School of Business Department of Accounting Financial Accounting BACC200 Chapter 10 Part 2 Plant Assets Natural Resources and Intangibles BACC200 Chapter 10 DEPRECIATION METHODS Depreciation is the process of distributing the cost of a plant asset over its useful life All property plant and equipment assets except land are depreciable Three Depreciation Methods Straight line Units of Activity Double Declining Balance Three factors affect the computation of depreciation Cost original book value Salvage Value residual or scrap value Useful Life life expectancy Companies should apply consistency by using the same depreciation method throughout the useful life of the asset STRAIGHT LINE METHOD Steps 1 Depreciable Cost Cost Salvage Value 2 Annual Depreciation Expense 3 Accumulated Depreciation at year end Accumulated Depreciation year start Depreciation Expense for the Year 4 Book Value at year end Cost Accumulated Depreciation at year end EXAMPLE Fixup has purchased the equipment for 100 000 on January 1 2017 The management team decides that the useful life of the equipment is 5 years and the salvage value is 10 000 Fixup prepares its financial statement at year end Depreciable Cost Cost Salvage Value 100 000 10 000 90 000 in 5 years Annual Depreciation Expense 18 000 per year Accumulated Depreciation year end Acc Dep year start Depreciation Expense Acc Dep 2017 0 18 000 18 000 Acc Dep 2018 18 000 18 000 36 000 Acc Dep 2019 36 000 18 000 54 000 Acc Dep 2020 54 000 18 000 72 000 Acc Dep 2021 72 000 18 000 90 000 Depreciable Cost BV year end Cost Acc Dep year end BV 2017 100 000 18 000 82 000 BV 2018 100 000 36 000 64 000 BV 2019 100 000 54 000 46 000 BV 2020 100 000 72 000 28 000 BV 2021 100 000 90 000 10 000 Salvage Value Date Dec 31 2017 Account Title and Explanation Depreciation Expense Accumulated Depreciation Dec 31 2018 Depreciation Expense Accumulated Depreciation Ref Debit Credit 18 000 18 000 18 000 18 000 STRAIGHT LINE METHOD FULL YEAR On January 1 2017 the company purchases a truck Cost 18 000 Salvage value 2 000 Useful life 4 years Depreciable Cost Cost Salvage Value 18 000 2 000 16 000 in 4 years Annual Depreciation Expense 4 000 per year C O N STA NT 4 years Accumulated Depreciation Book Value Year End Cost Accumulated Depreciation Depreciation Schedule Year Cost 2017 18 000 2018 18 000 2019 18 000 2020 18 000 Depreciati on Expense 4 000 4 000 4 000 4 000 4 000 8 000 12 000 16 000 14 000 10 000 6 000 2 000 equals to Depreciable Cost Adjusting Entries Date 2017 Depreciation Expense Accounts Title Ref Debit 4 000 Accumulate Depreciation 2018 Depreciation Expense Accumulate Depreciation 2019 Depreciation Expense Accumulate Depreciation 2020 Depreciation Expense Accumulate Depreciation 4 000 4 000 4 000 Credit 4 000 4 000 4 000 4 000 equals to Salvage Value For 2017 18 000 For 2018 18 000 For 2019 18 000 For 2020 18 000 4 000 8 000 12 000 16 000 STRAIGHT LINE METHOD PARTIAL YEAR On October 1 2017 the company purchases a truck Cost 18 000 Salvage value 2 000 Useful life 4 years Depreciable Cost Cost Salvage Value 18 000 2 000 16 000 in 4 years Annual Depreciation Expense 4 000 per year 4 years Cost Accumulated Depreciation Depreciation Schedule Year Cost 2017 18 000 2018 18 000 2019 18 000 2020 18 000 2021 18 000 Depreciati on Expense Accumulated Depreciation Book Value Year End 1 000 4 000 4 000 4 000 3 000 1 000 5 000 9 000 13 000 16 000 17 000 13 000 9 000 5 000 2 000 equals to Salvage Value Adjusting Entries equals to Depreciable Cost Accounts Title Date 2017 Depreciation Expense Ref Debit 1 000 Accumulate Depreciation 2018 Depreciation Expense Accumulate Depreciation 2019 Depreciation Expense Accumulate Depreciation 2020 Depreciation Expense Accumulate Depreciation 2021 Depreciation Expense Accumulate Depreciation 4 000 4 000 4 000 3 000 Credit 1 000 4 000 4 000 4 000 3 000 For 2017 18 000 For 2018 18 000 For 2019 18 000 For 2020 18 000 For 2021 18 000 1 000 5 000 9 000 13 000 16 000