Depreciation

Unit Nine

Learning Objectives Unit Nine

to understand the definition of depreciation;

to know how to calculate depreciation by straight-line method and accelerated depreciation method.

Would you have more cash if you depreciated your car? The answer is no. depreciation does not affect your cash flow. Likewise, depreciation does not affect the cash flow of a business. However, depreciation is subtracted in determining net income.

Warming-up Unit Nine

Text Skimming Ask students to read the text quickly and

ask them some questions. 1. Define depreciation. 2. Please describe the methods of

depreciation.3. Do you know how to calculate

depreciation by straight-line method, units-of-production method, SYD method and DDB method?

Vocabulary Unit Nineexception allocation offset journal accumulated Depreciation recognition accelerate obsolescence fraction revise retroactive abandonment

例外，除外 分配 抵消 日记账 累积折旧 承认，认可 加速 作 [ 报 ] 废；废弃 分数 修改 追溯既往的 废弃

Presentation

Depreciation Tangible assets are subjected to

depreciation. The only exception is land, which has unlimited term of existence.

Depreciation is a process of cost allocation,

not a process of asset valuation.

The journal entry to record depreciation expense:

a debit to depreciation expense a credit to accumulated depreciation

Methods of Depreciation

the straight-line method

units –of-production method

sum-of-the-years-digits method

double-declining balance

The straight-line method

The simplest and most widely used

method of computing depreciations is the

straight-line method. Under straight-line

method, the equal amount of depreciation

expense is allocated to each full period

of the asset’s useful life.

Using this method, the formula is:

Annual Depreciation = Cost-salvage Value/ Years of Useful Life

Example 1:

Assume that at the beginning of 2000, an equipment was acquired for $3,000 in cash, salvage value was estimated to be $300 with a useful life of 5 years. At the end of 2000, depreciation was determined as follows:

($3,000 - $300) / 5 years = $540 per year

Units-of-production method

Under the units-of-production method, depreciation is allocated in proportion

to the degree the asset is used in the production.

Using this method, the formula is:

Depreciation per unit=

Cost-Salvage Value

/ Estimated Total Units of Production

Example 2: Assume that a drilling tool was purchased for $3,000,

the salvage value was estimated to be $300, and 67,500 parts was estimated to be drilling by the drill during its useful life. Then,

Depreciation per unit = ($3,000 -$300) /67,500 parts = $0.04 per part

If 26,000 parts were drilled during the first year, then, this year's depreciation expense should be $1,040 (26,000 *$0.04)

Sum-of-the-years’-digits (SYD) method

By the SYD method, the yearly depreciation is calculated by multiplying the total depreciable

amount for the life of the asset by a fraction whose numerator is the remaining useful life and whose

denominator is the SYD.

Annual Depreciation = ( Cost – salvage Value) ×

( Remaining Useful Life/ SYD)

Example 3 Based on example 1 Years in useful life fraction OC-SV Annual

depreciation 1 5/15 * $2,700 = $900 2 4/15 * $2,700 = $720 3 3/15 * $2,700 = $540 4 2/15 * $2,700 = $360 5 1/15 * $2,700 = $180 SYD 15 Total $2,700

Double-declining balance (DDB) method

The DDB method derived its name from the fact

that a constant percentage factor twice the

straight-line rate, determined and applied each

year to the declining balance of the asset’s book

value. The straight-line rate is simply the number

of years in the asset’s useful life divided into

100%.

In equation form,

Twice straight-line Rate = 100%/Year of Useful Life × 2

Based on the information given in example 1, the straight-line- rate would be 100% / 5 = 20%. Double the straight-line rate is then 40%. The DDB method is used to determine annual depreciation expenses as follows:

1 $3,000 $0 $3,000 * 40% = $1,200 2 3,000 1,200 1,800 * 40% = 720 3 3,000 1,920 1,080 * 40% = 432 4 3,000 2,352 648 * 40% =259 5 3,000 2,611 389 89 Total Depreciation Taken $2,700

Revision of Estimated Depreciation

The provisions for depreciation are only estimates. The procedure for correcting the depreciation program is to spread the remaining undepreciated cost of the asset over the years of remaining useful life.

Disposal of Plant Assets

Assets may be retired by sale or abandonment. Generally, when an asset is disposed, the asset account an allowance account balance are canceled, and a gain or loss is recognized for the difference between the amount recovered on the asset and its book value, the gain and loss would be reported as “ Non-operating loss” in the year of disposal of the asset following Chinese Accounting system for Business Enterprises.

Notes Unit Nine straight-line method 直线法 会计学中，指将资产的应折旧金额均匀地分摊到该项资产的

各个使用期间。

accelerated method 快速折旧法 依据是效用递减，即固定资产的效用随着其使用寿命的缩短

而逐渐降低，因此，当固定资产处于较新状态时，效用高，产出也高，而维修费用较低，所取得的现金流量较大；当固定资产处于较旧状态时，效用低，产出也小，而维修费用较高，所取得的现金流量较小，这样，按照配比原则的要求，折旧费用应当呈递减的趋势。

Notes Unit Nine book value: the value of an asset of a business according

to its books 账面价值 这是指反映于帐薄上的金额，其中包括一切资产、负债和所

有者权益项目的金额。当该词汇用于固定资产时，通常是指固定资产净值，即由原始价值减去累计折旧，也称 carrying value 。一个企业的账面价值是指企业的资产总值超过负债总值的余额。账面价值不一定与市场价值相符， 由于物价的不断上涨，企业资产的账面价值（即历史成本）往往与其现实价值存在相当大的差异。

depreciable assets 应计折旧资产 这是指由于磨损和过时等因素需要计算折旧费用的资产，除

土地以外的固定资产均属于应计折旧资产。

Notes Unit Nine Therefore, no entry is made at the time the change in

estimate occurs, and charges for depreciation in subsequent periods (assuming use of the straight-line method) are based on dividing the remaining book value less any salvage value by the remaining estimated life.

