Depreciation, 5

16.
1 Depreciation Methods for

Financial Statement Reporting
Depreciate an asset and prepare a

depreciation schedule
using the straight-line method
using the units-of-production method
using the sum of the years digits

method
Using the declining balance method
Business Math, Eighth Edition

Cleaves/Hobbs
2009 Pearson Education, Inc. Upper Saddle River, NJ

07458 All Rights Reserved
Key Terms
Assets: properties owned by the business,

including anything of monetary value and
anything that can be exchanged for cash or
other property.
Estimated life or useful life: the number of

years an asset is expected to be useable.
Salvage value, scrap value, or residual

value: an estimated dollar value of an asset at
the end of the assets estimated life.
Cleaves/Hobbs

Key Terms
Depreciation: the amount an asset decreases in value

from its original cost.
Straight-line depreciation: a method of depreciation

in which the amount of depreciation of an asset is
spread equally over the number of years of useful life of
the asset.
Total cost: the cost of an asset including shipping and

installation charges.
Depreciable value: the cost of an asset minus the

salvage value.
Cleaves/Hobbs

16.1.1. Use the Straight Line

Depreciation Method
Find the total cost of the asset

TC = cost + shipping + installation
Find the depreciable value

Depreciable value = TC salvage value
Find the yearly depreciation:

= depreciable value years of expected life

Cleaves/Hobbs

Look at this example
Use the straight-line method to find the yearly

depreciation for a plating machine that has an
expected useful life of 5 years. The plating
machine cost $27,300; its shipping costs totaled
$250, installation charges came to $450 and its
salvage value is $1,000.
TC= $27,300 + $250 + $450 = $28,000
Depreciable value = $28,000 - $1,000 =

$27,000
Yearly depreciation = $27,000 5 = $5,400

Cleaves/Hobbs

Try this example
A labeling machine cost $43,000.

Installation costs totaled $1,250 and
shipping costs totaled $2,250. It has an
expected useful life of 10 years. Its salvage
value is $2,000. Use the straight-line
method of depreciation to find the yearly
depreciation for the labeling machine.

Cleaves/Hobbs
The depreciation is $4,450 per year

Key Terms
Depreciation schedule: a table showing the

years depreciation, the accumulated
depreciation, and the end-of-year book value.
Accumulated depreciation: the current years

depreciation plus all previous years
depreciation.
End-of-year book value: total cost minus

depreciation for the first year. Thereafter, it is
the previous years end-of-year book value
minus the current years depreciation.
Cleaves/Hobbs

16.1.2 Units-of-Production Method
Takes into account an assets use in terms of

production, for example:
Items produced
Miles driven
Hours operated
Number of times it has performed a specific
operation
Companies that use this method internally

often adjust to a method acceptable by the
IRS for tax-reporting purposes
Cleaves/Hobbs

Find the unit depreciation
Unit depreciation =
Depreciable value
Units produced during expected life
Depreciation for units produced

= unit depreciation x units produced

Cleaves/Hobbs

A label making machine that costs $28,000

after shipping and installation is expected to
print 50,000,000 labels during its useful life.
If the salvage value of the machine is
$1,000, find the unit depreciation and the
depreciation for printing 2,125,000 labels.
(go to next slide)

Cleaves/Hobbs

Find the depreciation
Unit depreciation = depreciable value units

produced during expected life
Unit production = $27,000/ 50,000,000
Unit depreciation = $0.00054
Depreciation for 2,125,000 labels

= $0.00054 x 2,125,000 = $1,147.50
The depreciation for that number of labels is

$1,147.50.
Cleaves/Hobbs

Try this example

A small pickup truck was purchased for
occasional deliveries during the busy season of
Eager Enterprises. Total cost of the truck was
$24,000. The salvage value is $2,500. The
expected number of miles to be driven over the
trucks useful life is 100,000. Find the
depreciation after one year is the truck has
been driven 3,000 miles.

Cleaves/Hobbs
$645 is the depreciation amount

16.1.3 Sum-of-theYears
Digits Method
Sum-of-the-years digit method: A

depreciation method which allow the greatest
depreciation the first year and decreasing
amount each year thereafter.
Years depreciation rate: the depreciation rate

for any given year of a depreciation schedule.

