DEPRECIATION

MATHESON FORMULA & THE SUM OF THE

YEARS –DIGITS (SYD)
 DEPRECIATION
O Decrease in value of physical properties with passage of time
and use.
O More specifically :
accounting concept establishing annual deduction against
before-tax income to reflect effect of time and use on asset’s
value in firm’s financial statements.
O To match yearly production of income over asset’s economic
life.
 MATHESON FORMULA/
CONSTANT PERCENTAGE METHOD
O The basic assumption for this method the annual
cost of depreciation is a constant percentage of the
salvage value (SV) at the beginning of the year.
O The annual depreciation charges, different each
year, decrease from year to year, greatest from the
first year, and least in the last year of life of the
property.
O With this formula, however a property can never
depreciate to zero value.
Let
n= useful life of the property
m= age of the property at any time less than or equal to n
d= annual cost of depreciation
Dm= accrued or total depreciation up to m years
Co= original or first cost of the property
Cm= book value of the property at the end of m years
Cn= book value at the end of life, n years,(salvage or scrap
value, as the case may be.)
k = ratio of the depreciation in any one year to the book
value at the beginning of that year. This is constant
throughout the life of the property.
d = 
O

Dm = kCm -1

Cm = – (1 – k ) m
Cn = C0 – (1 – k ) n

k=1- =1-
 Year Book value at the Depreciation Book value at the
beginning of the during the year end of the year
year
1 C0 kC0 C1 = C0(1-k)

2 C0(1-k) kC1 C2 = C0(1-k)2

3 C0(1-k)2 kC2 C3 = C0(1-k)3

… … … …
m C0(1-k)m-1 kCm - 1 Cm = C0(1-k)m

… … … …
n C0(1-k)n-1 kCn - 1 Cn = C0(1-k)n
 SUM OF THE YEARS-
DIGITS (SYD) METHOD
O It provides very rapid depreciation during the
early years of life of the property , and
therefore enables faster recovery of capital.
O It is easier to use than Matheson Formula.
O Properties can be depreciated to zero value.
O The basic assumption for the method is that
the value of the property decreases at a
decreasing rate.
 Steps in SYD Method
O Determine
  the sum of the years (∑ years )of the life
of the property. If n is the life of the property in
years, and nothing that the digits 1,2,3…(n-1), n
form an arithmetic progression , then
∑ years = (n + 1)
O Determine the loss in value due to depreciation, C 0 –
C n.
O The respective annual depreciation charges are:

for the first year, (C0 – Cn)

O for
O
  the 2nd year, (C0 – Cn)
O… … …
O For the (n -1 )th year , (C0 – Cn)
O For the nth year , (C0 – Cn)
O For any year m, m is less than or equal to n, the annual
depreciation charge is
dm = (C0- Cn )

NOTE that the annual depreciation charge gradually decreases

as the property gets older. The depreciation for the first year is
n times the depreciation charge for the last year n.
 Sample problem
O A contractor imported a bulldozer for his job,
paying 250, 000 to the manufacturer. Freight and
insurance charges amounted to 18,000;customs,
broker’s fees and arrastre services , 8,500 ;
taxes ,permits and other expenses ; 25,000.
If the contractor estimates the life of the
bulldozer to be 10 years with a salvage value of
20,000 ,determine the book value at the end of 6
years using the Matheson and SYD method.
 Cont.
Sol’n:
O 
Cn= 20,000
C0 = 250,000 +18,000+ 8,500 + 25,000 =301,500
O n = 10 years
m= 6 years

Matheson:

k = 1 - = 1- = 0.2376

C6 = C0 (1- k)6 = 301,500 (1- .2376)6 = 59, 201.53

 Cont.
SYD
O  
= 1+2+3+… +8+9+10 = (1 + 10) =55
C0 – Cn = 281,500
D6 = (281,500) = 230,318.18

C6 = C0 – D6 = 301,500 – 230,318.18 = 71,181.82

 Sample problem
O A civil engineer bought a gantry crane for
erecting tall buildings.it was invoiced from
Japan CIF (cost ,insurance , freight) Manila at
250,000. Brokerage ,bank, arrastre fees
,customs , duties, permits etc. total 120,000.
Prepare depreciation sched. For Matheson
and SYD method.
 Matheson method
C0=  370,000
O Cn= 50,000 n=10
k = 1 - = 1- = 0.1814
 Cont.
Year (m) BV at the Dep. during BV at the end
beg. Of the year ( kCm ) of the year
year (Cm) (Cm -kCm )
1 370,000 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 91,145.41
8 91,145.41 16,533.08 74,613.39
9 74,613.39 13,534.14 61,079.19
10 61,079.19 11.079.18 50,000.01