DEPRECIATION

1. A radio service panel truck initially costs P56,000 . Its resale value at the end of the fifth year
is estimated at P15,000 .

(a) Determine the annual depreciation cost by the Straight-Line Method.

(b) By means of the Declining Balance Method, determine the yearly depreciation charge for
the first and second years.

CO =₱ 56,000 ; Cn=P 15,000 ; n=5 yers .

(a) Straight-Line Method:

m
er as
P 56,000−P 15,000
d= =P 8,200
5

co
eH w
o.
(b) Declining Balance (Matheson) Method:
rs e
n Cn 15,000
k =1−
√ =1− 5
√
ou urc
=0.2316
CO 56,000
o

Year Depreciation Book Value

aC s

1 0.2316 ( P56,000 )=P 12,969.60 P 43,030.40

v i y re

2 0.2316 ( P 43,030.40 )=P 9,965.84 P33,064.56

For the first year, depreciation charge = P12,969.60

For the second year, depreciation charge = P 9,965.84
ed d
ar stu

2. An engineering firm purchased 12 years ago, a heavy planer for P50,000 . As the life of the
planner was 20 years, a straight-line depreciation reserve has been provided on that basis. Now
the firm wishes to replace the old planer with newly-designed planer possessing several
sh is

advantages. It can sell the old planner for P10,000 . The new machine will cost P70,000
Th

. How much new capital will be required to make the purchase?

Assuming no salvage∨scrap value at the end of 20 years, the annual depreciation charge is
P 50,000
d= =P 2,500
20
D 12=amount ∈the depreciation reserveat theend of 12 years
¿ 12 d=12 ( P 2,500 ) =P 30,000

Selling price of old planer=P 10,000

Total amount available for thenew planer=P 30,000+ P10,000=P 40,000

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 New capital required=P 70,000−P 40,000=P 30,000

3. A certain newly created company installed a 10,000−kw electric generating plant at a cost
of P 430 per kw . The amount of the total cost of the plant was sold to the public in the form
of bonds and were to mature in 20 years. The estimated life of the plant is 25 years. Salvage
value is conservatively set at 5% of the first cost, and interest on the bonds is 4% compounded
annually.
(a) What is the annual payment on the investment?
(b) What is the sinking fund accumulation after 10 years?

SOLUTION:

( a ) . Total cost of the plant ¿ P10,000 ( 430 )=P 4,300

Amount of Bonds sold = P 4,300,000

m
er as
Annual interest on bonds ¿ 0.04 ( P 4,300,000 ) =P 172,000

co
eH w
0.04
Annual depreciation charge ¿ 0.95 ( P 4,300,000 )
(( )
=P 137,181.45

o.
20
rs e 1+ 0.04 ) −1
ou urc
Note that the plant is depreciated in 20 years, instead of its estimated life of 25 years, because the
bonds mature in 20 years.

Annual Payment on Investment

o
aC s

¿ Interest on bonds+ Depreciation charge

v i y re

= P309,181.45

(b) . D10=total amunt ∈the depreciation fund after 10 years

ed d

( 1+0.04 )10 −1
( )
ar stu

= P137,181.45
0.04

= P1,647,015.19
sh is
Th

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