1. LESSON 8-4 Other Methods of Depreciation
4/20/2017
LESSON 8-4
Other Methods of Depreciation
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2. OTHER METHODS OF DEPRECIATION
LESSON 8-4
OTHER METHODS OF DEPRECIATION
4/20/2017
page 242
Many plant assets depreciate more in the early years of useful life than in the later years.
Charging more depreciation expense in the early years of a plant asset may be more accurate than caharging the same amount each year.
Multiplying the book value at the end of each fiscal period by a constant depreciation rate is called the declining-balance method of depreciation
Although the depreciation rate is the same each year, the annual depreciation expense declines from year to year
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3. DECLINING-BALANCE METHOD OF DEPRECIATION
LESSON 8-4
DECLINING-BALANCE METHOD OF DEPRECIATION
4/20/2017
page 242
The declining-balance depreciation rate is based on the straight-line rate. It is twice the straight-line rate (called the double declining-balance method)
This method does not use the estimated salvage value to compute annual depreciation
The estimated salvage value is used only to limit the last year’s depreciation expense
A plant asset is never depreciated below its estimated salvage value
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4. DECLINING-BALANCE METHOD OF DEPRECIATION
LESSON 8-4
DECLINING-BALANCE METHOD OF DEPRECIATION
4/20/2017
page 242
The annual depreciation expense is calculated using the beginning book value for each year (beginning book value is the same as the ending book value from the previous year)
Remember: Do not use salvage value in computing the book value
Purchased a computer for $2,000 on January 1st. The computer has a useful life of 5 years and an estimated salvage value of $175
1. Calculate the declining-balance rate.
Total Depreciation Expense %
 Estimated Useful Life (years)  5
= Straight-Line Rate %
 Double the Rate  2
= Declining-Balance Rate %
2. Calculate the annual depreciation for year 1.
Beginning Book Value $2000
 Depreciation Rate  40%
= Annual Depreciation Expense $800
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5. DECLINING-BALANCE METHOD OF DEPRECIATION
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Plant asset: Computer
Depreciation method: Declining balance
Original cost: $2,000.00
Estimated salvage value: $175.00
Estimated useful life: 5 years
Year
Beginning Book Value
Declining- Balance Rate
Annual Depreciation
Ending
Book Value 1 2 3 4 5
Total Depreciation
$2, ,200.00
720.00
432.00
259.20
40% — $
480.00
288.00
172.80
84.20
$1,825.00
$1,200.00
175.00 1 2
1. Calculate the declining-balance rate.
Total Depreciation Expense %
 Estimated Useful Life (years)  5
= Straight-Line Rate %
 Double the Rate  2
= Declining-Balance Rate %
2. Calculate the annual depreciation for year 3.
Beginning Book Value $720
 Depreciation Rate  40%
= Annual Depreciation Expense $288
LESSON 8-4

6. SUM-OF-THE-YEARS’-DIGITS METHOD OF DEPRECIATION
LESSON 8-4
SUM-OF-THE-YEARS’-DIGITS METHOD OF DEPRECIATION
4/20/2017
page 243
Another method of calculating depreciation is based on a fraction derived from the years’ digist for the useful life of a plant asset
Using fractions based on the number of years of a plant asset’s useful life is called the sum-of-the-years’-digits method of depreciation
Like the straight-line method, the estimated salvage value is subtracted from the original cost to compute an estimated total depreciation expense
This results in a last year ending book value equal to the palnt asset’s salvage value
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7. SUM-OF-THE-YEARS’-DIGITS METHOD OF DEPRECIATION
LESSON 8-4
SUM-OF-THE-YEARS’-DIGITS METHOD OF DEPRECIATION
4/20/2017
page 243
The fractions are determined as follows:
The years’ digits are added ( = 15
Then, using the sum of the years’ digits, a fraction is created for each year with the years’ digits in reverse order
The sum-of-the-years’-digits method results in a last year ending book value equal to the plant asset’s salvage value
1. Calculate the fraction.
Years’ Digits Fraction
1 5/15
2 4/15
3 3/15
4 2/15
5 1/15 15
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8. SUM-OF-THE-YEARS-DIGITS METHOD OF DEPRECIATION
page 243
Plant asset: Computer
Depreciation method: Sum-of-the-years-digits
Original cost: $2,000.00
Estimated salvage value: $175.00
Estimated useful life: 5 years
Year
Beginning Book Value
Fraction
Total Depreciation
Annual Depreciation
Ending
Book Value 1 2 3 4 5
Total
$2,000.00
1,391.67
905.00
540.00
296.67
5/15
4/15
3/15
2/15
1/15
$1,825.00
$608.33
486.67
365.00
243.33
121.67
$1,391.67
175.00 1 2
1. Calculate the fraction.
Years’ Digits Fraction
1 5/15
2 4/15
3 3/15
4 2/15
5 1/15 15
2. Calculate the annual depreciation for year 1.
Original Cost $2,000.00
Estimated Salvage Value –
Estimated Total Depreciation $1,825.00
Year’s Fraction  5/15
Annual Depreciation $608.33
LESSON 8-4

