Sunday, September 12, 2021 6:07 PM

Depreciation
It is the decrease in the value of the physical property with the passage of time.
Definitions of Value
Fair value is the value which is usually determined by a disinterested third party in order to
establish a price that is fair to both seller and buyer.
Book value, sometimes called depreciated book value, is the worth of a property as shown
on the accounting records of an enterprise.
Resale, value is the price that can be obtained from the sale of the property after it has
been used.
Salvage or Scrap value is the amount the property would sale for if disposed off as junk.

Types of Depreciation
Physical depreciation is due to the lessening of the physical ability of a property to produce
results. Its common causes are wear and deterioration.
Functional depreciation is due to the lessening in the demand for the function which the
property was designed to render. Its common causes are inadequacy, changes in styles,
population center's shift, a saturation of markets, or more efficient machines are produced.
Depreciation due to changes in price levels is almost impossible to predict and therefore is
not considered in economic studies.
Depletion refers to the decrease in the value of a property due to the gradual extraction of
its contents.

Physical and Economic Life

Physical life of a property is the length of time during which it is capable of performing the
function for which it was designed and manufactured
Economic life is the length of time during which the property may be operated at a profit.

Depreciation Methods
We shall use the following symbols for the different depreciation methods.
L = useful life of a property in years
Co = original cost
CL = the value at the end of life, the scrap value (including gain or loss due to removal)
d = annual cost of depreciation
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d = annual cost of depreciation
Dn = depreciation up to age n year
Cn = book value up to age n year

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Sunday, September 12, 2021 7:34 PM

The Straight Line Method (SLM)

In this method, the loss in value is considered to be directly proportional to the age of the
property. No interest is assumed to be paid on the amounts set aside in the depreciation
fund.

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Sunday, September 12, 2021 7:43 PM

An electronic guitar costs P90,000 and has an estimated salvage value of P8,000 at the end
of its 10 years lifetime. What would be the book value after three years, using the straight-
line method of depreciation?

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Sunday, September 12, 2021 7:44 PM

A machine has an initial cost of Php50,000 and a salvage value of Php10,000 after 10 years.
a.) What is the depreciation value?
b.) What is the straight-line depreciation rate as a percentage of the initial cost?
c.) What is the book value after five years using straight line depreciation?

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Sunday, September 12, 2021 7:50 PM

A company bought an equipment for P56,000. Other expenses including installation

amounted to P4,000. The equipment is expected to have a life of 16 years with a salvage
value of 10% of the original cost. Determine the book value at the end of 12 years by straight
line method.

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Sunday, September 12, 2021 7:50 PM

The Sinking Fund Method

This method assumes that a sinking fund is established in which funds will accumulate for
replacement. The total depreciation that has taken place up to any given time is assumed to
be equal to the accumulated amount in the sinking fund at that time.

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Sunday, September 12, 2021 7:53 PM

A firm bought an equipment for P56,000. Other expenses including installation amounted to
P4,000. The equipment is expected to have a life of 16 years with a salvage value of 10% of
the original cost. Determine the book value at the end of 12 years by sinking fund method at
12% interest.

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Sunday, September 12, 2021 7:54 PM

Declining Balance Method(DBM)

This is also called the constant percentage method or the Matheson Formula. It is assumed
that the annual cost of depreciation is a fixed percentage of the salvage value at the beginning
of the year. The ratio of the depreciation in any year to the book value at the beginning of that
year is constant throughout the life of the property and is designated by k, the rate of
depreciation.

This method does not apply, if the salvage value is zero, because k will be equal to one and
d1 will be equal to Co.

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Sunday, September 12, 2021 7:55 PM

A certain type of machine losses 10% of its value each year. The machine costs P2,000
originally. Make out a schedule showing the yearly depreciation, the total depreciation, and
the book value at the end of each year for five years.

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Sunday, September 12, 2021 7:55 PM

Double Declining Balance(DDB) Method

This method is very similar to the declining balance method except that the rate of depreciation
k is replaced by 2/L.
When the DDB method is used, the salvage value should not be subtracted from the first cost
when calculating the depreciation charge.

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Sunday, September 12, 2021 7:58 PM

A plant bought a calciner for P220,000 and used it for 10 years, the life span of the
equipment. What is the book value of the calciner after five years of use? Assume a scrap
value of P22,000 for the declining balance method, and P20,000 for the double-declining
balance method.

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Sunday, September 12, 2021 8:00 PM

Sum-of-the-Years'-Digits (SYD) Method

It provides very rapid depreciation during the early years of life of the property and therefore
enables faster recovery of capital.

It is easier to use than the Matheson formula.

Properties can be depreciated to zero value. The basic assumption for the method is that the
value of the property decreases at a decreasing rate.

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Sunday, September 12, 2021 8:04 PM

A structure costs P12,000 new. It is estimated to have a life of 5 years with a salvage value at the
end of life of P1,000. Determine the book value at the end of 3rd year of life. Use SYD method.

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