C10 - 1 Chapter 10 Depreciation Depreciation and Depletion...

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1 Depreciation Depreciation and Depletion and Depletion C hapter 10 An electronic presentation by Douglas Cloud Pepperdine University
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2 1. Identify the factors involved in depreciation. 2. Explain the alternative methods of cost allocation, including activity and time- based methods. 3. Record depreciation. 4. Explain the conceptual issues regarding depreciation methods. 5. Understand the disclosure of depreciation . Objectives Continued Continued
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3 6. Understand additional depreciation methods, including group and composite methods. 7. Compute depreciation for partial periods. 8. Explain the impairment of noncurrent assets. 9. Understand depreciation for income tax purposes. 10. Explain changes and corrections of depreciation. 11. Understand and record depletion. Objectives
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4 Factors Involved in Depreciation Asset cost Service life Residual value Method of cost allocation
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5 Factors Involved in Depreciation Service Life Service life is the measure of the number of units of service expected from the asset before its disposal.
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6 Factors Involved in Depreciation Service Life The factors that limit the service life of an asset can be divided into two general categories. Physical causes Functional causes
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7 Factors Involved in Depreciation Residual Value Residual, or salvage value, is the net amount that can be expected to be obtained when the asset is disposed at the end of its service life.
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8 Methods of Cost Allocation Activity (or use) methods Time-based methods a. Straight-line b. Accelerated (declining charge) (1) Sum-of-the-years’-digits (2) Declining balance
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9 Methods of Cost Allocation Activity Methods Depreciation Rate = Cost – Residual Value Total Lifetime Activity Level = $120,000 – $20,000 10,000 hours Assume the asset is used for 2,100 hours. Depreciation = $2,100 (2,100 hours x $10) = $10 per hour
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10 Methods of Cost Allocation Depreciation Rate = Cost – Residual Value Service Life = $120,000 – $20,000 5 Years Time-Based Method: Straight Line = $20,000 per year
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11 Methods of Cost Allocation Time-Based Method: Sum-of-the-Years’ Digits Depreciation Book Value at Year Base Fraction Depreciation Year-End 2003 $100,000 5/15 $ 33,333 $86,667 2004 100,000 4/15 26,667 60,000 2005 100,000 3/15 20,000 40,000 2006 100,000 2/15 13,333 26,667 2007 100,000 1/15 6,667 20,000 $100,000 Residual Residual Value Value
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12 Methods of Cost Allocation Time-Based Method: Declining-Balance Book Value at Book Value at Year Beginning of Year Rate Depreciation Year-End 2003 $120,000 40% $ 48,000 $72,000 2004 72,000 40% 28,800 43,200 2005 43,200 40% 17,280 25,920 2006 25,920 --- 5,920 20,000 2007 20,000 --- --- 20,000 $100,000 Double-Declining Balance Residual Residual Value Value
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Methods of Cost Allocation Time-Based Method: Declining-Balance Book Value at Book Value at Year Beginning of Year Rate Depreciation Year-End 2003 $120,000 30% $ 36,000 $84,000 2004 84,000 30% 25,200 58,800 2005 58,800 30% 17,640 41,160 2006 41,160
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This note was uploaded on 02/18/2011 for the course ECON 101 taught by Professor Unknown during the Spring '10 term at University of Toronto.

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C10 - 1 Chapter 10 Depreciation Depreciation and Depletion...

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