Chapter 8

Depreciation

Section 1
Straight-Line Method

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 Objectives
1. Understand the terms used in depreciation.
2. Use the straight-line method of depreciation
to find the amount of depreciation each year.
3. Use the straight-line method to find the book
value of an asset.
4. Use the straight-line method to prepare a
depreciation schedule.

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 Understand the Terms Used in
Depreciation
Depreciation – method of allocating the cost of a
tangible asset over its useful life and is used to account
for declines in value.
Tangible assets – physical assets: machinery, trucks,
cars, and computers
Intangible assets – patents, copyrights, franchise fees,
customer lists
Cost – basis for determining depreciation, it is total
amount paid for asset
Useful life – period of time asset will be used
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 Understand the Terms Used in
Depreciation

Salvage value, Scrap value, Residual value –

estimated value of asset when retired from service,
traded in, disposed of, or exhausted
No Salvage value – salvage value of 0
Accumulated depreciation – amount of
depreciation taken so far
Book value – cost minus depreciation

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 Use the Straight-line Method of Depreciation to
Find the Amount of Depreciation Each Year

Straight-line depreciation – assumes asset loses

an equal amount of value during each year of life

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 Finding Amount to be Depreciated

Amount to be depreciated(Depreciable amount)

= Cost – Salvage value

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 Finding Annual Depreciation

Depreciable amount
Depreciation =
Years of Life

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Use the Straight-line Method to Find the
Book Value of an Asset

Book value
= Cost – Accumulated depreciation

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 Example
KFC purchased a new low-fat chicken cooker at a
cost of $26,500. The estimated life of the fryer is 5
years, with a salvage value of $3500.
Find (a) the annual rate of depreciation,
(b) the annual amount of depreciation, and
(c) the book value at the end of the first year.

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 Example (cont)
(a) Annual rate of depreciation for
5-year life = 1/5 per year = 20%

(b) Cost - salvage value

$26,500– 3,500 =depreciable amount
$23,000

This $23,000 will be depreciated evenly over the 5-

year life for an annual depreciation of $4600
($23,000 × 20% = $4600).
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 Example (cont)

(c) Annual depreciation is $4600, to find the

book value subtract this from cost
cost $26,500
depreciation in 1st year – 4,600
book value end 1st yr $21,900

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 Finding Book Value

Step 1 Find depreciation to date by multiplying

the annual depreciation times the number
of years.
Step 2 Subtract this value from cost to find the
book value.

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 Example

A lighted display case at Albertson’s cost $3400,

has an estimated life of 10 years, and has a
salvage value of $800.
Find the book value at the end of 6 years.

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 Example (cont)
Annual rate of depreciation for 10-year life is 1/10 =
10%

Depreciable amount = Cost – Salvage value

= $3400 – $800 = $2600

Annual depreciation = $2600 × 10% = $260

Accumulated depreciation over 6 years
= $260 × 6 = $1560

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 Example (cont)
Find the book value at the end of 6 years by
subtracting the accumulated depreciation from the
cost.
cost $3400
accumulated depreciation –1560
book value end 6th year $1840
After 6 years, this display case would be carried on
the firm’s books with a value of $1840.

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Use the Straight-line Method to Prepare a
Depreciation Schedule

A depreciation schedule is often used to show the

annual depreciation, accumulated depreciation,
and book value over the useful life of an asset.

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 Example

Capital Curb and Concrete bought a new pickup

truck for $21,500. The truck is estimated to have a
useful life of 5 years, at which time it will have a
salvage value (trade-in value) of $3500. Prepare a
depreciation schedule using the straight-line method
of depreciation.

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 Example (cont)
Annual rate of depreciation for 5-year life = 1/5
per year = 20%
Find the depreciable amount as follows.
cost $21,500
Salvage value – 3,500
Depreciable amount $18,000
$18,000 depreciated over 5-year life has annual
depreciation of
$18,000 × 20% = $3600
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 Example (cont)
depreciation is $3600 each year, accumulated
depreciation at the end of 5 years equals the
depreciable amount; book value at the end of 5 years
equals the salvage value

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Follow Up to Example

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 Chapter 8
Depreciation

Section 2
Declining-Balance
Method

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 Objectives
1. Describe the declining-balance method of
depreciation.
2. Find the double-declining-balance rate.
3. Use the double-declining-balance method to
find the amount of depreciation and the book
value for each year.
4. Use the double-declining-balance method to
prepare a depreciation schedule.

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 Describe the Declining-balance
Method of Depreciation

Accelerated depreciation – used to more

accurately reflect rate assets lose value

Double-declining-balance method or 200%

method – multiply last year’s book value by the
double-declining-balance rate

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Find the Double-declining-balance rate

Find the straight-line rate of depreciation

Adjust this rate to 200% of itself (mathematically,
multiply it by 2)

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 Example

Find the straight-line rate and the double-declining-

balance (200%) rate for each of the following years of
life on the next slide.

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 Example (cont)

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 Use the Double-declining-balance Method to Find the
Amount of Depreciation and the Book Value for Each Year

Double-
Depreciation = declining- × Declining
balance rate balance

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 Example
Capital Curb and Concrete purchased a small
portable storage building for $8100. It is expected to
have a life of 10 years, at which time it will have no
salvage value. Using the double-declining- balance
method of depreciation, find the first and second
years’ depreciation and the book value at the end of
the first and second years.

