will be $20,000. Company A recognizes depreciation to the nearest whole month. Calculate
    the depreciation expenses for 2011, 2012 and 2013 using double declining balance depreciation method.

    Useful life = 5 years --> Straight line depreciation rate = 1/5 = 20% per year

    Depreciation rate for double declining balance method


    = 20% x 150% = 20% x 1.5 = 30% per year

    Depreciation for 2011


    = $140,000 x 30% x 9/12 = $31,500

    Depreciation for 2012


    = ($140,000 - $31,500) x 30% x 12/12 = $32,550

    Depreciation for 2013


    = ($140,000 - $31,500 - $32,550) x 30% x 12/12 = $22,785

    150% Declining Balance Depreciation Method

    Book Value
    Year Depreciation Rate Depreciation Expense Book Value at the year-end
    at the beginning
    2011 $140,000 30% $31,500 (*1) $108,500
    2012 $108,500 30% $32,550 (*2) $75,950
    2013 $75.950 30% $22,785 (*3) $53,165
    2014 $53,165 30% $15,950 (*4) $37,216
    2015 $37,216 30% $11,165 (*5) $26,051
    2016 $26,051 30% $6,051 (*6) $20,000

    (*1) $140,000 x 30% x 9/12 = $31,500


    (*2) $108,500 x 30% x 12/12 = $32,550
    (*3) $75,950 x 30% x 12/12 = $22,785
    (*4) $53,165 x 30% x 12/12 = $15,950
    (*5) $37,216 x 30% x 12/12 = $11,165
    (*6) $26,051 x 30% x 12/12 = $7,815

    --> Depreciation for 2016 is $6,051 to keep book value same as salvage value.
    --> $26,051 - $20,000 = $6,051 (At this point, depreciation stops.)

    Sum-of-the-years'-digits method

    Depreciation expense = (Cost - Salvage value) x Fraction


    Fraction for the first year = n / (1+2+3+...+ n)
    Fraction for the second year = (n-1) / (1+2+3+...+ n)
    Fraction for the third year = (n-2) / (1+2+3+...+ n)
    ...
    Fraction for the last year = 1 / (1+2+3+...+ n)

    n represents the number of years for useful life.

    [Example, Sum-of-the-years-digits method]

    Company A purchased the following asset on January 1, 2011.


    What is the amount of depreciation expense for the year ended December 31, 2011?
    Acquisition cost of the asset --> $100,000
    Useful life of the asset --> 5 years
    Residual value (or salvage value) at the end of useful life --> $10,000
    Depreciation method --> sum-of-the-years'-digits method

    Calculation of depreciation expense


    Sum of the years' digits = 1+2+3+4+5 = 15
    Depreciation for 2011 = ($100,000 - $10,000) x 5/15 = $30,000
    Depreciation for 2012 = ($100,000 - $10,000) x 4/15 = $24,000
    Depreciation for 2013 = ($100,000 - $10,000) x 3/15 = $18,000
    Depreciation for 2014 = ($100,000 - $10,000) x 2/15 = $12,000
    Depreciation for 2015 = ($100,000 - $10,000) x 1/15 = $6,000

    Sum of the years' digits for n years


    = 1 + 2 + 3 + ...... + (n-1) + n = (n+1) x (n / 2)

    Sum of the years' digits for 500 years


    = 1 + 2 + 3 + ...... + 499 + 500
    = (500 + 1) x (500 / 2) = (501 x 500) / 2 = 125,250

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