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Depreciation

Depreciation. LEARNING OUTCOMES. Understand basic terms of asset depreciation Apply straight line method of depreciation Apply DB and DDB methods of depreciation; switch between DDB and SL methods Apply MACRS method of depreciation Select asset recovery period for MACRS

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Depreciation

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  1. Depreciation

  2. LEARNINGOUTCOMES • Understand basic terms of asset depreciation • Apply straight line method of depreciation • Apply DB and DDB methods of depreciation; switch between DDB and SL methods • Apply MACRS method of depreciation • Select asset recovery period for MACRS • Explain depletion and apply cost depletion & percentage depletion methods

  3. Depreciation Terminology Definition:Book (noncash) methodto represent decrease in value of a tangible asset over time Two types: book depreciation and tax depreciation Book depreciation: used for internal accounting to track value of assets Tax depreciation: used to determine taxes due based on tax laws

  4. Methods of Charging Depreciation

  5. Features : (i) A fixed portion of the cost of a fixed asset is allocated and charged as periodic depreciation. (ii) Such depreciation becomes an equal amount in each period. Depreciation = (V-S)/n Where, V= Cost of the Asset S= Residual value or the expected scrap value n= estimated life of the asset. Fixed / Equal Instalment OR Straight Line Method

  6. Straight Line Depreciation Book value decreases linearly with time B - S Dt = Where:Dt= annual depreciation charge t = year B = first cost or unadjusted basis S = salvage value n = recovery period n BVt = B - tDt Where:BVt = book value after t years SL depreciation rate is constant for each year: d = dt = 1/n

  7. Example: SL Depreciation An argon gas processor has a first cost of 20,000 with a 5,000 salvage value after 5 years. Find (a) D3 and (b) BV3 for year three. (c) Plot book value vs. time. Solution:(a ) D3 = (B – S)/n = (20,000 – 5,000)/5 = $3,000 (c) Plot BV vs. time BVt 20,000 (b) BV3 = B – tDt = 20,000 – 3(3,000) = $11,000 11,000 5,000 0 3 5 Year, t

  8. Reducing / Diminishing Balance Method OR Written Down Value Method Features : (i) Depreciation is calculated at a fixed percentage on the original cost in the first year. But in subsequent years it is calculated at the same percentage on the written down values gradually reducing during the expected working life of the asset. (ii) The rate of allocation is constant (usually a fixed percentage) but the amount allocated for every year gradually decreases.

  9. Sum of Years Digit Method

  10. Example: Double Declining Balance A depreciable construction truck has a first cost of 2,20,000 with a 20,000 salvage value after 5 years. Find the (a) depreciation Original Cost of an Asset 2,20,000 Scrap Value (Estimated) 20,000 Working Life (Estimated) 5 years Total Depreciation Rs. 2,20,000 —Rs. 20,000 =Rs. 2,00,000 Annual Depreciation = Rs. 2,00,000 /5 =Rs. 40,000 Rate of Depreciation under Straight Line Method =Rs. 40,000*100/2,00,000 = 20% Depreciation under DDB Method = 2 x 20% or 40%

  11. The depreciation will be calculated as

  12. Method of Depreciation Straight line function: SLN(B,S,n) Declining balance function: DB(B,S,n,t) Change in Method

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