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Fixed Assets

2-Depreciation
 After getting {acquired} the asset, we start to use {Depreciate} it over its life, so
we should learn how to calculate depreciation.

Depreciation:
✓ Is the process of allocating the cost of the asset to expense over its useful life in
a rational and systematic manner.

Factors for Calculating Depreciation:

1. The 2. Estimated 3. Estimated

Cost of asset: Salvage Value: Useful Life:
✓ In terms of years
✓ Includes all necessary ✓ Estimate for value of (5 years, 10 years,…..)
expenditures to asset at the end of OR
acquire the asset and useful life . In terms of activity units
make it ready for use (Kilometers, Hours,
Units of output…)

Adjusting Entry for Dep. Expense each year:

Depreciation Expense xx

Accumulated depreciation xx

 Depreciation expense  Accumulated Depreciation

Is an expense and should be Is a Contra Asset account

reported in the Income (has Cr. nature) and should be
statement with operating reported with its related Asset
Expense.
in the Balance Sheet as a
decrease in the asset’s value.
 Depreciation Methods:
✓ We can calculate the annual depreciation using one of the following 2 methods:
1- Straight-line Method (SL)
2- Units of Activity Method.

1. Straight Line Method (SL)

Under this method, Depreciation Exp. is the same each year.

✓ We can calculate it in one step as follows:

Cost – Salvage Value

Annual Depreciation =
Useful Life

✓ OR in Two steps as follows:

Annual Dep. = (Cost – salvage value) x Dep. Rate %

Dep. Rate = 100%

Useful life

 Example {1}:

On January 1, 2020; the company purchased equipment at a cost of $110,000.

Estimated useful life is 5 years, and estimated salvage value is $ 10,000.

Required:

Using the Straight- Line method, calculate the following:

1- Depreciable cost (Value).

2- Annual depreciation expense for each year

Solution
1- Depreciable cost = Cost – Salvage = 110,000 – 10,000= $100,000.
2- Annual depreciation expense (SL method):

110,000−10,000
Annual Dep. Exp.= = $20,000
5 𝑦𝑒𝑎𝑟𝑠
 ✓ OR in Two steps as follows:
𝟏𝟎𝟎 %
✓ Dep. Rate = = 20 %.
𝟓 𝒚𝒆𝒂𝒓𝒔

✓ Annual Dep. = (110,000-10,000) x 20% = $ 20,000

depreciation expense for 2020 = $ 20,000

depreciation expense for 2021 =$ 20,000

depreciation expense for 2022 =$ 20,000

.
.
 The Adjusting entry would be the same each year:

Depreciation Expense ↑ 20,000

Accumulated Depreciation ↑ 20,000

We can Summarize the data of the 5 years in the following table:

Accumulated dep. Balance

For =
understanding Sum of Dep. Exp. Up to date
only
X =
Annual
Depreciable Dep. Accum. Dep. Book value
Years Dep.
Cost Rate Balance Dec. 31
Expense
2010 $ 100,000 20 % 20,000 20,000 90,000

2011 100,000 20 % 20,000 40,000 70,000

2012 100,000 20 % 20,000 60,000 50,000

2013 100,000 20 % 20,000 80,000 30,000

2014 100,000 20 % 20,000 100,000 10,000

Notes:
❖ In the last year {At the end of useful Life}→Accumulated Dep. Bal. = Depreciable Cost.
❖ Book Value = Cost 110,000 – Accumulated Dep. Balance & in the last year, B.V Must
equal to the salvage value.
 2. Units of Activity Method

To calculate Depreciation in this Method, we have to follow 2 steps to calculate dep. Exp. each
year:

Cost – Salvage Value

1. Depreciation Rate / Unit =
Total Units of Activity

2. Dep. Exp. Units of Activity Dep. Rate

Each year = during the year X per Unit

 Example {2}:
On 1/1/2020, AB Co. Purchased Equipment at a cost of $ 110,000 & Total
estimated units of activity 25,000 working hours. The salvage value of this
equipment estimated to be $ 10,000.

And the Actual miles driven were 8,000 mile in 2020 and 12,000 mile in 2021.

➢ Required:
✓ Using the units of Activity method:
1- Calculate Depreciation Expense for year 2020 and 2021
2- Prepare the Journal entry to record 2021 depreciation
3-
Solution
Dep. Rate Cost S.V
Per Unit = 110,000 – 10,000 =$ 4/ hour
25,000 hours

❖ Dep. Exp.2020= 8000m. X $4 = $32,000

Dep. Exp.2021= 6000m. X $4 = $24,000

❖ Journal Entry to record 2021 depreciation

Dep. Exp. 24000

Accum. Dep. 24000
 Exercise {3}:
On January 1, 2014, ABC Company purchased a delivery truck for $30,000.
The truck has expected salvage value of $ 2,000, and is expected to be driven
100,000 miles over its estimated useful life of 8 years.

Actual miles driven were 15,000 mile in 2014 and 12,000 mile in 2015.

Required:
(a) Compute Depreciation Expense for 2014 and 2015 using:
(1) The straight –line method,
(2) the units-of-activity method,
(b) Assume that ABC co. uses the straight-line method: Prepare the Journal entry to
record 2014 depreciation

Solution
(a) Depreciation Expense:
1- Straight Line Method: b) Straight Line Method:

𝟑𝟎,𝟎𝟎𝟎−𝟐,𝟎𝟎𝟎 3- Dep. exp.2014= 3,500

Annual Dep. = = $3,500.
𝟖 𝒚𝒆𝒂𝒓𝒔

❖ Dep. Exp.2014=$3,500 ❖ Journal Entry:

❖ Dep. Exp.2015=$3,500 Dep. Exp. 3500

Accum. Dep. 3500

2- Units of Activity:

𝟑𝟎,𝟎𝟎𝟎−𝟐,𝟎𝟎𝟎
Dep. Rate= = $0.28/mile
𝟏𝟎𝟎,𝟎𝟎𝟎 𝒎𝒊𝒍𝒆𝒔

❖ Dep. Exp.2014= 15000m. X $0.28=$4,200

❖ Dep. Exp.2015= 12000m. X $0.28=$3,360

❖
 HW
On January 1, 2020, ABC Company purchased a delivery truck for $ 105,000.
The truck has expected salvage value of $ 5,000, and is expected to be driven
200,000 miles over its estimated useful life of 10 years.

Actual miles driven were 20,000 mile in 2020 and 30,000 mile in 2021.

Required:
(c) Compute Depreciation Expense for 2020 and 2021 using:
(3) The straight –line method,
(4) the units-of-activity method,
(d) Assume that ABC co. uses the straight-line method: Prepare the Journal entry to
record 2021 depreciation