1. CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 18-2 Calculating Depreciation Expense

2. CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning Calculating Depreciation Generally accepted accounting principles require that the cost of the plant asset be expensed over the plant asset’s useful life The easiest and most widely used method to calculate depreciation is Straight-Line Method. Businesses need to know 2 things: Cost of the plant asset and two estimates. 1.The amount the business expects to receive when a plant asset is removed (salvage value) 2.The number of years a plant asset is expected to be used (estimated useful life) 2 LESSON 18-2

3. CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 3 LESSON 18-2 Estimated Salvage Value Original Cost Estimated Total Depreciation Expense =– $3,000.00 Annual Depreciation Expense = Years of Estimated Useful Life ÷ Estimated Total Depreciation Expense $600.00 $250.00 $3,250.00 STRAIGHT-LINE DEPRECIATION Calculating Annual Depreciation Expense 1 page 538 =– = 5 ÷ $3,000.00 1.Subtract the asset’s estimated salvage value from the original cost. 2.Divide the estimated total depreciation expense by the years of estimated useful life. 2

4. CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning Calculating Depreciation Expense of Part of a Year A month is the smallest unit of time used to calculate depreciation 4 LESSON 18-2

5. CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 5 LESSON 18-2 Months in a Year Annual Depreciation Expense Monthly Depreciation Expense =÷ $50.00 Partial Year’s Depreciation Expense = Number of Months Asset Is Used × Monthly Depreciation Expense $250.00 12 $600.00 CALCULATING DEPRECIATION EXPENSE FOR PART OF A YEAR Calculating Partial Year’s Depreciation Expense 1 page 539 =÷ = 5 × $50.00 1.Divide the annual depreciation expense by 12. 2.Multiply the monthly depreciation expense by the number of months the plant asset is used in a year. 2

6. CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning Calculating Accumulated Depreciation and Book Value The original cost of the plant asset minus accumulated depreciation is known as Book Value 6 LESSON 18-2

7. CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 7 LESSON 18-2 CALCULATING ACCUMULATED DEPRECIATION page 540 20X3 Depreciation Expense 20X2 Accumulated Depreciation 20X3 Accumulated Depreciation =+ $1,800.00$600.00 $1,200.00 =+

8. CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 8 LESSON 18-2 CALCULATING BOOK VALUE page 540 Accumulated Depreciation Original Cost Ending Book Value =– $1,450.00$1,800.00 $3,250.00 =– Annual Depreciation Beginning Book Value Ending Book Value =– $1,450.00$600.00 $2,050.00 =–