INTACC PPT DEPRECIATION 2020-2021, Summaries of Accounting

Download INTACC PPT DEPRECIATION 2020-2021 and more Summaries Accounting in PDF only on Docsity! 1 Accounting for Property, Plant and Equipment 2 5 Factors involved in the depreciation process ❑Estimation of useful lives An asset’s service life and physical life are not the same ❑Assets are retired (from productive life) due ▪ physical factors (such as damage), or ▪ economic factors (such as obsolescence) 6 METHODS OF DEPRECIATION ❖Time-Based Methods ▪ Straight line method ▪ Accelerated/Diminishing depreciation method ➢Sum-of-the-years’ digits ➢Declining balance method ❖ Activity Methods (based on performance/use) ▪ Service hours: This depreciation method is based on the theory that purchase of an asset represents the purchase of a number of hours of direct service. ▪ Units of Production:: This method is based on the theory that an asset is acquired for the service it can provide in the form of production output. Methods of Depreciation Time-Based Methods ❖Straight-line: This method recognizes equal periodic depreciation charges over the asset’s life. ❖Accelerated Method: • Sum-of-the-years’-digits—This method yields decreasing depreciation in each successive year. • Declining-balance—This method provides decreasing charges by applying a constant percentage rate to a declining asset book value. 10 Example – Drill machine purchased for P45 000 on 1 December 2006 – 5 year life, no residual value – Financial year ends 31 December – Straight line depreciation Depreciation for full year = P45 000/5 = P9000 Depreciation for partial year = P9000 x 7 months 12 months = P5250 Depreciation and partial periods 11 ▪ Declining balance method uses a depreciation rate that is some multiple of the straight-line method ➢e.g. Double-diminishing rate for a 10-year asset would be 20% ➢Rate remains constant and is applied to carrying amount each year ➢Residual is not deducted in calculating depreciation base. Diminishing /Accelerated Depreciation Methods F = declining balance factor (e.g., 150% or 200%) These provide a higher depreciation cost in earlier years and lower charges in later periods. Declining-Balance Method Depreciation = F x (Cost – Accumulated Depreciation) Depreciation (2020) = .20 x P100,000 Depreciation (2020) = P20,000 Depreciation (2021) = .20 x (P100,000 – P20,000) Depreciation (2021) = P16,000 Depreciation (2022) = .20 x (P100,000 – P20,000-P16,000) Depreciation (2022) = P12,800 Note: • Do not depreciate below salvage value. 15 Year Depreciable Amount Fraction Depreciation Book Value 2020 P95,000 5/15 P31,667 P68,333 2021 P95,000 4/15 P25,333 P43,000 2022 P95,000 3/15 P19,000 P24,000 2023 P95,000 2/15 P12,667 P11,333 2024 P95,000 1/15 P6,333 P5,000 Sum-of-the-Years’-Digits Method BOOK VALUE 16 Activity Method (Use Factor Method) Units-of-production method • Useful life is expressed in terms of total units of production or use expected from the asset • Depreciation= Cost – residual value____ Estimated lifetime production • Example (P100 000 – P5,000) = P3.80 per unit 25,000 units Cost of equipment P100,000 Residual Value P 5,000 Estimated number of units 25 000 units Depreciation (2020) = P3.80 x 3,500 actual units Depreciation (2020) = P13,300 Group and CompositeDepreciation • Group depreciation are applied to group of assets that are related and similar • Referred to as composite depreciation when the assets in the group are related but dissimilar. • Calculate annual depreciation charge at the straight-line rate times the group’s book value. ▪ Recognize gains and losses only when all assets in the group have been retired. Change in Estimated Life A company purchased P50,000 of equipment and estimated a 10-year life. Using the straight-line method with no residual value, the annual depreciation would be P5,000. After four years, accumulated depreciation would amount to P20,000, and the remaining a book value would be P30,000. At the beginning of the fifth year, it is determined that the equipment will only last four more years. Change in Estimated Life Depreciation Accumulated Year Computation Amount Depreciation 1 P50,000/10 = P5,000 P 5,000 2 P50,000/10 = 5,000 10,000 3 P50,000/10 = 5,000 15,000 4 P50,000/10 = 5,000 20,000 5 (P50,000 – P20,000)/4= 7,500 27,500 6 (P50,000 – P20,000)/4= 7,500 35,000 7 (P50,000 – P20,000)/4= 7,500 42,500 8 (P50,000 – P20,000)/4= 7,500 50,000 P50,000 First four years EXERCISES 22 25 5. A method that ignores salvage value in the early years of the asset’s life in calculating periodic depreciation expense is the a.productive-output method. b. group composite method. c. sum-of-the-years'-digits method. d. double-declining-balance method. 