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Depreciation Methods

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Raj Gaikwad
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25 views3 pages

Depreciation Methods

Uploaded by

Raj Gaikwad
Copyright
© © All Rights Reserved
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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Depreciation Methods

Depreciation Methods

Depreciation methods based on time


Straight line method
Declining balance method

Straight Line Depreciation Method

Depreciation = (Cost - Residual value) / Useful life

[Example, Straight line depreciation]

On April 1, 2011, Company A purchased an equipment at the cost of $140,000. This equipment is
estimated to have 5 year useful life. At the end of the 5th year, the salvage value (residual value) will be
$20,000. Company A recognizes depreciation to the nearest whole month. Calculate the depreciation
expenses for 2011, 2012 and 2013 using straight line depreciation method. (Financial Year = Calendar Year)

Depreciation for 2011


= ($140,000 - $20,000) x 1/5 x 9/12 = $18,000

Depreciation for 2012


= ($140,000 - $20,000) x 1/5 x 12/12 = $24,000

Depreciation for 2013


= ($140,000 - $20,000) x 1/5 x 12/12 = $24,000
Declining Balance Depreciation Method

Depreciation = Book value x Depreciation rate


Book value = Cost - Accumulated depreciation

Depreciation rate for double declining balance method


= Straight line depreciation rate x 200%

Depreciation rate for 150% declining balance method


= Straight line depreciation rate x 150%

[Example, Double declining balance depreciation]

On April 1, 2011, Company A purchased an equipment at the cost of $140,000. This equipment is estimated to
have 5 year useful life. At the end of the 5th year, the salvage value (residual value) will be $20,000. Company A
recognizes depreciation to the nearest whole month. Calculate the depreciation expenses for 2011, 2012 and 2013
using double declining balance depreciation method.

Useful life = 5 years --> Straight line depreciation rate = 1/5 = 20% per year

Depreciation rate for double declining balance method


= 20% x 200% = 20% x 2 = 40% per year

Depreciation for 2011


= $140,000 x 40% x 9/12 = $42,000

Depreciation for 2012


= ($140,000 - $42,000) x 40% x 12/12 = $39,200

Depreciation for 2013


= ($140,000 - $42,000 - $39,200) x 40% x 12/12 = $23,520

Double Declining Balance Depreciation Method

Book Value Book Value at the


Year Depreciation Rate Depreciation Expense
at the beginning year-end
2011 $140,000 40% $42,000 (*1) $98,000
2012 $98,000 40% $39,200 (*2) $58,800
2013 $58,800 40% $23,520 (*3) $35,280
2014 $35,280 40% $14,112 (*4) $21,168
2015 $21,168 40% $1,168 (*5) $20,000

(*1) $140,000 x 40% x 9/12 = $42,000


(*2) $98,000 x 40% x 12/12 = $39,200
(*3) $58,800 x 40% x 12/12 = $23,520
(*4) $35,280 x 40% x 12/12 = $14,112
(*5) $21,168 x 40% x 12/12 = $8,467

--> Depreciation for 2015 is $1,168 to keep book value same as salvage value.
--> $21,168 - $20,000 = $1,168 (At this point, depreciation stops.)

[Example, 150% declining balance depreciation]

On April 1, 2011, Company A purchased an equipment at the cost of $140,000. This equipment is estimated to
have 5 year useful life. At the end of the 5th year, the salvage value (residual value) will be $20,000. Company A
recognizes depreciation to the nearest whole month. Calculate the depreciation expenses for 2011, 2012 and 2013
using double declining balance depreciation method.

Useful life = 5 years --> Straight line depreciation rate = 1/5 = 20% per year

Depreciation rate for double declining balance method


= 20% x 150% = 20% x 1.5 = 30% per year

Depreciation for 2011


= $140,000 x 30% x 9/12 = $31,500

Depreciation for 2012


= ($140,000 - $31,500) x 30% x 12/12 = $32,550

Depreciation for 2013


= ($140,000 - $31,500 - $32,550) x 30% x 12/12 = $22,785

150% Declining Balance Depreciation Method

Book Value Depreciation Book Value at the


Year Depreciation Rate
at the beginning Expense year-end
2011 $140,000 30% $31,500 (*1) $108,500
2012 $108,500 30% $32,550 (*2) $75,950
2013 $75.950 30% $22,785 (*3) $53,165
2014 $53,165 30% $15,950 (*4) $37,216
2015 $37,216 30% $11,165 (*5) $26,051
2016 $26,051 30% $6,051 (*6) $20,000

(*1) $140,000 x 30% x 9/12 = $31,500


(*2) $108,500 x 30% x 12/12 = $32,550
(*3) $75,950 x 30% x 12/12 = $22,785
(*4) $53,165 x 30% x 12/12 = $15,950
(*5) $37,216 x 30% x 12/12 = $11,165
(*6) $26,051 x 30% x 12/12 = $7,815

--> Depreciation for 2016 is $6,051 to keep book value same as salvage value.
--> $26,051 - $20,000 = $6,051 (At this point, depreciation stops.)

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