1. BAF3M Calculating Depreciation *There will be a note to copy at the end of the slides *

2. What is Depreciation? Let’s say we purchased a VCR in 1992 for $605 How much would you pay for that VCR now??

3. Probably not a whole lot!! Maybe you’d be willing to pay $5

4. Residual Value The amount that an item is worth at the end of its life is called its ‘residual value’ Remember this term! ‘Residual Value’ (Another term for this is ‘Salvage Value’ – rember this too!)

5. The VCR So, we’ve decided that the VCR’s residual value is $5. In essence, we’ve used up $600 worth of the VCR since 1992. *($605 - 5)

6. Depreciation Depreciation refers to how much of an asset is used up. In the case of our VCR, it has depreciated by $600!

7. Depreciation of Assets All fixed assets are subject to depreciation

8. All assets except LAND The one exception to this rule is that Land is not depreciated. –However these assets are: Vehicles Equipment Buildings Patents Other major assets

9. So how do accountants calculate Depreciation? Let’s take the VCR example again. We’ve used up $600 worth of the asset over 20 years. (So how much did we use up EACH year?)

10. There are TWO main ideas on how to calculate it: Straight Line Depreciation Declining Balance Depreciation * We will look at these today and tomorrow. *

11. Straight Line Depreciation This is the simplest method! The formula is: original cost – residual value ---------------------------------- years of life of the asset

12. Straight Line Formula original cost – residual value ---------------------------------- years of life of the asset For our VCR, it takes the $600 we used up.. and spreads it evenly over 20 years. *Do you see that in the formula?

13. Straight Line Formula ** Please copy down example 1 near the bottom of page 337 in your textbook Start with ‘Straight-line depreciation for one year’ and copy until the end of the page **

14. Homework *Page 348 Exercise 1 (A,B,C)