Note:
1.
2.
3.
4.
5.
6.
7.
8.
Remember the following:
Cost – Salvage value = Depreciable value
Never depreciate more than cost minus salvage, regardless of method
Accumulated Depreciation = Depreciation taken to date
Book value = Cost – Accumulated depreciation taken to date
OR
Book value = Remaining book value – Current year’s depreciation expense
As time goes by, Accumulated Depreciation gets larger.
As time goes by, Book Value gets smaller.
At the beginning of the asset’s life, book value = cost.
At the end of the asset’s life, book value = salvage value.
Data for this example:
Machine Cost = $20,000
Salvage Value expected/estimated = $4,000
Life of asset expected = 4 years or 10,000 units total
Units used in:
Year 1 = 2,000
Year 2 = 3,000
Year 3 = 4,000
Year 4 = 3,000
Straight-Line Method
The formula for straight-line is: (Cost – Salvage) / Life in years = (20,000 – 4,000) / 4) =
16,000/4 = $4,000 depreciation per year.
You end up with the following:
Year
Year 1
Year 2
Year 3
Year 4
Depreciation Expense
(20,000-4,000)/4 = 16,000/4 = 4,000
(20,000-4,000)/4 = 16,000/4 = 4,000
(20,000-4,000)/4 = 16,000/4 = 4,000
(20,000-4,000)/4 = 16,000/4 = 4,000
Year
Year 1
Year 2
Year 3
Year 4
Depreciation Expense
(20,000-4,000)/4 = 16,000/4 = 4,000
(20,000-4,000)/4 = 16,000/4 = 4,000
(20,000-4,000)/4 = 16,000/4 = 4,000
(20,000-4,000)/4 = 16,000/4 = 4,000
Accumulated Depreciation
4,000
4,000 + 4,000 = 8,000
8,000 + 4,000 = 12,000
12,000 + 4,000 = 16,000
Book Value
20,000 - 4,000 = 16,000
20,000 – 8,000 = 12,000
20,000 - 12,000 = 8,000
20,000 - 16,000 = 4,000
OR
Accumulated Depreciation
4,000
4,000 + 4,000 = 8,000
8,000 + 4,000 = 12,000
12,000 + 4,000 = 16,000
Book Value
20,000 - 4,000 = 16,000
16,000 – 4,000 = 12,000
12,000 - 4,000 = 8,000
8,000 - 4,000 = 4,000
Units of Production Method
The formula for units is: (Cost – Salvage) / Life in units = (20,000 – 4,000) / 10,000 = $1.60
depreciation per unit.
Each year’s depreciation = Depreciation per unit x Number of units used that year
Year 1 Depreciation Expense = $1.60 x 2,000 = $3,200
Year 1 Acc. Deprec. = $3,200
Book value = $20,000 - $3,200 = $16,800
Year 2 Depreciation Expense = $1.60 x 3,000 = $4,800
Year 2 Acc. Deprec. = $3,200 + $4,800 = $8,000
Book value end of Year 2 = $20,000 - $8,000 = $12,000 or $16,800 - $4,800 = $12,000
Year 3 Depreciation Expense = $1.60 x 4,000 = $6,400
Year 3 Acc. Deprec. = $3,200 + $4,800 + $6,400 = $14,400
Book value end of Year 3 = $20,000 - $14,400 = $5,600 or $12,000 - $6,400 = $5,600
Year 4 Depreciation Expense = $1.60 x 3,000 = $4,800
Note: Now the problem is, regardless of depreciation method, you can only depreciate a total
of cost - salvage, which in this case is $20,000 - $4,000 = $16,000. That means we can't take
all the depreciation calculated above. We start with the Year 1 calculation ($3,200) plus Year 2
calculation ($4,800) plus Year 3 calculation ($6,400), which adds to $14,400 so we can only
depreciate $1,600 more. That means in Year 4 even though the calculation is $4,800, we are
limited to $1,600.
