DEPRECIATION: Straight Line Method 2013 DEPRECIATION

Definition: is the decrease in the value of physical property with the passage of time. Types of Depreciation 1. Normal depreciation (a) Physical (b) Functional 2. Depreciation due to changes in the price levels 3. Depletion

Definitions of Value VALUE- is the present worth of all future profits that are to be received through

ownership of a particular property. MARKET VALUE- is the amount which a willing buyer will pay to a willing seller for the property where each has equal

Physical and Economic Life PHYSICAL LIFE- 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.

advantage and is under no compulsion to buy or sell. UTILITY or USE VALUE- is what the property is worth to the owner as an operating unit. 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- is the worth of a property as shown on the accounting records of an enterprise. SALVAGE or RESALE VALUE- is the price that can be obtained from sale of the property after it has been used. SCRAP VALUE- is the amount the property would sell for if disposed off as junk.

Depreciation Methods We shall use the following symbols for the different depreciation methods. L = useful life of the property in years CO= original cost CL= value at the end of life, scrap value (Including gain or loss due to removal) d= annual cost of depreciation CN= book value at the end of n years

Purposes of Depreciation 1. To provide for the recovery of capital this has been invested in physical property. 2. To enable the cost of depreciation to be charge to the cost of producing products or services that results from the use of the property.

DN= depreciation up to age n years

Engineering Economy: Group3

2013

DEPRECIATION: Straight Line Method 2013

The Straight Line Method This method assumes that the loss in value is directly proportional to the age of the property. new equipment at the end of life. Determine the annual depreciation cost by straight line method. Solution

CO= P53, 000 + P1, 500 = P54, 500 CL= P5, 000 L=10

SAMPLE PROBLEMS: (3-1) An electronic balance costs P90, 000 and has an estimated salvage value of P8, 000 at the end of its 10 years life time. What would be the book value after three years, using the straight line method in solving for the depreciation? Solution

(3-3) A new electric saw for cutting small pieces of lumber in a furniture manufacturing plant has a cost basis of P4, 000 and a 10 year depreciable life. The estimated salvage value of the saw is zero at the end of 10 years. Determine the annual depreciation amounts using straight line method. Tabulate the annual depreciation amounts and the book value of the saw at the end of each year. Solution

CO= P90, 000 CL= P8, 000 L=10 n=3

D5= n d = (5)(P400) = P2, 000 C5 = CO D5= P4, 000 P2, 000 = P2, 000 Table:
n 0 1 2 3 4 5 6 7 8 9 10 d ----400 400 400 400 400 400 400 400 400 400 CN 4000 3600 3200 2800 2400 2000 1600 1200 800 400 0 2013

D3 = n d = (3)(P8, 200) = P24, 600 C3 = CO D3 = P90, 000 P24, 600 C3= P65, 400
(3-2) A broadcasting corporation purchased an equipment for P53, 000 and paid for P1, 500 for freight and delivery charges to the job site. The equipment has a normal life of 10 years with a trade-in value of P5, 000 against the purchase of

Engineering Economy: Group3

DEPRECIATION: Straight Line Method 2013

(3-4)A dump truck was bought for P30,000 six years ago. It will have a salvage value of P3,000 4 years from now. It is sold now for P8,000. What is the sunk cost if the depreciation used is straight line? Solution

CO= P30, 000 CL= P3, 000 L=10 n=6

D6= n d = (6)(P2, 700) = P16, 200 C6 = CO D6 = P30, 000 P16, 200 C6= P13, 800 SUNK COST = P13, 800 P8, 000 SUNK COST = P5, 800
(3-5) A telephone company purchased a microwave radio equipment for P6,000,000. Freight and installation charges amounted to 3% of the purchase price. If the equipment shall be depreciated over a period of 8 years with a salvage value of 5%. Determine the annual depreciation charges using straight line method. Solution

CO= P6, 000, 000 (1+0.03) = P6, 180, 000 CL= P6, 180, 000 (0.05) = P309, 000 L=8

AUGUST 2013

d = P733, 875
Engineering Economy: Group3

2013