2. PRESENTED BY:
Javeria
11-arid-3303
MIT-3
University Institute of Information Technology,
Rawalpindi(UIIT,UAAR)
Pakistan
3. Depreciation is the reduction in value of an
asset over time due to:
wear and tear
effluxion of time
obsolescence
4. What Can Be Depreciated?
A qualifying asset for depreciation must satisfy all these
conditions:
should be used in business
should have a definite useful life and a life longer than 1 year
must wear out, become obsolete or lose value
7. Required Factors in Calculating Asset
Depreciation
Useful life of asset
Residual value
Cost basis
Method of depreciation
8. 1. Straight-Line (SL) Method
Principle
A fixed asset provides its service in a uniform
fashion over its life
Formula
Annual Depreciation = cost – residual value
useful life
9. EXAMPLE
(Straight-Line Method)
Cost of machinery = $45,000
Residual value = $5,000
Useful life = 5 years.
Calculate annual cost of depreciation?
Year Computation Depreciation Accumulated Book Value
Expense Depreciation
$45,000
First (45,000-5,000)/5 $8,000 $8,000 37,000
Second (45,000-5,000)/5 8,000 16,000 29,000
Third (45,000-5,000)/5 8,000 24,000 21,000
Fourth (45,000-5,000)/5 8,000 32,000 13,000
Fifth (45,000-5,000)/5 8,000 40,000 5,000
Total 40,000
11. 2. Declining Balance Method
Principle
A fixed asset provides its service in a decreasing fashion. The book
value is reduced by a fixed percentage each year.
Formula
Annual Depreciation = Depreciation rate * Book value at start of year
Depreciation rate
200% Declining Method: Depreciation rate = 2/useful life
150% Declining Method : Depreciation rate = 1.5/useful life
130% Declining Method: Depreciation rate = 1.3/useful life
12. EXAMPLE
(200% Declining Balance Method)
Cost of machinery = $70,000
Residual value = $5000
Useful life = 5 years
Cost of annual Depreciation?
Year Computation Depreciation Accumulated Book Value
Expense Depreciation
$70,000
First $70,000 x 40% $28,000 $28,000 42,000
Second 42,000 x 40% 16,800 44,800 25,200
Third 25,200 x 40% 10,080 54,880 15,120
Fourth 15,120 x 40% 6,048 60,928 9,072
Fifth 9,072-$5,000 4,072 65,000 5,000
Total 65,000
13. Example – 200% Declining Balance Method
Annual
Depreciation
expense
1 2 3 4 5
Years
14. 3. MACRS Method
Principle
An asset has a fixed life according to the category in
which it falls.
The residual value is always zero.
Formula
Annual Depreciation = cost x appropriate MACRS % rate
15. TABLE OF PROPERTY CLASS AND NUMBER OF YEARS
Years
(c) 2001 Contemporary Engineering Economics 15
17. EXAMPLE
(MACRS Method)
Cost of tractor = Rs. 30,000
Cost of annual Depreciation?
Year Computation Depreciation Accumulated Book Value
Expense Depreciation
$30,000
First 33.33% x 30,000 9,999 9,999 20,001
Second 44.45% x 30,000 13,335 23,334 6,666
Third 14.81% x 30,000 4,443 27,777 2,223
Fourth 7.41% x 30,000 2,223 30,000 0