Year 4 Acc. Deprec. = $3,200 + $4,800 + $6,400 + $1,600 allowed = $16,000
Book value end of Year 4 = $20,000 - $16,000 = $4,000 or $5,600 - $1,600 = $4,000
You end up with the following:
Year
Year 1
Year 2
Year 3
Year 4
Depreciation Expense
$1.60 x 2,000= 3,200
$1.60 x 3,000 = 4,800
$1.60 x 4,000 = 6,400
$1.60 x 3,000 = 4,800 but limited to 1,600
Year
Year 1
Year 2
Year 3
Year 4
Depreciation Expense
$1.60 x 2,000= 3,200
$1.60 x 3,000 = 4,800
$1.60 x 4,000 = 6,400
$1.60 x 3,000 = 4,800 but limited to 1,600
Accumulated Depreciation
3,200
3,200 + 4,800 = 8,000
8,000 + 6,400 = 14,400
14,400 + 1,600 = 16,000
Book Value
20,000 – 3,200 = 16,800
20,000 – 8,000= 12,000
20,000 – 14,400 = 5,600
20,000 - 16,000 = 4,000
OR
Accumulated Depreciation
3,200
8,000
14,400
16,000
Book Value
20,000 – 3,200 = 16,800
16,800 – 4,800 = 12,000
12,000 – 6,400 = 5,600
5,600 – 1,600 = 4,000
Declining-Balance Method
The formula for declining balance is: Book value x Declining balance percent x Time as portion
of year.
Book value = Cost - Salvage value
Declining balance rate = 2 x Straight-line rate = 2 x 100%/Estimated useful life in years = 2 x
100%/4 years = 50%
When you first buy an asset, the book value = cost so this method starts with cost in Year 1.
Then for the other years, you use the remaining book value to determine the yearly
depreciation.
Year 1 Depreciation Expense = $20,000 x 50% = $10,000
Year 1 Accumulated Depreciation = $10,000
Book value = $20,000 - $10,000 = $10,000
Year 2 Depreciation Expense = $10,000 x 50% = $5,000
Year 2 Accumulated Depreciation = $10,000 + $5,000 = $15,000
Book value end of Year 2 = $20,000 - $15,000 = $5,000 or $10,000 - $5,000 = $5,000
Go ahead with calculations for Years 3 and 4 but be sure to read the note carefully.
Year 3 Depreciation Expense = $5,000 x 50% = $2,500
Year 3 Accumulated Depreciation = $15,000 + $2,500 = $17,500
Book value end of Year 3 = $5,000 - $2,500 = $2,500
Year 4 Depreciation Expense = $2,500 x 50% = $1,250
Year 4 Accumulated Depreciation = $17,500 + $1,250 = $18,750
Book value end of Year 4 = $20,000 - $18,750 = $1,250
Note: Now the problem is, regardless of depreciation method, you can only depreciate a total
of cost - salvage, which in this case is $20,000 - $4,000 = $16,000. That means we can't take
all the depreciation calculated above. We start with the Year 1 calculation ($10,000) plus Year
2 calculation ($5,000), which adds to $15,000 so we can only depreciate $1,000 more. That
means in Year 3 even though the calculation is $2,500, we are limited to $1,000. Then even
though the Year 4 calculation is $1,250, we can take no depreciation that last year because we
have taken a total of $16,000 through Year 3.
So…the calculations for Years 3 and 4 should actually be as follows because of the limitations:
Year 3 Depreciation Expense = $5,000 x 50% = $2,500 but limited to $1,000
Year 3 Accumulated Depreciation = $15,000 + $1,000 = $16,000
Book value end of Year 3 = $5,000 - $1,000 = $4,000
Year 4 Depreciation Expense = $2,500 x 50% = $1,250 but limited to $0
Year 4 Accumulated Depreciation = $16,000 + $0= $16,000
Book value end of Year 4 = $20,000 - $16,000 = $4,000
You end up with the following:
Year
Year 1
Year 2
Year 3
Year 4
Depreciation Expense
20,000 x 50% = 10,000
10,000 x 50% = 5,000
5,000 x 50% = 2,500 but limited to 1,000
2,500 x 50% = 1,250 but limited to -0since we reached $16,000 in Year 3
Year
Year 1
Year 2
Year 3
Year 4
Depreciation Expense
20,000 x 50% = 10,000
10,000 x 50% = 5,000
5,000 x 50% = 2,500 but limited to 1,000
2,500 x 50% = 1,250 but limited to -0since we reached $16,000 in Year 3
Accumulated Depreciation
10,000
10,000 + 5,000 = 15,000
15,000 + 1,000 = 16,000
16,000 + 0 = 16,000 since it
remains same as Year 3
Book Value
20,000 - 10,000 = 10,000
20,000 – 15,000 = 5,000
20,000 - 16,000 = 4,000
20,000 - 16,000 = 4,000
because it remains same as
Year 3
OR
Accumulated Depreciation
10,000
10,000 + 5,000 = 15,000
15,000 + 1,000 = 16,000
16,000 + 0 = 16,000 since it
remains same as Year 3
Book Value
20,000 - 10,000 = 10,000
10,000 – 5,000 = 5,000
5,000 - 1,000 = 4,000
4,000 - 0 = 4,000 because
it remains same as Year 3