RE: Examples are attached for Asma
Note: Remember the following:
1. Cost – Salvage value = Depreciable value
2. Never depreciate more than cost minus salvage, regardless of method
3. Accumulated Depreciation = Depreciation taken to date
4. Book value = Cost – Accumulated depreciation taken to date
OR
Book value = Remaining book value – Current year’s depreciation expense
5. As time goes by, Accumulated Depreciation gets larger.
6. As time goes by, Book Value gets smaller.
7. At the beginning of the asset’s life, book value = cost.
8. At the end of the asset’s life, book value = salvage value.
Data for this example:
Machine Cost = $20,000
Salvage Value expected/estimated = $4,000
Life of asset expected = 4 years or 10,000 units total
Units used in:
Year 1 = 2,000
Year 2 = 3,000
Year 3 = 4,000
Year 4 = 3,000
Straight-Line Method
The formula for straight-line is: (Cost – Salvage) / Life in years = (20,000 – 4,000) / 4) = 16,000/4 = $4,000 depreciation per year.
You end up with the following:
|
Year |
Depreciation Expense |
Accumulated Depreciation |
Book Value |
|
Year 1 |
(20,000-4,000)/4 = 16,000/4 = 4,000 |
4,000 |
20,000 - 4,000 = 16,000 |
|
Year 2 |
(20,000-4,000)/4 = 16,000/4 = 4,000 |
4,000 + 4,000 = 8,000 |
20,000 – 8,000 = 12,000 |
|
Year 3 |
(20,000-4,000)/4 = 16,000/4 = 4,000 |
8,000 + 4,000 = 12,000 |
20,000 - 12,000 = 8,000 |
|
Year 4 |
(20,000-4,000)/4 = 16,000/4 = 4,000 |
12,000 + 4,000 = 16,000 |
20,000 - 16,000 = 4,000 |
OR
|
Year |
Depreciation Expense |
Accumulated Depreciation |
Book Value |
|
Year 1 |
(20,000-4,000)/4 = 16,000/4 = 4,000 |
4,000 |
20,000 - 4,000 = 16,000 |
|
Year 2 |
(20,000-4,000)/4 = 16,000/4 = 4,000 |
4,000 + 4,000 = 8,000 |
16,000 – 4,000 = 12,000 |
|
Year 3 |
(20,000-4,000)/4 = 16,000/4 = 4,000 |
8,000 + 4,000 = 12,000 |
12,000 - 4,000 = 8,000 |
|
Year 4 |
(20,000-4,000)/4 = 16,000/4 = 4,000 |
12,000 + 4,000 = 16,000 |
8,000 - 4,000 = 4,000 |
Units of Production Method
The formula for units is: (Cost – Salvage) / Life in units = (20,000 – 4,000) / 10,000 = $1.60 depreciation per unit.
Each year’s depreciation = Depreciation per unit x Number of units used that year
Year 1 Depreciation Expense = $1.60 x 2,000 = $3,200
Year 1 Acc. Deprec. = $3,200
Book value = $20,000 - $3,200 = $16,800
Year 2 Depreciation Expense = $1.60 x 3,000 = $4,800
Year 2 Acc. Deprec. = $3,200 + $4,800 = $8,000
Book value end of Year 2 = $20,000 - $8,000 = $12,000 or $16,800 - $4,800 = $12,000
Year 3 Depreciation Expense = $1.60 x 4,000 = $6,400
Year 3 Acc. Deprec. = $3,200 + $4,800 + $6,400 = $14,400
Book value end of Year 3 = $20,000 - $14,400 = $5,600 or $12,000 - $6,400 = $5,600
Year 4 Depreciation Expense = $1.60 x 3,000 = $4,800
Note: Now the problem is, regardless of depreciation method, you can only depreciate a total of cost - salvage, which in this case is $20,000 - $4,000 = $16,000. That means we can't take all the depreciation calculated above. We start with the Year 1 calculation ($3,200) plus Year 2 calculation ($4,800) plus Year 3 calculation ($6,400), which adds to $14,400 so we can only depreciate $1,600 more. That means in Year 4 even though the calculation is $4,800, we are limited to $1,600.
