Upcoming SlideShare
×

# Depreciation 130220175802-phpapp01 (1)

327 views
183 views

Published on

1 Like
Statistics
Notes
• Full Name
Comment goes here.

Are you sure you want to Yes No
• Be the first to comment

Views
Total views
327
On SlideShare
0
From Embeds
0
Number of Embeds
0
Actions
Shares
0
13
0
Likes
1
Embeds 0
No embeds

No notes for slide

### Depreciation 130220175802-phpapp01 (1)

1. 1. (c) 2001 Contemporary Engineering Economics 1
2. 2. DEPRECIATION PRESENTED BY: TAHSEEN ULLAH Class No: 01 BBA(H) 5th semester ABDUL WALI KHAN UNIVERSITY MARDAN (PABBI CAMPUS)
3. 3. Depreciation Depreciation: represents the systematic allocation of the cost of a capital asset over a period of time for financial reporting purposes, tax purposes, or both.
4. 4. What Can Be Depreciated? A qualifying asset for depreciation must satisfy all these conditions:  should be used in business  should have a definite useful life and a life longer than 1 year  must wear out, become obsolete or lose value
5. 5. Types of Depreciation Book Depreciation Tax Depreciation
6. 6. Book Depreciation  Book Depreciation is provided as per the prevailing accounting standards and the necessary law of land.
7. 7. Tax Depreciation  Tax Depreciation is provided as per the prevailing taxation laws.
8. 8. Methods to Calculate Depreciation  Straight-Line Method  Declining Balance Method  MACRS Method
9. 9. Required Factors in Calculating Asset Depreciation  Useful life of asset  Residual value  Cost basis  Method of depreciation
10. 10. 1. Straight-Line (SL) Method Principle A fixed asset provides its service in a uniform fashion over its life Formula Annual Depreciation = cost – residual value useful life
11. 11. EXAMPLE (Straight-Line Method) Cost of machinery = \$45,000 Residual value = \$5,000 Useful life = 5 years. Calculate annual cost of depreciation? Year Computation Depreciation Expense Accumulated Depreciation Book Value \$45,000 First (45,000-5,000)/5 \$8,000 \$8,000 37,000 Second (45,000-5,000)/5 8,000 16,000 29,000 Third (45,000-5,000)/5 8,000 24,000 21,000 Fourth (45,000-5,000)/5 8,000 32,000 13,000 Fifth (45,000-5,000)/5 8,000 40,000 5,000 Total 40,000
12. 12. Example - (Straight-Line Method) Annual Depreciation expense 1 2 3 Years 4 5
13. 13. 2. Declining Balance Method Principle A fixed asset provides its service in a decreasing fashion. The book value is reduced by a fixed percentage each year. Formula Annual Depreciation = Depreciation rate * Book value at start of year
14. 14. EXAMPLE ( Declining Balance Method) Cost of machinery = \$70,000 Residual value = \$5000 Useful life = 5 years Cost of annual Depreciation? Year Computation DBM=100% 2 5years DBM= 40% Depreciation Expense Accumulated Depreciation Book Value \$70,000 First \$70,000 x 40% \$28,000 \$28,000 42,000 Second 42,000 x 40% 16,800 44,800 25,200 Third 25,200 x 40% 10,080 54,880 15,120 Fourth 15,120 x 40% 6,048 60,928 9,072 Fifth 9,072-\$5,000 4,072 65,000 5,000 Total 65,000
15. 15. Example – Declining Balance Method Annual Depreciation expense 1 2 3 Years 4 5
16. 16. 3. MACRS Method Principle An asset has a fixed life according to the category in which it falls. The residual value is always zero. Formula Annual Depreciation = cost x appropriate MACRS % rate
17. 17. MACRS Schedule R e c o ve ry Year 1 2 3 4 5 6 7 8 P ro p e rty C la s s 3 -Y e a r 5 -Y e a r 3 3 .3 3 % 2 0 .0 0 % 4 4 .4 5 3 2 .0 0 1 4 .8 1 1 9 .2 0 7 .4 1 1 1 .5 2 1 1 .5 2 5 .7 6 7 -Y e a r 1 4 .2 9 % 2 4 .4 9 1 7 .4 9 1 2 .4 9 8 .9 3 8 .9 2 8 .9 3 4 .4 6
18. 18. EXAMPLE (MACRS Method) Cost of tractor = Rs. 30,000 Cost of annual Depreciation? Year Computation Depreciation Accumulated Expense Depreciation Book Value \$30,000 First 33.33% x 30,000 9,999 9,999 20,001 Second 44.45% x 30,000 13,335 23,334 6,666 Third 14.81% x 30,000 4,443 27,777 2,223 Fourth 7.41% x 30,000 2,223 30,000 0