LESSON 8-4 Other Methods of Depreciation

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LESSON 8-4 Other Methods of Depreciation 6/24/2018 LESSON 8-4 Other Methods of Depreciation RED

DECLINING-BALANCE METHOD OF DEPRECIATION page 242 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 $2,000.00 1,200.00 720.00 432.00 259.20 40% — $ 800.00 480.00 288.00 172.80 84.20 $1,825.00 $1,200.00 175.00 1 2 1. Calculate the declining-balance rate. Total Depreciation Expense 100%  Estimated Useful Life (years)  5 = Straight-Line Rate 20%  Double the Rate  2 = Declining-Balance Rate 40% 2. Calculate the annual depreciation for year 3. Beginning Book Value $720  Depreciation Rate  40% = Annual Depreciation Expense $288 LESSON 8-4

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 – 175.00 Estimated Total Depreciation $1,825.00 Year’s Fraction  5/15 Annual Depreciation $608.33 LESSON 8-4

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 $ 800.00 480.00 288.00 172.80 84.20 $608.33 486.67 243.33 121.67 LESSON 8-4

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

CALCULATING DEPRECIATION EXPENSE FOR INCOME TAX PURPOSES LESSON 8-4 6/24/2018 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 Original Cost ´ Depreciation Rate = Annual Depreciation Rate Year 3 $2,000.00 ´ 19.20% = $384.00 LESSON 8-4 RED

DEPLETION 1 2 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 22.815.00 15,795.00 10,530.00 $80,730.00 $89,470.00 69,410.00 19,270.00 1 2 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

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 depletion LESSON 8-4