DEPRECIATION TYPES OF DEPRECIATION

Depreciation means the decrease in the value of physical properties or  Normal Depreciation
assets with the passage of time and use. It is the non-cash method of  Physical
representing the reduction in value of a tangible asset.  Functional
 Depreciation due to changes in price levels
 Depletion
Definitions of Value
ADDITIONAL NOTES
 Value is the present worth of all future profits that are to be  Physical life of a property is the length of time during which it is
received through ownership of a particular property. capable of performing the function for which it was designed and
manufactured.
 Market Value is the amount which a willing buyer will pay to a
willing seller for the property where each has equal advantage  Economic life is the length of time during which the property may
and is under no compulsion to buy and sell. be operated at a profit.

 Fair Value is the value which is usually determined by a  It should be simple.

disinterested third party in order to establish a price that is fair to
 It should recover capital.
both buyer and seller.
 The book value will be reasonably close to the market value at
 Book Value (depreciated book value) is the worth of a property
any time.
as shown on the accounting records of an enterprise.
 The method should be accepted by the BIR.
 Salvage (Resale Value) is the price that can be obtained from
the sale of a property after it has been used. DEPRECIATION SYMBOLS
 Scrap Value is the amount the property would sell for if disposed  n = useful life of the property in years
off as a junk
 C0 = the original cost
 Cn = the value at the end of the life
Purposes of Depreciation
 d = the annual cost of depreciation
 To provide for the recovery of capital which has been invested in
physical property.  Cm = the book value at the end of b years

 To enable the cost of depreciation to be charged to the cost of  Dm = depreciation up to age m years
producing products or services that results from the use of the
property.
STRAIGHT – LINE METHOD place up to any given time is assumed to be equal to the accumulated
amount in the sinking fund at that time.
The method assumes that the loss in value is directly proportional to the
age of the property. Annual Depreciation, d
Annual Depreciation, d C 0  Cn i
d
C 0  Cn 1  in  1
d
n Total Depreciation after “m” years, Dm
Total Depreciation after “m” years, Dm
Dm 

d 1  im  1 
mC 0  C n  i
Dm 
n
Book Value after “m” years, Cm
Book Value after “m” years, Cm C m  C 0  Dm
C m  C 0  Dm Example:
Example: A broadcasting corporation purchased an equipment for P53, 000 and
paid P1, 500 for freight and delivery charges to the job site. The
An electronic balance costs P90, 000 and has an estimated salvage
equipment has a normal life of 10 years with a trade – in value of P5, 000
value of P8, 000 at the end of its 10 years life time. What would be the
against the purchase of a new equipment at the end of the life. Determine
book value after three years, using the straight line method in solving for
the annual depreciation cost by the (a) straight line method and (b) by
the depreciation?
the sinking fund method. Assume interest at 6.5% compounded annually.
Given:
Given:
C0 = 90,000 Cn = 8, 000 n = 10 m=3
C0 = 53, 000+1, 500 = 54, 500 n = 10 Cn = 5, 000
Solution:
Solution:
390000  8000
Dm   24,600
10 54,500  5000
(a) d  ₱4, 950 Answer
Cm = 90000 – 24, 600 = ₱65, 400 Answer
10
54500  50000.065
(b) d  ₱3, 668 Answer
1  0.06510  1
SINKING FUND METHOD (Annuity Method)
This method assumes that a sinking fund is established in which funds
will accumulate for replacement. The total depreciation that has taken
DECLINING BALANCE METHOD (Matheson Formula) Given:
In this method, sometimes called the constant percentage method or the k = 10% C0 = 2, 000 m=5
Matheson Formula, it is assumed that the annual cost of depreciation is
To compute for the depreciation at the end of each year, we will use the
a fixed percentage of the salvage value at the beginning of the year.
formula
Total Depreciation after “m” years dm  C0 1  k m k
dm  C0 1  k m1k To compute the book value at the end/beginning of each year, we will
Book Value after “m” years, Cm use the formula

