Building Economy ARE 431
Dr. Mohammad A. Hassanain 1
Depreciation and Depletion
1
Depreciation
 Depreciation is the decre...
Building Economy ARE 431
Dr. Mohammad A. Hassanain 2
Methods of Depreciation
 Straight Line Depreciation (SL)
P SV
D =
P ...
Building Economy ARE 431
Dr. Mohammad A. Hassanain 3
Methods of Depreciation
a. Annual depreciation
P SV $50 000 $10 000
B...
Building Economy ARE 431
Dr. Mohammad A. Hassanain 4
Methods of Depreciation
D =
m
Depreciable Years Remaining
S f Y Di it...
Building Economy ARE 431
Dr. Mohammad A. Hassanain 5
Methods of Depreciation
The depreciation charge for each of the three...
Building Economy ARE 431
Dr. Mohammad A. Hassanain 6
Depletion
 Depletion is applicable to natural resources which
when r...
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10 depreciation and depletion

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10 depreciation and depletion

  1. 1. Building Economy ARE 431 Dr. Mohammad A. Hassanain 1 Depreciation and Depletion 1 Depreciation  Depreciation is the decrease in value of the asset over time, through wear, deterioration or obsolescence.  Obsolescence occur when the asset is no longer technologically superior to available alternatives.  Book Value is the difference between its original costs and the total amount of depreciation that has been charged to date. 2 g  Market Value is the amount of money that could be obtained for the asset if it were sold in the market.
  2. 2. Building Economy ARE 431 Dr. Mohammad A. Hassanain 2 Methods of Depreciation  Straight Line Depreciation (SL) P SV D = P - SV n Where: D = Annual depreciation P = First cost of the asset (include purchase price, delivery cost installation cost and other equipment related costs) 3 cost, installation cost and other equipment related costs). SV = Salvage value of the asset (the net value after dismantling or removal costs have been subtracted from the actual monetary value). n = Expected depreciable life of the asset Methods of Depreciation BV(m) = P - mD( ) Example: If an asset has a first cost of $50,000 with $10,000 salvage value after five years. 4 a. Calculate the annual depreciation. b. Calculate the book value of the asset after each year.
  3. 3. Building Economy ARE 431 Dr. Mohammad A. Hassanain 3 Methods of Depreciation a. Annual depreciation P SV $50 000 $10 000 BV(m) = P – mD (m = 1, 2, 3, 4, 5) b. Book value of the asset after each year. D = P - SV n = $50,000 - $10,000 5 years = $8,000 per year 5 BV(1) = $50,000 – (1)$8,000 = $42,000 BV(2) = $50,000 – (2)$8,000 = $34,000 BV(3) = $50,000 – (3)$8,000 = $26,000 BV(4) = $50,000 – (4)$8,000 = $18,000 BV(5) = $50,000 – (5)$8,000 = $10,000 = SV Methods of Depreciation  Sum of the Year Digits Depreciation (SYD)  The sum of the year digits is a rapid write-off technique by which most of the value of the asset is written off in the first one-third of its life.  The mechanics of the method involve finding the sum of the year digits from 1 through n.  The depreciation charge for any given year is then obtained by multiplying the first cost of the asset 6 less its salvage value (P-SV) by a ratio of the number of years remaining in the life of the asset to the sum of year digits.
  4. 4. Building Economy ARE 431 Dr. Mohammad A. Hassanain 4 Methods of Depreciation D = m Depreciable Years Remaining S f Y Di it (First Cost – Salvage value) m Sum of Year Digits D = m n – m + 1 SYD (P – SV) 7 Where D = Depreciation charge for any given year mm SYD = n (n + 1) 2 BV(m) = P - m (n –m/2 + 0.5) SYD (P – SV) Methods of Depreciation Example: Calculate the depreciation charge for the first threeCalculate the depreciation charge for the first three years and the book value for year three for an asset which had a first cost of $25,000, and a salvage value of $4,000 and a life of eight years. Solution: The sum of years digits must be calculated first: 8 SYD = n (n + 1) 2 SYD = = 36 8 (8 + 1) 2
  5. 5. Building Economy ARE 431 Dr. Mohammad A. Hassanain 5 Methods of Depreciation The depreciation charge for each of the three years: n – m + 1 D = m n – m + 1 SYD (P – SV) D = 1 8 – 1 + 1 36 (25,000 – 4,000) = $4667 9 D = 2 8 – 2 + 1 36 (25,000 – 4,000) = $4083 Methods of Depreciation D = 3 8 – 3 + 1 36 (25,000 – 4,000) = $3500 BV(m) = P - m (n –m/2 + 0.5) SYD (P – SV) The book value for year three: 10 BV(3) = 25,000 - 3 (8 –3/2 + 0.5) 36 (21,000) = $12,750
  6. 6. Building Economy ARE 431 Dr. Mohammad A. Hassanain 6 Depletion  Depletion is applicable to natural resources which when removed can not be re-purchased as can a machine or building.machine or building.  Depletion is based on the level of activity or usage, not time as in depreciation.  The depletion charge is calculated as follows: 11 d = Initial investment Resource capacitym Depletion Example: A company has purchased some forest land for $350,000, from which an estimated 175 million board feet of lumber are recoverable. Determine the depletion charges if 15 million and 22 million board feet are removed in the first and second years. d = Initial investment Resource capacitym = 350,000 175 = $2,000 per million board feet 12 Resource capacitym 175 First Year = 2,000 (15) = $30,000 Second Year = 2,000 (22) = $44,000

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