1. Depreciation Georgia CTAE Resource Network
Instructional Resources Office
Written by: Dr. Marilynn K. Skinner
May 2009

2. LEARNING GOALS Define, classify, account for cost of fixed assets.
Compute depreciation using straight-line, units-of-production, declining balance.
Account for disposal of fixed assets.
Continued

3. Why is a “major purchase” different?
LG 1
Why is a “major purchase” different?
Major purchase is expensive & long-lived.

4. Expenditures must be classified as
LG 1
CLASSIFYING COSTS
Expenditures must be classified as
Expenses
Investments
Fixed assets

5. When is a purchased item a fixed asset?
LG 1
EXHIBIT 2
When is a purchased item a fixed asset?
Yes No
Expense No
Yes
Fixed Assets
Investments

6. LEARNING GOALS 2
Compute depreciation using straight-line, units-of-production, declining balance.

7. LG 2
EXHIBIT 4

8. What are some methods of depreciation?
LG 2
What are some methods of depreciation?
We examine 3 depreciation methods.

9. 3 methods to calculate depreciation expense
LG 2
DEPRECIATION METHODS
3 methods to calculate depreciation expense
Straight-line depreciation
Same amount of depreciation each year
Units of production depreciation
Depreciation varies with asset use
Declining balance
Accelerated method provides more depreciation in earlier years

10. STRAIGHT-LINE DEPRECIATION
LG 2
STRAIGHT-LINE DEPRECIATION
Depreciation expense =
(Cost – Residual value) /
Useful life

11. (Cost – Residual value) /
LG 2
EXERCISE 9-15a
A backhoe acquired on 1/5 for $84,000 has an estimated useful life of 12 years and no residual value. Determine the depreciation for each of the first 2 years by straight-line depreciation.
Click button to skip this exercise
Depreciation expense =
(Cost – Residual value) /
Useful life
($84,000 - $0)/12 = $7,000 year 1 & 2
Press “Enter” or click left mouse button for answer.

12. UNITS-OF-PRODUCTION DEPRECIATION
LG 2
UNITS-OF-PRODUCTION DEPRECIATION
Depreciation expense =
{(Cost – Residual value)/ Productive activity} *
Current activity

13. {(Cost – Residual value)/ Productive activity} *
LG 2
EXERCISE 9-13
A diesel-powered generator with cost of $345,000 and residual value of $18,000, has an expected operating life of 75,000 hours. In July, the generator was used 1,250 hours. Calculate depreciation by units-of-production depreciation.
Click button to skip this exercise
Depreciation expense =
{(Cost – Residual value)/ Productive activity} *
Current activity
{($345,000 - $18,000)/75,000} * 1,250 = $5,450
Press “Enter” or click left mouse button for answer.

14. DECLINING-BALANCE DEPRECIATION
LG 2
DECLINING-BALANCE DEPRECIATION
For double-declining balance:
Depreciation expense =
2*(1/Life) * (Cost – Accumulated Depreciation)

15. 2*(1/Life) * (Cost – Accumulated Depreciation)
LG 2
EXERCISE 9-15b
A backhoe acquired on 1/5 for $84,000 has an estimated useful life of 12 years and no residual value. Determine the depreciation for each of the first 2 years by double-declining balance depreciation.
Click button to skip this exercise
Depreciation expense =
2*(1/Life) * (Cost – Accumulated Depreciation)
2 * (1/12) *($84,000 - $0) = $14,000 in year 1 2*(1/12) *($84,000 - $14,000) = $11,667 in year 2
Press “Enter” or click left mouse button for answer.

16. First, bring depreciation expense up to date
LG 3
ASSET DISPOSAL
Assets can be
Discarded
Sold
First, bring depreciation expense up to date

17. 2/14 ENTRY: Discarding Asset
LG 3
2/14 ENTRY: Discarding Asset
SCF BS IS
2/14 Accumulated Depr.
Equipment
25,000
Discard an asset
No effect cash flow
Decreases assets, equity on balance sheet
Increases expenses on income statement

18. 10/12 ENTRY: Selling Asset Sell an asset Increase investing cash flow
LG 3
10/12 ENTRY: Selling Asset
10/12 Cash
Accumulated Depr
Loss
Equipment
1,000
7,750
1,250
10,000
SCF BS IS
Sell an asset
Increase investing cash flow
Decreases assets, equity on balance sheet
Increases expenses on income statement