Econ Module06 AY2023 2024

FLORENCIO L.
VARGAS COLLEGE, INC CC: BES 205

COLLEGE OF ENGINEERING 2nd Semester
Instructional Module AY2023-2024
DEGREE BS in Civil Engineering, BS YEAR 2 Module 06

PROGRAM Mechanical Engineering LEVEL Number
COURSE Engineering Economics COURSE BES 205 CREDIT 3
TITLE CODE UNITS
TOPIC Methods of Depreciation TIME 4 Hours/Wk WEEK
FRAME NO.
LEARNING OBJECTIVES
After the lesson, you will be able to:
1. Discuss the concepts of depreciation; and
2. Solve problems on different methods of depreciation.
6.1 DEPRECIATION
Depreciation is defined as the decrease in the value of a property, such as machinery,
equipment, building, or other structure, due to the passage of time.
Excluded from this definition are properties whose values increase with time, such as
antiques, paintings of the masters, rare stamps, rare coins, and in most cases land.
Depreciation must always be included in the cost of production of any product or the
rendering of any service where equipment is used for the following reasons:
1. To provide for the replacement of the equipment either at the end of its physical or
economic life or at the time when its operation no longer results in a satisfactory profit.
2. To provide for the maintenance of capital to replace the decrease in the value of
equipment caused by physical or functional causes.
6.2 TYPES OF DEPRECIATION

Decreases in the value of property (with the passage of time) are due mainly to the following:
1. Physical depreciation caused by the following:

a. Deterioration due to the effects of various chemical and mechanical factors on the
materials composing the property. Included in this are rusting of metal parts, decay of
wooden parts of a structure, and discoloration and cracking of plastic parts.
b. Wear and tear due to abrasion, friction between moving parts of equipment, impact,
vibration, or fatigue of the materials in the property. It is determined by use rather
than by age. Sudden physical damage to a property due to accidents and disasters,
such as fire, flood, earthquake, tidal waves, and other unforeseen acts of nature are
excluded from the determination of decrease in value.
2. Functional depreciation which is due to a decrease in the demand for the function of the
equipment for which it was designed. Such depreciation is caused by the following:
a. Inadequacy of the equipment.
b. Obsolescence caused by the invention of more efficient equipment and machines
to perform the same task.
c. Changes in methods of production.
d. Changes in styles and designs of the goods produced on the equipment.
e. Transfer of population due to various causes.
Engineering Economics
3. Changes in the price levels of similar property. If price levels rise during the life of a
property, even if the original investment has been recovered through the proper
depreciation procedure, the recovered capital will be insufficient to provide an identical
replacement. Thus, it is the capital that has depreciated and not the property.
ASTAJHO40067862
“In accordance with Section 185, Fair use of a Copyrighted Work of Republic
Act 8293, the copyrighted works included in this material may be reproduced
1
for educational purposes only and not for commercial distribution.”
FLORENCIO L. VARGAS COLLEGE, INC CC: BES 205
6.3 DEPRECIATION COST

The depreciation cost depends upon the physical or economic life of the equipment and its
first cost.
The physical life of the equipment is the length of time during which it is capable of
performing the function for which it was designed and manufactured.
The economic life of equipment is the length of time during which it will operate at a
satisfactory profit. Thus, even though the equipment can still perform its function, but if it can
only operate at a loss, then it is considered economically dead. Replacement is in order.
The life of any property is usually difficult to determine accurately. In many cases, the
determination of life is dependent to a great extent upon the experience of the men
managing the enterprise in the use of similar equipment. For purposes of taxation, the U.S,
Internal Revenue Services has prepared a list of equipment with their corresponding lives.
The first cost of any property includes the original purchase price, freight and
transportation charges to the site, installation expenses, initial taxes and permits to operate,
and all other expenses needed to put the equipment into operation.
The amount to be recovered, equal to the depreciation cost, is the difference between
the first cost and the salvage or scrap value of the equipment.
Salvage value, sometimes called second-hand value, is defined to be the amount for
which the equipment or machine can be sold as second-hand. It implies that the machine can
still perform its function.
Scrap or junk value is the amount the equipment can be sold for when disposed as
junk. This implies that the equipment cannot be used anymore for the function for which it
was designed.
To solve problems, we shall be using the corresponding symbols for the common terms used
in depreciation:
The first cost (Co) or unadjusted basis is the delivered and installed cost of the asset
including purchase price, delivery and installation fees, and other depreciable direct
expenses incurred to prepare the asset for use. The term unadjusted basis, or direct basis,
is used when the asset is new, with the term adjusted basis used after some depreciation
has been charged.
Book value (Cm) represents the remaining, un-depreciated capital investment on the
books after the total amount of depreciation charges to date has been subtracted from
the basis. The book value is determined at the end of each year.
The recovery period (n) is the depreciable life of the asset in years. Often there are
different n values for book and tax depreciation. Both of these values may be different
from the asset’s estimated productive life.
Salvage value (Cn) or residual value or scrap value is the estimated resale value of an asset
at the end of its useful life.
ASTAJHO40067862
2
6.4 REQUIREMENTS FOR A DEPRECIATION METHOD

A depreciation method should fulfill the following requirements:
1. Payments to the depreciation fund should be equal to the loss in the value due to
depreciation.
2. The method should be simple.
3. Before its adoption, approval of the method should be secured from the Bureau of
Internal Revenue.
4. To be satisfactory, the actual value of the equipment should, at all times, be equal to
the book value. It will be necessary from time to time to check the actual value against
the book value, and in case the two values are not in agreement, adjustments should
be made.
6.5 METHODS OF COMPUTING DEPRECIATION
1. STRAIGHT LINE DEPRECIATION

In this method of computing depreciation, the book value decreases uniformly to each
year of the estimated useful life.
a. Annual depreciation charge, d
𝐂𝐨 − 𝐂𝐧
𝐝=
𝐧
where: Co = first cost

Cn = cost after “n” years (salvage/scrap value)
n = life of the property
b. Book value at the end of “m” years using og using, Cm
𝐂𝐦 = 𝐂𝐨 − 𝐃𝐦
where: Dm = total depreciation after “m” years

Dm = d(m)
c. Depreciation rate = d/Co
d. Salvage rate = Cn/Co
e. Sunk cost = Book Value – Actual Resale Value
2. SINKING FUND METHOD

A sinking fund method is a technique for depreciating an asset in bookkeeping records
while generating money to purchase a replacement for the asset when it reaches the end
of its useful life. Under the sinking fund method, the business sets aside an amount of
money to invest annually so that the principal plus the interest in the fund will be enough
to replace the asset which results to higher depreciation expenses.
a. Annual depreciation charge, d

(𝐂𝐨 − 𝐂𝐧 )(𝐢)
𝐝=
(𝟏 + 𝐢)𝐧 − 𝟏
where: Co = first cost
Cn = cost after “n” years (salvage/scrap value)
n = life of the property
ASTAJHO40067862
3
b. Total depreciation after “m” years, Dm
(𝟏 + 𝐢)𝐦 − 𝟏
𝐃𝐦 = 𝐝 [ ]
𝐢
c. Book value at the end of “m” years
𝐂𝐦 = 𝐂𝐨 − 𝐃𝐦
where: Dm = total depreciation after “m” years
d. Sunk Cost = Cm – Actual Resale Value
3. DECLINING BALANCE METHOD OR MATHESON FORMULA

