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Unformatted text preview: Depreciation Methods Accounting for Inventories Depreciation Example 1 (pdf) Depreciation Example 1a (pdf) Depreciation Example 2 (pdf) Depreciation Example 2a (pdf) GAAP Accounting Research Bulletin (ARB) No. 43, Chapter 9C, Para 5 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, 2006, 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 2006, 2007 and 2008 using straight line depreciation method. Depreciation for 2006 = ($140,000 - $20,000) x 1/5 x 9/12 = $18,000 Depreciation for 2007 = ($140,000 - $20,000) x 1/5 x 12/12 = $24,000 Depreciation for 2008 = ($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...
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- Spring '09