Chapter 8! The Accounting Cycle Work Sheet and Adjusting Process Unit 4 Quest (chapter 8 and 10) will be on December 10 (Wednesday) Youtube clip: “Straight Line and Declining Balance Method” by Notepirate

 The two most common methods of calculating depreciation are the straight line method and declining balance method.  So far we only learned the straight line method. Depreciation

 DBM of depreciation calculates the annual depreciation by multiplying the undepreciated cost of the asset by a fixed percentage.  CRA (tax collection agency) has set guidelines for the percentage figures for each long term asset. These rates are called Captial Cost Allownce Rate or Depreciation Rate. For example:  Auto 30%  Computers 55%  Computer software 100%  Office furniture and equipment 20%  Buildings acquired after % Declining Balance Method

 Let’s say we purchased several computers for $22000 on March 1,  Since the CCA rate is 55%, on December 31, we have to calculate:  Depreciation amount = * 0.55 =  But only in the first year of purchase, CRA mandates that businesses use Half Year Rule, which means we can depreciate only 6 months portion of the year, so we have to reduce the depreciation expense by 50%  * 0.5 = 6050  Undepreciated Cost in 2012= – 6050 = Declining Balance Method

ON December , we have to calculate  Depreciation amount = * 0.55 =  Undepreciated Cost for 2013 = – = On December , we have to calculate  Depreciation amount = * 0.55 =  Undepreciated cost for 2014 = – = Declining Balance Method

Begining or CCA Depreciation Ending Undepreciated Rate Expense Undepreciated YearCost Cost % % % % Declining Balance Method

 In order to calculate DBM depreciation, you just have to use the ending balance of undepreciated cost * CCA rate. In other words,  Depreciation cost = Begining balance * CCA rate  Ending Undepreciated cost = Begining Undepreciated cost – Depreciation Expense  We should calculate depreciation expense on Dec 31 of each year until the computers are sold or scrapped.  Remember that straight line method gives same depreciation expense every year whereas the DBM produces depreciation figures which are larger in the early years and smaller in the later years. Declining Balance Method

 We do not need to estimate the useful life or salvage value when using DBM, so CRA mandates that Canadian businesses use DBM (rather than straight line method) when reporting their income (for income tax purpose) to CRA.  Compared to SLM, using DBM leads to higher depreciation expense in early years, which leads to lower net income in Income Statement.  Many companies would produce two income statements: one for CRA (using DBM) and second one for investors, owners and bankers (using SLM).  By forcing DBM to businesses, CRA is encouraging businesses to buy Long Term Assets. Declining Balance Method

 Depreciation Adjusting Entry you have to make on December 31 is exactly same as SLM.  How the asset numbers are presented in Balance Sheet is exactly same as SLM.  Only the depreciation expense amount calculation is different from SLM. Declining Balance Method vs Straight Line Method

 Remember that people with Shsm must connect their Shsm with your group project.  Review Q #8, 10,11, 13, 14, 15 (P311)  (P311) Ex 1D, 1E, 1F, 2B, 2C, 5, 6 Classwork / Homework (Tuesday)

 Review Q #1, 3, 4, 5, 6, 7, 9 (P311)  P311 Ex 1A, 1B, 1C, 2A, 2C, 3, 4  I took up Ex 1A, 1B and 1C after 20 minutes. Homework (Monday)