Declining balance is also known as the fixed percentage or uniform percentage method.
Declining balance accelerates the write-off of asset value because the annual depreciation
is determined by multiplying the book value at the beginning of a year by a fixed
(uniform) percentage.
a. k = constant ratio = 𝟏 − √𝑪𝑪𝒏

𝒏
or
𝒐
𝒎 𝑪
k = 𝟏 − √ 𝑪𝒎
𝒐
b. Annual depreciation
Annual depreciation for any year:

𝒅𝒎 = 𝒌(𝑪𝒐 )(𝟏 − 𝒌)𝒎−𝟏
Depreciation for the first 5 years:

𝐝𝟏 = 𝐤(𝐂𝐨 )(𝟏 − 𝐤)𝟎
𝐝𝟐 = 𝐤(𝐂𝐨 )(𝟏 − 𝐤)𝟏
𝐝𝟑 = 𝐤(𝐂𝐨 )(𝟏 − 𝐤)𝟐
𝐝𝟒 = 𝐤(𝐂𝐨 )(𝟏 − 𝐤)𝟑
𝐝𝟓 = 𝐤(𝐂𝐨 )(𝟏 − 𝐤)𝟒
c. Total depreciation after 5 years

DT5 = d1 + d2 + d3 + d4 + d5
d. C5 = book value after 5 years = Co – DT5

Cm = book value after “m” years = Co(1 – k)m
4. SUM OF THE YEARS-DIGITS METHOD (SYD)

Is the type of accelerated depreciation technique that allocates higher depreciation
expense in the earlier years of an asset’s useful life, it involves calculating depreciation
based on the sum of the number of years in an asset’s useful life.

a. Respective depreciation charges:
𝐧
First year: 𝐝𝟏 = (𝐂𝐨 − 𝐂𝐧 ) ∑ 𝐲𝐞𝐚𝐫𝐬
𝐧−𝟏
Second year: 𝐝𝟐 = (𝐂𝐨 − 𝐂𝐧 ) ∑ 𝐲𝐞𝐚𝐫𝐬
ASTAJHO40067862
4
𝐧−𝟐
Third year: 𝐝𝟑 = (𝐂𝐨 − 𝐂𝐧 ) ∑ 𝐲𝐞𝐚𝐫𝐬 and so on…
b. Book value after “m” years, Cm
𝐂𝐦 = 𝐂𝐨 − (𝐝𝟏 + 𝐝𝟐 + ⋯ + 𝐝𝐦 )
c. Sum of the year’s digit, ∑ 𝑦𝑒𝑎𝑟𝑠
𝒏(𝒏 + 𝟏)
∑ 𝒚𝒆𝒂𝒓𝒔 =
𝟐
5. DOUBLE-RATE DECLINING BALANCE METHOD

Double declining balance depreciation is independent of salvage value. Furthermore, the
book value never stops decreasing, although the depreciation decreases in magnitude.
In this method, the depreciation during any year is a constant ratio of the book
value at the beginning of the year. If the useful life is n years, the straight-line rate is 1/n
and the double-rate declining balance rate is 2/n. The depreciation charge is computed by
multiplying the unamortized value at the beginning of each year by 2/n.
2
a. r = n
b. Depreciation for the first 5 years:

𝐝𝟏 = 𝐂𝐨 (𝐫)
𝐝𝟐 = (𝐂𝐨 − 𝐝𝟏 )(𝐫)
𝐝𝟑 = (𝐂𝐨 − 𝐝𝟐 )(𝐫)
𝐝𝟒 = (𝐂𝐨 − 𝐝𝟑 )(𝐫)
𝐝𝟓 = (𝐂𝐨 − 𝐝𝟒 )(𝐫)
c. Total depreciation after 5 years:

DT5 = d1 + d2 + d3 + d4 + d5
d. Book value after “m” years, Cm

Cm = Co(1 – r)m
6. THE STRAIGHT-LINE PLUS AVERAGE INTEREST FORMULA

For this method it is assumed that the amount of capital recovered each year is on a
straight-line basis, as shown in Fig. 6.1. The investment is recovered each year by an
amount equal to (co – cn)/n. Thus, the annual interest charges are not equal, and we have
to determine the average annual interest cost to have equal costs.
Fig. 6.1 Graphical Representation of Payments by the Straight-Line Method.

ASTAJHO40067862
5
We derive the average interest as follows:

Interest paid at the end of the first year
= Coi + (Co – Cn)i
Interest paid at the end of the last year n

𝐂 −𝐂
= Cni + ( 𝐨 𝐧 𝐧 )i
Average interest
𝟏 𝐂 −𝐂 𝐧+𝟏 𝒊
= 𝟐[Coi + (Co – Cn)i + Cni + ( 𝐨 𝐧 𝐧 )i] = (Co – Cn) ( 𝐧 ) 𝟐 + Cni
Thus, the annual cost (AC) is the sum of the annual depreciation of a straight-line
formula plus the average interest.
𝐂 −𝐂 𝐧+𝟏 𝒊
AC = ( 𝐨 𝐧 𝐧 ) + (Co – Cn) ( 𝐧 ) 𝟐 + Cni
7. SERVICE OUTPUT OR UNITS OF PRODUCTION METHOD

In this production method, depreciation is charged according to the actual number of
units produced. In units of production method, higher depreciation is charged when
there is higher activity, and less is charged when there is a low level of operation.
(𝐂𝐨 − 𝐂𝐧 )𝐐𝐦
𝐝𝐦 =
𝐓
where: Qm = the total number of units of output during the mth year
T = the total units of output to the end of life
dm = depreciation charge during year m
8. ACTIVITY OR WORKING HOURS METHOD

Under activity method, the depreciation expense is calculated by asset’s number of
hours the asset is used during the period. In other words, this method focuses on the
actual use of the asset rather than the passage of time.
(𝐂𝐨 − 𝐂𝐧 )𝐇𝐦
𝐝𝐦 =
𝐇
where: Hm is the total number of hours during the mth year

H is the total number of hours up to the end of the life
dm = depreciation charge during year m
9. GROUP AND COMPOSITE METHODS OF DEPRECIATION

The methods explained in previous articles are called unit or item depreciation because
they consider the write-off on only one asset at a time. However, in large companies,
assets are usually grouped into classes and the depreciation charge is computed for the
entire class, not for each individual asset. An advantage in grouping assets together and
depreciating them as a unit is that no capital gain or loss is computed at the time a single
asset is retired. The cost of a single asset is removed from the group account and the gain
or loss is determined only at the time when the last asset is retired.
The group depreciation method consists of the computation of a single annual

depreciation charge for a group of similar assets using their average life. When an asset in
the group is retired, the method requires the calculation of a new value of the
depreciation charge for the remaining assets. Any of the previous methods for computing
the depreciation charge can be used.
ASTAJHO40067862
6
The appropriate group depreciation rate is determined by the equations:
𝟏
Group Depreciation Rate = 𝑬𝒔𝒕𝒊𝒎𝒂𝒕𝒆𝒅 𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝑳𝒊𝒇𝒆 𝒐𝒇 𝑮𝒓𝒐𝒖𝒑
and is applied to the total first costs of the assets.
If the class consists of dissimilar assets, the depreciation computed is termed

composite depreciation. For this method, annual depreciation is computed for each asset
on a straight-line basis, and the total annual depreciati0n for the group is related to the
total first cost to give the depreciation rate. The formulas for this method are:
𝑻𝒐𝒕𝒂𝒍 𝑨𝒏𝒏𝒖𝒂𝒍 𝑫𝒆𝒑𝒓𝒆𝒄𝒊𝒂𝒕𝒊𝒐𝒏

