A noncash expense that reduces the value of an asset as a result of wear and tear, age, or obsolescence. Most assets lose their value over time (in other words, they depreciate), and must be replaced once the end of their useful life is reached. There are several accounting methods that are used in order to write off an asset's depreciation cost over the period of its useful life. Because it is a non-cash expense, depreciation lowers the company's reported earnings while increasing free cash flow.
Depreciable
Subject to depreciation; wasting: said of buildings, machinery, equipment, and other limited-life fixed assets.
Depreciable cost
That part of the cost of a fixed asset that is to be spread over useful life; i.e., cost less the estimated recovery from resale or salvage.See service cost; depreciation base.
Depreciation cost
- Cost less accumulated depreciation, if any, and less any other related valuation account having the effect of reducing original outlay to a recoverable cost; the book value of a fixed asset. The net amount remaining, although equal to a fraction of original cost: that portion of cost judged to be fairly assignable against likely recoveries or against operations of future years. Compare with depreciable cost.
- Cost that has been expensed; depreciation expense.
Example:
Shehgarlynn's purchased a machine with a 4 year estimated useful life and a estimated 10% salvage value for $80,000 on January 1, 2007. In its income statement, what would Shehgarlynn report as the depreciation expense for 2009 using the double declining balance method?
Computation below:
Salvage value is ignored when using DDB depreciation method (except that the asset cannot be depreciated below salvage value.)
Beg. of the year book value X DDB rate = Depreciation Expense
2007 $80,000 50% = $40,000
2008 ($80,000-40,000) 50% = $20,000
2009 ($80,000-60,000) 50% = $10,000
The DDB rate is twice the straight-line (1/4 X 2 = 2/4 =50%).
Note: That in 2010, enough depreciation would be recorded to depreciate the asset from its beginning of year book value ($10,0000) down to its salvage value (10% X $80,000 = $8,000) or $2,000 of depreciation.
Using Straight - Line Method
On January 1, 2007, ShehGarLynn's Corporation purchased a machine for $50,000. ShehGarLynn paid shipping expenses of $500 as well as installation costs of $1,200. The Machine was estimated to have a useful life of 10 years and an estimated salvage value of $5,000. In January 2008, additions costing $3,600 were made to the machine in order to comply with pollution control ordinances. These additions neither prolonged the life of the machine nor did they have any salvage value. If ShehGarLynn records depreciation under straight-line method, depreciation expense for 2008 is.
Computation below:
The Machine cost is ............................$50,000.00
Add: Installation cots............................ 1,200.00
Shipping Expense........................ 500.00
Total cost of Machine...........................$51,700.00
Less:Salvage value............................... 5,000.00
depreciation base.................................$ 46,700.00
Divided Useful life ............................ .. 10 years
Annual depreciation cost ................... $ 4,670.00
$3,600/9 years.................................. 400.00
Depreciation for 2008 ...................... $ 5,070.00
Note:
January 1, 2007................10 years
January 1, 2008..................9 years
Since $3,600 being amortized over the remaining 9 years.
^^^^^^^^^^^^^^^^^^^^^^^^^^**********************^^^^^^^^^^^^^^^^^^^^^^
In January 2005 Shehgar Company purchased equipment for $150,000, to be used in its manufacturing operations. The equipment was estimated to have a useful life of 8 years, with salvage value estimated at $15,000. Shehgar considered various methods of depreciation and selected the sum of the years digit method. On December 31, 2006, the related allowance for accumulated depreciation should have a balance.
Solution:
Accumulated Depreciation under all three methods at December 31, 2006 must be computed below:
Straight Line SYD DDB
2005 $16,875.00 $30,000.00 $37,500.00
2006 16,875.00 26.250.00 28,125.00
Total $33,650.00 $56,250.00 $65,625.00
Straight Line Method (SL Computation)
Cost of the Machine .......................... $150,000.00
Less: Salvage Value............................ 15,000.00
135,000.00
Divided 8 years (useful life)................... 8 yrs
Accumulated Depreciation annually.......$ 16,875.00
.2006................................................... 16,875.00
$ 33,650.00
Sum-Of-The-Years-Digits Method (SYD Computation)
2005 2006
Cost of the Machine...............................$150,000.00 $150,000.00
Less: Salvage Value................................ 15,000.00 15,000.00
135,000.00 135,000.00
Multiply 8/36........................................ .222222
Multiply 7/36......................................... .194444
Accumulated Depreciation annually.............30,000.00 26,250.00
Double Declining Balance Method
Beg. of the Year Book Value X DD Rate Depreciation
2005......................$150,000.00 25% $37,500.00
2006.....................($150,000-37,500.00) 25% 28,125.00
Total Depreciation.................................................................$65,625.00
1X2 = 2 = 25%
8
No comments:
Post a Comment