Methods of depreciation
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Methods of Depreciation. Georgia CTAE Resource Network Instructional Resources Office Written by: Dr. Marilynn K. Skinner May 2009. Four Methods. Straight Line Declining Balance Sum of the Year’s Digits Units of Production. Straight Line. Annual Depreciation = Cost – Salvage Value

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Methods of Depreciation

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Methods of depreciation

Methods of Depreciation

Georgia CTAE Resource Network

Instructional Resources Office

Written by: Dr. Marilynn K. Skinner

May 2009


Four methods

Four Methods

  • Straight Line

  • Declining Balance

  • Sum of the Year’s Digits

  • Units of Production


Straight line

Straight Line

Annual Depreciation = Cost – Salvage Value

Years of Useful Life

Example: You purchase a truck that costs $19,000. It has a salvage value of $5,000 and a useful life of 5 years. What is the annual depreciation?

Annual Depreciation = 19,000-5,000

5

Annual Depreciation = $2,800


Declining balance

Declining Balance

Declining balance is calculated on either 1.5 X 0r 2 X the straight line amount (Percentage)

Straight line percentage is calculated by dividing 1 by the number of years of useful life.

Each consecutive year, the depreciation amount is calculated by multiplying the percentage by the book value (Cost – accumulated depreciation)


Declining balance example

Declining Balance Example

Example: You purchase a truck that costs $19,000. It has a salvage value of $5,000 and a useful life of 5 years. What is the annual depreciation

  • Calculate Percentage 1/5 years = 20% X 2 = 40%

  • Note: The Book Value may never fall below Salvage Value


Sum of the years digits

Sum of the Years Digits

First add all the digits of the years of useful life. For instance: For 5 years you would add

1+2+3+4+5=15. Each year make a fraction of the year/sum.


Units of production

Units of Production

Johnson Company purchases a machine for $500,000. The machine is expected to produce 2,000,000 units. In the first year the machine produced 400,000 units.

Calculate cost per unit:

Depreciable Cost/Expected Units of Production

500,000/2,000,000 = .25

Calculate Current Year Depreciation:

Cost per unit X Current Year’s Units of Production

.25 X 400,000 = $100,000


Accumulated depreciation

Accumulated Depreciation

  • Contra Account to the Asset Account (Equipment, Buildings, etc.)

  • Balance Sheet or permanent account

  • Has normal credit balance

  • Book Value = Asset – Accumulated Depreciation


Depreciation expense

Depreciation Expense

  • Temporary Account

  • Closed at end of fiscal year

  • Income Statement Account


Entry to record depreciation

Entry to record depreciation

Depreciation Expense XXXX

Accumulated Depreciation XXXX


Recording the sale of a depreciable asset

Recording the sale of a depreciable asset

  • Must remove both the asset and the associated accumulated depreciation from the books

  • Must record gain or loss (use as plug figure)

  • Example:

    Johnson Company sells its equipment that cost $500, 000 with $200,000 of Accumulated Depreciation for $350,000.


Recording the sale of a depreciable asset1

Recording the sale of a depreciable asset

  • Johnson Company sells its equipment that cost $500, 000 with $200,000 of Accumulated Depreciation for $350,000

    Cash in Bank 350,000

    Accumulated Depreciation 200,000

    Equipment500,000

    Gain on Sale of Equipment 50,000

    *A loss is recorded as a debit


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