Composite Depreciation Rate = 𝑻𝒐𝒕𝒂𝒍 𝑭𝒊𝒓𝒔𝒕 𝑪𝒐𝒔𝒕𝒔
𝑻𝒐𝒕𝒂𝒍 𝑫𝒆𝒑𝒓𝒆𝒄𝒊𝒂𝒃𝒍𝒆 𝑽𝒂𝒍𝒖𝒆

Composite Life = 𝑻𝒐𝒕𝒂𝒍 𝑨𝒏𝒏𝒖𝒂𝒍 𝑫𝒆𝒑𝒓𝒆𝒄𝒊𝒂𝒕𝒊𝒐𝒏
6.6 COMPARISON BETWEEN THE 4 MOST USED METHODS OF DEPRECIATION
To establish the comparison between the depreciation methods mentioned above, let us
consider the following data:
First cost, Co = ₱ 10,000.00

Salvage value, Cn = ₱ 500.00
Life of property, n = 5 years
A. Using the Straight Line Method
𝐂 −𝐂 𝟏𝟎,𝟎𝟎𝟎− 𝟓𝟎𝟎
d = 𝐨𝐧 𝐧 = 𝟓
d = ₱ 1,900.00
Tabulation of book value:

Period Depreciation Book Value
0 ₱ 10,000.00
1 ₱ 1,900.00 8,100.00
2 1,900.00 6,200.00
3 1,900.00 4,300.00
4 1,900.00 2,400.00
5 1,900.00 500.00
Checking for the book value at 4th year:

Cm = Co – Dm = Co – d(m) = 10,000 – (1,900)(4)
C4 = ₱ 2,400.00
B. Using the Sinking Fund Method

Assume 10% interest rate,

(𝐂𝐨 − 𝐂𝐧 )(𝐢) (𝟏𝟎,𝟎𝟎𝟎− 𝟓𝟎𝟎)(𝟎.𝟏𝟎)
d= (𝟏+𝐢)𝐧 −𝟏
= (𝟏+𝟎.𝟏𝟎)𝟓 −𝟏
d = ₱ 1,556.076
𝐃𝟏 = 𝐝 = ₱ 𝟏, 𝟓𝟓𝟔. 𝟎𝟕𝟔
ASTAJHO40067862
7
(𝟏 + 𝐢)𝐦 − 𝟏
𝐃𝐦 = 𝐝 [ ]
𝐢
(𝟏+𝟎.𝟏𝟎)𝟐 −𝟏
𝐃𝟐 = 𝟏, 𝟓𝟓𝟔. 𝟎𝟕𝟔 [ 𝟎.𝟏𝟎 ] = 3,267.7596
(𝟏+𝟎.𝟏𝟎)𝟑 −𝟏
𝐃𝟑 = 𝟏, 𝟓𝟓𝟔. 𝟎𝟕𝟔 [ ] = 5,150.6116
𝟎.𝟏𝟎
(𝟏+𝟎.𝟏𝟎)𝟒 −𝟏
𝐃𝟒 = 𝟏, 𝟓𝟓𝟔. 𝟎𝟕𝟔 [ ] = 7,221.7487
𝟎.𝟏𝟎
(𝟏+𝟎.𝟏𝟎)𝟓 −𝟏
𝐃𝟓 = 𝟏, 𝟓𝟓𝟔. 𝟎𝟕𝟔 [ ] = 9,500.00
𝟎.𝟏𝟎

0 ₱ 10,000.00
1 ₱ 1,556.08 8,443.92
2 3,267.76 6,732.24
3 5,150.61 4,849.39
4 7,221.75 2,778.25
5 9,500.00 500.00
C. Using the Declining Balance Method

𝒏 𝑪 𝟓 𝟓𝟎𝟎
k = 𝟏 − √𝑪𝒏 = 𝟏 − √𝟏𝟎,𝟎𝟎𝟎 = 1 – 0.5493
𝒐
k = 0.4507
𝒅𝒎 = 𝒌(𝑪𝒐 )(𝟏 − 𝒌)𝒎−𝟏
𝐝𝟏 = 𝐤(𝐂𝐨 )(𝟏 − 𝐤)𝟎 = 𝟎. 𝟒𝟓𝟎𝟕(𝟏𝟎, 𝟎𝟎𝟎)(𝟏 − 𝟎. 𝟒𝟓𝟎𝟕)𝟎 = 𝟒, 𝟓𝟎𝟕. 𝟎𝟎

𝐝𝟐 = 𝐤(𝐂𝐨 )(𝟏 − 𝐤)𝟏 = 𝟎. 𝟒𝟓𝟎𝟕(𝟏𝟎, 𝟎𝟎𝟎)(𝟏 − 𝟎. 𝟒𝟓𝟎𝟕)𝟏 = 𝟐, 𝟒𝟕𝟓. 𝟔𝟗
𝐝𝟑 = 𝐤(𝐂𝐨 )(𝟏 − 𝐤)𝟐 = 𝟎. 𝟒𝟓𝟎𝟕(𝟏𝟎, 𝟎𝟎𝟎)(𝟏 − 𝟎. 𝟒𝟓𝟎𝟕)𝟐 = 𝟏, 𝟑𝟓𝟗. 𝟗𝟎
𝐝𝟒 = 𝐤(𝐂𝐨 )(𝟏 − 𝐤)𝟑 = 𝟎. 𝟒𝟓𝟎𝟕(𝟏𝟎, 𝟎𝟎𝟎)(𝟏 − 𝟎. 𝟒𝟓𝟎𝟕)𝟑 = 𝟕𝟒𝟔. 𝟗𝟗
𝐝𝟓 = 𝐤(𝐂𝐨 )(𝟏 − 𝐤)𝟒 = 𝟎. 𝟒𝟓𝟎𝟕(𝟏𝟎, 𝟎𝟎𝟎)(𝟏 − 𝟎. 𝟒𝟓𝟎𝟕)𝟒 = 𝟒𝟏𝟎. 𝟑𝟐

0 ₱ 10,000.00
1 ₱ 4,507.00 5,493.00
2 2,475.69 3,017.31
3 1,359.90 1,657.41
4 746.99 910.42
5 410.32 500.10
Note: Slight difference is a result of rounding values.
D. Using SYD Method
𝒏(𝒏+𝟏) 𝟓(𝟓 +𝟏)

