3.

Decreasing Charge or accelerated or diminishing Year Particular Dep’n AccDep’n Carrying

balance methods amount
acquisition 430k
- Provides higher depreciation in earlier years and lower 1st
4/10x400k 160k 160k 270k
depreciation in the later years which results in
2nd 3/10x400k 120k 280k 150k
DECREASING charge over the useful life.
3rd 2/10x400k 80k 360k 70k
Rationale: 4th 1/10x400k 40k 400k 30k
400K
-New assets are capable of PRODUCING MORE
REVENUE in the earlier years than in later years
FRACTIONAL DEPRECIATION- SYD
 Sum of years’ digits
Cost of asset 300k
*Multiplying the depreciable amount by a series of
Residual value None
fraction ( ) Date of acquisition April 1,2019
Estimated useful life 3yrs
Example, 4 years: 1st year

SYD: (4+3+2+1=10) Depreciation for each year: SYD = 6 (3+2+1)

If the useful life is a large number use this formula: April 1, 2019-March 31,2020 (3/6 x 300k) 150k
SYD=life April 1, 2020-March 31,2021 (2/6 x 300k) 100k
April 1, 2021-March 31,2022 (1/6 x 300k) 50k
Example,25 yrs: SYD: )= 325 300k

1st year=
Computation of dep’n- calendar period
Sum of half years’ digits
Dep’n 2019 150k x 9/12 (april-dec31 2019) 112,500
Useful life: 2 ½ years (multiply the useful life by 2 to
get the useful life of the asset in half years) Dep’n 2020 150k x 3/12 (jan1-mar31,2020) 37500
100k x 9/12 (apr1-dec31,2020) 75K
2 ½ x 2= 5 112,500
First year: 5/15 & 4/15 (pertaining to six months)
Dep’n 2021 100k x 3/12 (jan1-mar 31,2021) 25k
Second year: 3/13 & 2/15 50k x 9/12 (apr1-dec31 2021) 37500
62500
Third year: 1/15
Dep’n 2022 50k x 3/12 (jan1-mar 31 2022) 12500
PROBLEM:
=300K

 DOUBLE DECLINING BALANCE METHOD

Machinery 430K
- The straight line rate is simply DOUBLED to get
Residual Value 40K
the fixed rate
Estimated useful life 4 yrs
- AKA “200% declining balance method”
- In this method the RESIDUAL VALUE IS
SYD= 4(( ) IGNORED
EXAMPLE:  b. Retirement Method
- NO DEPRECIATION is recorded until the asset is
Cost of asset 500k RETIRED
Date of Acquisition January 1, 2019
- Amount of depreciation is equal to the
Residual value 50k (IGNORED)
ORIGINAL COST OF THE ASSET – SALVAGE
Estimated useful life 5yrs
Straight line rate (100%/5) 20% PROCEEDS
Double declining rate (20% x 2) 40%  c. Replacement Method
- NO DEPRECIATION is recorded until the asset is
RETIRED AND REPLACE
Year Particular Dep’n AccDep’n Carrying - Amount of depreciation is equal to
amount
REPLACEMENT COST OF THE ASSET RETIRED –
acquisition 500k
SALVAGE PROCEEDS
1st 40% x500k 200k 200k 300k
2nd 40% x300k 120k 320k 180k *Both method is suitable when a large number of
3rd 40% x180k 72k 392k 108k
similar items are employed and constantly retired and
4th 40% x108k 43,200 435,200 64,800
replaced
5th 64800-50K 14800 450K 50K
450K CHANGE in USEFUL LIFE
150% declining balance 1st – compute for the carrying amount before the
- Method is the same with double declining CHANGE
balance except the fixed rate is 150% of straight 2nd – Use the amount to compute for the depreciation
line rate.
*PAST DEPRECIATION is not CORRECTED
4. OTHER METHODS
CHAPTER 32: DEPLETION
 Inventory Method
- Merely estimating the value of the asset at the IFRS 6- to specify the financial reporting for exploration
end of the period. and evaluation of mineral resources
- Difference between the BALANCE of the asset
Exploration and evaluation expenditures DO NOT
account and the value at the end of the year is
include the following:
RECOGNIZED as depreciation of the year.
- Applied generally to assets which are small and a) BEFORE the entity has obtained the RIGHT to
inexpensive explore a specific area
b) AFTER the technical feasibility and commercial
Example:
viability of extracting a mineral resource are
Tools account, Jan1 100k DEMONSTRABLE. (this pertains to
Acquisition, at cost 90k developmental expenditures)
Sale of used tools at residual value 2k
Inventory 12/31, at cost 125k WASTING ASSET- physically consumed and once
consumed it cannot be replaced anymore. These are
natural resources
Depreciation
COST OF WASTING ASSET
Balance of tools account (100k+90k-2K) 188K
Inventory of tools- 12/31 (125K) a) Acquisition Cost- price paid to obtain the
Depreciation 63K property containing natural resources
 b) Exploration Cost- expenditure incurred BEFORE
technical feasibility and commercial viability of
extracting a mineral resource are
demonstrated.(acquisition of right to explore,
geological study, exploratory drilling etc.)
*Another method of depletion is STRAIGHT LINE
METHOD but it is not generally favored because it is
difficult to estimate the useful life of the wasting asset
REVISION OF DEPLETION RATE

