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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