Cleaves/Hobbs

Find the years depreciation
The numerator of the years depreciation rate

is the number of years of expected life
remaining.
The denominator of the years depreciation

rate is the sum of the numbers from 1 to the
years of expected life.
Shortcut for finding the sum:

n(n+1) = sum
2
Cleaves/Hobbs

Find the depreciation for each of the five years

of expected life of a bottle capping machine that
costs $27,300 and has a shipping cost of $250
and an installation cost of $450, and a salvage
value of $1,000. Make a depreciation schedule.
Denominator = 5 (6) 2 = 15
Numerator for year 1 = 5; year 2 = 4 and so on.
Depreciable value = TC salvage value
Depreciable value = $27,000

Cleaves/Hobbs

Depreciation schedule
Year 1 = $27,000 x 5/15 = $9,000

End of year book value = $28,000-$9,000=$19,000
Year 2 = $27,000 x 4/15 = $7,200

End of year book value = TC accumulated
depreciation = $11,800
Now, calculate the depreciation and book value for

Years 3, 4, 5.
Y 3 $5,400 and end-of year book value is $6,400.


Cleaves/Hobbs

16.1.4 Declining Balance

Method of Depreciation
A depreciation method that provides for large

depreciation in the early years of the life of an
asset.
Double-declining rate (or 200% decliningbalance method): a declining balance

depreciation that is twice the straight-line
depreciation.
150% declining rate: a common declining

balance rate that is 1 times the straight line
rate.
Cleaves/Hobbs

Find the depreciation
Yearly double declining rate = yearly straight

line depreciation rate x 2
Yearly 150% declining depreciation rate =

yearly straight line depreciation rate x 1.5
First years depreciation = total cost x yearly

depreciation rate
For all other years: Years depreciation =

previous end-of-year book value x yearly
depreciation rate.
Cleaves/Hobbs

An ice-cream freezer has a useful life of six

years. Find the yearly:
straight line rate expressed as a decimal and

a percent
Double-declining rate expressed as a

decimal and a percent.
150%-declining rate expressed as a decimal

and a percent.

Cleaves/Hobbs

The rates
Straight-line
= 1/6 or .1667 or 16.67%
Double-declining
= 2(1/6) = 1/3 or 33%
150% declining rate = 1.5 (1/6) = 0.25 or 25%

Cleaves/Hobbs

Tip!
In declining-balance depreciation, the

depreciation for the first year is based on the
total cost of the asset.
Do not subtract the salvage value from the total

cost to find the depreciation in the first year.
The end-of-year book value for any year

cannot drop below the salvage value of the
asset. If the depreciation would cause it to drop
below the salvage value, the years ending
value will be the salvage value.
Cleaves/Hobbs

A packaging machine costing $28,000 with an

expected life of five years and a resale value of
$1,000 is depreciated by the declining balance
method at twice the straight-line rate. Prepare
a depreciation schedule.
Year one (2) x 1/5 = 2/5 or 40% or .40

$28,000 x 40% = $11,200
End of year 1 book value = TC depreciation
End of year 1 = $28,000- $11,200 = $16,800

Cleaves/Hobbs

Finish the depreciation schedule
Year Two = previous end-of-year book

value x double-declining rate
$16,800 x 0.4 = $6,720
End-of-year Two book value =

previous end-of-year book value
depreciation = $16,800 - $6,720 = $10,080
(go to next slide)

Cleaves/Hobbs

Years 3, 4 and 5
Year Three =
previous end-of-year book value x doubledeclining rate = $10,080 x 0.4 = $4,032
End-of- year Three book value

= $10,080 - $4,032 = $6,048
Year Four depreciation = $2,419.20

End of year Four book value = $3,628.80
Year Five depreciation = $1,451.52

End-of-year Five book value = $2,177.28
Cleaves/Hobbs

16.2 Depreciation
Methods for IRS Reporting
Depreciate an asset and prepare a

depreciation schedule using the modified
accelerated cost-recovery system
(MACRS)
Depreciate an asset after taking a section

179

Cleaves/Hobbs

16.2.1 Using MACRS
In, 1981, the IRS enacted an accelerated costrecovery system (ACRS) for the depreciation of
property put into service after that date.
Allowed businesses to write off cost of assets

more quickly.
Objective was to encourage businesses to

invest in more assets despite an economic
slowdown at the time.
Cleaves/Hobbs

Table 16-5
Table 16-5 indicates that each recovery period

has a depreciation rate for one year more than
the recovery period indicates.
First and last year in the recovery period are

partial years.
Greatest amount of depreciation is realized in

the second year, which is the first full year.
Cleaves/Hobbs

Using the MACRS Method
Using the IRS publication, determine the

assets recovery period and find the
appropriate table.
Find the MACRS rate using Table 16-5
Multiply the years MACRS rate by the total

cost of the asset.
Years Depreciation =
Years MACRS rate x total cost

Cleaves/Hobbs

Why is this easier than traditional

depreciation methods?
1. You do not have to find a depreciable

value.
2. You do not have to determine a salvage

value.
3. The useful life is determined by the
property classes.
Cleaves/Hobbs


Find the depreciation for each year for a boiler
that was purchased for $28,000 and placed in
service at midyear under the MACRS method of
depreciation as a five-year property.
Year 1 depreciation = MACRS rate x Total Cost

