DEPRECIATION

By: Aldinette Esto

Business Math
Depreciation
 Isthe loss or decline in value of an
asset through use and passage of
time.

 Assets depreciate through age,

obso le sce nc e, d ec ay,
de cr ea se in ef fici enc y a nd
ina deq uac y.
Basic Principle of Business

 Capital intact

Assets no longer profitable

 Replacement or depreciation fund

 Basic Notation in Depreciation
 O = original cost of the asset
 S = Scrap or salvage value
 W = wearing value
 n = useful or economic life
of an asset in yrs, months & the like
 R = depreciation charge per year
 t = given year or date
 BV = Book value
 r = rate of depreciation
 Terms to remember
 Scrap valu e/Salva ge/Tra de-in-
val ue
An asset that can no longer be
used for the purpose for which it
was purchased
 We ar in g va lue/To tal de pre cia tion
The difference between the
original cost and the scrap
value; W = O - S
 Book v al ue
 Methods of determining the
depreciation of various assets

 StraightLine Method
 Service Hour Method
 Production Units Method
 Annuity Method
 A. Straight-Line-Method
 It spr ea ds depreci atio n
evenl y over the usef ul l ife of
the asset. It assumes tha t
depreci atio n is in proporti on
to ti me.

 Form ula fo r p eriodic depre ciatio n

a) W = O – S
b) R = W
n
 Example 1
A s teel ca binet which cos t P 8, 500 is
expect ed to l ast 12 yrs ., an d at t hat
time will have a t rad e-in-va lue of
P500. F ind t he ann ua l depreciat ion
ch arg e.

Given: O = P8,500 S = P500 n = 12

Sol: W = O – S
= P8,500 – P500 = P8,000
R=W÷n
= P8,000 ÷ 12 = P666.67
 Example 2
An it em which co st P 5,200 an d af ter 5
yrs h as a scr ap value of P 400. W hat is
the annu al depreciat io n? W hat
per cent o f t he c ost is t he yearly
depre cia tion?

Given: O = P5,200 S = P400 n=5

Sol:
W=O–S R = W/n r = R/W
= 5,200–400 = 4,800/5 = 960/4,800
• Example 3
A mach in e which co st s P 12 ,0 00 and after
6 yrs has a s alvag e va lue o f P 900.
Det er min e t he yearly deprec iat ion and
pr ep are a depreciat ion s che dule.
Given: O = P12,000 S = P900 n=6
Sol: W = O – S R=W÷n
= 12,000 - 900 = 11,100 ÷ 6
= P11,100 = P1,850
DEPRECIATION SCHEDULE – STRAIGHT LINE METHOD
Annual Accumulated Book
Year Depreciation Depreciation Value
0 0 SUB TRA CT O to
0AD P12,000
1ADD A P1,850
D & RE P1,850 10,150
2 1,850 3,700 8,300
3 1,850 5,550 6,450
4 1,850 7,400 4,600
5 1,850 9,250 2,750
6 1,850 11,100 900
 Try it yourself!!!
• A piece of equipment which was
purchased for P200,000.00 has an
estimated useful life of 8 years
and a scrap of P10,000.00.
a) What is the book value of the
equipment after 3 years?
b) What is the book value of the
equipment after 5 years?
 So lut ion:
 A) BV = O – (Rt )

= 20 0, 000 – [ ( 200,0 00
-10 ,000) x 3 ]
8
= P1 28,75 0

 B) BV = O – (Rt )
= 20 0, 000 – [ ( 200,0 00
-10 ,000) x 5 ]
8
 B. Service Hours Method
 Similar to the Straight-Line Method
except that it calculates “book value”
based on the hours an object has been
used. It assumes that the number of
productive hours decreases as the
property becomes older.
 Formula: a) R = (O - S) ÷ n

b) RE = SH x R
 Example 1
A sewing machine purchased for P4500 has an
estimated life of four years and a scrap value of
P300. Use the straight line method to find the
depreciation. Assume that the useful life of the
machine is estimated to be 15,000 service hours
and the actual number of hours spent in
production each year is as follows:
1st yr: 4,500 hrs 2nd yr: 4,100 hrs
3rd yr: 3,500 hrs 4th yr: 2,900 hrs
• Solution to Ex 1
R = O – S = 4,500 = 0.28 per hour
n 15,000
An nua l D epr eciati on E xpens e:
RE = SH x R
1st yr RE = 4,500 x 0.28 = 1,260
2nd yr RE = 4,100 x 0.28 = 1,148
3rd yr RE = 3,500 x 0.28 = 980
4th yr RE = 2,900 x 0.28 = 812
DEPRECIATION SCHEDULE – SERVICE HOURS METHOD

Annual Accumulated Book

Year Depreciation Depreciation Value
0 0 SUB TRA CT O to
0AD P4,500
1ADD A P1,260
D & RE P1,260 3,240
2 1,148 2,408 2,092
3 980 3,388 1,112
4 812 4,200 300
Try It Yourself!!!