Cm  C0 1  k m Cm  C0 1  k m
Constant Percentage of Depreciation, k
Book Value Depreciation
Cm Book Value at the End of
k  1 m at the during the
C0 Year
Beginning of Year
the Year
(Cm)
the Year (dm)
1 ₱2, 000 ₱200 ₱1, 800
SCHEDULE OF DEPRECIATION DUE TO DECLINING BALANCE
2 ₱1, 800 ₱180 ₱1, 620
Book Value 3 ₱1, 620 ₱162 ₱1, 458
Depreciation 4 ₱1, 458 ₱145.80 ₱1, 312.20
at the Book Value at the End of
Year during the
Beginning of the Year 5 ₱1, 312.20 ₱131.22 ₱1, 180.98
Year
the Year
1 Co d1  kC0 C1  C0  d1   C0 1  k  DOUBLE – DECLINING BALANCE (DDB) METHOD
2 C o 1  k  d1  kC1 C 2  C 0  d 2   C 0 1  k  2
This method is very similar to the declining balance method except that
3 C o 1  k 2 d1  kC 2 C 3  C 0  d 2   C 0 1  k 3 the rate of depreciation is replaced by 2/n.
-
m C o 1  k m1 d1  kCm1 C m  C 0  d 2   C 0 1  k m Total Depreciation after “m” years
m1
-  2 2
d m  C 0 1  
n C o 1  k 
n1
d1  kCn1 C n  C 0  d 2   C 0 1  k 
n
 n n
Example: Book Value after “m” years, Cm
m
A certain type of machine loses 10% of its value each year. The machine  2
costs P2, 000 originally. Make out a schedule showing a yearly C m  C 0 1  
 n
depreciation, the total depreciation and the book value at the end of each
year for 5 years.
Example: For example, for a property whose life is 5 years.
Determine the rate of depreciation, the total depreciation up to the end Year in
of the 8th year and the book value at the end of 8 years for an asset that Depreciation Depreciation during the
Year Reverse
costs P15, 000 and has an estimated scrap value of P2, 000 at the end Factor Year
Order
of 10 years by (a) declining balance method and (b) the double declining 1 5 5/15 (5/15)(C0 – Cn)
balance (DDB) method. 2 4 4/15 (4/15)(C0 – Cn)
3 3 3/15 (3/15)(C0 – Cn)
Given:
4 2 2/15 (2/15)(C0 – Cn)
C0 = 15, 000 Cn = 2, 000 n = 10 m=8 5 1 1/15 (1/15)(C0 – Cn)
Sum of Year Digits = 15
Solution:
Alternative formula for SYD Method
(a) Declining Balance Method n  m1
Depreciation charge for the mth year: dm  C 0  Cn 
SYD
Cm 2000
k  1 m  1  10  18.25% m2n  m  1
C0 15000 Total Depreciation at any time m Dm  C 0  Cn 
2  SYD
Cm  C0 1  k m  150001  0.18258  ₱2, 992
Example 1:
Dm  C0  Cm  15000  2992  ₱12, 008
A structure costs P12, 000 new. It is estimated to have a life of 5 years
with a salvage value at the end of life P1, 000. Determine the book value
(b) Double Declining Balance (DDB) Method at the end of each year of life.
2 2
Rate of Depreciation =   0.2 Given:
n 10
C0 = 12, 000 Cn = 1, 000 n=5
m 8
 2  2  Year in
C m  C 0 1    150001    ₱2, 517 Depreciation Book Value at the End of
 n  10  Year Reverse
per year Each Year
Order
1 5 ₱3, 667 ₱8, 333
Dm  C0  Cm  15000  2517  ₱12, 483 2 4 ₱2, 933 ₱5, 400
3 3 ₱2, 200 ₱3, 200
4 2 ₱1, 467 ₱1, 733
SUM OF THE YEAR’S DIGITS (SYD) METHOD 5 1 ₱733 ₱1, 000
Let dm = depreciation charge during the mth year
dm = (depreciation factor)(total depreciation) Example 2:

dm = (reverse digit/sum of the digits)(C0 – Cn) A consortium of international telecommunication companies contracted
for the purchase and installation of a fiber optic cable linking two major
cities at a total cost of US $960M. This amount includes freight and
installation charges estimated at 10% of the above contract price. If the
cable shall be depreciated over a period of 15 years with zero salvage
value. What is the depreciation charge during the 8th year using SYD
method?
Given:

C0 = 960, 000, 000 Cn = 0 n = 15 m=8

Solution:

 15  8  1
dm  960,000,000   $64, 000, 0000
 120 