ES ECON 1

DEPRECIATION
DEPRECIATION
• The decrease in the value of physical property due to passage of
time
• Method of reallocating the cost of tangible asset over its useful
life span of it being in motion
• The reduction of fall in the value of an asset or physical property
during course of its working life and due to the passage of time
TYPES OF
DEPRECIATION
A. Physical Depreciation. This is due to the reduction of the
physical ability of an equipment or asset to produce results
B. Functional Depreciation. This is due to the reduction in the
demand for the function that the equipment or asset was
designed to render. This type of depreciation is often called
obsolescence.
DEPRECIATION
Methods of computing depreciation
1. Straight Line Method (SLM)
2. Sinking Fund Method (SFM)
3. Declining Balance Method (DBM)
4. Sum-of-the-years-digits Method (SYD)
5. Double Declining Balance Method (DDBM)
STRAIGHT LINE METHOD (SLM) 5

In this method of computing depreciation, it is assumed that the loss in

value is directly proportional to the age of the equipment or asset.
Annual Depreciation Charge, d

𝑪𝒐− 𝑪𝒏
𝒅=
𝒏
Where:

- first cost

- cost after “n” years (salvage value or scrap value)

n – life of the property

STRAIGHT LINE METHOD (SLM) 6

Book value at the end of “m” years using,

-
Where:
EXAMPLE 1
An asset is purchased for Php 500,000.00 The salvage value
in 25 years is Php 100,000.00. What is the total depreciation
in the first three years using straight-line method?

A. Php 48,000
B. Php 46,000
C. Php 47,000
D. Php 45,000
EXAMPLE 2
A machine costs P 8,000 and an estimated life of 10 years
with a salvage value of P500. What is its book value after 8
years using straight line method?

A.P2,100
B.P2,000
C.P1,900
D.P2,200
EXAMPLE 3
A machine has an initial cost of P50,000.00 and a salvage
value of P10,000.00 after 10 years. What is the straight line
method depreciation rate as a percentage of the initial cost?

A. 7%
B. 8%
C.9%
D.10%
SINKING FUND METHOD (SFM) 10

In this method of computing depreciation, it is assumed that a sinking fund is

established in which funds will accumulate for replacement purposes
Annual Depreciation Charge, d

( 𝑪 ¿ ¿ 𝒐 − 𝑪𝒏 ) 𝒊
𝒅= 𝒏
¿
(𝟏+ 𝒊) − 𝟏
Where:
- first cost
- cost after “n” years (salvage value or scrap value)
n – life of the property
SINKING FUND METHOD (SFM) 11

Book value at the end of “m” years using,

-
Where:

𝒎
𝒅 [ (𝟏+ 𝒊 ) −𝟏 ]
𝑫 𝒎=
𝒊
EXAMPLE 1
A consortium of international telecommunication companies contracted for the
purchase and installation of fiber optic cable linking Manila City and Cebu City
at a total cost of P960 Million . This amount includes freight and installation
charges estimated at 10% of the above total contract price. If the cable shall be
depreciated over a period of 15 years with zero salvage value and money is worth
6% per annum, what is the annual depreciation charge?

A. P40.2 Million
B. P41.2 Million
C. P42.2 Million
D. P43.2 MIllion
EXAMPLE 2
An equipment costs P10,000 with a salvage value of P500 at
the end of 10 years. Calculate the annual depreciation cost
by the sinking-fund method at 4% interest.

A.P791.26
B.P792.61
C.P726.17
D.P771.26
EX. 3
A machine with a useful life of 15 years is bought for P20,000. The
money is worth 8% and the scrap value is P5,000. Using sinking
fund, determine the accumulated depreciation for the 4 th year.

A.P12,489
B.P11,997
C.P2,489.37
D.P1,997.04
CALC TECH EX. 3
A machine with a useful life of 15 years is bought for P20,000. The
money is worth 8% and the scrap value is P5,000. Using sinking
fund, determine the book value at the tenth year.

A.P12,489
B.P11,997
C.P2,489.37
D.P1,997.04
 16
DECLINING BALANCE METHOD (DBM)

In this method of computing depreciation, it is assumed that the annual cost of

depreciation is a fixed percentage of the book value at the beginning of the
year. This method is sometimes known as constant percentage method or
matheson formula

or
The value k is the constant percentage. Hence k must be decimal and a value
less than 1. In this method, the salvage value or scrap value must not be zero.
EXAMPLE 1
A VOM has a selling price of P 400. If its selling price is
expected to decline at a rate of 10% per annum due to
obsolescence , what will be its selling price after 5 years?

A.P243.89
B.P263.02
C.P236.20
D.P251.20
EXAMPLE 2
A machine costing P45,000 is estimated to have a book value of
P4,350 when retired at the end of 6 years. Depreciation cost is
computed using a constant percentage of the declining book value.
What is the annual rate of depreciation in %?

A.30.75%
B.31.25%
C.32.25%
D.33.75%
CALC TECH EX. 1
A broadcasting corporation purchased an equipment that costs
P7,000,last 8 years and has a salvage value of P350. Determine the
book value during the 4th year using declining balance method

A. P1,565.25
B. P2,214.84
C. P1,711.25
D. P1,645.84
CALC TECH EX. 2
A certain copier machine costs P150,000 with a trade in value of
P15,000 after making 800,000 copies. Using the declining balance
method, what is book value when the machine had made 300,000
copies?

A. P63,254.48
B. P64,765.25
C. P67,833.32
D. P130,473.40
 21
SUM-OF-THE-YEARS-DIGITS METHOD (SYD)

the depreciation rate percentage for each year is calculated as the number of
years in remaining asset life for the same year divided by the sum of remaining
asset life every year through the asset's life. As the depreciation rate decreases
over time, so does the depreciation charge.
EXAMPLE 1
A company purchases an asset for P10,000.00 and plans to
keep it for 20 years. If the salvage value is zero at the end of
20th year, what is the depreciation in the third year? Use
SYD method.

A.P857.14
B.P865.32
C.P845.90
D.P875.41
EXAMPLE 2
ABC Corporation makes it a policy that for any new equipmet
purchased, the annual depreciation cost should not exceed 20% of the
first cost at any time with no salvage value. Determine the length of
service life necessary if the depreciation used is the SYD Method.

A. 7 years
B.6 years
C. 8 years
D. 9 years
EXAMPLE 3
An asset is purchased for P9,000. Its estimated life is 10
years which will be sold for P1,000.Find the book value
during the 1st year using SYD.

A. P7,545.45
B. P1,454.54
C. P4,415.54
D. P4,545.45
 25
DOUBLE DECLINING BALANCE METHOD
(DDBM)

a form of accelerated depreciation that doubles the regular depreciation

approach. It is frequently used to depreciate fixed assets more heavily in the
early years, which allows the company to defer income taxes to later years.
 26
DOUBLE DECLINING BALANCE METHOD
(DDBM)
Depreciation expense
)

Book value,
-
EXAMPLE
Cost of the machine is P140,000, useful life of 8 years,
salvage value of P10,000. Determine the 4 th year
depreciation charge using the Double Declining Balance
Method.

A. P17,465.25
B. P14,765.625
C. P17,833
D. P13,473.4
EXAMPLE
ABC Company purchases a machine for $10,000 with a
useful life of 5 years and no salvage value. Calculate the
depreciation expense and book value for each year using the
double declining balance method.
A. Year 1
B. Year 2
C. Year 3
D. Year 4
E. Year 5
29