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 Example (cont)
Straight-line depreciation rate for 10-year life is 1/10 =
10%

Double-declining-balance is 10% × 2 = 20%

1st year depreciation = 20% of declining bal.
= 20% × $8100 cost
= $1620
Find the book value at end of 1st year
cost $8100
depreciation to date –1620
book value at end of 1st year $6480
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 Example (cont)

2nd year depreciation

= 20% of book value at end of 1st year
= 20% × $6480 cost
= $1296

Find the book value at end of 2nd year

value at end of 1st year $6480

year 2 depreciation –1296
book value at end of 2nd year $5184
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 Use the Double-declining-balance Method to
Prepare a Depreciation Schedule

same rate is used each year with the declining-balance

method

rate is multiplied by the declining balance (last year’s

book value)

amount of depreciation in a given year may have to be

adjusted so that book value is never less than
salvage value3
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 Example

Capital Curb and Concrete bought a new pickup

truck at a cost of $21,500. It is estimated the truck
will have a useful life of 5 years, at which time it
will have a salvage value (trade-in value) of $3500.
Prepare a depreciation schedule using the double-
declining-balance method of depreciation.

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 Example (cont)
Annual rate of depreciation for 5-year life = 1/5
per year = 20%
Double-declining-balance is 20% × 2 = 40%

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 Example (cont)

In year 4, 40% of $4644 is $1858

Book value may never be less than salvage value,
depreciation of $4644 – $3500 = $1144 is taken in
year 4, so that book value equals salvage value.
No further depreciation remains.
Total amount of depreciation taken over the life of the
asset is the same using either the straight-line or the
double-declining-balance method of depreciation.

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Follow Up to Example

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 Chapter 8
Depreciation

Section 3
Sum-of-the-Years’-
Digits Method

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 Objectives
1. Understand the sum-of-the-years’-digits
method of depreciation.
2. Find the depreciation fraction for the sum-of-
the-years’-digits method.
3. Use the sum-of-the-years’-digits method to
find the amount of depreciation for each year.
4. Prepare a depreciation schedule for the sum-
of-the-years’-digits method.

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Understand the Sum-of-the-Years’-Digits
Method of Depreciation

Accelerated depreciation – used to more accurately

reflect rate assets lose value

Sum-of-the-years’-digits – produces results between

straight-line and double-declining-balance methods;
more straight-line at beginning and double-declining-
balance at end

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Find the Depreciation Fraction for Sum-
of-the-Years’-Digits Method
Depreciation fraction – value by which the
depreciable amount is multiplied to give the annual
depreciation
Denominator – is sum of all the years of the
estimated life of the asset (sum of the years’ digits)
Numerator – is number of years of life remaining
at the beginning of that year

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 Example

Find the depreciation fraction for each year if

the sum-of-the-years’-digits method of
depreciation is used for an asset with a useful
life of 6 years.

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 Example (cont)
Denominator is 1 + 2 + 3 + 4 + 5 + 6 = 21
Numerator is different each year:
Year Depreciation Fraction
1 6/21
2 5/21
3 4/21
4 3/21
5 2/21
6 1/21
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 Example (cont)

Under the sum-of-the-years’-digits method, an

asset having a life of 6 years is assumed to lose
6/21 of its value the first year, 5/21 the second
year, and so on. The sum of the six fractions in the
table is 21/21, or 1, so that the entire depreciable
amount is used over the 6-year life.

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Find the Depreciation Fraction for Sum-
of-the-Years’-Digits Method

A quick method of finding the sum of the years’

digits is by the formula

n (n + 1)
2
where n is the estimated life of the asset.

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 Use the Sum-of-the-Years’-Digits Method to Find the
Amount of Depreciation and the Book Value for Each Year

Depreciation = Depreciation Depreciable

×
fraction amount

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 Example

Capital Curb and Concrete purchases a DitchMaster

trencher at a cost of $8940. The trencher has a useful
life of 8 years and an estimated salvage value of
$1200. Find the first and second years’ depreciation
using the sum-of-the-years’-digits method.

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 Example (cont)

First year’s depreciable amount is

$8940 – $1200 = $7740.

The depreciation denominator is

1 + 2 + 3 + 4 + 5 + 6 + 7 + 8 = 36.
The first year’s numerator is 8, the first-year fraction
is 8/36.
First year’s depreciation is
8/36 × $7740 = $1720.

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 Example (cont)

The second year’s numerator is 7.

The second-year fraction is 7/36.
This multiplies times the original depreciable amount.
Second year’s depreciation is
7/36 × $7740 = $1505

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Prepare a Depreciation Schedule for the
Sum-of-the-Years’-Digits Method

For comparison, the next example uses the same

truck we used in previous examples.

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 Example

Capital Curb and Concrete bought a new pickup

truck for $21,500. The truck is estimated to have a
useful life of 5 years, at which time it will have a
salvage value of $3500. Prepare a depreciation
schedule using the sum-of-the-years’-digits method
of depreciation.

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 Example (cont)
The depreciation fraction has a denominator of
1 + 2 + 3 + 4 + 5 = 15

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 Follow Up to Example

Notice that the

useful life,
salvage value, and
book value at the
end of the useful
life is exactly the
same for all three.

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 Follow Up to Example

The sum-of-the-years’-digits method generates

rapid depreciation in the early years, yet also
provides some depreciation in the later years.

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 Follow Up to Example

The amount of depreciation in any one year on one

depreciable asset may not be large. However,
depreciation on the many different depreciable
assets owned by a company can amount to quite a
bit. So the differences between depreciation
methods can make a significant difference on
income taxes.

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