1. Contemporary Mathematics for Business and Consumers
Third Edition
By: Robert A. Brechner
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2. Chapter 17
Depreciation
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3. Outline Chapter 17, Depreciation
Section I Traditional Depreciation –Methods used for Financial Statement Reporting
17-1 Calculating depreciation by the straight-line method.
17-2 Calculating depreciation by the sum-of- years-digits.
17-3 Calculating depreciation by the declining-balance method.
17-4 Calculating depreciation by the units-of-production method.
Section II Asst Cost Recovery Systems –IRS Prescribed Methods for Income Tax Reporting
17-5 Calculating depreciation by using the Modified Accelerated Cost Recovery System (MACRS).
17-6 Calculating the periodic depletion cost of natural resources.

4. Section I, Traditional Depreciation – Methods for Financial Statement Reporting
Outline
17-1 Calculating Depreciation by the Straight-Line Method
Steps to Prepare a Depreciation Schedule by the Straight –Line-Method:
Step 1. Determine the total coast and salvage value of the asset.
Step 2. Subtract salvage value from total cost to find amount total amount of depreciation.
Step 3. Calculated the amount of depreciation by dividing the total depreciation by the useful life of the asset.
Step 4. Set up the depreciation schedule in the form of a chart with the following headings:
End Annual Accumulated Book
of Year Depreciation Depreciation Value

5. Everybody’s Business
Learning Tip
On a depreciation schedule, the starting book value is the original cost of the asset, and the last book value is the salvage value of the asset.

6. 17-2 Calculating Depreciation by the Sum-of-Years’-Digits Method
Steps to Prepare a Depreciation Schedule by the um-of-Years’-Digits Method:
Step 1. Find the total depreciation of the asset by
Step 2. Calculate the SYD depreciation rate fraction for each year by.
Total depreciation = Total cost – Salvage value
SYD depreciation rate fraction = Years of useful life remaining
n (n=1) 2

7. 17-2 Calculating Depreciation by the Sum-of-Years’-Digits Method (Cont
Steps to Prepare a Depreciation Schedule by the um-of-Years’-Digits Method:
Step 3. Calculate the depreciation for each year by multiplying the total depreciation by that years’ depreciation rate fraction.
Step 4. Set up the depreciation schedule in the form of a chart with the following headings:
End of Total Depreciation Annual Accumulated Book
Year Depreciation x Rate fraction = Depreciation Depreciation Value
Annual depreciation = total depreciation x Depreciation rate fraction

8. Everybody’s Business
Real World Connection
From Chapter 15, Financial Statements, remember that depreciation appears on both the balance sheet and the income statement.
Balance sheet – Used to determine book value of an asset.
Income statement- Listed as an operating expense.

9. Section II, Asset Cost Recovery Systems – IRS Prescribed Methods for Income Tax Reporting
17-5 Calculating Depreciation by Using the Modified Accelerated Cost Recovery System (MACRS)
Steps to Prepare a Depreciation Schedule by Using MACRS:
Step 1. Use Table 17-1 to determine the property calss for the asset in question.
Step 2. Multiply the cost recovery percentage for each year, from Table 17-2, by the original basis of the asset.
Step 3. Set up the depreciation schedule in the form of a chart with the following headings:
End of Original Cost recovery Cost recovery Accumulated Book
Year Basis Percentage (depreciation) Depreciation Value

10. Everybody’s Business
Learning Tip
In MACRS, the entire asset is depreciated. There is no salvage value.
Note that the percents for any given property class in the Cost Recovery Percentage table add up to 100%

11. 17-6 Calculating the Periodic Depletion cost of Natural Resources
Steps to Calculate the Periodic Depletion Cost of Natural Resources:
Step 1. Compute the average depletion cost per unit by
Step 2. Calculate the periodic depletion cost by:
Average depletion cost per unit = Total cost of resources – Residual value Estimated total units available
Periodic = Units produced in Average depletion
depletion current period X cost per unit
cost

12. Key Terms Chapter 17, Depreciation Long-term assets Depreciation
Depreciation schedule Sum-of-the-years’digit
Double-declining balance Total cost
General depreciation system (GOS)
Alternative depreciation system (ADS)
Modified accelerated cost recovery system (MACRS)
Straight-line depreciation
Wasting assets Accelerated depreciation
Depletion Declining-balance
Half year convention Useful life
Units-of-production Book value
Cost recovery allowance Property class

13. Chapter 17 Straight-Line Method
Total cost = Cost + Freight + Setup expenses
Total depreciation = Total cost - Salvage value
Total depreciation
Estimated useful life (years)
Annual depreciation =
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14. Chapter 17 “Formulas” Sum-of-the-Years’ Digits Method
Years of useful life remaining
n(n + 1) 2
Annual depreciation = Total depreciation x Depreciation
rate factor
SYD depreciation rate fraction =
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15. Chapter 17 “Formulas” Declining-Balance Method
Declining-balance rate = x Multiple
Beginning book value = Ending book value of previous year
Ending book value = Beginning book value - Depreciation
for the year 1
Useful life
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16. Chapter 17 “Formulas” Units-of-Production Method Cost - Salvage value
Units of useful life
Annual depreciation = Depreciation per unit x Units produced
Depreciation per unit =
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17. Chapter 17 “Formulas” MACRS Depreciation
Depreciation deduction = Original basis x Cost recovery %
Natural Resources Depletion
Total cost of resource - Residual value
Estimated total units available
Periodic depletion = Units produced in x Average depletion
cost current period cost per unit
Average depletion =
cost per unit
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18. Chapter 17, Section II Business Decision Intangible Write-offs
As you have seen in this chapter, companies depreciate or write-off the
expense of tangible assets, such as trucks and equipment over a period of
its useful life. Many companies also have intangible assets that must be
accounted for as an expense over a period of time.
Intangible assets are resources that benefit the company, but do not have any
physical substance. Some examples are copyrights, franchises, patents,
trademarks and leases. In accounting, intangible assets are written off in a
procedure known as asset amortization. This is much like straight-line
depreciation, but there is no salvage value.
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19. Chapter 17, Section II
a. Using the straight-line method, calculate the patent’s annual amortization
expense for the years before the lawsuit.
$600,000
b. Calculate the amortization expense per year for the remaining years after the
lawsuit.
$655,000
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