...Depreciation Example | Cost | $ 110,000 | Salvage value | $ 20,000 | Useful life | 5 | Purchase date | January 1, 2011 | Straight line depreciation Year | Depreciation | | 2011 | $ 18,000 | =($110,000 - $20,000) x 1/5 | 2012 | $ 18,000 | =($110,000 - $20,000) x 1/5 | 2013 | $ 18,000 | =($110,000 - $20,000) x 1/5 | 2014 | $ 18,000 | =($110,000 - $20,000) x 1/5 | 2015 | $ 18,000 | =($110,000 - $20,000) x 1/5 | Total | $ 90,000 | | Double declining balance depreciation = 200% of SLD. Depreciation rate = 40% of WDV Year | Book value at the beginning of year | Depreciation rate | Depreciation expense | | Accumulated depreciation | Book value at year-end | 2011 | $ 110,000 | 40% | $ 44,000 | | $ 44,000 | $ 66,000 | 2012 | $ 66,000 | 40% | $ 26,400 | | $ 70,400 | $ 39,600 | 2013 | $ 39,600 | 40% | $ 15,840 | | $ 86,240 | $ 23,760 | 2014 | $ 23,760 | 40% | $ 3,760 | (*1) | $ 90,000 | $ 20,000 | 2015 | $ 20,000 | 40% | $ - | | $ 90,000 | $ 20,000 | Total | | | $ 90,000 | | | | (*1) Depreciation stops when accumulated depreciation reaches depreciation base. Depreciation base = cost - salvage value = $110,000 - $20,000 = $90,000 | Example Company X had purchased a Car on 1 April 2009 for ` 300,000. The car was sold for ` 100,000 on 30 June 2012. Depreciation rate on Car for various years were as under: 2009-10: WDV 20% 2010-11: WDV 20% 2011-12: WDV 30% (to be considered...
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...Suggested Solution Depreciation FA2 Part 1 Question 1 1-Jan-11 b/d Furniture and Fittings 100,000 31-Dec-11 c/d 100,000 31-Dec-11 c/d (FP) Accumulated of Depreciation on F&F 28,750 1-Jan-11 b/d 31-Dec-11 Depreciation 28,750 5% x (100,000-25,000) 3750 (CI) 25,000 3,750 28,750 working 1 Depreciation F&F Van 1-Jan-11 b/d 50,000 31-Dec-11 c/d 50,000 31-Dec-11 c/d (FP) Accumulated of Depreciation on van 17,000 1-Jan-11 b/d 31-Dec-11 Depreciation 17,000 10% x 50,000 5000 (CI) 12,000 5,000 17,000 working 2 Depreciation van Statement of Comprehensive Income (extract) for the year ended 31/12/2011 Less: Expenses Depreciation on F&F 3750 Depreciaiton on van 5000 Statement of Financial Position (extract) as at 31 July 2012 √ Non-current Asset Cost Acc. Dep Furniture & Fittings 100,000 28,750 Van 50,000 17,000 NBV 71,250 33,000 Prepared by Ms Nur Shahida Suggested Solution Depreciation FA2 Part 1 Question 2 1-Jan-10 b/d 1-Jan-11 b/d Lorry 60,000 31-Dec-10 c/d 60,000 31-Dec-11 c/d 60,000 60,000 1-Jan-10 Acc. Dep 1-Jan-11 Acc. Dep Depreciation on lorry 12,000 31-Dec-10 c/d (CI) 12,000 31-Dec-11 c/d (CI) 12,000 12,000 working 1 Depreciation 20% x 60000 12000 (CI) 31-Dec-10 c/d (FP) 31-Dec-11 c/d (FP) Accumulated of Depreciation on lorry 12,000 31-Dec-10 Depreciation 24,000 24,000 1-Jan-11 b/d 31-Dec-11 Depreciation 12,000 12,000 12,000 24,000 Statement of Comprehensive Income (extract) for the...
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...that will last for more than one year, but will not last indefinitely. Over time, these assets depreciate. Depreciation is defined as a non-cash expense that reduces the value of an asset as a result of physical or functional factors over time. Therefore, the costs of the fixed assets should be recorded as an expense over their useful lives, since they depreciate and must be replaced once the end of their useful life is reached. Physical depreciation factors include wear and tear during use or from being exposed to such things as weather. Functional depreciation factors include obsolescence or changes in customer needs that cause the asset to no longer provide services for which it was intended or needed. When it comes to computing depreciation, there are three factors that determine the depreciation expense for a fixed asset: the asset’s initial cost, expected useful life, and estimated residual value. And there are also three different ways to calculate depreciation: the straight –line method, the units-of-production method, and the double-declining-balance method. The straight-line method of depreciation provides the same amount of depreciation expense for each year of the asset’s useful life, and is known to be the most commonly used method of calculating depreciation. The unit’s-of-production method of depreciation provides the same amount of depreciation expense for each unit of production. Based on what the asset is, the unit’s-of-production method can be expressed...
