Cost Residual Value Useful Life Remaining including the current yr Depreciation

# Cost residual value useful life remaining including

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(Cost – Residual Value) Useful Life Remaining (including the current yr) Depreciation Expense Depreciable Base Depreciation Fraction x Sum of Years = If the useful life is equal to 4, the “Sum of Years” is equal to 10 (1 + 2 + 3 + 4).

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Declining-Balance (Cost – Accumulated Dep) x Rate Useful Life = Depreciation Expense Net Book Value Depreciation Rate Rate = 2 for double declining balance Rate = 1.5 for one-and-a-half-declining balance The “Rate” can be whatever number the manager chooses Double-declining balance is the most frequently used accelerated method of depreciation *Book value cannot go below residual value
Cost Allocation Methods What is depreciation expense each year from 2008-2010 using each of the following methods of depreciation? 1) Straight-line 2) Activity 3) Sum-of-years-digits 4) Double declining balance 5 Minutes Car cost \$50,000 Residual value \$2,000 Useful life 3 Purchased 2008 Estimated Hours Operational 30,000 Hours Used 2008: 14,000 2009: 12,000 2010: 4,000

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Straight-line (Cost – Residual Value) x 1 Useful Life = Depreciation Expense (50,000 – 2,000) x 1 3 = 16,000 2008 2009 2010 Dep Exp 16,000 Acc Dep 16,000 Dep Exp 16,000 Acc Dep 16,000 Dep Exp 16,000 Acc Dep 16,000 16,000 16,000 End of year BV: \$34,000 (\$50,000 - \$16,000) End of year BV: \$18,000 (\$34,000 - \$16,000) End of year BV: \$2,000 (\$18,000 - \$16,000) Car cost \$50,000 Residual value \$2,000 Useful life 3 Purchased 2008 Estimated Hours Operational 30,000 Hours Used 2008: 14,000 2009: 12,000 2010: 4,000
Activity (Cost – Residual Value) x (50,000 – 2,000) 14,000 30,000 = 22,400 2008 2009 2010 x End of year BV: \$27,600 (\$50,000 - \$22,400) End of year BV: \$8,400 (\$27,600 - \$19,200) End of year BV: \$2,000 (\$8,400 - \$6,200) Actual Production Estimate Total Production = Depreciation Expense (50,000 – 2,000) 12,000 30,000 = 19,200 x (50,000 – 2,000) 4,000 30,000 = 6,400 x Dep Exp 22,400 Acc Dep 22,400 Dep Exp 19,200 Acc Dep 19,200 Dep Exp 6,400 Acc Dep 6,400 Car cost \$50,000 Residual value \$2,000 Useful life 3 Purchased 2008 Estimated Hours Operational 30,000 Hours Used 2008: 14,000 2009: 12,000 2010: 4,000

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Double-declining 2008 2009 2010 End of year BV: \$16,667 (\$50,000 - \$33,333) End of year BV: \$1,852 (\$5,556 - \$3,704) Dep Exp 33,333 Acc Dep 33,333 (Cost – Acc Dep) x Rate Useful Life = Depreciation Expense (50,000 – 0) x 2 3 = 33,333 (50,000 – 33,333) x 2 3 = 11,111 Dep Exp 11,111 Acc Dep 11,111 End of year BV: \$2,000 (\$5,556 - \$3,556) Car cost \$50,000 Residual value \$2,000 Useful life 3 Purchased 2008 Estimated Hours Operational 30,000 Hours Used 2008: 14,000 2009: 12,000 2010: 4,000 End of year BV: \$5,556 (\$16,667 - \$11,111) (50,000 – 44,444) x 2 3 = 3,704 Dep Exp 3,556 Acc Dep 3,556 Cannot take \$3,704 because doing so would cause the book value to drop below the residual value. Can only take \$3,556 , which brings the book value down to the residual value.
Sum-of-Years’-Digits 2008 2009 2010 End of year BV: \$26,000 (\$50,000 - \$24,000) End of year BV: \$2,000 (\$10,000 - \$8,000) Dep Exp 24,000 Acc Dep 24,000 (Cost – Resid Value) x Useful Life Remaining (including the current yr) Sum of Years = Depreciation Expense (50,000 – 2,000) x 3 6 = 24,000 (50,000 – 2,000) x 2 6 = 16,000 Dep Exp 16,000 Acc Dep 16,000 Car cost \$50,000 Residual value \$2,000 Useful life 3 Purchased 2008 Estimated Hours Operational 30,000 Hours Used 2008: 14,000 2009: 12,000 2010: 4,000 End of year BV: \$10,000 (\$26,000 - \$16,000) (50,000 – 20,000) x 1 6 = 8,000 Dep Exp 8,000 Acc Dep 8,000

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Cost Allocation Methods Comparing depreciation methods Depreciation Expense 2008 \$16,000 \$22,400 \$33,333 \$24,000 2009 \$16,000 \$19,200 \$11,111 \$16,000 2010 \$16,000 \$6,400 \$3,556 \$8,000 Total \$48,000 \$48,000 \$48,000 \$48,000 Year Straight- line Units-of- Production Double- declining Sum-of-Years’- Digits
Component Depreciation Component Depreciation IFRS requires that each part of an item of PP&E that is significant to the total cost of the asset must be depreciated separately.

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• Winter '18
• jane smith

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