∑ 𝒚𝒆𝒂𝒓𝒔 = = = 15
𝟐 𝟐
𝐧 𝟓
𝐝𝟏 = (𝐂𝐨 − 𝐂𝐧 ) ∑ 𝐲𝐞𝐚𝐫𝐬 = (𝟏𝟎, 𝟎𝟎𝟎 − 𝟓𝟎𝟎) 𝟏𝟓 = 3,166.67
𝐧−𝟏 𝟓−𝟏
𝐝𝟐 = (𝐂𝐨 − 𝐂𝐧 ) ∑ 𝐲𝐞𝐚𝐫𝐬 = (𝟏𝟎, 𝟎𝟎𝟎 − 𝟓𝟎𝟎) = 2,533.33
𝟏𝟓
𝐧−𝟐 𝟓−𝟐
𝐝𝟑 = (𝐂𝐨 − 𝐂𝐧 ) ∑ = (𝟏𝟎, 𝟎𝟎𝟎 − 𝟓𝟎𝟎) = 1,900.00
𝐲𝐞𝐚𝐫𝐬 𝟏𝟓
ASTAJHO40067862
8
𝐧−𝟑 𝟓−𝟑
𝐝𝟒 = (𝐂𝐨 − 𝐂𝐧 ) ∑ 𝐲𝐞𝐚𝐫𝐬 = (𝟏𝟎, 𝟎𝟎𝟎 − 𝟓𝟎𝟎) = 1,266.67
𝟏𝟓
𝐧−𝟒 𝟓−𝟒
𝐝𝟓 = (𝐂𝐨 − 𝐂𝐧 ) ∑ 𝐲𝐞𝐚𝐫𝐬 = (𝟏𝟎, 𝟎𝟎𝟎 − 𝟓𝟎𝟎) = 633.33
𝟏𝟓

0 ₱ 10,000.00
1 ₱ 3,166.67 6,833.33
2 2,533.33 4,300.00
3 1,900.00 2,400.00
4 1,266.67 1,133.33
5 633.33 500.00
Book Value Obtained by Various Depreciation Methods
Fig. 6.2 The diagram shows that the declining balance method has the largest annual
depreciation charge while the sinking fund method has the smallest annual depreciation
charges.
6.7 EXAMPLES OF DEPRECIATION

1. The original cost of a certain piece of equipment is ₱150,000.00 and it is depreciated by a
10% sinking fund method. Determine the annual depreciation charge if the book value of
the equipment after 10 years is the same as if it had been depreciated at ₱14,000.00 each
year by straight-line formula.
Given: Co = ₱150,000.00; i = 10%; d = ₱14,000.00 (yearly depreciation by straight-line

formula)
Solution:
Solve for the cost after n years by straight-line formula, Cn

𝐂𝐨 − 𝐂 𝐧
𝐝=
𝐧
Cn = Co – nd = 150,000 – 10(14,000) = ₱ 10,000.00
By the sinking fund formula, the annual depreciation charge is

ASTAJHO40067862
9
(Co − Cn )(i) (150,000−10,000)(0.10)

d= (1+i)n −1
= (1+0.10)10 −1
d = ₱ 8,784.36 Ans.
2. A certain company makes it the policy that for any new piece of equipment the annual
depreciation cost should not exceed 10% of the original cost at any time with no salvage
or scrap value. Determine the length of service life necessary if the depreciation method
used is (a) the straight-line formula, (b) the sinking fund formula at 8%, and (c) the SYD
method.
Given: d = 0.10Co; Cn = 0
Required: length of service life, n
Solution:
(a) Straight-Line Formula
Co − Cn
d=
n
C
0.10Co = o →n = 10 years Ans.
n
(b) Sinking Fund Formula at 8%

(Co − Cn )(i)
d=
(1 + i)n − 1
(Co − 0)(0.08)
0.10Co =
(1 + 0.08)n − 1
0.08Co
(1 + 0.08)n − 1 =
0.10Co
(1 + 0.08)n = 0.8 + 1
n ln(1.08) = ln (1.8)
n = 7.64 years Ans.
(c) SYD Method

𝐧
𝐝𝟏 = (𝐂𝐨 − 𝐂𝐧 ) ∑ 𝐲𝐞𝐚𝐫𝐬
𝒏(𝒏+𝟏)
But, ∑ 𝒚𝒆𝒂𝒓𝒔 = and d1 = 0.10Co
𝟐
Hence,
𝐧
𝟎. 𝟏𝟎𝐂𝐨 = (𝐂𝐨 )
𝐧(𝐧 + 𝟏)
[ ]
𝟐
𝟐
𝟎. 𝟏𝟎 =
𝒏+𝟏
0.10(n + 1) = 2
0.10n + 0.10 = 2
0.10n = 1.9
n = 19 years Ans.
3. A contractor imported a bulldozer for his job, paying ₱250,000.00 to the manufacturer.
Freight and insurance charges amounted to ₱18,000.00; customs’ broker’s fees and
arrastre services, ₱8,500.00; taxes, permits, and other expenses, ₱25,000.00.

If the contractor estimates the life of the bulldozer to be 10 years with salvage value
of ₱20,000.00, determine the book value at the end of 6 years, using the (a) straight-line
formula, (b) sinking fund formula at 8%, (c) Matheson formula, and (d) SYD method.
ASTAJHO40067862
10
Given:
Co = 250,000 + 18,000 +8,500 + 25,000 = ₱ 301,500.00
Cn = ₱ 20,000.00; n = 10; m = 6
Required: Book value after 6 years, Cm
Solution:
(a) Straight-Line Method
Cm = Co - Dm (1)
Dm = d(m) (2)
𝐂 𝐨 − 𝐂𝐧 𝟑𝟎𝟏,𝟓𝟎𝟎 − 𝟐𝟎,𝟎𝟎𝟎
𝐝= = = ₱ 𝟐𝟖, 𝟏𝟓𝟎. 𝟎𝟎
𝐧 𝟏𝟎
So that, by Eq. 2
Dm = d(m) = 28,150(6) = ₱ 168,900.00
Hence, the book value after 6 years is can be solved using Eq. 1
Cm = 301,500 – 168,900
C6 = ₱ 132,600.00 Ans.

(𝟏+𝐢)𝐦 −𝟏
Dm = d[ 𝐢
] (3)
(𝐂𝐨 − 𝐂𝐧 )(𝐢) (𝟑𝟎𝟏,𝟓𝟎𝟎− 𝟐𝟎,𝟎𝟎𝟎)(𝟎.𝟎𝟖)
𝐝= (𝟏+𝐢)𝐧 −𝟏
= (𝟏+𝟎.𝟎𝟖)𝟏𝟎 −𝟏
d = ₱ 19,431.80
Then, by substituting values in Eq. 3

(𝟏+𝐢)𝐦 −𝟏 (𝟏+𝟎.𝟎𝟖)𝟔 −𝟏
Dm = d[ 𝐢
] = 19,431.80[ 𝟎.𝟎𝟖
] = ₱ 142,550.3
Thus, the book value after 6 using Eq. 1 is