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...Depreciation Depreciation is a non-cash expense which reduces the value of a fixed asset except Land as a result of wear and tear, age, or obsolescence. Most assets lose their value over time (in other words, they depreciate), and must be replaced once the end of their useful or economic life is reached. There are several accounting methods that are used in order to write off an asset's depreciation cost over the period of its useful life because it is a non-cash expense, depreciation lowers the company's reported earnings while increasing free cash flow. In a simple word depreciation is all about the reduction in the value of fixed assets and the allocation of the cost of assets to periods in which the assets are used. While depreciation expense is recorded on the income statement of a business, its impact is generally recorded in a separate account and disclosed on the balance sheet as accumulated depreciation, under fixed assets, according to most accounting principles. Without an accumulated depreciation account on the balance sheet, depreciation expense is usually charged against the relevant asset directly. The values of the fixed assets stated on the balance sheet will decline, even if the business has not invested in or disposed of any assets. The amounts will roughly approximate fair value. Otherwise, depreciation expense is charged against accumulated depreciation. Showing accumulated depreciation separately on the balance sheet has the effect of preserving...
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...Depreciation Accounting 1 Types of Long-Lived Assets • Tangible asset • Asset with physical substance • Property, plant, and equipment = fixed asset. • Intangible asset • Intellectual property. • No physical substance • Examples are patent rights, copyrights 2 Amortization • View capital asset as bundle of services • Similar to prepaid expenses, cost is expensed as company benefits from the services • • • • Land - no depreciation Plant and equipment - depreciation Natural resources - depletion Intangible assets - amortization 3 Depreciation Methods • • Straight line method • (original cost - residual value) /service life Accelerated methods • Declining balance methods • Sum of the years’ or years’ digits methods 4 Declining Balance Method • Depreciation = book value * depreciation rate. • Double declining balance method = book value * 2 * straight line rate. • Straight line rate = 1/(life of asset in years). 5 Impaired Assets • • • An asset for which its remaining benefits, as measured by the sum of future cash flows the asset’s use will generate, is less than its book value If entity expects to hold asset • Write asset down to fair value If entity expects to sell asset • Write asset down to lower of cost or fair value less cost of disposal. 6 Group Depreciation n Group depreciation • Treats all similar assets as a “pool” or group rather than calculating for each item separately. • No gain or...
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...Depreciation of Property, Plant and Equipment Group 8 1. Complete the textbook problem assigned to your group per the requirements of the specific problem or case. P-2 The cost of equipment purchased by Charleston, Inc., on June 1, 2014, is $89,000. It is estimated that the machine will have a $5,000 salvage value at the end of its service life. Its service life is estimated at 7 years, its total working hours are estimated at 42,000, and its total production is estimated at 525,000 units. During 2014, the machine was operated 6,000 hours and produced 55,000 units. During 2015, the machine was operated 5,500 hours and produced 48,000 units. Instructions: Compute depreciation expense on the machine for the year ending December 31, 2014, and the year ending December 31, 2015, using the following methods. (1) Straight-line. (2) Units-of-output. (3) Working hours. (4) Sum-of-the-years'-digits. (5) Declining-balance (twice the straight-line rate). Answer: (1) Straight-line. Year Cost Salvage value Estimated service life Partial depreciation expense 2014 $89,000 $5,000 7 0.58 $7,000 2015 $89,000 $5,000 7 1 $12,000 (2) Units-of-output. Year Cost Salvage value Total Production Units Produced Units depreciation expense 2014 $89,000 $5,000 525,000 55,000 $8,800 2015 $89,000 $5,000 525,000 48,000 $7,680 ...
