Slide 1Depreciation methodsStraight line methodExampleSlide 5Straight line method – full yearSlide 7Straight line method – PARTIAL yearSlide 9Financial Accounting BACC200School of BusinessDepartment of AccountingBACC200- Chapter 10Plant Assets, Natural Resources and IntangiblesChapter 10|Part 2DEPRECIATION METHODSThree Depreciation Methods:Straight-line Units of ActivityDouble Declining BalanceDepreciation 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 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 METHODSteps:1) Depreciable Cost = Cost – Salvage Value2) 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)EXAMPLEFixup 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 ExpenseAcc Dep (2017)= 0 + 18,000= $18,000Acc Dep (2018)= 18,000 + 18,000= $36,000Acc Dep (2019)= 36,000 + 18,000= $54,000Acc Dep (2020)= 54,000 + 18,000= $72,000Acc Dep (2021)= 72,000 + 18,000= $90,000Depreciable CostBV (year end)= Cost – Acc. Dep (year end)BV (2017)= 100,000 – 18,000= $82,000BV (2018)= 100,000 – 36,000= $64,000BV (2019)= 100,000 – 54,000= $46,000BV (2020)= 100,000 – 72,000= $28,000BV(2021)= 100,000- 90,000= $10,000Salvage ValueDate Account Title and ExplanationRef Debit CreditDec 312017Depreciation ExpenseAccumulated Depreciation18,00018,000Dec 312018Depreciation ExpenseAccumulated Depreciation18,00018,000STRAIGHT LINE METHOD – FULL YEAROn 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 year4 yearsCONSTANTYear CostDepreciation ExpenseAccumulated DepreciationBook Value(Year End)2017 18,000 4,000 4,000 14,0002018 18,000 4,000 8,000 10,0002019 18,000 4,000 12,000 6,0002020 18,000 4,000 16,000 2,000 Depreciation ScheduleCost – Accumulated Depreciationequals to Salvage Valueequals to Depreciable Cost Adjusting EntriesDate Accounts Title Ref Debit Credit2017 Depreciation ExpenseAccumulate DepreciationG 4,000 G4,0002018 Depreciation ExpenseAccumulate DepreciationG 4,000 G4,0002019 Depreciation ExpenseAccumulate DepreciationG 4,000 G4,0002020 Depreciation ExpenseAccumulate DepreciationG 4,000 G4,000For 2017: 18,000 – 4,000For 2018: 18,000 – 8,000For 2019: 18,000 – 12,000For 2020: 18,000 – 16,000STRAIGHT LINE METHOD – PARTIAL YEAROn 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 year4 yearsYear CostDepreciation ExpenseAccumulated DepreciationBook Value(Year End)2017 18,000 1,000 1,000 17,0002018 18,000 4,000 5,000 13,0002019 18,000 4,000 9,000 9,0002020 18,000 4,000 13,000 5,0002021 18,000 3,000 16,000 2,000 Depreciation ScheduleCost – Accumulated Depreciationequals to Salvage Valueequals to Depreciable Cost Adjusting EntriesDate Accounts Title Ref Debit Credit2017 Depreciation ExpenseAccumulate DepreciationG 1,000 G1,0002018 Depreciation ExpenseAccumulate DepreciationG 4,000 G4,0002019 Depreciation ExpenseAccumulate DepreciationG 4,000 G4,0002020 Depreciation ExpenseAccumulate DepreciationG 4,000 G4,0002021 Depreciation ExpenseAccumulate DepreciationG 3,000 G3,000For 2017: 18,000 – 1,000For 2018: 18,000 – 5,000For 2019: 18,000 – 9,000For 2020: 18,000 – 13,000For 2021: 18,000 –