Cm = 301,500 – 142,550.3
C6 = ₱ 158,949.7 Ans.
(c) Matheson Formula

Cm = Co(1 – k)m (4)
Solving for the constant ratio, k

𝑛 𝐶 10 20,000
k = 1 − √𝐶𝑛 = 1 − √301,500 = 0.2376
𝑜
We can now solve for the book value after 6 years using Eq. 4
Cm = Co(1 – k)m = 301,500(1 – 0.2376)6
C6 = ₱ 59,201.52 Ans.
(d) SYD Method

Cm = Co − (d1 + d2 + ⋯ + dm )
Cm = Co − Dm (Same as Eq. 1)
Where:
Dm = d1 + d2 +…..+ dm
D6 = d1 + d2 + d3 + d4 + d5 + d6
ASTAJHO40067862
11
But,
n
d1 = (Co − Cn ) ∑ years
n−1
d2 = (Co − Cn ) ∑ years and so on
It follows that,
𝐧+(𝐧−𝟏)+(𝒏−𝟐)+(𝒏−𝟑)+(𝒏−𝟒)+(𝒏−𝟓)
D6 = (𝐂𝐨 − 𝐂𝐧 ) ∑ 𝐲𝐞𝐚𝐫𝐬
(5)
𝒏(𝒏+𝟏) 𝟏𝟎(𝟏𝟎+𝟏)
∑ 𝒚𝒆𝒂𝒓𝒔 = = = 55
𝟐 𝟐
By substituting values in Eq. 5,

𝟏𝟎+(𝟏𝟎−𝟏)+(𝟏𝟎−𝟐)+(𝟏𝟎−𝟑)+(𝟏𝟎−𝟒)+(𝟏𝟎−𝟓)
D6 = (301,500 − 20,000) 𝟓𝟓
45
D6 = (281,500) 55 = ₱ 230,318.18
Thus, book value after 6 years by using Eq. 1 is

Cm = 301,500 − 230,318.18
C6 = ₱ 71,181.82 Ans.
4. A civil engineer bought a gantry crane for erecting tall buildings. It was invoiced from
Japan CIF (cost, insurance, freight) Manila at ₱250,000.00. Brokerage, bank, arrastre fees,
customs’ duties, permits, etc. total ₱120,000. At the end of 10 years, he expects to sell it at
₱50,000.00. Prepare a depreciation schedule for each of the following methods: (a)
straight line formula, (b) sinking fund formula at 12%, (c) Matheson formula, and (d)
SYD method.
Given:
Co = 250,000 + 120,000 = ₱ 370,000.00; Cn = ₱ 50,000.00; n = 10
Required: A depreciation schedule for 4 different methods

Solution:
(a) Straight-Line Method
𝐂 −𝐂 𝟑𝟕𝟎,𝟎𝟎𝟎 − 𝟓𝟎,𝟎𝟎𝟎
𝐝 = 𝐨𝐧 𝐧 = = ₱ 𝟑𝟐, 𝟎𝟎𝟎. 𝟎𝟎
𝟏𝟎
Note: Yearly depreciation is uniform for a straight-line formula.
Table 6.2.a Depreciation Schedule for Straight-Line Formula.

Book Value at the Depreciation (d) Book Value at the End
Year Beginning of Year of Year (Cm)
1 ₱370,000.00 ₱32,000.00 ₱338,000.00
2 338,000.00 32,000.00 306,000.00
3 306,000.00 32,000.00 274,000.00
4 274,000.00 32,000.00 242,000.00
5 242,000.00 32,000.00 210,000.00
6 210,000.00 32,000.00 178,000.00
7 178,000.00 32,000.00 146,000.00
8 146,000.00 32,000.00 114,000.00
9 114,000.00 32,000.00 82,000.00
10 82,000.00 32,000.00 50,000.00

(𝐂𝐨 − 𝐂𝐧 )(𝐢) (𝟑𝟕𝟎,𝟎𝟎𝟎− 𝟓𝟎,𝟎𝟎𝟎)(𝟎.𝟏𝟐)
𝐝= (𝟏+𝐢)𝐧 −𝟏
= (𝟏+𝟎.𝟏𝟐)𝟏𝟎 −𝟏
d = ₱ 18,234.93
ASTAJHO40067862
12
(𝟏+𝐢)𝐦 −𝟏 (𝟏+𝟎.𝟏𝟐)𝐦 −𝟏
Dm = d[ 𝐢
] = 18,234.93[ 𝟎.𝟏𝟐
]
(𝟏+𝟎.𝟏𝟐)𝐦 −𝟏
Dm = 18,234.93[
𝟎.𝟏𝟐
] (1)
Thus, the amassed depreciation for each year is as follows (use Eq. 1 above):
D1 = 18,234.93(1) = ₱ 18,234.93
D2 = 18,234.93(2.12) = ₱ 38,658.06
D3 = 18,234.93(3.3744) = ₱ 61,531.96
D4 = 18,234.93(4.779328) = ₱ 87,150.72
D5 = 18,234.93(6.35284736) = ₱ 115,843.74
D6 = 18,234.93(8.115189043) = ₱ 147,979.92
D7 = 18,234.93(10.08901173) = ₱ 183,972.45
D8 = 18,234.93(12.29969314) = ₱ 224,284.07
D9 = 18,234.93(14.77565631) = ₱ 269,433.10
D10 = 18,234.93(17.54873507) = ₱ 320,000.00
Table 6.2.b Depreciation Schedule for Sinking Fund Formula.

Book Value at the Accrued Book Value at the End
Year Beginning of Year 1 Depreciation(Dm) of Year (Co - Dm)
(Co)
1 ₱370,000.00 ₱18,234.93 ₱351,765.07
2 38,658.06 331,341.94
3 61,531.96 308,468.04
4 87,150.72 282,849.28
5 115,843.74 254,156.26
6 147,979.92 222,020.08
7 183,972.45 186,027.55
8 224,284.07 145,715.93
9 269,433.10 100,566.90
10 320,000.00 50,000.00
(c) Matheson Formula

Cm = Co(1 – k)m (4)
Solving for the constant ratio, k

𝑛 𝐶 10 50,000
k = 1 − √𝐶𝑛 = 1 − √370,000 = 0.1813904101
𝑜
Note: Store the value of k in your calculator for convenience and more accurate values.
Table 7.2.c Depreciation Schedule for Matheson Formula.

Book Value at the Depreciation During Book Value at the End
Year Beginning of Year (Cm) the Year (kCm) of Year (Cm - kCm)
1 ₱370,000.00 ₱67,114.45 ₱302,885.55
2 302,885.55 54,940.53 247,945.02
3 247,945.02 44,974.85 202,970.17
4 202,970.17 36,816.84 166,153.33
5 166,153.33 30,138.62 136,014.71
6 136,014.71 24,671.76 111,342.95
7 111,342.95 20,196.54 91,146.41

8 91,146.41 16,533.08 74,613.33
9 74,613.33 13,534.14 61,079.19
10 61,079.19 11,079.18 50,000.01
ASTAJHO40067862
13
(d) SYD Method

𝒏(𝒏+𝟏) 𝟏𝟎(𝟏𝟎+𝟏)
∑ 𝒚𝒆𝒂𝒓𝒔 = = = 55
𝟐 𝟐
Respective depreciation charges,
n
d1 = (Co − Cn )
∑ years
n−1
d2 = (Co − Cn )
∑ years
n−2
d3 = (Co − Cn ) ∑ years and so on….
It follows then, that depreciation during that year is

n − (m − 1)
dm = (Co − Cn )[ ]
∑ years
Factor
(C
dm = o − C n )(Factor)
dm = (370,000 − 50,000)(Factor)
dm = (320,000)(Factor)
Table 6.2.d Depreciation Schedule for SYD Method.

