The document explains the accounting for depreciation of fixed assets, detailing how assets lose value over time and the systematic transfer of their costs to expense accounts. It covers different depreciation methods such as straight line, declining balance, and units of production, providing examples for each method. Additionally, the document discusses the disposal of fixed assets, including selling, trading in, and accounting for gains or losses, as well as the revision of depreciation estimates.

1. Accounting for Depreciation
M. Awais Yaqoob
2011-ch-32
(University of Engineering and Technology, Lahore)

2. Accounting for Depreciation
 Fixed assets other than land lose their ability over
time to provide services
 Costs of equipment, buildings, and land
improvements should be transferred to expense
accounts in a systematic manner during their
expected useful lives.
 DEPRECIATION
 Adjusting entry to record depreciation is usually
made at the end of each month or at the end of
the year Fixed assets other than land lose their
ability over time to provide services

3. Adjusting Entry
Account Debit Credit
Depreciation expense $7,000
Accumulated depreciation - truck $7,000

4. Depreciation
Accumulated depreciation
 Shows the amount that the asset has lost in value since its
purchase
Depreciation expense
 Shows the amount that the asset has lost in value this
period.
Factors that cause a decline the ability of a fixed
asset to provide services may be identified as
 Physical depreciation
 Occurs from the wear and tear while in use and from the action
of the weather
 Functional depreciation
 Occurs when a fixed asset is no longer able to provide services
at the level for which it was intended.

5. Factors in Computing
Depreciation Expense
The fixed asset’s initial cost
Its expected useful life
Its estimated value at the end of
its useful life.

6. Depreciation Methods
Straight line
Declining balance
Units of production

7. Straight line Method
Provides for the same amount of
depreciation expense for each year of
the asset’s useful life
Annual depreciation expense =
Cost – Salvage value
Life

8. Example 1
A machine had a cost of $24,000, salvage value of
$2,000 and useful life of 5 years
Annual depreciation expense =
Cost – Salvage value
Life
= $24,000 - $2,000
5 years
= $4,400 annual depreciation

9. Adjusting entry
Account Debit Credit
Depreciation expense $4,400
Accumulated depreciation - truck $4,400

10. Example 2
A machine had a cost of $30,000,
salvage of $5,000 and useful life of 6
years. Compute depreciation under the
straight line method?
What is depreciation expense in year 3?

11. Units of Production
This method provides for the same
amount of depreciation expense for
each unit produced or each unit of
capacity used by the asset

12. Units of Production
Depreciation rate per unit =
Cost – Salvage value
Estimated units
Depreciation Expense =
Depreciation rate x annual units

13. Example 3
A machine had a cost of $24,000,
salvage value of $2,000, estimated total
hours of production of 10,000 and
annual hours used of 2,100 hours.
Compute depreciation for the period
under the units of production method.

14. Example 3
Depreciation rate per unit =
Cost – Salvage value
Estimated hour
= $24,000 - $2,000 = $2.20
10,000 hours
Annual depreciation expense =
Hourly depreciation rate x annual hours
= $2.20 x 10,000 hours = $2,200

15. Example 4
A machine had a cost of $30,000,
salvage value of $5,000, estimated total
hours in production of 5,000 and annual
hours used of 900 hours. Compute the
depreciation expense for the period
using the units of production method

16. Declining Balance Method
Provides for a declining periodic
expense over the estimated useful life
of the asset.
Book value
= Cost – Accumulated depreciation

17. Declining Balance Method
Steps
 Compute the DB rate = 100/Life of asset
 For double declining balance
 Multiply rate time 2
 Depreciation expense =
Beg. book value X Rate
 Rule: the book value may never by less than
the salvage value of the asset

18. Example 5:
A machine had a cost of $24,000, salvage value of $2,000,
estimated life of five year. Compute depreciation
Year Cost Accumulat
ed
Depreciati
on
Book
value at
beginning
of year
Rate Depreciati
on
Book
value at
end of
year
1 $24,000 $24,000 40% $9,600 $14,400
2 24,000 9,600 14,400 40% 5,760 8,640
3 24,000 15,360 8,640 40% 3,456 5,184
4 24,000 18,816 5,184 40% 2,073.60 3,110.40
5 24,000 20,889.60 3110.40 1,110.40 2,000

19. Example 6
Example 6: A machine had a cost of $30,000, salvage value of
$5,000, estimated life of 6 years. Compute depreciation
using the double declining balance method.

