CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 8-4 Other Methods of Depreciation

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning Depreciation Methods A Company can select ANY generally accepted depreciation method, however, once selected the company must stay with that method for “consistent reporting” purposes. Can be changed BUT must show reason why new method would better report the company’s financial activities 2 LESSON 8-4

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning Accounting Terms (Double) Declining-Balance Method of Depreciation—multiplying the book value at the END of each fiscal period by a constant depreciation rate. Loses MOST value EARLY! The RATE of depreciation is the same each year BUT the annual depreciation expense DECLINES from year to year. Based on the “Straight-line” rate but is DOUBLED! Depreciation expense calculated using the Beginning book value for each year “Accelerated Depreciation Method” 3 LESSON 8-4

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 4 LESSON 8-4 Annual Depreciation Exp. = Depreciation Rate xBeginning Book Value Year 3$720.00x40%=$ DOUBLE-DECLINING BALANCE DEPRECIATION page 242 Total Depreciation Expense100%  Estimated Useful Life  5 years =Straight-Line Rate20% xDouble the Ratex 2 =Declining-Balance Rate40% $ %

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning DOUBLE-DECLINING BALANCE DEPRECIATION NOTE: This method does NOT use the estimated salvage value to compute annual depreciation. Salvage value is only used so you know not to go BELOW this value 5 LESSON 8-4

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning Accounting Terms Sum-of-the-years’ digits method— using fractions based on the number of years of a plant asset’s useful life. ADD the years’ digits then a fraction is created for each year with the years’ digits in REVERSE ORDER Depreciation expense calculated by multiplying the total depreciation expense times the fraction 6 LESSON 8-4

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning SUM-OF-THE-YEARS’ DIGITS METHOD 7 LESSON 8-4 $ $ $ /15 4/15 3/15 2/15 1/ Original Cost Estimated Salvage Value =Estimated Total Depreciation Expense$ xYear’s Fractionx 5/15 =Annual Depreciation Expense$ Years’ Digits Fraction 15/15 24/15 33/15 42/15 51/15

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning SUM-OF-THE-YEARS’ DIGITS METHOD 8 LESSON 8-4 Like the straight-line method, the estimated salvage value is SUBTRACTED from the original cost to compute the annual depreciation. This is considered an “Accelerated Depreciation Method” similar to the Double-Declining Balance Method Loses most of the value in the EARLY years

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning PRODUCTION-UNIT METHOD OF DEPRECIATION Production-unit method of Depreciation —calculating estimated annual depreciation expense based on the amount of production expected from a plant asset. Measureable! Remember DO NOT depreciate BELOW the salvage value of the item 9 LESSON 8-4

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 10 LESSON 8-4 Annual Depreciation Exp. = Depreciation Rate xTotal Miles Driven Year 19,000x$0.18=$1, PRODUCTION-UNIT METHOD OF DEPRECIATION page 245 Original Cost$18, Estimated Salvage Value- 2, =Estimated Total Depreciation Expense$16,  Estimated Useful Life  90,000 miles =Depreciation Rate$0.18/mile $ $ Truck Production-Unit $18, $2, ,000 miles Miles Depreciation Rate: $0.18 per mile driven

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 11 LESSON 8-4 Annual Depreciation Rate = Depreciation Rate xOriginal Cost Year 3$ x19.20%=$ CALCULATING DEPRECIATION EXPENSE FOR INCOME TAX PURPOSES page % 32.00% 19.20% 11.52% 05.76% 100.0% MACS Property Class Depreciation Rate Modified Accelerated Cost Recovery System—MACRS A depreciation method required by the Internal Revenue Service to be used for income tax purposes. Most common classes are 5 and 7 year classes of assets. Similar to the Double-Declining Balance Method.

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning DEPLETION Depletion—the DECREASE in value of a plant asset because of the REMOVAL of a Natural Resource Ex: Oil, gas, coal, gravel, minerals, timber This method is the same as “Production-unit method. Multiply the amount produced for the year by the rate of production. 12 LESSON 8-4

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 13 LESSON 8-4 Annual Depletion Expense = Depletion Rate xTones of Coal Removed Year 16,000x$1.755=$10,530.00DEPLETION page 247 Original Cost$100, Estimated Salvage Value- 12, =Estimated Total Value of Coal$87,  Estimated Tons of Recoverable Coal  50,000 =Depletion Rate per Ton of Coal$1.755 per ton $ $ $ $ Coal Mine Production-Unit (Depletion) $100, $12, Tons of Coal: 50,000 tons Tons Depletion Rate: $1.755 per ton

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 14 LESSON 8-4 TERMS REVIEW Declining-balance method of depreciation Sum-of-the-years’-digits method of depreciation Production-unit method of depreciation Modified accelerated cost recovery system Depletion page 234

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning Audit Your Understanding 1.Which depreciation method does NOT use the estimated salvage value to compute annual depreciation? 2.What is the basis for the production-unit method of calculating depreciation? 15 LESSON 8-4

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning Audit Your Understanding 3.How does a mining company calculate the amount of depletion for a year? 16 LESSON 8-4