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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

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

Equipment 500,000

Gain on Sale of Equipment 50,000

*A loss is recorded as a debit

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