Book Value at Factor Depreciation During Book Value at
Year the Beginning of [n − (m − 1)] the Year the End of the
the Year ∑ years (C o Cn)(Factor)
– Year
1 ₱370,000.00 10/55 ₱58,181.82 ₱311,818.18
2 311,818.18 9/55 52,363.64 259,454.54
3 259,454.54 8/55 46,545.45 212,909.09
4 212,909.09 7/55 40,727.27 172,181.82
5 172,181.82 6/55 34,909.09 137,272.73
6 137,272.73 5/55 29,090.91 108,181.82
7 108,181.82 4/55 23,272.73 84,909.09
8 84,909.09 3/55 17,454.55 67,454.54
9 67,454.54 2/55 11,636.36 55,818.18
10 55,818.18 1/55 5,818.18 50,000.00
5. Determine the year-end book value for the gantry crane in Example 4 by the Double-Rate
Declining Balance Method.
Given:
Co = 250,000 + 120,000 = ₱ 370,000.00
Cn = ₱ 50,000.00
n = 10
Required: Year-end book value by DRDBM
Solution:
Book value after mth year
Cm = Co(1 – r)m
Double rate, r
r = 2/n = 2/10 = 0.20
Year-End Book Value at,

Year 1: C1 = 370,000(1 – 0.20)1 = ₱ 296,000.00
Year 2: C2 = 370,000(1 – 0.20)2 = ₱ 236,800.00

Year 3: C3 = 370,000(1 – 0.20)3 = ₱ 189,440.00
Year 4: C4 = 370,000(1 – 0.20)4 = ₱ 151,552.00
Year 5: C5 = 370,000(1 – 0.20)5 = ₱ 121,241.60
Year 6: C6 = 370,000(1 – 0.20)6 = ₱ 96,993.20
ASTAJHO40067862
14
Year 7: C7 = 370,000(1 – 0.20)7 = ₱ 77,594.62

Year 8: C8 = 370,000(1 – 0.20)8 = ₱ 62,075.70
Year 9: C9 = 370,000(1 – 0.20)9 = ₱ 49,660.56
Year 10: C10 = 370,000(1 – 0.20)10 = ₱ 39,728.45
6. An asphalt and aggregate mixing plant having a capacity of 50 m 3 every hour costs
₱2,500,000.00. It is estimated to process 800,000 m 3 during its life. During a certain year
it processed 60,000 m3. If its scrap value is ₱100,000.00, determine the total depreciation
during the year and the depreciation cost chargeable to each batch of 50 m 3 using the
production-units method.
Given:
Co = ₱2,500,000.00; Cn = ₱100,000.00; T = 800,000 m3
Solution:
(𝐂 − 𝐂 ) (𝟐,𝟓𝟎𝟎,𝟎𝟎𝟎− 𝟏𝟎𝟎,𝟎𝟎𝟎)
d1 = depreciation cost/m3 = 𝐨 𝐧 = 𝟑
𝐓 𝟖𝟎𝟎,𝟎𝟎𝟎 𝒎
d1 = ₱3.00 per cubic meter
Depreciation during the year where 60,000 m3 were processed,

D = total depreciation = ₱3.00/m3(60,000 m3)
D = ₱180,000.00 Ans.
Depreciation charge to each batch of 50 m3,

D = ₱3.00/m3(50 m3) = ₱150.00 Ans.
7. A company purchased a machine for ₱30,000.00, used it for 5 years and then sold it for
₱10,000.00. If capital is worth 8%, determine the annual cost of depreciation and interest
using the following: (a) sinking fund depreciation and interest on first cost, (b) straight-
line depreciation plus average interest.
Given:
Co = ₱30,000.00: Cn = ₱10,000.00; n = 5; i = 8%
Required: Annual cost of depreciation and interest
Solution:
(a) Sinking fund depreciation and interest on the first cost
(Co − Cn )(i)
d = (1+i) n −1 + Coi
Interest on the first cost

Sinking fund depreciation
(30,000− 10,000)(0.08)
d= (1+0.08)5 −1
+ (30,000)(0.08)
(30,000− 10,000)(0.08)
d= (1+0.08)5 −1
+ (30,000)(0.08)
d = ₱ 5,809.13 Ans.
(b) Straight-line depreciation plus average interest

Co − Cn 30,000− 10,000
Depreciation (Single-line) = = = ₱4,000.00
n 5
n+1 𝑖
Average interest = (Co – Cn) ( ) 2 + C ni
n
5 + 1 0.08
= (30,000 – 10,000) ( ) + (10,000)(0.08)
5 2
= ₱1,760.00
ASTAJHO40067862
15
Hence,
Annual Cost = Depreciation + Average Interest = 4,000 + 1,760
AC = ₱ 5,760.00 Ans.
8. The Reyes Machine Company owns three different models of lathes whose data are
indicated in the table below.
Model Number First Cost Salvage Value Expected

Number Owned Life
A 12 ₱ 25,000.00 ₱ 5,000.00 8
B 6 12,000.00 2,000.00 10
C 4 15,000.00 3,500.00 12
One-half of the lathes of each model will be sold after 8 years and the remainder will be
replaced after 12 years. Compute the total annual straight-line depreciation charges
using (a) the group depreciation method, and (b) the composite depreciation method. (c)
Compute the total annual depreciation charges for each method, and compute the
composite life based on depreciation.
Solution:
(a) Group Depreciation Method
8+10+12
Average Life Expectancy = = 10 years
3
𝑇𝑜𝑡𝑎𝑙 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝐴𝑚𝑜𝑢𝑛𝑡

Annual Group Depreciation = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑙𝑖𝑓𝑒
12(25,000−5000)+6(12,000−2,000)+4(15,000−3,500)
= 10
= ₱ 34,600
₱ 34,600
Annual Depreciation per Machine = 12+6+4 = ₱1,572.73/Machine
Depreciation for each year is shown in the table below:
Number in Service Annual Accumulated

Year A B C Depreciation Depreciation
1-8 12 6 4 ₱ 34,600 ₱ 276,800
9 - 12 6 3 2 ₱ 17,300∗ ₱ 138,400
₱ 415,200
*depreciation for years 9-12 = (₱1,572.73/Machine)(6 + 3 + 2)Machines

= ₱17,300.00
(b) Composite Depreciation Method
Annual depreciation for each model:

12(25,000−5,000)
DA = = ₱30,000.00
8
6(12,000−2,000)
DB = = ₱6,000.00
10
4(15,000−3,500)
DC = = ₱3,833.33
12
ASTAJHO40067862
16
Composite Depreciation Amount:
Years 1 – 8: 30,000 + 6,000 + 3,833.33 = ₱39,833.33

Accumulated depreciation after 8 years
= 8(39,833.33) = ₱318,666.67
Years 9-10: (Models B and C only)

