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Sample Problem

The document describes different methods for calculating depreciation of an asset over 10 years: - Straight-line method calculates equal depreciation amounts each year of $400 for a total depreciation of $4,000. - Declining balance method calculates larger depreciation amounts in earlier years, totaling $3,570.50 over 10 years. - Sum of the years' digits method allocates depreciation unevenly over the years based on a formula, totaling $4,000 over 10 years. - Switching method uses declining balance initially but switches to straight-line later if it yields a larger deduction, fully depreciating the asset over 10 years.

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Ralph Parducho
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944 views2 pages

Sample Problem

The document describes different methods for calculating depreciation of an asset over 10 years: - Straight-line method calculates equal depreciation amounts each year of $400 for a total depreciation of $4,000. - Declining balance method calculates larger depreciation amounts in earlier years, totaling $3,570.50 over 10 years. - Sum of the years' digits method allocates depreciation unevenly over the years based on a formula, totaling $4,000 over 10 years. - Switching method uses declining balance initially but switches to straight-line later if it yields a larger deduction, fully depreciating the asset over 10 years.

Uploaded by

Ralph Parducho
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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7/24/2013

Sample Problem
A new electric saw for cutting small pieces of lumber in a furniture manufacturing plant has a cost basis of P4,000 and a 10year depreciable life. The estimated SV of the saw is zero at the end of 10 years.

EOY, k

dk

4000

400

3600

400

3200

d5* = 5(4000 0)/10 = 2000

400

2800

BV5 = 4000 {5(4000-0)/10} = 2000

400

2400

400

2000

400

1600

400

1200

400

800

400

400

10

400

Method 1: Straight-Line (SL) Method


Where:
N
B
dk
BVk
SVN
dk*

dk = (B SVN)/N
dk* = Kdk for 1 k N
BVk = B dk*

=
=
=
=
=
=

Depreciable life of the asset in years


Cost Basis
Annual depreciation deduction in year k
Book value at the end of year k
Estimated salvage value at end of year N
Cumulative depreciation through year k

EOY, k

Method 2: Declining Balance (DB) Method

BVk

dk

Sample Computations

BVk

d5 = (4000 0)/ 10 = 400

Sample Computations

4000

800

3200

640

2560

R = 2/10 = 0.20
d6 = 4000(1 0.2) 5(0.2) = 262.14

Where:
D1 = B(R)
k-1
dk= B(1-R) (R)
k
dk* = B[1-(1-R) ]
k
BVk = B(1-R)
N
BVN = B(1-R)

d6* = 4000[1 - (1 0.2) 6]= 2951.42

R
R

=
=

Ratio of the depreciation in any one year to the


BV at the beginning of the year.

From the sample problem: assuming a 200% declining balance

dk= (B SVN) * {[2*(N-K+1)]/[N*(N+1)]}


BVk = B {[2*(B-SVN)]/N}*k + {[(B-SVN)/[N*(N+1)]*k(k+1)
dk* = B BVk

512

409.60

1638.40

2048

327.68

1310.72

262.14

1048.58

209.72

838.86

167.77

671.09

134.22

536.87

10

107.37

429.50

BV6 = 4000(1 0.2) 6= 1048.58

Declining Balance / N

Method 3: Sum of the Years Digits (SYD) Method

EOY, k

dk

BVk

Sample Computations
4000

727.27

3272.73

654.55

2618.18

581.82

2036.36

509.09

1527.27

436.36

1090.91

363.64

727.27

290.91

436.36

218.18

218.18

145.45

72.73

10

72.73

d4 = 4000 * {[2*(10 4 + 1)]/(10*11)} = 509.09

BV4 = 4000 {[2*4000]/10}*4 + {4000/(10*11)}*4*5


= 1527.27
d4* = 4000 1527.27 = 2472.23

7/24/2013

Method 5: Units-of-Production Method


Method 4: Declining Balance with Switchover to Straight-Line

Year, k
1
2
3
4
5
6
7
8
9
10
TOTAL

Beginning of
Year BV
4000
3200
2560
2048
1638.40
1310.72
1048.58
786.44
524.30
262.16

200% DB Method
800
640
512
409.60
327.68
262.14
209.72
167.77
134.22
107.37
3570.50

SL Method
400
355.56
320
292.57
273.07
262.14
262.14
262.14
262.14
262.14

Depreciation Amount
Selected
800
640
512
409.6
327.68
262.14 (SWITCH)
262.14
262.14
262.14
262.14
4000.00

A piece of equipment used in a business has a basis of P50,000 and is expected to have a P10,000 salvage value when
replaced after 30,000 hours of use. Find its depreciation rate per hour of use, and find its book value after 10,000 hours of
operation.
Solution:
Depreciation per unit of production = (50,000 10,000)/30,000 = P1.33 per hour
After 10,000 hours, BV = 50,000 (P1.33/hr)(10,000 hrs) = P36,700

Note: The switch over occurs in the year in which a larger depreciation amount is obtained from the straight-line method.
With switch over the book value at year ten is 0.00

Depletion
WGS zinc company recently bought an ore-bearing parcel of land for P2,000,000. The recovery reserves in the mine were
estimated to be 500,000 tons.
a.
b.

If 75,000 tons of ore were mined during the first year and 50,000 tons were sold, what was the depletion
allowance for year one?
Suppose at the end of year one, reserves were reevaluated and found to be only 400,000 tons. If 50,000
additional tons are sold in the second year, what is the depletion allowance for year two?

Solutions:
a.

Depletion allowance for year 1?


Depletion unit = P2,000,000/500,000 tons = P4.00 per ton.
Depletion Allowance for year 1 = 50,000 tons (P4.00/ton) = P200,000

b.

The adjusted cost basis at the beginning of year 2 = P2,000,000 P200,000 = P1,800,000
The depletion unit =P1,800,000/400,000 tons = P4.5/ton
Depletion Allowance for year 2 = 50,000 tons (P4.5/ton) = P225,000

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