Prepared by Johnny Howard © 2015 South-Western, a part of Cengage Learning

18–2 © 2015 South-Western, a part of Cengage Learning

18–3 © 2015 South-Western, a part of Cengage Learning Depreciation—the decrease in the value of physical assets of business caused by wear or by obsolescence. Book value of an asset—the original cost minus the accumulated depreciation, or the total of all depreciation to that time. Methods of Depreciation Straight-line (SL) method Units-of-production method Declining balance (DB) method T E R M S 1

18–4 © 2015 South-Western, a part of Cengage Learning Computing Depreciation with the Straight-Line Method Factors Original cost Estimated service life Estimated scrap value Formula: (Original cost – Scrap value) ÷ Estimated service life in periods of time = Depreciation amount for one unit or period E X A M P L E 1

18–5 © 2015 South-Western, a part of Cengage Learning Computing Depreciation with the Units-of-Production Method Formula: (Original cost – Scrap value) ÷ Estimated life in service units = Depreciation amount for one unit E X A M P L E 2

18–6 © 2015 South-Western, a part of Cengage Learning to Compute Depreciation, Using the DB Method 1.Divide 100% by the estimated years of useful life to determine the basic depreciation rate. 2.Multiply the basic depreciation rate by 2 (double- declining-balance) or by 1.5 (150%-declining- balance) to determine the declining-balance depreciation rate. 3.Multiply the declining-balance depreciation rate by the book value of the asset at the beginning of the year to determine the depreciation amount for that year. (For the first year, the book value at the beginning of the year equals the asset cost. Do not subtract the scrap value.) 3

18–7 © 2015 South-Western, a part of Cengage Learning E X A M P L E *As book value ($972) is larger than estimated scrap value ($900), there is some depreciation in the sixth year. However, the calculated depreciation ($388.80) is greater than book value minus scrap value ($972 2 $900 5 $72). Thus, depreciation is limited to the smaller amount, $72. 3

18–8 © 2015 South-Western, a part of Cengage Learning to Compute Depreciation Using the SYD method 1.Compute the sum of all the year’s digits in the estimated life of the asset. Use this shortcut formula: (( n + 1) × n ) ÷ 2, where n = number of years in estimated life. 2.Determine the current year’s depreciation fraction by using this formula: Estimated years of life remaining at the beginning of the current year ÷ Sum of all digits from Step 1. 3.Multiply the total depreciation amount ( Cost – SV ) of the asset by the depreciation fraction from Step 2 to determine depreciation for the current year. Note that each year a new depreciation fraction from Step 2 is determined and Step 3 is repeated. The sum of all digits in Step 1 and the total depreciation amount in Step 3 are the same every year. 4

18–9 © 2015 South-Western, a part of Cengage Learning E X A M P L E 4

18–10 © 2015 South-Western, a part of Cengage Learning MACRS 1 Depreciation Schedules for Common Business Assets

18–11 © 2015 South-Western, a part of Cengage Learning E X A M P L E 5

18–12 © 2015 South-Western, a part of Cengage Learning Figure 18.1Modified Accelerated Cost Recovery System (MACRS) Depreciation Schedule Note: The MACRS percentage for the first year is applicable to a partial or full year.

18–13 © 2015 South-Western, a part of Cengage Learning Computing Partial-Year Depreciation E X A M P L E 6

18–14 © 2015 South-Western, a part of Cengage Learning Computing Partial-Year Depreciation (cont’d) E X A M P L E 6

18–15 © 2015 South-Western, a part of Cengage Learning Chapter Terms for Review accumulated depreciation basic depreciation rate book value declining-balance (DB) method declining-balance depreciation rate depreciation double-declining-balance estimated service life Modified Accelerated Cost Recovery System (MACRS) obsolescence 150%-declining-balance original cost scrap value (SV) straight-line (SL) method sum-of-the-years-digits (SYD) method units-of-production method

18–16 © 2015 South-Western, a part of Cengage Learning Assignment 18.1: Business Depreciation A Solve the following depreciation problems.

18–17 © 2015 South-Western, a part of Cengage Learning Assignment 18.1: Business Depreciation A Solve the following depreciation problems.

18–18 © 2015 South-Western, a part of Cengage Learning Assignment 18.1: Business Depreciation A Solve the following depreciation problems.

18–19 © 2015 South-Western, a part of Cengage Learning Assignment 18.1: Business Depreciation A Solve the following depreciation problems.

18–20 © 2015 South-Western, a part of Cengage Learning B Solve the following depreciation problems. Round dollar amounts to two decimal places. Assignment 18.1: Business Depreciation

18–21 © 2015 South-Western, a part of Cengage Learning B Solve the following depreciation problems. Round dollar amounts to two decimal places. Assignment 18.1: Business Depreciation : :

18–22 © 2015 South-Western, a part of Cengage Learning B Solve the following depreciation problems. Round dollar amounts to two decimal places. Assignment 18.1: Business Depreciation

18–23 © 2015 South-Western, a part of Cengage Learning C Solve the following depreciation problems. Assignment 18.1: Business Depreciation

18–24 © 2015 South-Western, a part of Cengage Learning C Solve the following depreciation problems. Assignment 18.1: Business Depreciation

18–25 © 2015 South-Western, a part of Cengage Learning C Solve the following depreciation problems. Assignment 18.1: Business Depreciation

18–26 © 2015 South-Western, a part of Cengage Learning Assignment 18.2: Business Depreciation A Solve the following depreciation problems. Round dollar amounts to two decimal places.

18–27 © 2015 South-Western, a part of Cengage Learning Assignment 18.2: Business Depreciation A Solve the following depreciation problems. Round dollar amounts to two decimal places.

18–28 © 2015 South-Western, a part of Cengage Learning Assignment 18.2: Business Depreciation A Solve the following depreciation problems. Round dollar amounts to two decimal places.

18–29 © 2015 South-Western, a part of Cengage Learning Assignment 18.2: Business Depreciation B Solve the following depreciation problems.

18–30 © 2015 South-Western, a part of Cengage Learning Assignment 18.2: Business Depreciation B Solve the following depreciation problems.

18–31 © 2015 South-Western, a part of Cengage Learning Assignment 18.2: Business Depreciation B Solve the following depreciation problems.