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... 04/30/12 Re: Types of Depreciation for Assets Depreciation is the process of allocating to expense the cost of an asset according to its useful life. Depletion is the allocation of the expense for natural resources. Amortization is used for the expenses of intangible assets that a company may use. All three need to calculate the useful life of the items being expensed. They also need to have a life span. There are differences between all three, such as depreciation is used for physical assets like buildings, land, and machinery. Depletion on the other hand is used for natural resources such as timber, underground deposit such as oil, and gas. Finally, amortization is for intangible assets like patents, trademarks and goodwill. When calculating depreciation three factors must be determined; cost, salvage value, and useful life. To calculate the depreciable value of the asset one would use the cost less salvage value divided by the useful life of the asset. This would equal the annual depreciation rate of the asset. The straight-line method of depreciation remains the same until the useful life of the asset is used and is the most commonly used method. Calculating depletion requires cost less salvage value divided by estimated units multiplied by number of units extracted and sold. This would equal the annual depletion expense for the asset and is using the units-of-activity method. Last, amortization is calculated similar to depreciation in that the cost of the asset...
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...Depreciation Depreciation is the analytical reduction in the recorded cost of a fixed asset. There are many examples of fixed assets that can be depreciated such as cars, houses, buildings, leasehold improvements, plant equipment, furniture and leasehold improvements with the only exception being land. Land is not depreciated since over time land is not depleted only with the exception of natural resources. Depreciation is used to match an amount of the cost of a fixed asset to the revenue that it generates. This can be mandated under the matching principle in which you document revenues with their correlated expenses in the same reporting period in order to create a clear image of the results of a revenue-generating transaction. The net outcome of depreciation is an eventual decline in the documented...
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...Depreciation at Delta Air Lines and Singapore Airlines (A) In the early 1990s, the American airline industry experienced a $12.8 billion loss. During this fragile economic state, airline companies reconsidered accounting policies and the long-term effect of each policy on a company’s bottom line. Accounting for such a large part of Total Assets (approximately 50%), the PPE account and its contra account, Accumulated Depreciation, affect both the Balance Sheet and the Income Statement of airline companies. Therefore, the method and assumptions a company implements relating to the calculation of depreciation can significantly alter the company’s financial appearance. Delta Airlines and Singapore both use the straight-line method to depreciate their airline equipment. However, the two companies assume different useful lives and salvage values, influencing the amount and timing of depreciation expense. Delta assumes longer useful lives than Singapore, increasing the life over time from 10 to 15 to 20 years in April 1993 (see Exhibit 1). A longer useful life spreads out depreciation over a longer period of time, therefore lowering the annual expense and increasing Net Income. Conversely, Delta is decreasing the residual value of PPE from 10% to 5% of cost. The increased depreciable base of Delta’s fleet paired with the extremely high useful life, Delta decreased their annual depreciation expense on every $100 of gross equipment from $9 in years prior to July 1986 to $4...
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...will flow towards an entity. Depreciation is the lessening of value continuously on an asset that is being used (for example over a period of 5 years). As for example a vehicle is used, wear and tear occurs and depreciation is therefore written off on the vehicle (as less economic benefits will flow to an entity now that the vehicle has been used). Whereas impairment on the other hand, is when an asset's value suddenly drops. For example when a car gets damaged from an accident and is no longer worth what is was before the accident, the difference will be impairment. Impairment is also common in loans receivable from other companies, as the company who the money was lent to might become bankrupt and suddenly not be able to repay the loan. The loan balance will therefore be impaired Depreciation means the depreciable amount of an asset (cost/revalued amount less residual value) is allocated on a systematic basis over its useful life. Depreciation = Depreciable amount / Useful life Impairment means when an asset/s carrying amount is exceeds its recoverable amount, the amount over recoverable amount should be write off from carrying amount and present in Balance Sheet. This process is call as Impairment An impairment (loss) is the amount by which the carrying amount (i.e. balance sheet value) of an asset or cash-generating unit exceeds its recoverable amount. Impairment = Carrying value - Recoverable amount Calculation Choices depreciation is generally computed using...
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... (i) Delta Air Lines need to update the residual value and depreciation of their aircraft over time in order to calculate the life of the aircraft. The calculation requires estimation and assumptions such as the long-term of usage, maintenance cost, residual value and economic conditions which need constant review. Technological changes in the industry are one of the reasons why Delta Air Lines decided to extend the useful lives of their flight equipment. Technological advances such as changing engines from pistons to jet engines allow aircrafts to function more efficiently with less wear and tear on the airframes and for longer period of times. With consistently updated with latest technology, aircraft are better maintained and can simply last much longer. In addition, Delta Air Lines decision to change in depreciation since 1986 had a positive impact on the company’s financial statements. Depreciation is a non-cash item which does not affect cash flows or revenue. However, it does have an effect on the net income. By stretching out depreciation, Delta will see a decrease in depreciation expense resulting in higher net income. This is crucial for not only for Delta Air Lines, but to all airlines companies as well as intense competition and deregulation in the industry were being pressured to show more profits and results. The disadvantage to decreasing in depreciation is taxes. With decreased depreciation and increased net income, Delta Air Lines’ income taxes increased...