Year 4 Acc. Deprec. = $3,200 + $4,800 + $6,400 + $1,600 allowed = $16,000
Book value end of Year 4 = $20,000 - $16,000 = $4,000 or $5,600 - $1,600 = $4,000
You end up with the following:
|
Year |
Depreciation Expense |
Accumulated Depreciation |
Book Value |
|
Year 1 |
$1.60 x 2,000= 3,200 |
3,200 |
20,000 – 3,200 = 16,800 |
|
Year 2 |
$1.60 x 3,000 = 4,800 |
3,200 + 4,800 = 8,000 |
20,000 – 8,000= 12,000 |
|
Year 3 |
$1.60 x 4,000 = 6,400 |
8,000 + 6,400 = 14,400 |
20,000 – 14,400 = 5,600 |
|
Year 4 |
$1.60 x 3,000 = 4,800 but limited to 1,600 |
14,400 + 1,600 = 16,000 |
20,000 - 16,000 = 4,000 |
OR
|
Year |
Depreciation Expense |
Accumulated Depreciation |
Book Value |
|
Year 1 |
$1.60 x 2,000= 3,200 |
3,200 |
20,000 – 3,200 = 16,800 |
|
Year 2 |
$1.60 x 3,000 = 4,800 |
8,000 |
16,800 – 4,800 = 12,000 |
|
Year 3 |
$1.60 x 4,000 = 6,400 |
14,400 |
12,000 – 6,400 = 5,600 |
|
Year 4 |
$1.60 x 3,000 = 4,800 but limited to 1,600 |
16,000 |
5,600 – 1,600 = 4,000 |
Declining-Balance Method
The formula for declining balance is: Book value x Declining balance percent x Time as portion of year.
Book value = Cost - Salvage value
Declining balance rate = 2 x Straight-line rate = 2 x 100%/Estimated useful life in years = 2 x 100%/4 years = 50%
When you first buy an asset, the book value = cost so this method starts with cost in Year 1. Then for the other years, you use the remaining book value to determine the yearly depreciation.
Year 1 Depreciation Expense = $20,000 x 50% = $10,000
Year 1 Accumulated Depreciation = $10,000
Book value = $20,000 - $10,000 = $10,000
Year 2 Depreciation Expense = $10,000 x 50% = $5,000
Year 2 Accumulated Depreciation = $10,000 + $5,000 = $15,000
Book value end of Year 2 = $20,000 - $15,000 = $5,000 or $10,000 - $5,000 = $5,000
Go ahead with calculations for Years 3 and 4 but be sure to read the note carefully.
Year 3 Depreciation Expense = $5,000 x 50% = $2,500
Year 3 Accumulated Depreciation = $15,000 + $2,500 = $17,500
Book value end of Year 3 = $5,000 - $2,500 = $2,500
Year 4 Depreciation Expense = $2,500 x 50% = $1,250
Year 4 Accumulated Depreciation = $17,500 + $1,250 = $18,750
Book value end of Year 4 = $20,000 - $18,750 = $1,250
Note: Now the problem is, regardless of depreciation method, you can only depreciate a total of cost - salvage, which in this case is $20,000 - $4,000 = $16,000. That means we can't take all the depreciation calculated above. We start with the Year 1 calculation ($10,000) plus Year 2 calculation ($5,000), which adds to $15,000 so we can only depreciate $1,000 more. That means in Year 3 even though the calculation is $2,500, we are limited to $1,000. Then even though the Year 4 calculation is $1,250, we can take no depreciation that last year because we have taken a total of $16,000 through Year 3.
So…the calculations for Years 3 and 4 should actually be as follows because of the limitations:
Year 3 Depreciation Expense = $5,000 x 50% = $2,500 but limited to $1,000
Year 3 Accumulated Depreciation = $15,000 + $1,000 = $16,000
Book value end of Year 3 = $5,000 - $1,000 = $4,000
Year 4 Depreciation Expense = $2,500 x 50% = $1,250 but limited to $0
Year 4 Accumulated Depreciation = $16,000 + $0= $16,000
Book value end of Year 4 = $20,000 - $16,000 = $4,000
You end up with the following:
|
Year |
Depreciation Expense |
Accumulated Depreciation |
Book Value |
|
Year 1 |
20,000 x 50% = 10,000 |
10,000 |
20,000 - 10,000 = 10,000 |
|
Year 2 |
10,000 x 50% = 5,000 |
10,000 + 5,000 = 15,000 |
20,000 – 15,000 = 5,000 |
|
Year 3 |
5,000 x 50% = 2,500 but limited to 1,000 |
15,000 + 1,000 = 16,000 |
20,000 - 16,000 = 4,000 |
|
Year 4 |
2,500 x 50% = 1,250 but limited to -0- since we reached $16,000 in Year 3 |
16,000 + 0 = 16,000 since it remains same as Year 3 |
20,000 - 16,000 = 4,000 because it remains same as Year 3 |
OR
|
Year |
Depreciation Expense |
Accumulated Depreciation |
Book Value |
|
Year 1 |
20,000 x 50% = 10,000 |
10,000 |
20,000 - 10,000 = 10,000 |
|
Year 2 |
10,000 x 50% = 5,000 |
10,000 + 5,000 = 15,000 |
10,000 – 5,000 = 5,000 |
|
Year 3 |
5,000 x 50% = 2,500 but limited to 1,000 |
15,000 + 1,000 = 16,000 |
5,000 - 1,000 = 4,000 |
|
Year 4 |
2,500 x 50% = 1,250 but limited to -0- since we reached $16,000 in Year 3 |
16,000 + 0 = 16,000 since it remains same as Year 3 |
4,000 - 0 = 4,000 because it remains same as Year 3 |