1. Methods of Depreciation Georgia CTAE Resource Network Instructional Resources Office Written by: Dr. Marilynn K. Skinner May 2009

2. Four Methods Straight Line Declining Balance Sum of the Year’s Digits Units of Production

3. Straight Line Annual Depreciation = Cost – Salvage Value Years of Useful Life Example: You purchase a truck that costs $19,000. It has a salvage value of $5,000 and a useful life of 5 years. What is the annual depreciation? Annual Depreciation = 19,000-5,000 5 Annual Depreciation = $2,800

4. Declining Balance Declining balance is calculated on either 1.5 X 0r 2 X the straight line amount (Percentage) Straight line percentage is calculated by dividing 1 by the number of years of useful life. Each consecutive year, the depreciation amount is calculated by multiplying the percentage by the book value (Cost – accumulated depreciation)

5. Declining Balance Example Example: You purchase a truck that costs $19,000. It has a salvage value of $5,000 and a useful life of 5 years. What is the annual depreciation 1. Calculate Percentage 1/5 years = 20% X 2 = 40% 2. Note: The Book Value may never fall below Salvage Value YearBook ValueDepreciation Rate Annual Depreciation Accumulated Depreciation 119,00040%7,600 211,40040%4,56012,160 36,840184015,000 45,00015,000 55,00015,000

6. Sum of the Years Digits First add all the digits of the years of useful life. For instance: For 5 years you would add 1+2+3+4+5=15. Each year make a fraction of the year/sum. YearDepreciable Cost Year’s Fraction Annual Depreciation Accumulated Depreciation 119,0005/156,333 219,0004/155,06711,400 319,0003/152,60014,000 419,000 5

7. Units of Production Johnson Company purchases a machine for $500,000. The machine is expected to produce 2,000,000 units. In the first year the machine produced 400,000 units. Calculate cost per unit: Depreciable Cost/Expected Units of Production 500,000/2,000,000 =.25 Calculate Current Year Depreciation: Cost per unit X Current Year’s Units of Production.25 X 400,000 = $100,000

8. Accumulated Depreciation Contra Account to the Asset Account (Equipment, Buildings, etc.) Balance Sheet or permanent account Has normal credit balance Book Value = Asset – Accumulated Depreciation

9. Depreciation Expense Temporary Account Closed at end of fiscal year Income Statement Account

10. Entry to record depreciation Depreciation Expense XXXX Accumulated Depreciation XXXX

11. Recording the sale of a depreciable asset Must remove both the asset and the associated accumulated depreciation from the books Must record gain or loss (use as plug figure) Example: Johnson Company sells its equipment that cost $500, 000 with $200,000 of Accumulated Depreciation for $350,000.

12. Recording the sale of a depreciable asset Johnson Company sells its equipment that cost $500, 000 with $200,000 of Accumulated Depreciation for $350,000 Cash in Bank 350,000 Accumulated Depreciation 200,000 Equipment500,000 Gain on Sale of Equipment 50,000 *A loss is recorded as a debit