pptchapter11 - Depreciation summary Why Depreciation and...

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Slide 11-1 UCSB, Anderson Depreciation and Depletion Chapter 11 Slide 11-2 UCSB, Anderson Depreciation, summary Why? Matching! How much? Cost of asset less estimated salvage value. How? Methodology which most closely approximates use of the asset. Straight line: most common. Depreciation is the same every period. Assumes ratable asset benefit/ use. Activity based: when asset is consumed at a rate approximating the units it produces. Therefore depreciation expense may vary from period to period depending on units produced. Sum of the years digits: Accelerates depreciation, thus indicating that the asset is more productive in its’ earlier years. Declining balance: Also accelerates depreciation. Does NOT include salvage value. When asset gets depreciated to salvage value, you stop. Slide 11-3 UCSB, Anderson Calculating Depreciation Facts to be known: 1. Historical cost 2. Salvage value One and two above are collectively known as the Depreciable Base 3. Estimated service life Number of years that the assets is capable of economically providing the service it was purchased to perform. Not to be confused with the physical life. Is dependent on “Ecomonic and Physical” factors. Slide 11-4 UCSB, Anderson Depreciation Methods Financial Accounting Depreciation Methods Tax Depreciation Special methods 1. Declining Balance 2. Sum-of-the-years’ digits Straight- line Activity Decreasing Charge 1. Composite method 2. Hybrid methods Methods of Depreciation
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Slide 11-5 UCSB, Anderson Depreciation Example Facts: Cost of machine $260,000 Estimated useful life 10 years Estimated salvage value $20,000 Productive life in hours 60,000 hours Hours machine used 1 st year 6,000 hours Hours machine used 2 nd year 12,000 hours Hours machine used 3 rd year 3,000 hours Compute deprecation in years 1, 2 & 3 Using:
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pptchapter11 - Depreciation summary Why Depreciation and...

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