Lesson 3:
 STRAIGHT LINE MTD
SINKING FUND MTD
DECLINING BALANCE MTD
DOUBLE DECLINING BALANCE MTD
SUM-OF-THE-YEARS DIGIT MTD
SERVICE OUTPUT MTD
INTRODUCTION
The
of the physical property
such as equipment, building
or other properties due to
the passage of time
INTRODUCTION
the
of all the future profits
that are to be received
through ownership of a
particular property
MARKET Value
UTILITY or USE Value
FAIR Value
BOOK Value
SALVAGE Value
SCRAP Value
INTRODUCTION
1.
Normal Depreciation
a.
b.
2.
3.
Physical Depreciation
Functional Depreciation
Depreciation due to changes in price levels
Depletion
INTRODUCTION
ECONOMIC DEPRECIATION
the gradual decrease in utility in
an asset with use and time
PHYSICAL
DEPRECIATION
FUNCTIONAL
DEPRECIATION
DEPRECIATION
ACCOUNTING DEPRECIATION
The systematic allocation of an
asset’s value in portions over
its depreciable life—often used
in engineering economic
analysis
BOOK
DEPRECIATION
TAX
DEPRECIATION
INTRODUCTION
 length
of time during
which it is
for which it
designated
manufactured.
was
&
 length
of time during
which time property
may be
METHODS
IN DETERMINING THE
DEPRECIATION
OF A PROPERTY
 STRAIGHT LINE MTD
SINKING FUND MTD
DECLINING BALANCE MTD
DOUBLE DECLINING BALANCE MTD
SUM-OF-THE-YEARS DIGIT MTD
SERVICE OUTPUT MTD
METHODS IN DETERMINING THE DEPRECIATION
‘
’:
of depreciation at ‘nth’ year
:
after ‘n’ years
:
on
total loss value after ‘n’ years
:
after ‘n’ years
:
: value at the end of the life
:
value
(unless indicated)
‘
’:
after ‘L’ years
‘
’:
after ‘n’ years
‘ ’:
‘ ’:
of property (in yrs)
of property in ‘n’ yrs
NOTE: In general,
n L
Dn  d1  d 2  d 3    d n
Cn  C0  Dn
METHODS
IN DETERMINING THE
DEPRECIATION
STRAIGHT
LINE METHOD
(SLM)
OF A PROPERTY
 STRAIGHT LINE MTD
SINKING FUND MTD
DECLINING BALANCE MTD
DOUBLE DECLINING BALANCE MTD
SUM-OF-THE-YEARS DIGIT MTD
SERVICE OUTPUT MTD
STRAIGHT LINE METHOD (SLM)
assume
that the loss in value
is
to the age of the property
Dn  n
Dn  k n 
Dn  d n 
Dn C0  Cn
d

n
n
Dn C0  Cn
d

n
n
Dn  d n 
Cn  C0  Dn
STRAIGHT LINE METHOD (SLM)
1.
2.
An asset is purchased for P500,000. The salvage value in
25 yrs id P100,000. What is the annual cost of
depreciation in the first 3 years using straight line
method (SLM)?
A large profitable corporation has purchased a jet plane
for the use of its executives. The cost of the plane is
P76M. I has a useful life of 5 years. The estimated resale
value at the end of 5 years is P6M. Using SLM, what is
the book value of the jet at the end of 3 yrs.
METHODS
IN DETERMINING THE
SINKING
FUND
METHOD
(SFM)
DEPRECIATION
OF A PROPERTY
 STRAIGHT LINE MTD
SINKING FUND MTD
DECLINING BALANCE MTD
DOUBLE DECLINING BALANCE MTD
SUM-OF-THE-YEARS DIGIT MTD
SERVICE OUTPUT MTD
SINKING FUND METHOD (SFM)
Assumes
that the sinking fund is
established in which funds will
accumulated for replacement.
Considers
the time-money
relationship (annuity)
0
Dn
C0-CL
1
2
3
4
5
6
n
L
d
d
d
d
d
d
d
d
Dn  d F / A, i &, n 
d
Dn
 1  i   1


i


n

C0  C n
 1  i n  1


i


 1  i n  1
Dn  d 

i


Cn  C0  Dn
SINKING FUND METHOD (SFM)
1.
2.
3.
A plant erected to manufacture socks has a first cost of
P10,000,000 with an estimated salvage value of P100,000 at the
end of 25 years. Find the book value after 10 years using SFM,
assuming 6% interest rate.
A unit of welding machine cost P45,000 with an estimated life for
5 years. Its salvage value id P2,500. Find its depreciation rate by
using SFM. Assume i=8.5%
An equipment bought for P30,000 six years ago. It will have a
salvage value of P3,000, 4 years from now. It is sold for P8,000.
What is the SUNK COST if SFM is used with 6% interest rate.
METHODS
IN DETERMINING THE
DECLINING
BALANCE
METHOD
(DBM)
DEPRECIATION
OF A PROPERTY
 STRAIGHT LINE MTD
SINKING FUND MTD
DECLINING BALANCE MTD
DOUBLE DECLINING BALANCE MTD
SUM-OF-THE-YEARS DIGIT MTD
SERVICE OUTPUT MTD
DECLINING BALANCE METHOD (DBM)
NOTE: This method does not apply
when salvage value, CL=0
also
called
the
or
.
assume
that the annual cost of
depreciation, is a fixed percentage of
salvage value at the beginning of the
year.
The
ratio of depreciation in any year
to the book value at the beginning of
that year is constant throughout the
life of property and is designated by
, , rate of depreciation
Cn
CL
k  1 n
 1 L
C0
C0
d n  C0 k 1  k 
n 1

