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Depreciation
Sum of the year’s digit and Declining Balance Accelerated or decreasing charge methods These methods provide higher depreciation charge in the earlier years then lower depreciation in the later years resulting in diminishing depreciation rate trough the useful life of the asset. This is supported by the matching principle where new assets are expected to produce more revenue in earlier years than on later years. Sum of the years digit This method provides the depreciation rate by computing the sum of the years of the useful life of the asset as the denominator and then using the fraction of the remaining useful life as the numerator. The denominator can be computed using an arithmetic sequence formula, n x (n+1)/2 where n is the useful life of the asset. Illustration: Cost of equipment P 4,000, Salvage Value P 500, Estimated Useful Life 7 years To compute for the denominator, we use the formula n x (n+1)/ 7 x (7+1)/2= 28 To verify: 7+6+5+4+3+2+1= On the first year the depreciation rate will be 7/28= 25% On the second year the depreciation rate will be 6/28= 21% On the third year, 5/28= 18% Year Depreciation 1 7/28 x 3,500,000= 875, 2 6/28 x 3,500,000= 750, 3 5/28 x 3,500,000=625, 4 4/28 x 3,500,000=500, 5 3/28 x 3,500,000=375, 6 2/28 x 3,500,000=250, 7 1/28 x 3,500,000=125, As shown in the illustration, there is a declining rate in depreciation for each year.
Declining balance method- double declining balance A fixed rate is computed by multiplying by the declining carrying amount of the asset. In double declining balance, the straight-line rate is multiplied by 200% to get the double declining rate. Illustration Cost of equipment 2,000, Residual Value 200, Estimated useful Life 9 years Straight line rate will be computed as 1/9= 11% multiplied by the double rate of 2 which will give us a double declining rate of 22%. Year Depreciation Accumulated Depreciation Carrying Amount P 2,000, 1 22% x 2,000,000= 440,000 P440, 1,560, 2 22% x 1,560,000= 343,200 783, 1,216, 3 22% x 1,216,800= 267,696 1,050, 949, 4 22% x 949,104= 208, 803 1,259, 740, 5 22% x 740,301= 162,866 1,422, 577, 6 22% x 577,435=127,035 1,549, 450, 7 22% x 450,400= 99,088 1,648, 351, 8 22% x 351,312= 77,289 1,725,978 274, 9 22% x 274,023=74,023 1,800, 200, As shown in the illustration, the depreciation rate decreases for each year. 150% declining Balance
Wires 50, Cash 50, To record the retirement Depreciation Expense 53, Wires 53, 1200 x 40=48, 100 x 50= 1300 tools at 53,000 using FIFO Change in useful life Estimated useful life of an asset can change either due to unexpected physical deterioration or economic factors. These factors can decrease the useful life of an asset. Unexpected stability and improved maintenance can increase the useful life of an asset. If that happens, the depreciation charge for current and future periods shall be adjusted. In computing for the new depreciation rate, past depreciation is not adjusted, and we simply allocate the remaining life of an asset to the new useful life. Illustration Boss Ocs company have a machinery costing 10,000,000. The entity has acquired the machinery on January 1, 2019 and the asset have a useful life of 10 years. At the beginning of the fourth year, the company assessed that the useful life of asset is now 12 years. Compute for the adjusted depreciation rate. Cost of the machine 10,000, Accumulated Depreciation (10,000,000/ 10 x 3) (3,000,000) Carrying amount at the beginning of the fourth year 7,000, Annual depreciation starting the 4th^ year (7,000,000/9) 777, The new depreciation period is derived by adding the increase to the useful life of an asset to its remaining useful life. Change in Depreciation Methods If the current depreciation method being used in an asset does not effectively reflect the pattern in which the economic benefits are derived by the entity, depreciation methods may be changed to reflect the actual economic benefits consumed by the entity. If that is the case, the change in depreciation shall be accounted as a change in accounting estimate and the depreciation rate for the current and future periods shall be adjusted.
Illustration An entity decided to change the depreciation method of an asset from double declining balance to straight line at the end of the 1st year. The asset was acquired at the cost of 500,000 and have a useful life of 5 years. Depreciation rate using double declining balance: 1/5 x 200% = 40% 500,000 x 40%= 200, Cost 500, Depreciation (200,000) Carrying amount at the end of the first year 300, New depreciation Rate for the second year 300,000/4= 75, The remaining useful life of the asset (5-1=4) is used to derive the depreciation from the remaining carrying amount (300,000) of the asset. To Journalize the new depreciation rate for the second year: Depreciation Expense 75, Accumulated Depreciation 75, QUESTIONS AND PROBLEMS
III. Depreciation is used in Intangible Assets a. True, True, False b. False, False, True c. False True False d. False, False, False
- Adelicious Company owns disposable jigs used in the production of hotdogs, which is the most accurate depreciation method? a. Straight-line method b. Retirement Method c. Declining Balance d. Replacement method
- Change in useful life is accounted for as a. change in accounting estimate b. change in accounting methods c. both statements are false d. both statements are true
- The following are the accelerated methods of depreciation except a. sum of the years digits b. declining balance method c. multiple declining balance method d. double declining balance method
- Boss Ocs rental company uses group depreciation for its fleet of boats, when it retires one of its boat and receives cash from a salvage company, the carrying value of the PPE will be decreased by the. a. Original Cost of the boat b. Original cost of the boat less cash proceeds c. cash proceeds received d. cash proceeds received and the original cost of the truck.
- The following data relates to a machinery acquire by an entity at the beginning of 2019 Cost 10,000,
Salvage Value 500, Useful Life 5 years Compute the depreciation on 2019 using the 150% declining balance method.
- In the preceding problem, what is the carrying amount of the asset on December 31, 2021?
- Relating to the preceding problem, assuming the entity used the straight-line method at the beginning of 2022 compute for the new depreciation rate.
- An entity purchased an equipment on 2018 at a cost of 500,000 with a useful life of 5 years. The entity adopted the double declining balance method in calculating depreciation. What is the accumulated depreciation for 2020?
- The following data relates to an equipment acquired by Lador Company on 2022. Cost 15,000, Salvage Value 1,000, Useful Life 7 years What is the depreciation on 2023 using sum of the year’s digits?
- In the immediately preceding problem, what is the carrying amount of the asset on 2029?
- The following data relates to tools acquired on the current year with a beginning balance of 200,000. Acquisition cost January 1 80, February 1 40, Inventory at the yearend 78, Compute for the depreciation using inventory method.
- The following data relates to an equipment acquired by an entity on 2018