2 METHODS for EXPLORATION COST =

- Successful effort method *SAME EXAMPLE

*Exploration cost related to the DISCOVERY of
commercially PRODUCIBLE natural resources is 2nd year:
CAPITALIZED while exploration cost related to Additional dev. Cost: 3,750,000
Estimated recovarable 1,250,000
DRY HOLES or UNSUCCESSFUL DISCOVERY is
Deposits beg. 2nd year
EXPENSED in the period INCURRED. Units extracted 300K
- Full Cost Method
*ALL ALLOCATION COST whether successful or Original Cost 10M
unsuccessful are CAPITALIZED Additional dev cost 3,750,000
Total 13,750,000
c) Development Cost- cost incurred to exploit or Acc Depletion (2.5M)
Remaing depletable Amt 11,250,000
extract the natural res ource
d) Restoration Cost- cost to be incurred in order to New Depletion Rate per unit (11,250,000/1,250,000)
bring the property to its original condition. =P9
- CAPITALIZED ONLY when the entity INCURS THE
OBLIGATION when the asset is acquired. Depletion (300k x 9) 2.7M
Acc Depletion 2.7M
DEPLETION- The removal or exhaustion of a natural
resource. A systematic allocation of the depletable
amount of a wasting asset over the period.
DEPRECIATION OF MINING PROPERTY
METHOD (output or production method)
- Tangible equipment such as transportation
Depletion rate per unit= equipment, heavy machinery, mine shaft etc.
shall be reported in SEPARATE accounts and
Depletion for the period =Depletion rate per unit x units depreciated under normal dep’n policies
extracted during the year - The depreciation is based on USEFUL LIFE of the
equipment or USEFUL LIFE OF THE WASTING
Example: ASSET, WHICHEVER IS SHORTER.
- If useful life of asset is shorter (straight line)
Total cost of wasting asset 10M
Estimated resource deposit 1M - If useful life of wasting asset is shorter (output
Units extracted in the 1st year 250K method)
- MOVABLE AND CAN BE USED IN FUTURE
Depletion rate per unit = = P10 EXTRACTIVE PROJECT mining equipment is
Depletion for the period = 250K x 10 = 2.5M depreciated using STRAIGHT LINE METHOD.

Depletion 2.5M
Acc Depletion 2.5M
EXAMPLE:

Life of equipment is SHORTER Life of wasting asset is Depreciation rate per unit (7,111,112/400K)= 17.78
SHORTER
Heavy Equipment 9M 9M *60K units are extracted on the third year
Useful life (equipment) 10yrs 10yrs
resource deposit 450K 450K Depreciation for 3rd year (60K x 17.78) = 1,066,800
Units extracted 30K 50K
each year TRUST FUND DOCTRINE

- The share capital of a corporation is conceived

450k/30k= 15 yrs (life of wasting 450k/50K= 9yrs (life of as a trust fund for the PROTECTION of creditors.
asset) wasting asset) - Corporation can pay dividends to shareholders
but LIMITED ONLY TO THE BALANCE OF
*The useful ife of equipment is *the useful life of RETAINED EARNINGS.
shorter so we will use the wasting asset is shorter - Corporation CANNOT pay dividends if it has
straight line so we will use the DEFICIT
output method)
9M/10yrs= 900K (depreciation) WASTING ASSET DOCTRINE
Depreciation/unit
9M/450K= P20 - Wasting asset corporation can LEGALLY return
capital
50KxP20= 1M (dep’n)
- Wasting asset corporation can pay dividend to
the extent of RETAINED EARNINGS and
SHUTDOWN
ACCUMULATED DEPLETION.
- When output method is used in depreciating
Example:
mining property, in the event of shutdown, such
method CANNOT BE USED Wasting asset at cost 1M
- If output method is used, in the year of Acc Depletion 100K
shutdown the carrying amount shall be Retained earnings 200K
depreciated using STRAIGHT LINE.
*maximum amount declared as dividend = 300K
In the preceding example (output method used) 100K acc depletion + 200K retained earnings
Equipment, at cost 9M
Acc depreciation (1M) Retained earnings 200K
Carrying amount 8M Capital liquidated 100K
Div Payable 300K
Depreciation (2ndyr)
(8M/9yrs) 888,888

When operation is resumed, the depreciation is

again computed following the OUTPUT METHOD

Equipment at cost 9M
Acc Dep’n (1M+888,888) (1,888,888)
Carrying Amt (Beg of 3rdyr) 7,111,112

Original estimate of deposit 450K units

Less: Extracted in 1st year 50K units
Remaining estimate of deposit 400K units