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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. 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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  1. Methods of Depreciation Georgia CTAE Resource Network Instructional Resources Office Written by: Dr. Marilynn K. Skinner May 2009

  2. Four Methods • Straight Line • Declining Balance • Sum of the Year’s Digits • Units of Production

  3. 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

  4. 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)

  5. 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

  6. 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.

  7. 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

  8. 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

  9. Depreciation Expense • Temporary Account • Closed at end of fiscal year • Income Statement Account

  10. Entry to record depreciation Depreciation Expense XXXX Accumulated Depreciation XXXX

  11. 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.

  12. 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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