Depreciation is a systematic and rational process of distributing the cost of tangible assets over the life of assets.

Depreciation is a process of allocation. Cost to be allocated = acquisition cot - salvage value Allocated over the estimated useful life of assets. Allocation method should be systematic and rational. Depreciation Methods Depreciation methods based on time Straight line method Declining balance method Sum-of-the-years'-digits method Depreciation based on use (activity) Straight Line Depreciation Method Depreciation = (Cost - Residual value) / Useful life [Example, Straight line depreciation] On April 1, 2011, Company A purchased an equipment at the cost of $140,000. This equipment is estimated to have 5 year useful life. At the end of the 5th year, the salvage value (residual value) will be $20,000. Company A recognizes depreciation to the nearest whole month. Calculate the depreciation expenses for 2011, 2012 and 2013 using straight line depreciation method. Depreciation for 2011 = ($140,000 - $20,000) x 1/5 x 9/12 = $18,000 Depreciation for 2012 = ($140,000 - $20,000) x 1/5 x 12/12 = $24,000 Depreciation for 2013 = ($140,000 - $20,000) x 1/5 x 12/12 = $24,000

Declining Balance Depreciation Method Depreciation = Book value x Depreciation rate Book value = Cost - Accumulated depreciation Depreciation rate for double declining balance method = Straight line depreciation rate x 200% Depreciation rate for 150% declining balance method

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Depreciation rate for 150% declining balance method = Straight line depreciation rate x 150% [Example, Double declining balance depreciation] On April 1, 2011, Company A purchased an equipment at the cost of $140,000. This equipment is estimated to have 5 year useful life. At the end of the 5th year, the salvage value (residual value) will be $20,000. Company A recognizes depreciation to the nearest whole month. Calculate the depreciation expenses for 2011, 2012 and 2013 using double declining balance depreciation method. Useful life = 5 years --> Straight line depreciation rate = 1/5 = 20% per year Depreciation rate for double declining balance method = 20% x 200% = 20% x 2 = 40% per year Depreciation for 2011 = $140,000 x 40% x 9/12 = $42,000 Depreciation for 2012 = ($140,000 - $42,000) x 40% x 12/12 = $39,200 Depreciation for 2013 = ($140,000 - $42,000 - $39,200) x 40% x 12/12 = $23,520 Double Declining Balance Depreciation Method Year 2011 2012 2013 2014 2015 (*1) (*2) (*3) (*4) (*5) Book Value at the beginning $140,000 $98,000 $58,800 $35,280 $21,168 = = = = = $42,000 $39,200 $23,520 $14,112 $8,467 Depreciation Rate 40% 40% 40% 40% 40% Depreciation Expense $42,000 (*1) $39,200 (*2) $23,520 (*3) $14,112 (*4) $1,168 (*5) Book Value at the year-end $98,000 $58,800 $35,280 $21,168 $20,000

$140,000 x 40% x 9/12 $98,000 x 40% x 12/12 $58,800 x 40% x 12/12 $35,280 x 40% x 12/12 $21,168 x 40% x 12/12

--> Depreciation for 2015 is $1,168 to keep book value same as salvage value. --> $21,168 - $20,000 = $1,168 (At this point, depreciation stops.) [Example, 150% declining balance depreciation] On April 1, 2011, Company A purchased an equipment at the cost of $140,000. This equipment is estimated to have 5 year useful life. At the end of the 5th year, the salvage value (residual value) will be $20,000. Company A recognizes depreciation to the nearest whole month. Calculate the depreciation expenses for 2011, 2012 and 2013 using double declining balance depreciation method. Useful life = 5 years --> Straight line depreciation rate = 1/5 = 20% per year Depreciation rate for double declining balance method = 20% x 150% = 20% x 1.5 = 30% per year Depreciation for 2011 = $140,000 x 30% x 9/12 = $31,500 Depreciation for 2012 = ($140,000 - $31,500) x 30% x 12/12 = $32,550 Depreciation for 2013 = ($140,000 - $31,500 - $32,550) x 30% x 12/12 = $22,785

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150% Declining Balance Depreciation Method Year 2011 2012 2013 2014 2015 2016 (*1) (*2) (*3) (*4) (*5) (*6) Book Value at the beginning $140,000 $108,500 $75.950 $53,165 $37,216 $26,051 Depreciation Rate 30% 30% 30% 30% 30% 30% Depreciation Expense $31,500 (*1) $32,550 (*2) $22,785 (*3) $15,950 (*4) $11,165 (*5) $6,051 (*6) Book Value at the year-end $108,500 $75,950 $53,165 $37,216 $26,051 $20,000

$140,000 x 30% x 9/12 = $31,500 $108,500 x 30% x 12/12 = $32,550 $75,950 x 30% x 12/12 = $22,785 $53,165 x 30% x 12/12 = $15,950 $37,216 x 30% x 12/12 = $11,165 $26,051 x 30% x 12/12 = $7,815 --> Depreciation for 2016 is $6,051 to keep book value same as salvage value. --> $26,051 - $20,000 = $6,051 (At this point, depreciation stops.)

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