20. Revision of Depreciation
Revising the estimates of the residual
value and the useful life is normal
Used to determine depreciation
expense in future periods

21. Example 7
Assumed a fixed asset purchased for
$130,000 was originally estimated to have a
useful life of 30 years and a residual value of
$10,000. The asset has been depreciated for
10 years by the straight line method.
At the end of ten years, the asset’s book
value of $90,000. During 11th
year, it is
estimated that the remaining useful life is 25
years and that the residual value is $5,000.
Compute depreciation expense for the 11th
year using the new information provided.

22. Example 7
Depreciation expense=
= $130,000-$10,000
30
= $ 4,000.00 per year before changes
Accumulated Depreciation balance
=$4,000 X 10 years
= $40,000
Book value
= $130,000.00 – $40,000 = $90,000

23. Example 7
New depreciation expense =
Book value – new salvage
Remaining life
= ($90,000-$5,000)
25
= $ 3,400.00 per year for remaining years

24. Disposal of Fixed Assets
Discarding of Fixed Assets
When asset has no residual value and is
fully depreciated.

25. Example 8
 Asset with a cost of $25,000 and fully
depreciated is discarded
Account Debit Credit
Accumulated Depreciation $25,000
Fixed Asset $25,000

26. Selling of Fixed Assets
Three things can happen
Sale at book value
 No gain or loss
Sale below book value
 Loss is recognized
Sale after book value
 Gain is recognized

27. Selling at book value
Example 9:
 Asset with cost of $25,000 and Accumulated
Depreciation of $10,000 is sold for $15,000 cash.
Account Debit Credit
Cash $15,000
Accumulated depreciation $10,000
Fixed Asset $25,000

28. Selling price above book value
Gain is recognized
Example 10:
 Asset with cost $25,000, Accumulated
Depreciation of $10,000 is sold for $20,000 cash.
Account Debit Credit
Cash $20,000
Accumulated depreciation $10,000
Fixed Asset $25,000
Gain on disposal of asset $5,000

29. Selling price below book value
Loss is recognized
Example 11: Asset with cost of $25,000, Accumulated
Depreciation of $10,000 is sold for $12,000 cash.
Account Debit Credit
Cash $12,000
Accumulated Depreciation $10,000
Loss on disposal of asset $3,000
Fixed Asset $25,000

30. Exchanging Similar Assets
Old equipment is often traded in for new
equipment having a similar use.
The seller allows the buyer an amount for
the old equipment traded in called TRADE
IN ALLOWANCE.
The remaining balance – the amount owed
is either paid in cash or recorded as a
liability – called BOOT

31. Gain on exchanges
Not recognized for financial reporting
purposes.
When trade-in allowance exceeds the book
value of an asset traded in and no gain is
recognized, the cost recorded for the new
asset can be determined in either of two
ways:
 Cost of new asset = List price + Unrecognized gain
 Cost of new asset = Cash given + book value of oldNot
recognized for financial reporting purposes.

32. Example 12
New equipment is purchased with a list price
of $5,000, trade in allowance of old is $1,100,
cost of old equipment is $4,000, accumulated
depreciation $3,200. Record the entry. New
equipment is purchased with a list price of
$5,000, trade in allowance of old is $1,100,
cost of old equipment is $4,000, accumulated
depreciation $3,200. Record the entry.

33. Example 12
Account Debit Credit
Fixed Asset – new $800
Accumulated Depreciation $3,200
Fixed Asset – old $4,000

34. Losses on Exchange
For financial reporting purposes, losses are
recognized on exchanges of similar fixed
assets.
If trade in is less than the book value of
the old equipment, there is a loss

35. Example 14
New equipment is purchased with a list price
of $5,000, trade in allowance of old is $700,
cost of old equipment is $4,000, accumulated
depreciation $3,200. Record the entry.
Account Debit Credit
Fixed Asset – new $700
Accumulated Depreciation $3,200
Loss on exchange of asset $100
Fixed Asset – old $4,000