depreciation
DESCRIPTION
Methods of calculating depreciationTRANSCRIPT
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(c) 2001 Contemporary Engineering Economics 1
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PRESENTED BY:
Javeria
11-arid-3303
MIT-3
University Institute of Information Technology, Rawalpindi(UIIT,UAAR)
Pakistan
DEPRECIATION
METHODS
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DEPRECIATION
Depreciation is the reduction in value of an asset over time due to:
wear and tear effluxion of time obsolescence
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What Can Be Depreciated?
A qualifying asset for depreciation must satisfy all these conditions:
should be used in business
should have a definite useful life and a life longer than 1 year
must wear out, become obsolete or lose value
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Types of Depreciation
Book Depreciation
Tax Depreciation
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Methods to Calculate Depreciation
Straight-Line Method
Declining Balance Method
MACRS Method
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Required Factors in Calculating Asset Depreciation
Useful life of asset
Residual value
Cost basis
Method of depreciation
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Principle A fixed asset provides its service in a uniform fashion over its life
FormulaAnnual Depreciation = cost – residual value useful life
1. Straight-Line (SL) Method
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EXAMPLE (Straight-Line Method)
Year Computation DepreciationExpense
AccumulatedDepreciation
Book Value
$45,000
First (45,000-5,000)/5 $8,000 $8,000 37,000
Second (45,000-5,000)/5 8,000 16,000 29,000
Third (45,000-5,000)/5 8,000 24,000 21,000
Fourth (45,000-5,000)/5 8,000 32,000 13,000
Fifth
Total
(45,000-5,000)/5 8,000
40,000
40,000 5,000
Cost of machinery = $45,000Residual value = $5,000Useful life = 5 years.Calculate annual cost of depreciation?
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Example - (Straight-Line Method)
Years
1 2 3 4 5
Annual Depreciation expense
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PrincipleA fixed asset provides its service in a decreasing fashion. The book value is reduced by a fixed percentage each year.
FormulaAnnual Depreciation = Depreciation rate * Book value at start of
year
Depreciation rate200% Declining Method: Depreciation rate = 2/useful life150% Declining Method : Depreciation rate = 1.5/useful life130% Declining Method: Depreciation rate = 1.3/useful life
2. Declining Balance Method
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EXAMPLE(200% Declining Balance Method)
Year Computation DepreciationExpense
AccumulatedDepreciation
Book Value
$70,000
First $70,000 x 40% $28,000 $28,000 42,000
Second 42,000 x 40% 16,800 44,800 25,200
Third 25,200 x 40% 10,080 54,880 15,120
Fourth 15,120 x 40% 6,048 60,928 9,072
Fifth
Total
9,072-$5,000 4,072
65,000
65,000 5,000
Cost of machinery = $70,000Residual value = $5000 Useful life = 5 yearsCost of annual Depreciation?
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Example – 200% Declining Balance Method
Years
1 2 3 4 5
Annual Depreciation expense
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PrincipleAn asset has a fixed life according to the category in which it falls. The residual value is always zero.
FormulaAnnual Depreciation = cost x appropriate MACRS % rate
3. MACRS Method
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(c) 2001 Contemporary Engineering Economics 15
TABLE OF PROPERTY CLASS AND NUMBER OF YEARS
Years
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(c) 2001 Contemporary Engineering Economics 16
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EXAMPLE(MACRS Method)
Year Computation DepreciationExpense
AccumulatedDepreciation
Book Value
$30,000
First 33.33% x 30,000 9,999 9,999 20,001
Second 44.45% x 30,000 13,335 23,334 6,666
Third 14.81% x 30,000 4,443 27,777 2,223
Fourth 7.41% x 30,000 2,223 30,000 0
Cost of tractor = Rs. 30,000Cost of annual Depreciation?
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