6. Which of the following depreciation methods applies a uniform depreciation rate each period to an asset's book value? a.Straight-line b. Units-of-production c. Declining-balance d. Sum-of-the-years'-digits 26 7. When the estimate of an asset's useful life is changed, a.depreciation expense for all past periods must be recalculated. b. there is no change in the amount of depreciation expense recorded for future years. c.only the depreciation expense in the remaining years is changed. d. None of the above are true. 8. Which of the following reasons provides the best theoretical support for accelerated depreciation? a.Assets are more efficient in early years and initially generate more revenue. b. Expenses should be allocated in a manner that "smooths" earnings. c.Repairs and maintenance costs will probably increase in later periods, so depreciation should decline. d. Accelerated depreciation provides easier replacement because of the time value of money. 27 1. Dewey Company purchased a machine that was installed and placed in service on January 2, 2007, at a total cost of $480,000. Residual value was estimated at $80,000. The machine is being depreciated over ten years by the double-declining-balance method. For the year 2008, Dewey should record depreciation expense of a. $64,000. b. $76,800. c. $80,000. d. $96,000. PROBLEM SOLVING Year Depreciation Book Value 2007 20% X 480,000 96,000 384,000 2008 20% X 384,000 76,800 Straight Line Method = 400,000/10 = 40,000 40,000/400,000 = 10% per year Double Declining = 20% 30 4. On January 1, 2008, Carson Company purchased equipment at a cost of $420,000. The equipment was estimated to have a useful life of five years and a salvage value of $60,000. Carson uses the sum-of-the-years'-digits method of depreciation. What should the accumulated depreciation be at December 31, 2011? a. $240,000 b. $288,000 c. $336,000 d. $360,000 Year Depreciable Amount Fraction Depreciation Book Value 2008 P360,000 5/15 P120,000 300,000 2009 P360,000 4/15 P96,000 2010 P360,000 3/15 P72,000 2011 P360,000 2/15 P48,000 P336,000 SYD = 5 (1 +5) = 15 2 31 5. On January 1, 2006, Kalos Co. purchased a new machine for $2,500,000. The new machine has an estimated useful life of five years and the salvage value was estimated to be $250,000. Kalos uses the sum-of-the-years'-digits method of depreciation. The amount of depreciation expense for 2008 is a. $450,000. b. $600,000. c. $666,667. d. $750,000. Year Depreciable Amount Fraction Depreciation Book Value 2006 P2,250,000 5/15 P750,000 P1750,000 2007 P2,250,000 4/15 P600,000 2008 P2,250,000 3/15 P450,000 32 6. On January 1, 2008, Carson Company purchased equipment at a cost of $570,000. The equipment was estimated to have a useful life of five years and a salvage value of $60,000. Carson uses the sum-of-the-years'-digits method of depreciation. What should the accumulated depreciation be at December 31, 2010? a.$340,000 b. $408,000 c. $456,000 d. $510,000 Year Depreciable Amount Fraction Depreciation Book Value 2008 P510,000 5/15 P170,000 2009 P510,000 4/15 P136,000 2010 P510,000 3/15 P102,000 P408,000 35 9. At the start of its business, Snell Corp. decided to use the composite method(group) of depreciation and prepared the following schedule of machinery owned. Total Estimated Estimated Life Cost Salvage Value in Years Machine A $275,000 $25,000 20 Machine B 100,000 10,000 15 Machine C 20,000 -- 5 Snell computes depreciation on the straight-line method. Based on the information presented, the composite life of these assets (in years) should be a. 13.3. b. 16.0. c. 18.0. d. 19.8. Depreciable Amount (Cost-SV) Useful Life Depreciation per year A P250,000 20 P12,500 B 90,000 15 6,000 C 20,000 5 4,000 P360,000 P22,500 Average life of assets: P360,000 ÷ P22,500 = 16 years Group depr ciation rate: P22,500 ÷ P395,000 = 6% 36 10. Hendricks Construction purchased a crane on January 1, 2007, for $102,750. At the time of purchase, the crane was estimated to have a life of six years and a residual value of $6,750. In 2009, Hendricks determined that the crane had a total useful life of seven years and a residual value of $4,500. If Hendricks uses the straight-line method of depreciation, what will be the depreciation expense for the crane in 2009? a.$16,000 b.$13,250 c.$9,464 d.$8,000 Year Computation Depreciation Expense Accumulated Depreciation 2007 P96,000/6 years P16,000 P16,000 2008 P96,000/6 years P16,000 P32,000 2009 P102750 -P32,000- 4500/5 years P13,250