9. COMPARISON OF THREE METHODS OF DEPRECIATION
page 244
Plant asset: Computer
Depreciation method: Comparison
Original cost: $2,000.00
Estimated salvage value: $175.00
Estimated useful life: 5 years
Year
Straight-Line Method
Double Declining-Balance Method
Sum-of-the-Years-Digits Method 1 2 3 4 5
Total Depreciation
$365.00
365.00
$1,825.00 $
480.00
288.00
172.80
84.20
$608.33
486.67
243.33
121.67
Regardless of the depreciation method used, the total depreciation expense over the useful life of an asset is the same
Double declining balance method & sum-of-the-years’-digits are known as accelerated depreciation methods
LESSON 8-4

10. PRODUCTION-UNIT METHOD OF DEPRECIATION
LESSON 8-4
PRODUCTION-UNIT METHOD OF DEPRECIATION
4/20/2017
page 245
Sometimes the useful life of a plant asset depends on how much the asset is used
Ex. Automobile will wear out faster if it is driven 80,000 miles a year rather than 60,000 miles.
Calculating estimated annual depreciation expense based on the amount of production expected from a plant asset is called the production-unit method of depreciation
The depreciation rate for the asset is calculated by dividing the estimated total depreciation expense by the estimated useful life
1. Calculate the depreciation rate.
Original Cost $18,200
– Estimated Salvage Value – 2,000
= Est. Total Depreciation Expense $16,200
 Estimated Useful Life (miles)  90,000
= Depreciation Rate $0.18/mile
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11. PRODUCTION-UNIT METHOD OF DEPRECIATION
page 245
Plant asset: Truck
Depreciation method: Production-unit
Original cost: $18,200.00
Estimated salvage value: $2,000.00
Estimated total depreciation: $16,200.00
Estimated useful life: 90,000 miles
Depreciation rate: $0.18 per mile driven
Year
Beginning Book Value
Miles Driven
Annual Depreciation
Ending
Book Value 1 2 3 4 5
Totals
$18,200.00
16,580.00
12,440.00
7,940.00
3,980.20
9,000
23,000
25,000
22,000
8,000
87,000
$ 1,620.00
4,140.00
4,500.00
3,960.00
1,440.00
$15,600.00
$16,580.00
2,540.00 1 2
1. Calculate the depreciation rate.
Original Cost $18,200
– Estimated Salvage Value – 2,000
= Est. Total Depreciation Expense $16,200
 Estimated Useful Life (miles)  90,000
= Depreciation Rate $0.18/mile
2. Calculate annual depreciation for year 1.
Total Miles Driven 9,000
 Depreciation Rate  $0.18
= Annual Depreciation Exp. $1,620.00
LESSON 8-4

12. CALCULATING DEPRECIATION EXP. FOR INCOME TAX PURPOSES
LESSON 8-4
CALCULATING DEPRECIATION EXP. FOR INCOME TAX PURPOSES
4/20/2017
page 246
Modified Accelerated Cost Recovery System is a depreciation method required by the Internal Revenue Service to be used for income tax calculation purposes for most plant assets placed in service after 1986.
This method is generally referred to as MACRS.
MACRS has prescribed periods for nine classes of useful life for plant assets.
An asset is assigned to a specific class based on its characteristics and general life expectancy.
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13. CALCULATING DEPRECIATION EXPENSE FOR INCOME TAX PURPOSES
LESSON 8-4
4/20/2017
CALCULATING DEPRECIATION EXPENSE FOR INCOME TAX PURPOSES
page 246
Plant asset: Printer
Depreciation method: MACRS
Original cost: $2,000.00
Property class: 5 year
Year
Depreciation Rate
Annual Depreciation 1 2 3 4 5 6
Totals
20.00%
32.00%
19.20%
11.52%
5.76%
100.00%
$400.00
640.00
384.00
230.40
115.20
$2,000.00
This actual calculation for this method is not covered in objective 4.02
Original Cost
Depreciation Rate =
Annual Depreciation Rate
Year 3
$2,000.00
19.20% =
$384.00
Annual depreciation is calculated by multiplying the plant asset’s original cost times the depreciation rate for its specific class (Set by the IRS)
LESSON 8-4
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14. DEPLETION 1 2 page 247 Plant asset: Coal Mine
LESSON 8-4
4/20/2017
DEPLETION
page 247
Plant asset: Coal Mine
Depreciation method: Production-unit
Original cost: $100,000.00
Estimated salvage value: $12,250.00
Estimated total depletion: $87,750.00
Est. tons of recoverable coal: 50,000 tons
Depletion rate: $1.755 per ton
Year
Beginning Book Value
Tons Recovered
Annual Depletion
Ending
Book Value 1 2 3 4 5
Totals
$100,000.00
89,470.00
68,410.00
45,595.00
29,800.00
6,000
12,000
13,000
9,000
46,000
$ 10,530.00
21,060.00
15,795.00
10,530.00
$80,730.00
$89,470.00
69,410.00
19,270.00 1 2
This method of depreciation is not covered in objective 4.02
1. Calculate the depletion rate.
Original Cost $100,000
– Estimated Salvage Value – 12,250
= Est. Total Value of Coal $87,750
 Est. Tons of Recoverable Coal  50,000
= Depletion Rate per Ton of Coal $1.755
2. Calculate annual depletion for year 1.
Tons of Coal Removed 6,000
 Depletion Rate  $1.755
= Annual Depreciation Exp. $10,530.00
LESSON 8-4
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15. TERMS REVIEW declining-balance method of depreciation
page 248
declining-balance method of depreciation
sum-of-the-years’-digits method of depreciation
production-unit method of depreciation
Modified Accelerated Cost Recovery System
LESSON 8-4