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

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

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 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

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

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

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

  • 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

  • Temporary Account

  • Closed at end of fiscal year

  • Income Statement Account


Entry to record depreciation

Depreciation Expense XXXX

Accumulated Depreciation XXXX


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 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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