CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 8-4 Other Methods of Depreciation Declining-balance depreciation method. Sum-of-the-years’-digits depreciation method. Production-unit depreciation method. Modified Accelerated Cost Recovery System. Depletion.

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning Chapter 8 Objectives Accounting for Uncollectible Accounts After studying Chapter 8, you will be able to: Define accounting terms related to plant assets and depreciation. Identify accounting concepts and practices related to accounting for plant assets and depreciation. Journalize entries for buying plant assets. Calculate and record property tax expense. Calculate and record depreciation expense for a plant asset using straight- line depreciation. Journalize entries disposing of plant assets. Calculate depreciation expense using other methods. 2 LESSON 8-4

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning Lesson 8-4 declining-balance method of depreciation: multiplying the book value at the end of each fiscal period by a constant depreciation rate sum-of-the-years’-digits method of depreciation: using fractions based on the number of years of a plant asset’s useful life production-unit method of depreciation: calculating estimated annual depreciation expense based on the amount of production expected from a plant asset 3 LESSON 8-4

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning Lesson 8-4 Modified Accelerated Cost Recovery System: a depreciation method required by the Internal Revenue Service to be used for income tax calculation purposes for most plant assets placed in service after 1986 depletion: the decrease in the value of a plant asset because of the removal of a natural resource 4 LESSON 8-4

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 5 LESSON 8-4 Plant asset: Computer Depreciation method: Declining balance Original cost: $2, Estimated salvage value: $ Estimated useful life: 5 years YearBeginning Book Value Declining- Balance Rate Annual Depreciation Ending Book Value Total Depreciation $2, , % — $ $1, $1, — 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 DECLINING-BALANCE METHOD OF DEPRECIATION page

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 6 LESSON 8-4 Plant asset: Computer Depreciation method: Sum-of-the-years’-digits Original cost: $2, Estimated salvage value: $ Estimated useful life: 5 years Year Beginning Book ValueFraction Total DepreciationAnnual Depreciation Ending Book Value Total $2, , /15 4/15 3/15 2/15 1/15 $1, $ $1, $1, Calculate the annual depreciation for year 1. Original Cost $2, Estimated Salvage Value – Estimated Total Depreciation $1, Year’s Fraction  5/15 Annual Depreciation $ SUM-OF-THE-YEARS’-DIGITS METHOD OF DEPRECIATION page Calculate the fraction.Years’ DigitsFraction 1 5/15 2 4/15 3 3/15 4 2/15 5 1/15 15

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 7 LESSON 8-4 COMPARISON OF THREE METHODS OF DEPRECIATION page 244 Plant asset: Computer Depreciation method: Comparison Original cost: $2, Estimated salvage value: $ Estimated useful life: 5 years Year Straight-Line Method Double Declining- Balance Method Sum-of-the-Years’- Digits Method Total Depreciation $ $1, $ $1, $ $1,825.00

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 8 LESSON 8-4 Plant asset: Truck Depreciation method: Production-unit Original cost: $18, Estimated salvage value: $2, Estimated total depreciation: $16, Estimated useful life: 90,000 miles Depreciation rate: $0.18 per mile driven YearBeginning Book Value Miles DrivenAnnual DepreciationEnding Book Value Totals $18, , , , , ,000 23,000 25,000 22,000 8,000 87,000 $ 1, , , , , $15, $16, , , , , 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 Driven9,000  Depreciation Rate  $0.18 =Annual Depreciation Exp.$1, PRODUCTION-UNIT METHOD OF DEPRECIATION page

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 9 LESSON 8-4 Original Cost  Depreciation Rate = Annual Depreciation Rate Year 3$2,  19.20%=$ CALCULATING DEPRECIATION EXPENSE FOR INCOME TAX PURPOSES page 246 Plant asset: Printer Depreciation method: MACRS Original cost: $2, Property class: 5 year YearDepreciation RateAnnual Depreciation Totals 20.00% 32.00% 19.20% 11.52% 5.76% % $ $2,000.00

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 10 LESSON 8-4 Plant asset: Coal Mine Depreciation method: Production-unit Original cost: $100, Estimated salvage value: $12, Estimated total depletion: $87, Est. tons of recoverable coal: 50,000 tons Depletion rate: $1.755 per ton YearBeginning Book Value Tons Recovered Annual DepletionEnding Book Value Totals $100, , , , , ,000 12,000 13,000 9,000 6,000 46,000 $ 10, , , , $80, $89, , , , , 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 $ Calculate annual depletion for year 1. Tons of Coal Removed6,000  Depletion Rate  $1.755 =Annual Depreciation Exp.$10, DEPLETION page

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 11 LESSON 8-4 DEFINE TERMS REVIEW In Quizlet 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 248

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning Exit Ticket for today: Audit Your Understanding 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? 3.How does a mining company calculate the amount of depletion for a year? 12 LESSON 8-4 In a Word Document, SaveAS: Chapter8-4AYUYourName And drop in my Inbox today!

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning Complete the following assignments for Chapter 8-4 today Define Terms Review on page 248. Answer Audit Your Understanding questions on page 248. Complete Work Together 8-4 on Aplia – page 248. Complete On Your Own 8-4 on Aplia – page 248. Complete Application Problem 8-7 on Aplia – page 253. Complete Application Problem 8-8 on Aplia – page 253. Complete Application Problem 8-9 on Aplia – page 253. Complete Application Problem 8-10 on Aplia – page LESSON 8-4