INTACC PPT DEPRECIATION 2020-2021, Summaries of Accounting

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Accounting for Property,

Plant and Equipment

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❑ Asset Cost: Purchase cost plus any capitalized expenditures. ❑ Residual Value (Salvage/Scrap/Disposal): is the estimated value that an entity would currently obtain from selling the asset, after deducting the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life. ❑ Useful Life: (a) the period over which an asset is expected to be available for use by an entity; or (b) the number of production or similar units expected to be obtained from the asset by an entity. ❑ Accumulated Depreciation: Total depreciation recorded since acquisition. ❑ Book Value: Historical cost of the asset less accumulated depreciation. ❑ Depreciable base/amount: It is the amount subject to depreciation. It is computed aa Original cost of the asset less estimated salvage value

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Factors involved in the depreciation process

❑Estimation of useful lives An asset’s service life and physical life are not the same ❑Assets are retired (from productive life) due ▪ physical factors (such as damage), or ▪ economic factors (such as obsolescence)

Methods of Depreciation

Time-Based Methods

❖ Straight-line : This method recognizes

equal periodic depreciation charges over

the asset’s life.

❖ Accelerated Method:

• Sum-of-the-years’-digits —This method yields decreasing depreciation in each successive year.
• Declining-balance— This method provides decreasing charges by applying a constant percentage rate to a declining asset book value.

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Time-Based Depreciation Method

I. Straight-line method

• Depreciation expense same each year as benefits are consumed at same rate each year
• Calculation for annual charge: Cost of asset – residual value useful life of the asset
• Example P100 000 – P5000 = P9,500 per year 10 years Cost of equipment P100 000 Residual Value P5, Estimated useful life 10 years [9,500/95,000 = 10% per year]

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• Drill machine purchased for P45 000 on 1 December 2006
• 5 year life, no residual value
• Financial year ends 31 December
• Straight line depreciation Depreciation for full year = P45 000/ = P Depreciation for partial year = P9000 x 7 months 12 months = P

Depreciation and partial periods

11 ▪ Declining balance method uses a depreciation rate that is some multiple of the straight-line method ➢e.g. Double-diminishing rate for a 10-year asset would be 20% ➢Rate remains constant and is applied to carrying amount each year ➢Residual is not deducted in calculating depreciation base.

Diminishing /Accelerated

Depreciation Methods

F = declining balance factor (e.g., 150% or 200%) These provide a higher depreciation cost in earlier years and lower charges in later periods.

13 ▪ Sum-of-the- years’ - digits method results in a decreasing depreciation charge based on a decreasing fraction of depreciable cost ▪ At end of useful life, balance remaining equals residual value

Accelerated Depreciation Methods

14 t = remaining useful life of the asset Sum-of-the-Years’-Digits Method SYD = [ n (n + 1)] 2 SYD = [ 5 (5 + 1)] 2 SYD = 15 t Depreciation = SYD x (^) (Cost – Residual Value) FORMULA:

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Activity Method (Use Factor Method)

Units-of-production method

• Useful life is expressed in terms of total units of production or use expected from the asset
• Depreciation= Cost – residual value____ Estimated lifetime production
• Example (P100 000 – P5,000) = P3.80 per unit 25,000 units Cost of equipment P100, Residual Value P 5, Estimated number of units 25 000 units Depreciation (2020) = P3.80 x 3,500 actual units Depreciation (2020) = P13,

Group and CompositeDepreciation

• Group depreciation are applied to group of assets that are related and similar
• Referred to as composite depreciation when the assets in the group are related but dissimilar.
• Calculate annual depreciation charge at the straight- line rate times the group’s book value. ▪ Recognize gains and losses only when all assets in the group have been retired.

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Revision of Estimated LIfe

When these estimates are revised, depreciation needs to be revised These revised depreciation expenses ▪ apply prospectively to the remaining life of asset ▪ do not affect prior periods

Change in Estimated Life

A company purchased P 50 , 000 of equipment and estimated a 10 - year life. Using the straight-line method with no residual value, the annual depreciation would be P 5 , 000. After four years , accumulated depreciation would amount to P 20 , 000 , and the remaining a book value would be P 30 , 000. At the beginning of the fifth year, it is determined that the equipment will only last four more years.