6,000 + 3,833.33 = ₱9,833.33
= 318,666.67 + 2(9,833.33) = ₱338,333.33
Years 11-12: (Model C only) = ₱3,833.33

= 338,333.33+ 2(3,833.33) = ₱346,000.00
(c) The total accumulated depreciation by either method after 12 years = ₱346,000.00
𝑇𝑜𝑡𝑎𝑙 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑏𝑙𝑒 𝑉𝑎𝑙𝑢𝑒
Composite life = 𝑇𝑜𝑡𝑎𝑙 𝐴𝑛𝑛𝑢𝑎𝑙 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛
12(35,000−5,000)+6(12,000−2,000)+4(15,000−3,500)
= 30,000+6,000+ 3,833.33
= 11.70 years Ans
6.8 DEPLETION
Certain natural resources such as mines, quarries , oil and gas wells, and timber lands are
called “wasting” or “depleting” assets due to the gradual extraction of the contents of such
properties. To provide for the recovery of capital invested in such assets, a depletion fund is
provided. The annual charge set asside in the fund is called depletion cost rather than
depreciation cost.
It is usual practice to return annually a part of the investment of each investor instead
of accumulating a depletion fund. The yearly amount paid to the investor consists of two
parts: part the capital invested and the dividends or profit of the investor.
The theoretical depletion charge for a year is usually determined by two methods
1. Unit or Factor Method

This method is dependent on the initial cost of the property and the number of units in the
property. The depletion charge during any year is calculated using the following formula:
Depletion cost during any year
𝒊𝒏𝒊𝒕𝒊𝒂𝒍 𝒄𝒐𝒔𝒕 𝒐𝒇 𝒑𝒓𝒐𝒑𝒆𝒓𝒕𝒚
= ( 𝒕𝒐𝒕𝒂𝒍 𝒖𝒏𝒊𝒕𝒔 𝒊𝒏 𝒑𝒓𝒐𝒑𝒆𝒓𝒕𝒚 ) (𝒖𝒏𝒊𝒕𝒔 𝒔𝒐𝒍𝒅 𝒅𝒖𝒓𝒊𝒏𝒈 𝒕𝒉𝒆 𝒚𝒆𝒂𝒓)
2. Percentage or Depletion Allowance Method

The depletion charge under this method is computed as follows:
Depletion Charge = Fixed Percentage of the Gross Income
Depletion Charge = 50% of the Net Taxable Income
Note: Use the smaller depletion charge.
Table 6.1 Fixed Percentages Allowed for Certain Natural Resources:

Natural Resources Maximum Percentage∗
Oil and Gas wells 22

Sulfur, Cobalt, Nickel, Zinc 22
Gold, Silver, Copper, Iron Ore 15
Coal, Sodium Chloride 10
Gravel, Sand, Clay 5
*Based on Gross Income
ASTAJHO40067862
17
6.9 EXAMPLES OF DEPLETION
9. To develop an oil well containing 2,000,000 barrels of oil required an initial investment
of ₱30,000,000.00, in a certain year, 400,000 barrels of oil were produced from this well.
Determine the depletion charge during the year.
Solution: By the Unit or Factor Method.
Depletion cost during the year

𝑖𝑛𝑖𝑡𝑖𝑎𝑙 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
= (𝑒𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑜𝑖𝑙 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛) (𝑜𝑖𝑙 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑 𝑑𝑢𝑟𝑖𝑛𝑔 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟)
₱30,000,000
= (2,000,000 𝑏𝑎𝑟𝑟𝑒𝑙𝑠) (400,000 𝑏𝑎𝑟𝑟𝑒𝑙𝑠)
= ₱ 6,000,000.00
10. The total gross income of the oil company in Example 9 is ₱34,000,000.00 for the
particular year, and the taxable income after taking all deductions, except for depletion,
is ₱14,100,000.00. Determine the allowable depletion allowance for the year.
Solution: By the Percentage or Depletion Allowance Method, the percentage of gross

income allowed for oil is 22% (refer to Table 7.1).
Depletion Charge = Fixed Percentage of the Gross Income

Depletion Charge = (0.22)(34,000,000) = ₱7,480,000.00
Based on the net income.,

Depletion Charge = 50% of the Net Taxable Income
Depletion Charge = (0.50)(14,000,000) = ₱7,050,000.00
The lesser depletion charge must be chosen. Thus,

Allowable depletion charge = ₱7,050,000.00 Ans.
11. During the month of August, a mining company has a gross income of ₱3,200,000.00
from the production of nickel. All expenses, excluding depletion expenses for this month,
amount to ₱2,600,000.00. If the fixed depletion rate for nickel is 22%, what is the
depletion allowance for this month?
Solution:
Based on gross income,
Depletion allowance = (0.22)(3,200,000) = ₱704,000.00
Based on net income,
Depletion allowance = (0.50)(3,200,000 – 2,600,000) = ₱300,000.00 Ans.
6.10 SUPPLEMENTARY PROBLEMS
P6.1 You are planning to sell your electronic manufacturing plant originally costing
₱250,000.00 when it was put up 15 years ago. Some equipment originally costing ₱10,000.00
was replaced 10 years ago with new equipment costing ₱15,000.00. The equipment installed
10 years ago has now depreciated by ₱7,500.00. The depreciation of the remaining portion of
the plant originally installed 15 years ago is now ₱40,000.00. Determine the present book
value of your plant.
ASTAJHO40067862
18
P6.2 A broadcasting corporation purchased equipment worth ₱53,000.00 and paid ₱1,500.00
for freight and delivery charges to the site. The equipment has a normal life of 10 years with a
trade-in value of 5,000.00 against the purchase of new equipment at the end of life.
(a) Determine the annual depreciation cost by the straight-line method.
(b) Determine the annual depreciation cost by the sinking fund method. Assume interest
is 6% compounded annually.
P6.3 The cost of a certain asset is ₱3,000.00; its life is 6 years and scrap value is ₱500.00. Find
the annual rate of depreciation under constant percentage method, and construct a
depreciation table.
P6.4 A telephone company purchased microwave radio equipment for ₱6,000,000.00. Freight
and installation charges amount to 3% of the purchase price. If the equipment is depreciated
over an eight-year period with salvage value of 5%, determine the following:
(a) Annual depreciation charge using the straight-line method.
(b) Depreciation charge during the fifth year using the SYD method.
P6.5 A television company purchased machinery for ₱100,000.00 on July 1, 1979. It is