 A car purchased for P134,000 has an

estimated life of eight years and a
scrap value of P6,425. Use the service
hour method to find the depreciation.
Assume that the useful life of the car is
estimated to be 24,300 service hours
and the actual no. of hours spent in
using the car each yr is as follows:
 1st yr: 4,300 SH 2nd yr: 4,000 SH
3rd yr: 3,800 SH 4th yr: 3,200 SH
5th yr: 3,000 SH 6th yr: 2,500 SH
7th yr: 2,000 SH 8th yr: 1,500 SH

f) Find the depreciation charge per hour.

g) Find the book value of the car after 2 yrs.
h) Find the book value of the car after 4 yrs.
i) Find the book value of the car after 5 yrs.
j) Find the book value of the car after 7 yrs.
C. Production Units Method
 Itis based on the number of hours
an asset is used or the number of
units it produces.

 This method allows for more

depreciation during a busy period
of an asset
 Example 1
A machi ne cost s P 7,5 00 has a salvag e
value of P60 0. It is e st ima ted t hat t he
mach in e can produ ce 2 5,00 0 unit s. This
mach in e has been run as f ollows :
1st yr – 2,800 units 2nd yr – 3,200 units
3rd yr – 4,100 units 4th yr – 5,500 units
5th yr – 2,500 units
* Prepare a depreciation table.
Given: O= P7,500 S = P600 n = 2,500hrs
Sol: W = O – S
= 7,500 – 600 = P6,900

Annual Depreciation:
1st yr P6,900 (2,800 ÷ 25,000) = P 772.80
2nd yr 6,900 (3,200 ÷ 25,000) = 883.20
3rd yr 6,900 (4,100 ÷ 25,000) = 1,131.60
4th yr 6,900 (5,500 ÷ 25,000) = 1,518.00
5th yr 6,900 (2,500 ÷ 25,000) = 690.00
• Depreciation Schedule
Annu al Accu mulate d
Boo k
Yr Depr ec iation D epr eci ati on
Val ue
0 0 0 P7,500
5 P 772.80 P 772.80 6,727.20
6 883.20 1,656.00 5,844.00
7 1,131.60 2,787.60 4,712.40
8 1,518.00 4,305.60 3,194.40
 Example 2
A cer tain machine co st s P 12 ,8 00
depre cia tes t o P 1, 200. T his t ype o f
mach ine h as an e st im ated oper ating
lif e of 3 5,5 00 h rs, a nd run as f ollows :
1st yr - 3,400 hrs 2nd yr - 3,800 hrs
3rd yr - 4,350 hrs 4th yr - 5,160 hrs
5th yr - 4,995 hrs 6th yr - 7,200 hrs
7th yr - 1,500 hrs
*Prepare a depreciation table.
• Sol: W=O–S
= P12,800 – P1,200 = P11,600
Annual Depreciation:
1st yr P11,600 (3,400÷35,500) = P1,110.99
2nd yr 11,600 (3,800÷35,500) = 1,241.69
3rd yr 11,600 (4,350÷35,500) = 1,421.41
4th yr 11,600 (5,160÷35,500) = 1,686.08
5th yr 11,600 (4,995÷35,500) = 1,632.17
6th yr 11,600 (7,200÷35,500) = 2,352.68
7th yr 11,600 (1,500÷35,500) = 490.14
• Depreciation Schedule
Annual Total Book
Yr Depreciation Depreciation Value
0 0 0 P12,800
1 P1,110.99P1,110.99 11,689.01
2 1,241.69 2,352.68 10,447.32
3 1,421.41 3,774.09 9,025.91
4 1,686.08 5,460.17 7,339.83
5 1,632.17 7,092.34 5,707.66
6 2,352.68 9,445.02 3,354.98
7 490.14 9,935.16 2,864.84
Try It Yourself!!!
 D. Annuity Method
 The depreciation charge is composed
of the amount credited to the fund and
the interest on the book value of the
asset.
 The investment in the asset is
regarded, first, as the amount of the
salvage value which earns interest, and
second, an investment in an annuity to
be equal to the periodic payments.
 “compound interest method of
depreciation”