Depreciation example-2013

# Depreciation example-2013 - ACCT 2013-Accounting Principles...

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ACCT 2013-Accounting Principles University of Arkansas Sam M. Walton College of Business Depreciation handout Prepared by Dixon Cooper Spring, 2011 This handout will walk you through the basics of depreciation, and then compare three common methods of depreciation calculation; straight-line, units-of-activity, and double-declining-balance. We will then examine the process of disposing of the asset. In the past, most of the expenses that we have discussed were based on the concept that the expenses were for a particular period. For example, if we recorded salary expenses for the last two weeks of November, 2005, the expenses were recorded in the month of November, and they were incorporated into the income statements for the month of November and the year, 2005. However, the calculation of depreciation expenses is a different concept. Depreciation is the process of allocating the cost of using a long-lived asset over its anticipated economic (useful) life (the amount of time that we expect to use the asset). For example, if we were going to buy a delivery truck to use over the next five years, we would want to allocate the depreciation expense over the entire five year period. We would not want all of the cost to be reflected in the month or year of the purchase. An important point to keep in mind is that the calculation of the depreciation expense for a period is not based on the anticipated changes in the fair market value of the asset in question. Instead depreciation expense calculation is the allocation of the cost of owning the asset over the period of time that we expect to use the asset. In the determination of the depreciation expense that we will be recording over the economic life of the asset there are additional terms that we need to discuss (we have already defined economic life earlier, so I will not expand on it further). The next term is salvage (residual) value . Salvage value is the price that we think the asset could bring if it were sold or used as a trade-in when we are finished using it. The determination of salvage value can be a somewhat inexact science, since we are anticipating something that will occur in the future. Often salvage value is determined based on past experiences with similar assets. 1

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The next term is depreciable base (cost). This value represents the amount of depreciation expense that we expect to take over the time period that we own the asset (economic life). For example, if we paid \$50,000 for an asset, and we anticipate a salvage value of \$10,000, the depreciable base would be \$40,000. We would expect to take \$40,000 in depreciation over the time period that we use the asset, and then sell it for \$10,000. However, what we expect, and what actually happens at the end of the asset's life is not always the same. We will address what happens if we hold the asset for longer than the anticipated economic life or if it is worth more or less than the anticipated salvage value at the end of this handout. In the following calculations of the depreciation expense for the three methods
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Depreciation example-2013 - ACCT 2013-Accounting Principles...

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