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...can charge the rental operation with depreciation expense. Generally, real property never depreciates in value, but since the investment in the property generates income via appreciation of value, it is acceptable to recover the costs against the income earned, through annual depreciation deductions. In our case, the sole purpose of the company’s real estate fund, which consists of houses, hotels and commercial buildings, is to provide income in the form of rental cash flow and share of appreciation in value of those properties. Since the property is used for an income producing activity, the company can charge rental operation with depreciation expense. Despite the fact that the general rule is that the property will increase in value, or "appreciate" over time, charging depreciation does not indicate that the value of property have depreciated. Depreciation is merely an accounting expense to allocate the cost of the property over different periods (the asset’s useful life). Charging depreciation can also provide tax shelter for the company, since the depreciation cost can be treated as a considerable amount of tax deduction. Furthermore, such treatment provides an income statement more comparable to other real estate entities, as the rental operation costs are normally depreciated by most companies. This provides better comparability, however, at the cost of relevancy. Alternative 2: Do not charge rental operation with depreciation expense The other alternative for CFS...
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...Basis of Depreciation 1 Basis of Depreciation A Comparison Between Generally Accepted Accounting Principles (GAAP) and Income Tax Basis Basis of Depreciation 2 Abstract The basic concept of depreciation is based on the assumption that most property, plant, and equipment assets or depreciable assets have a useful life over which they are consumed. The portion of these depreciable assets consumed through usage or obsolescence is what accountant refers to as depreciation. The measurement of depreciation according to Generally Accepted Accounting Principles (GAAP) follow the “cost principle” and “matching principle”; in that depreciable assets cost should be valued at their original or historical cost, and that depreciation expense is recognized in the same period the benefit was derived from the consumption of the said asset. On the other hand, Income Tax Basis follows the concept of “recovery period”; in that businesses recover the cost of the depreciable assets faster because the period (useful life) is accelerated. This paper will compare and contrast Income Tax Basis for depreciation and GAAP basis for depreciation. Basis of Depreciation ...
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...Discussion of Bonus Depreciation Deduction in the United States May 6, 2015 Abstract The term paper researches the history of bonus depreciation allowance provision, the usefulness to the decision making of corporate taxpayers, and how the temporary changes in recent years affect cash flow of businesses. Under Section 168(k) of IRC, bonus depreciation is a special depreciation allowance to deduct income tax of corporate taxpayers. Though this ranges from 30% to 100% as determined by annual election of congress, bonus depreciation actually results in substantial present value tax savings for businesses when they purchase new qualified property. The introduction section is an overview of bonus depreciation, how it is relevant to businesses, and why taxpayers care about it. The legislation history is a brief description of temporary changes and the timeline of bonus depreciation. The fictional example section presents the possible effects of bonus depreciation transitioning from 50% in 2014 to 0% in 2015, and the conclusion section summarizes this research. Keywords: Depreciation Deduction, Bonus Depreciation, Cash Savings INTRODUCTION Outline the topic. Bonus depreciation is special depreciation allowance that allows businesses an additional first-year depreciation deduction when the qualifying asset is first purchased. It helps business recover the costs of qualified new property made in a particular year faster than the ordinary depreciation schedule allow. Bonus...
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...margin for the month, Choi decides to change her depreciation rule from recognizing assets on the first day of the month nearest the purchase date to recognizing assets on the first day of the following month. Identify decisions that managers must make in applying depreciation, is Choi’s rule ethical, how might this change affect profit margins? Plant assets are defined as “tangible assets used in the company’s operations that have a useful life of more than one accounting period” (Wild, Shaw, & Chiapetta, 2013, 396). When making decisions regarding depreciation, managers must look at the accounting rules regarding depreciation, the industry standards for depreciation, cost and salvage value, useful life, and the methods and their overall impact on the business (Wild, Shaw, & Chiapetta, 2013). When looking at which method to use, managers must reflect on the method’s impact on profits as well as the impact on taxes. When choosing one method it may increase net income, but may also increase the amount of taxes paid because of higher reported income. Therefore a method that results in higher incomes, will be offset by increases in taxes due. Therefore it is the manager’s job to choose what the company’s actual goal is and choose the method that suits the strategy (Stice & Stice, 2008). Companies are not constrained by law as to what depreciation method they choose and therefore the organization may choose whichever depreciation method that suits the organization’s purpose, as...
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