Year 1 depreciation = 20% x $28,000
Year 1 depreciation = $5,600
Do the subsequent years through Year 6.
Check calculations on the following slide.
Cleaves/Hobbs

Check your calculations.
Year 4 depreciation = $3,225.60
The sum of yearly depreciations equals the total

cost of the asset ($28,000).
Cleaves/Hobbs

16.2.2 Depreciate an Asset After

Taking a Section 179 Deduction
For tax purposes, it can be treated as a onetime expense, rather than as a capital
expenditure that is depreciated over several
years.
The amount that is claimed under Section 179

is subtracted from the original price of the
property and the balance can be depreciated
using any of the approved methods of
depreciation.
Eligible only in the first year that a qualifying

property is purchased and placed into service.
Cleaves/Hobbs

Section 179 Deduction
Property must be placed in service for

business purposes only. A property put in
service first for personal use and subsequently
for business use would not be eligible.
Eligible property, in general, is tangible,

depreciable personal property that is used for
the production of income.
Can only be used to reduce taxable income,

not to create a net loss; estates and trusts
cannot claim the Section 179 deduction.
Cleaves/Hobbs

How to depreciate an asset after

taking a Section 179 deduction
Decide how much of the maximum section 179

allowance to apply to the asset.
Subtract the elected section 179 deduction from

the total cost of the asset.
Apply an approved depreciation method to the

value from the previous step, instead of the
actual total cost.

Cleaves/Hobbs

Find the first year depreciation using MACRS

for the 7th Innings kitchen, that is purchased
and placed into service at midyear. The price of
the property is $125,250 and the maximum
$100,000 section 179 deduction is elected.
$125,250-$100,000 = $25,250
$25,250 x 14.29% (MACRS rate) = $3,608.23
The first years depreciation is $3,608.2336

Cleaves/Hobbs


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16.

1 Depreciation Methods for

Depreciate an asset and prepare a

using the straight-line method

using the units-of-production method

using the sum of the years digits

Using the declining balance method

Business Math, Eighth Edition

2009 Pearson Education, Inc. Upper Saddle River, NJ

Assets: properties owned by the business,

Estimated life or useful life: the number of

Salvage value, scrap value, or residual

2009 Pearson Education, Inc. Upper Saddle River, NJ

Depreciation: the amount an asset decreases in value

Straight-line depreciation: a method of depreciation

Total cost: the cost of an asset including shipping and

Depreciable value: the cost of an asset minus the

2009 Pearson Education, Inc. Upper Saddle River, NJ

16.1.1. Use the Straight Line

Find the total cost of the asset

Find the depreciable value

Find the yearly depreciation:

Business Math, Eighth Edition

2009 Pearson Education, Inc. Upper Saddle River, NJ

Look at this example

Use the straight-line method to find the yearly

TC= $27,300 + $250 + $450 = $28,000

Depreciable value = $28,000 - $1,000 =

Yearly depreciation = $27,000 5 = $5,400

2009 Pearson Education, Inc. Upper Saddle River, NJ

Try this example

A labeling machine cost $43,000.

Business Math, Eighth Edition

The depreciation is $4,450 per year

Depreciation schedule: a table showing the

Accumulated depreciation: the current years

End-of-year book value: total cost minus

2009 Pearson Education, Inc. Upper Saddle River, NJ

16.1.2 Units-of-Production Method

Takes into account an assets use in terms of

Companies that use this method internally

2009 Pearson Education, Inc. Upper Saddle River, NJ

Find the unit depreciation

Depreciation for units produced

Business Math, Eighth Edition

2009 Pearson Education, Inc. Upper Saddle River, NJ

Look at this example

A label making machine that costs $28,000

Business Math, Eighth Edition

2009 Pearson Education, Inc. Upper Saddle River, NJ

Find the depreciation

Unit depreciation = depreciable value units

Unit production = $27,000/ 50,000,000

Unit depreciation = $0.00054

Depreciation for 2,125,000 labels

The depreciation for that number of labels is

2009 Pearson Education, Inc. Upper Saddle River, NJ

Try this example

Business Math, Eighth Edition

$645 is the depreciation amount

Sum-of-the-years digit method: A

Years depreciation rate: the depreciation rate

Business Math, Eighth Edition

2009 Pearson Education, Inc. Upper Saddle River, NJ