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© 2015 Cengage Learning. All Rights Reserved. LESSON 7-4 Other Methods of Depreciation Learning Objectives LO4 Calculate depreciation expense using the declining-balance depreciation method. LO5 Calculate depreciation expense using the units-of-production method. LO6 Calculate and record depletion of a natural resource. © 2015 Cengage Learning. All Rights Reserved.

Declining-Balance Method of Depreciation Lesson 7-4 Declining-Balance Method of Depreciation LO4 Any method of depreciation that records greater depreciation expense in the early years and less depreciation expense in the later years is called accelerated depreciation. The declining-balance method of depreciation is a type of accelerated depreciation that multiplies the book value of an asset by a constant depreciation rate to determine annual depreciation. A declining-balance rate that is twice the straight-line rate is called the double declining-balance method of depreciation. © 2015 Cengage Learning. All Rights Reserved.

Declining-Balance Method of Depreciation Lesson 7-4 Declining-Balance Method of Depreciation LO4 Estimated Depreciation Expense ÷ Years of Estimated Useful Life = Straight-Line Rate of Depreciation 100% ÷ 5 = 20% Straight-Line Rate of Depreciation × Multiply by Two = Double Declining-Balance Rate of Depreciation 20% × 2 = 40% © 2015 Cengage Learning. All Rights Reserved.

Declining-Balance Method of Depreciation Lesson 7-4 Declining-Balance Method of Depreciation LO4 Plant Asset: Automobile Original Cost: $35,000.00 Depreciation Method: Double Declining-Balance Estimated Salvage Value: $3,000.00 Estimated Useful Life: 5 years Year Beginning Book Value Double Declining- Balance Rate Annual Depreciation Ending Book Value 1 $35,000.00 40% $14,000.00 $21,000.00 2 21,000.00 8,400.00 12,600.00 3 5,040.00 7,560.00 4 3,024.00 4,536.00 5 — 1,536.00 3,000.00 Total Depreciation $32,000.00 1 Double declining-balance rate 2 Annual depreciation 3 Final year’s depreciation © 2015 Cengage Learning. All Rights Reserved.

Units-of-Production Method of Depreciation Lesson 7-4 Units-of-Production Method of Depreciation LO5 Plant Asset: Van Original Cost: $24,200.00 Depreciation Method: Units-of-Production Estimated Salvage Value: $5,000.00 Original Cost: $24,200.00 Estimated Useful Life: 120,000 miles Depreciation Rate: $0.16 per mile driven 2 Unit depreciation rate Year Beginning Book Value Miles Driven Annual Depreciation Ending Book Value 1 $24,200.00 22,600 $3,616.00 $20,584.00 2 20,584.00 24,300 3,888.00 16,696.00 3 28,100 4,496.00 12,200.00 4 20,400 3,264.00 8,936.00 5 16,200 2,592.00 6,344.00 1 Annual depreciation expense © 2015 Cengage Learning. All Rights Reserved.

Units-of-Production Method of Depreciation Lesson 7-4 Units-of-Production Method of Depreciation LO5 Original Cost - Estimated Salvage Value = Total Depreciation Expense $24,200 - $5,000 = $19,200 Total Depreciation Expense ÷ Estimated Useful Life = Unit Depreciation Rate $19,200 ÷ 120,000 miles = $0.16/mile © 2015 Cengage Learning. All Rights Reserved.

Calculating Depreciation Expense for Income Tax Reporting Lesson 7-4 Calculating Depreciation Expense for Income Tax Reporting LO5 The U.S. Internal Revenue Service has published rules for most plant assets when calculating the amount of depreciation expense used in computing a business’s federal income tax obligation. This depreciation method is called the Modified Accelerated Cost Recovery System (MACRS). MACRS is an accelerated depreciation method with prescribed periods for nine classes of plant assets. © 2015 Cengage Learning. All Rights Reserved.

Lesson 7-4 MACRS Table LO5 © 2015 Cengage Learning. All Rights Reserved. © 2015 Cengage Learning. All Rights Reserved.

MACRS Example LO5 Lesson 7-4 © 2015 Cengage Learning. All Rights Reserved. © 2015 Cengage Learning. All Rights Reserved.

Comparison of Depreciation Methods Lesson 7-4 Comparison of Depreciation Methods LO5 Plant Asset: Automobile Original Cost: $4,000.00 Depreciation Method: Comparison of 5-year Property Estimated Salvage Value: $350.00 Estimated Useful Life: 5 years Straight-Line Method Double Declining-Balance Method MACRS Year Annual Depreciation 1 $730.00 $1,600.00 $800.00 2 730.00 960.00 1,280.00 3 576.00 768.00 4 345.60 460.80 5 168.40 450.80 6 ---- 230.40 Total Depreciation $3,650.00 $4,000.00 © 2015 Cengage Learning. All Rights Reserved.

Calculating Depletion on Natural Resources Lesson 7-4 Calculating Depletion on Natural Resources LO6 The decrease in the value of a plant asset because of the removal of a natural resource is called depletion. © 2015 Cengage Learning. All Rights Reserved. © 2015 Cengage Learning. All Rights Reserved.

Calculating Depletion on Natural Resources Lesson 7-4 Calculating Depletion on Natural Resources LO6 Original Cost - Estimated Salvage Value = Estimated Value of Coal $2,500,000 - $400,000 = $2,100,000 Estimated Value of Coal ÷ Estimated Tons = Depletion Rate $2,100,000 ÷ 800,000 tons = $2.625/ton © 2015 Cengage Learning. All Rights Reserved.

Lesson 7-4 Audit Your Understanding 1. Which depreciation method ignores the estimated salvage value? ANSWER Declining-balance and MACRS. © 2015 Cengage Learning. All Rights Reserved. © 2015 Cengage Learning. All Rights Reserved.

Lesson 7-4 Audit Your Understanding 2. What is the basis for the units-of-production method of calculating depreciation? ANSWER The amount of use the asset receives, measured in hours, units, weight, or volume. © 2015 Cengage Learning. All Rights Reserved. © 2015 Cengage Learning. All Rights Reserved.

Lesson 7-4 Audit Your Understanding 3. Describe the types of assets in the MACRS five- and seven-year property classes. ANSWER The five-year property class includes cars, general purpose trucks, computers, manufacturing equipment, and office machinery. The seven-year property class includes office furniture and fixtures. © 2015 Cengage Learning. All Rights Reserved. © 2015 Cengage Learning. All Rights Reserved.

Lesson 7-2 Audit Your Understanding 4. How does a mining company calculate the amount of depletion for a year? ANSWER Tons of material mined times the depletion rate equals annual depletion expense. The depletion rate is calculated by dividing the estimated total value of the mineral resource by the estimated number of tons of the mineral to be recovered. © 2015 Cengage Learning. All Rights Reserved. © 2015 Cengage Learning. All Rights Reserved.