Dn  C0  Cn  C0 1  1  k 
Cn  C0 1  k 
n

n
CL  C0 1  k 
L
 CL
Cn  C0 
 Cn



n
L
DECLINING BALANCE METHOD (DBM)
1.
An induction motor has a first cost of P20,000 and a
salvage value of P1,000 at the end of 10 years. Determine
the book value after 6 years using DBM.
2.
Find the salvage value of the machine which has a 25
years economic life and cost P2.5M at its 5th year of
operation. It has a first cost of P3.76M.
METHODS
DOUBLE
DECLINING
BALANCE
METHOD
(DDBM)
IN DETERMINING THE
DEPRECIATION
OF A PROPERTY
 STRAIGHT LINE MTD
SINKING FUND MTD
DECLINING BALANCE MTD
DOUBLE DECLINING BALANCE MTD
SUM-OF-THE-YEARS DIGIT MTD
SERVICE OUTPUT MTD
DOUBLE DECLINING BALANCE METHOD (DDBM)
2
k
L
this
method is very similar to
declining balance method
except the rate of depreciation,
, is replaced by
.
NOTE:
This
method does not apply
when salvage value, CL=0
Salvage Value
be
subtracted from the first cost
when calculating depreciation
charge
2
 2 
d n  C0  1  
L
 L 

n 1
Dn  C0  Cn  C0 1  1  k 
 2
Cn  C0 1  
 L
n
n

 2
CL  C0 1  
 L
L
DOUBLE DECLINING BALANCE METHOD (DDBM)
1.
Determine the rate of depreciation, the total
depreciation up to the end of 8th year and the book value
at the end of 8 years for an asset that costs P15,000 new
and has an estimated scrap value of P2,000 at the end 10
years by using
(a) DBM
(b) DDBM
METHODS
IN DETERMINING THE
SUM-OF-THEYEARS-DIGITS
METHOD
(SOYD)
DEPRECIATION
OF A PROPERTY
STRAIGHT LINE MTD
SINKING FUND MTD
DECLINING BALANCE MTD
DOUBLE DECLINING BALANCE MTD
SUM-OF-THE-YEARS DIGIT MTD
SERVICE OUTPUT MTD
SUM-OF-THE-YEARS-DIGITSS METHOD (SOYD)
2L  n  1
C0  C L 
dn 
LL  1
Let
= depreciation during the ‘nth’ year
= (depreciation factor)
X (total depreciation, DL)
n2 L  n  1
C0  CL 
Dn 
LL  1
Dn  d1  d 2  d3  ...  d n
reverse digit
C0  CL 
dn 
SOYD
Cn  C0  Dn
SUM-OF-THE-YEARS-DIGITS METHOD (SOYD)
1.
An asset is purchased for P9,000. Its estimated life is 10
years. After which it will be sold P1,000. Find the book
value during the 3rd year if SOYD method is used.
2.
A company purchases an asset for P10K and plans to
keep it for 20 years. If the salvage value is zero at the end
of 20 years, what is the depreciation in the 3rd year using
SOYD method.
METHODS
IN DETERMINING THE
SERVICEOUTPUT
METHOD
(SOM)
DEPRECIATION
OF A PROPERTY
 STRAIGHT LINE MTD
SINKING FUND MTD
DECLINING BALANCE MTD
DOUBLE DECLINING BALANCE MTD
SUM-OF-THE-YEARS DIGIT MTD
SERVICE OUTPUT MTD
SERVICE- OUTPUT METHOD (SOM)
(No. of Hours Used)
that
the
total
depreciation that ha taken place
is directly proportional to the
quantity of output of the
property up to that time.
Hn
C0  C L 
H
dn 
Assumes
‘
’:
‘
’:
at ‘nth’ year
with useful life
This
method has the advantage
of making the unit cost of
depreciation constant and giving
low depreciation expense during
periods of low production
(No. of Hours Used)
dn 
‘
at ‘nth’ year
’:
‘
Tn
C0  C L 
T
’:
with
useful life
SERVICE- OUTPUT METHOD (SOM)
1.
A Television Company purchased machinery for P100,000 on July 1, 2013. It is
estimated that it will have a useful life of 10 years; scrap value of P4,000,
productions of 400,000 units and working hours of 120,000.
The company uses the machinery for 14,000 hrs in 2013 and 18,000 hours in
2014. The machinery produces 36,000 units in 2013 and 44,000 units in 2014.
Compute the depreciation for 2014 using each method :
(a) Working Hours Mtd
(b) Output Mtd
(c) SLM
(d) SFM with 9% interest rate
(e) DBM
(f) DDBM
(g)SOYD
Lesson 3:
 STRAIGHT LINE MTD
SINKING FUND MTD
DECLINING BALANCE MTD
DOUBLE DECLINING BALANCE MTD
SUM-OF-THE-YEARS DIGIT MTD
SERVICE OUTPUT MTD