estimated that it will have a useful life of ten years, scrap value of ₱4,000.00, production of
400,000 units and working hours of 120,000. The company uses the machinery for 14,000
hours in 1979 and 18,000 hour in 1980. The machinery produces 36,000 units in 1979 and
44,000 units in 1980. Compute the depreciation for 1980 using method given below.
(a) Straight line method
(b) Working hours
(c) Output method
P6.6 A machine shop purchased 10 years ago a milling machine for ₱60,000.00. A straight-line
depreciation reserve had been provided based on a 20-year life of the machine. The owner of
the machine shop desires to replace the old milling machine with a modern unit having many
advantages costing ₱100,000.00. It can sell the old unit for ₱20,000.00. How much new
capital will be required for the purchased?
P6.7 A trenching machine may be used to dig irrigation ditches or pipeline trenches. A
contractor purchases one for ₱400,000.00 and he estimates that it will be able to dig 500,000
meters during its life and he expects to receive ₱5,000.00 as scrap value when he sells it.
During a certain year he used the machine to dig 90,000 meters of trench. Determine the
depreciation cost for that year.
P6.8 A mining company invested ₱25,000,000.00 to develop an oil well which is estimated to
contain 1,000,000 barrels of oil. During a certain year, 200,000 barrels were produced from
this well. Compute the depletion charge during that year.
P6.9 A coal mining company has owned a mine for the past five years. During this time the
following tonnage of ore has been removed each year: 25,000; 32,000; 30,000; and 28,000
tons. The mine is estimated to contain a total of 500,000 tons. The initial cost of the mine is
₱12,000,000.00. If the company had a gross income for this coal of ₱220.00 per ton for the
first two years, and ₱300.00 per ton for the last three years, (a) determine the depletion
charge for each year using the larger values for the two methods, and (b) compute the
percent of the initial cost that has been written off in the five years.
P6.10 The Carryall trucking Company uses three delivery trucks that cost ₱100,000.00;
₱120,000.00; and ₱150,000.00. The estimated salvage values are ₱20,000.00; ₱25,000.00; and
ASTAJHO40067862
19
₱35,000.00. All trucks have an expected service life of 10 ears. Determine the group
depreciation rate and annual depreciation.
P6.11 Oil FGC installed a crude oil processing plant costing $12 million with an estimated
capacity to process 50 million barrels of crude oil during its entire life. Production during the
first year of operation is 2 million barrels. Expected residue of the processing plant is $2
million. What is the depreciation charge during the first year?
P6.12 The Rainbow Electric Company uses three production machines described below
Machine Life
No. Type of Machine First Cost Salvage Value (years)
1 Cutting Machine ₱30,000.00 ₱5,000.00 8
2 Drill Press ₱22,000.00 ₱4,000.00 6
3 Sanding Machine ₱15,000.00 1,500.00 5
Determine (a) the composite life, (b) the composite depreciation rate, (c) the annual
depreciation.
P6.13 An asset is purchased for ₱90,000.00. Its estimated life is 10 years after which it will be
sold for ₱1,000.00. Find the book value during the second year if the sum-or-the-years digit
depreciation is used.
P6.14 The XXX Inc. (Construction Company) purchased tools and equipment for ₱150,000.00
on January 1, 2015. The information regarding usability and life of the tools and equipment’s
are given below:
Estimated salvage value: ₱10,000.00

Estimated useful life: 10 years
Estimated productive life in hours: 15,000 hours
The tools and equipment were used for 2,000 hours during the year 2015. Calculate
depreciation expense for the year 2015 using activity method of depreciation.
P6.15 An engineer bought an equipment for ₱500,000.00. He spent an additional amount of

₱30,000.00 for installation and other expenses. The estimated useful life of the equipment is
10 years. The salvage value is x% of the first cost. Using the straight line method of
depreciation, the book value at the end of 5 years will be ₱291,500.00. What is the value of x?
ASTAJHO40067862
20

Econ Module06 AY2023 2024

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Econ Module06 AY2023 2024

Uploaded by

Copyright:

Available Formats

FLORENCIO L.

VARGAS COLLEGE, INC CC: BES 205

DEGREE BS in Civil Engineering, BS YEAR 2 Module 06

6.2 TYPES OF DEPRECIATION

1. Physical depreciation caused by the following:

6.3 DEPRECIATION COST

6.4 REQUIREMENTS FOR A DEPRECIATION METHOD

6.5 METHODS OF COMPUTING DEPRECIATION

1. STRAIGHT LINE DEPRECIATION

a. Annual depreciation charge, d

where: Co = first cost

b. Book value at the end of “m” years using og using, Cm

where: Dm = total depreciation after “m” years

c. Depreciation rate = d/Co

d. Salvage rate = Cn/Co

e. Sunk cost = Book Value – Actual Resale Value

2. SINKING FUND METHOD

a. Annual depreciation charge, d

b. Total depreciation after “m” years, Dm

c. Book value at the end of “m” years

where: Dm = total depreciation after “m” years

d. Sunk Cost = Cm – Actual Resale Value

3. DECLINING BALANCE METHOD OR MATHESON FORMULA

a. k = constant ratio = 𝟏 − √𝑪𝑪𝒏

Annual depreciation for any year:

Depreciation for the first 5 years:

c. Total depreciation after 5 years

d. C5 = book value after 5 years = Co – DT5

4. SUM OF THE YEARS-DIGITS METHOD (SYD)

based on the sum of the number of years in an asset’s useful life.

b. Book value after “m” years, Cm

c. Sum of the year’s digit, ∑ 𝑦𝑒𝑎𝑟𝑠

5. DOUBLE-RATE DECLINING BALANCE METHOD

b. Depreciation for the first 5 years:

c. Total depreciation after 5 years:

d. Book value after “m” years, Cm

6. THE STRAIGHT-LINE PLUS AVERAGE INTEREST FORMULA

Fig. 6.1 Graphical Representation of Payments by the Straight-Line Method.

We derive the average interest as follows:

Interest paid at the end of the last year n

7. SERVICE OUTPUT OR UNITS OF PRODUCTION METHOD

8. ACTIVITY OR WORKING HOURS METHOD

where: Hm is the total number of hours during the mth year

9. GROUP AND COMPOSITE METHODS OF DEPRECIATION

The group depreciation method consists of the computation of a single annual

The appropriate group depreciation rate is determined by the equations:

and is applied to the total first costs of the assets.

If the class consists of dissimilar assets, the depreciation computed is termed

𝑻𝒐𝒕𝒂𝒍 𝑨𝒏𝒏𝒖𝒂𝒍 𝑫𝒆𝒑𝒓𝒆𝒄𝒊𝒂𝒕𝒊𝒐𝒏

𝑻𝒐𝒕𝒂𝒍 𝑫𝒆𝒑𝒓𝒆𝒄𝒊𝒂𝒃𝒍𝒆 𝑽𝒂𝒍𝒖𝒆

6.6 COMPARISON BETWEEN THE 4 MOST USED METHODS OF DEPRECIATION

First cost, Co = ₱ 10,000.00

A. Using the Straight Line Method

Tabulation of book value:

Checking for the book value at 4th year:

B. Using the Sinking Fund Method

Assume 10% interest rate,

Tabulation of book value:

C. Using the Declining Balance Method

𝒅𝒎 = 𝒌(𝑪𝒐 )(𝟏 − 𝒌)𝒎−𝟏

𝐝𝟏 = 𝐤(𝐂𝐨 )(𝟏 − 𝐤)𝟎 = 𝟎. 𝟒𝟓𝟎𝟕(𝟏𝟎, 𝟎𝟎𝟎)(𝟏 − 𝟎. 𝟒𝟓𝟎𝟕)𝟎 = 𝟒, 𝟓𝟎𝟕. 𝟎𝟎

Tabulation of book value:

D. Using SYD Method