因此，预估中发生的变化没有办法及时登记，同时在以后各期中的折旧费（假设使用直线法）是基于剩余寿命除以剩余账面价值减去净残值。

Notes Unit Nine Generally, when an asset is disposed, the asset account

an allowance account balance are canceled, and a gain or loss is recognized for the difference between the amount recovered on the asset and its book value, the gain or loss would be reported as “Non-operating loss” in the year of disposal of the asset following Chinese Accounting System for Business Enterprises.

通常，处理一个资产时，该资产账户里的津贴账户余额应该被取消，同时资产回收数额和其账面价值之间确认的损益，将在今年的中国企业会计制度处置资产时被称为“非经营亏损”。

Depreciation

Unit Nine

Review

1. Ask students to read all the new words and phrases.

2. Review the language points.

Exercises Unit Nine

I. Term Study.Match the terms in column A with the definitions in column B.

A B

1. Franchise

2. Depreciation method

3. Plant assets

4. Book value

5. Mineral deposit

6. Disposal

A. tangible assets

B. Natural resources

C. Intangible assets

D. Cost less accumulated depreciation

E. The process of allocating a portion of a depreciable plant asset to the period in which it provides benefits

F. To give an asset away

1. ____________ refers to an asset’s ability to perform its assigned task.

2. ___________ is a systematic and rational process allocating depreciable cost to the periods in which plant assets are used.

Exercises Unit NineII. Complete the following sentences with the

appropriate phrases.

Functional value

Depreciation

accelerated units-production residual value depreciation functional value

3. Four factors should be considered in determining periodic depreciation expense: original acquisition cost, estimated ____________, estimated useful life or productivity, and depreciation method chosen.

4. ______________ is a depreciation method that allocates depreciation based on usage not on time.

5. Sum-of-years’-digit method and double-declining balance method are referred to as two _________ depreciation methods.

Exercises Unit Nine

residual value

Units-production

accelerated

Exercises Unit Nine

III. Decide whether the following statements are true or false. Write T for true and F for false.

( ) 1. One reason for recording depreciation is to secure proper matching of costs and revenue.

( ) 2. The credit balance in an Accumulated Depreciation account represent the amount of a fund accumulating for the purpose of buying new assets.

( ) 3. Depreciation is the process of periodically writing down an asset to arrive at its fair market value.

T

F

T

Exercises Unit Nine

( ) 4. The sum-of-the-years’ digit method results in the same total depreciation as does the straight-line depreciation method.

( ) 5. Depreciation must be recorded on the limited life of plant assets simply because the assets will not last indefinitely to matter how well it is maintained.

( ) 6. Double-declining balance method ignores any residual value in its formula, but you must stop taking depreciation when the book value equals the residual value.

T

T

T

Exercises Unit Nine

IV. Choose the best answer.

1. In which of the following situations should the named company not record any depreciation expense on the asset described?

A.Commuter Airline is required by law to maintain its aircraft in “as good as new” condition.

B.Metro Advertising owns an office building that has been increasing in value each year since it was purchased.

C.Computer Sales Co. has in inventory a new type of computer, designed “never to become obsolete”.

D.None of the above answer is correct – in each case, the named company should record depreciation on the asset described.

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Exercises Unit Nine

2. Which of the following statements is correct?

A.Accumulated depreciation represents a fund being accumulated for the replacement of plant assets.

B.The cost of a machine includes the cost of repairing damage to the machine during the installation process.

C.Company may use different depreciation methods in its financial statements and its income tax return.

D.The use of an accelerated depreciation methods causes an asset to wear out more quickly than those of the straight-line method.

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Exercises Unit Nine

3. On April 1, 2006, Sanders Construction paid $10,000 for equipment with an estimated useful life of 10 years and a residual value of $2,000. The company uses the double-declining-balance method of depreciation and applies the half-year convention to fractional periods. In 2007, the amount of depreciation expense to be recognized on this equipment is:

A. $1,600

B. $1,440

C. $1,280

D. Some other amount

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Exercises Unit Nine

4. The book value of an asset classified as plant and equipment is obtained by:

A. deducting accumulated depreciation from the revenue the asset has produced.

B. deducting accumulated depreciation from the original cost of the asset.

C. deducting accumulated depreciation from the original cost of the asset less its salvage value.

D. deducting the original cost of the asset from its current market value.

5. Which of the following method is referred to as “accelerated method”?

A. straight-line method B. SYD C. DDB D. Both B and C

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Assignments

Do Ex. Ⅳ &Ⅴ after class.