Straight-Line Depreciation Allocates an equal amount of the depreciable cost based on time to each year (month) of the asset’s service life. Asset cost - Estimated residual value Straight-Line Depreciation = Asset’s service life (Years or Months) 7-1

Activity-Based Depreciation Allocate an asset’s cost based on use rather than time Step 1 Compute the average depreciation rate per unit Depreciable Cost (Cost – Salvage Value) Total units expected to be produced/used Step 2Multiply the average depreciation rate per unit by the number of units consumed each period 7-2 Step 3 Journal entry recording a debit to depreciation expense and a credit to accumulated depreciation.

Double Declining Balance (DDB) - STEPS 1.Straight line Depreciation as a % - Compute straight-line deprec. in the form of a percentage. For example, 4 year useful life = 25% of the value each year (1 / useful life) 2.DDB Percentage Rate - Multiply the straight-line percentage rate by 2 (hence, the title of ‘double’ declining balance) to compute the DDB percentage rate. 3.First Year Depreciation Expense - Multiply the DDB % rate by the period’s beginning asset book value (cost less accumulated depreciation). ***Under the DDB method, ignore the residual value of the asset in computing depreciation, except during the last year. *** 4.Record Depreciation Expense - Record and post the calculated depreciation expense (debit depreciation expense and credit accumulated depreciation) 5.Next Years Depreciation Expense - Multiply the DDB % rate by the period’s beginning asset book value (cost less accumulated depreciation). 6. Determine the final year’s depreciation amount—that is, the amount needed to reduce asset book value to its residual value. The residual value should not be depreciated but should remain on the books until the asset is disposed. 3

DDB – Example – Using Depreciation Schedule 4

Exercise 5

Straight-line Depreciation – Bought van on year useful life (36,000) miles Residual value = $2,800  What is book value at the end of year 2?

Activity Based Depreciation Bought van on ; 4 year useful life (36,000) miles; Residual value = $2,800 Actual usage – Year 1 – 11,000 miles; Year 2 – 13,000 miles; Year 3 – 5,000 miles; Year 4 – 7,000 miles  What is book value at the end of year 2?

8 Double-declining-balance Bought van on year useful life (36,000) miles Residual value = $2,800 DepreciationAccumulatedEnding DateAsset CostDDB RateBook ValueExpenseDepreciationBook Value 1/1/ /31/ /31/ /31/ /31/2016  Step 1  Step 2

Calculate Gain or Loss on Sale/Retirement 1. Bring accumulated depreciation up-to-date to: 1. Record depreciation expense up to date of disposal 2. Calculate sale amount based on one of 2 scenarios 1. Sale Price - Equals cash received (sale) 2. Retirement, $0.00 is received. 3. Subtract current book value (Updated after Step 1). 1. If result is positive, record gain (credit); if negative, record loss (debit). Journal Entry – close out asset and accumulated depreciation 1. Debit Cash if sale (if retirement, no cash is received) 2. Debit accumulated depreciation (to close out account) 3. Credit tangible asset account (to close out account) 4. Record gain (credit) or loss (debit) on disposal (New accounts – Gain with a normal Credit Balance and Loss with a normal Debit Balance) Disposal of Long-Term Assets - STEPS

Recording Long-Term Asset Disposals Little King Sandwiches purchased a new delivery truck. Here are the specific details: Cost of the new truck$40,000 Estimated residual value$5,000 Estimated service life5 years 7-10 Assume a sale after 3 years for 22,000.