2. The worth of an item most often decreases
over the years.
This decrease in worth is due to what is
called
The most common methods of
depreciation are:
depreciation.
3. I. Straight-line method
II. The units-of-production method
III. The sum-of-years-digits method
IV. The declining-balance method
V. The modified accelerated cost-recovery
system method (MACRS)
4. THE STRAIGHT-LINE METHOD
Often used because it is the easiest one to
compute.
This method assumes that the items will
depreciate by the same amount each year.
5. It involves four factors:
1. The of the item – This cost is
the actual price that the business paid for
the item plus any shipping costs and
installation costs.
2. The of the item – This
could be stated by the number of years the
item can be used or the number of hours of
operation an item is used, such as
a) machinery
b) number of miles a vehicle is driven over its
lifetime as in the case of a delivery van.
original cost
estimated lifetime
6. 3. The or of an item –
When the item is no longer useful to the
company, it may be sold to another company or
even to a salvage dealer who can cut it up for its
scrap value.
4. The of an item for a specific
year, number of miles, hours, etc. of operation is
the value of an item after depreciation is
calculated.
scrap resale value
book value
7. In order to compute the yearly depreciation
amount of an item, subtract the scrap value for
the item from the original cost, and then divide
the answer by the value of its estimated lifetime.
The original cost minus the scrap value is called
depreciable amount.
8. Example 1. A factory machine was purchased
for $15,000 and has an estimated lifetime of 5
years. If the scrap value at the end of 5 years is
estimated at $3000, find the amount of the
depreciation for each year.
Example 2. Find the book value at the end of 4
years of a digital video camera costing $24,000
with an expected lifetime of 6 years. The scrap
value at the end of its lifetime is $3000.
9. A depreciation schedule can be made to keep
track of an item’s depreciation over its lifetime.
The depreciation schedule should consist of four
items.
The year
The depreciation during the year
The accumulated depreciation
The value of the item at the end of the year
10. Example 3. Make a straight-line depreciation
schedule for a heating unit that costs $900, has
an estimated lifetime of 4 years, and a scrap
value of $100.
Step 1. Find the depreciable amount
Step 2. Find the book value of the unit at the of
the first year by subtracting the depreciation
amount from the original cost.
11. Step 3. For the next year, subtract the
depreciation amount from the book value of the
unit for the previous year to get the book value
for that year.
Step 4. Repeat step 3 for the remaining years.
Step 5. Find the accumulated depreciation for
each year by adding the depreciation for that
year to the sum of the depreciation for the
previous years.
Step 6. Make a table.
12. PRACTICE:
1. Find the yearly depreciation, using the straight-
line method of 10 security uniforms costing
$200 each and having a lifetime of 4 years.
There is no scrap value.
2. A file cabinet costs $700. If it has an expected
lifetime of 10 years, find the yearly depreciation
using the straight-line method. The scrap value
is $100.
3. Find the yearly depreciation of a lawn tractor
costing $1800. It has an expected lifetime of 5
years and a scrap value of $200. Use the
straight-line depreciation method.
13. 4. Find the book value at the end of 60,000 miles of
a bus costing $80,000 if it has an expected
lifetime of 100,000 miles and a scrap value of
$8000. Use the straight-line method.
5. Find the yearly depreciation of 15 table and
chair sets for a restaurant costing a total of
$60,000. The scrap value is $4000 and the
expected lifetime is 8 years. Use the straight-
line method. Make a depreciation schedule for
the table and chair sets.
14. SUM-OF-THE-YEARS-DIGITS METHOD
Assumes that the amount of the depreciation of
an item is the largest in the first year and then
gets smaller each year at a proportional rate.
Example 1. A computer system costing $32,000
has an expected lifetime of 5 years. The scrap
value is estimated to be $2000. Find the
depreciation for each year using the sum-of-the-
years-method.
15. Step 1. Find the depreciable amount.
Step 2. Find the sum of the number of each year
for the expected lifetime or the sum of the digits.
Step 3. Make a fraction using the year numbers
in reverse order over the sum and multiply by the
depreciation amount.
16. Example 2. A small truck costing $18,000 has
an expected lifetime of 4 years and a scrap value
of $2000. Find the amount of depreciation for
each of the 4 years.
17. PRACTICE:
1 An automobile service center purchases an
emission-testing machine for $44,000. Its
expected lifetime is 7 years. The estimated scrap
value is $2000. Find the yearly depreciation and
the book value for the first 2 years using the
sum-of-the-years-digits method.
2. A bank purchases 10 safety deposit boxes at a
cost of $250 each. If the lifetime of the boxes is 20
years, find the depreciation for the first 3 years
using the sum-of-the-years-digits method and the
book value at the end of the third year. The
estimated scrap value of each box is $10.
18. 3. A library purchases some books for a total cost of
$800. If the estimated lifetime value of the books
is 4 years and the scrap value is $50, find the
annual depreciation using the sum-of-the-years-
digits method.
4. An x-ray machine used at an airport costs
$75,000 when new. It has an estimated lifetime
of 5 years. The scrap value is $5000.
5. A short-line railroad purchases a used switch
engine for $48,000. It has an estimated lifetime
of 6 years. The scrap value is $6000. Find the
yearly depreciation using the sum-of-the-years-
digits method. Make a depreciation schedule.
19. DECLINING-BALANCE METHOD
Similar to sum-of-the-years-digits method.
Assumes that the largest amount of depreciation
occurs during the first year then deceases for
each succeeding year
Example 1. A cleaning company purchases 10
vacuum cleaners at a total of $4000. The
expected lifetime of the vacuum cleaners is 4
years. The scrap value is $250. Using the double-
declining method, find the yearly depreciation.
20. Step 1. Find the depreciation rate and double it.
Step 2. Find the depreciation for the first year.
Step 3. Find the book value.
Example 2. A delivery van costs $22,000 and
has an estimated lifetime of 5 years. Its scrap
value in 5 years is $2500. Find the depreciation
using the double-declining method.
21. PRACTICE
1. A soundboard for a theater’s sound system costs
$1500. Its estimated lifetime is 3 years. Its scrap
value is $50. Find the annual depreciation using
the double-declining method.
2. A photographer purchases a digital video camera
for $24,000. Its estimated lifetime is 4 years. The
scrap value is $1400. Find the annual
depreciation using the double-declining balance
method. Make a depreciation schedule for the
item.
22. 3. A large hotel chain purchases carpeting for its new
building in Harrisburg. The cost and installation is
$96,000. The estimated lifetime is 7 years. Its scrap
value is $4000. Find the depreciation for the first 2
years using the double-declining balance method.
4. The same hotel chain purchases 80 beds with springs
and mattresses for a total cost of $56,000. The
estimated lifetime is 10 years. The scrap value is
$600. Find the depreciation for the first 3 years using
the double-declining method.
5. A bank purchases a security system costing $24,000
(including installation). The lifetime of the system is
12 years. Its scrap value is $1000. Find the
depreciation for the first 2 years using the double-
declining method.
