CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning

LESSON 8-4LESSON 8-4

Other Methods of Depreciation

Declining-balance depreciation method.Sum-of-the-years’-digits depreciation method.Production-unit depreciation method.Modified Accelerated Cost Recovery System.Depletion.

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning

Chapter 8 ObjectivesChapter 8 ObjectivesAccounting for Uncollectible AccountsAccounting for Uncollectible Accounts

After studying Chapter 8, you will be able to:Define accounting terms related to plant assets and depreciation.Identify accounting concepts and practices related to accounting for plant assets and depreciation.Journalize entries for buying plant assets.Calculate and record property tax expense.Calculate and record depreciation expense for a plant asset using straight-line depreciation.Journalize entries disposing of plant assets.Calculate depreciation expense using other methods.

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LESSON 8-4

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning

Lesson 8-4Lesson 8-4

declining-balance method of depreciation: multiplying the book value at the end of each fiscal period by a constant depreciation rate

sum-of-the-years’-digits method of depreciation: using fractions based on the number of years of a plant asset’s useful life

production-unit method of depreciation: calculating estimated annual depreciation expense based on the amount of production expected from a plant asset

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LESSON 8-4

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning

Lesson 8-4Lesson 8-4

Modified Accelerated Cost Recovery System: a depreciation method required by the Internal Revenue Service to be used for income tax calculation purposes for most plant assets placed in service after 1986

depletion: the decrease in the value of a plant asset because of the removal of a natural resource

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LESSON 8-4

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning

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LESSON 8-4

Plant asset: Computer

Depreciation method: Declining balance

Original cost: $2,000.00Estimated salvage value: $175.00Estimated useful life: 5 years

Year Beginning Book Value

Declining- Balance Rate

Annual Depreciation

Ending

Book Value

1

2

3

4

5

Total Depreciation

$2,000.00 1,200.00

720.00

432.00

259.20

40%

40%

40%

40%

40%

—

$ 800.00

480.00

288.00

172.80

84.20

$1,825.00

$1,200.00

720.00

432.00

259.20

175.00

—

1. Calculate the declining-balance rate.Total Depreciation Expense 100%

Estimated Useful Life (years) 5= Straight-Line Rate 20% Double the Rate 2= Declining-Balance Rate 40%

2. Calculate the annual depreciation for year 3.Beginning Book Value $720

Depreciation Rate 40%= Annual Depreciation Expense $288

DECLINING-BALANCE METHOD OF DECLINING-BALANCE METHOD OF DEPRECIATIONDEPRECIATION page 242

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LESSON 8-4

Plant asset: Computer

Depreciation method: Sum-of-the-years’-digits

Original cost: $2,000.00

Estimated salvage value: $175.00

Estimated useful life: 5 years

YearBeginning Book

Value FractionTotal

Depreciation Annual Depreciation

Ending

Book Value

1

2

3

4

5

Total

$2,000.00

1,391.67

905.00

540.00

296.67

5/15

4/15

3/15

2/15

1/15

$1,825.00

$1,825.00

$1,825.00

$1,825.00

$1,825.00

$608.33

486.67

365.00

243.33

121.67

$1,825.00

$1,391.67

905.00

540.00

296.67

175.00

2. Calculate the annual depreciation for year 1.Original Cost

$2,000.00Estimated Salvage Value

– 175.00Estimated Total Depreciation

$1,825.00Year’s Fraction

5/15Annual Depreciation

$608.33

SUM-OF-THE-YEARS’-DIGITS METHOD SUM-OF-THE-YEARS’-DIGITS METHOD OF DEPRECIATIONOF DEPRECIATION page 243

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1. Calculate the fraction. Years’ Digits Fraction1 5/15

2 4/15

3 3/15

4 2/15

5 1/15

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CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning

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LESSON 8-4

COMPARISON OF THREE COMPARISON OF THREE METHODS OF DEPRECIATIONMETHODS OF DEPRECIATION page 244

Plant asset: Computer

Depreciation method: Comparison

Original cost: $2,000.00

Estimated salvage value: $175.00

Estimated useful life: 5 years

YearStraight-Line

MethodDouble Declining-Balance Method

Sum-of-the-Years’-Digits Method

1

2

3

4

5

Total Depreciation

$365.00

365.00

365.00

365.00

365.00

$1,825.00

$ 800.00

480.00

288.00

172.80

84.20

$1,825.00

$608.33

486.67

365.00

243.33

121.67

$1,825.00

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning

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LESSON 8-4

Plant asset: Truck Depreciation method: Production-unitOriginal cost: $18,200.00Estimated salvage value: $2,000.00

Estimated total depreciation: $16,200.00Estimated useful life: 90,000 milesDepreciation rate: $0.18 per mile driven

Year Beginning Book Value

Miles Driven Annual Depreciation EndingBook Value

12345

Totals

$18,200.0016,580.0012,440.00

7,940.003,980.20

9,00023,00025,00022,000

8,00087,000

$ 1,620.004,140.004,500.003,960.001,440.00

$15,600.00

$16,580.0012,440.00

7,940.003,980.202,540.00

1. Calculate the depreciation rate.Original Cost $18,200

– Estimated Salvage Value – 2,000= Est. Total Depreciation Expense $16,200 Estimated Useful Life (miles) 90,000= Depreciation Rate $0.18/mile

2. Calculate annual depreciation for year 1.Total Miles Driven 9,000

Depreciation Rate $0.18= Annual Depreciation Exp. $1,620.00

PRODUCTION-UNIT METHOD OF PRODUCTION-UNIT METHOD OF DEPRECIATIONDEPRECIATION page 245

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CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning

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LESSON 8-4

Original Cost

DepreciationRate

=Annual

Depreciation Rate

Year 3 $2,000.00 19.20% = $384.00

CALCULATING DEPRECIATION CALCULATING DEPRECIATION EXPENSE FOR INCOME TAX PURPOSESEXPENSE FOR INCOME TAX PURPOSES page 246

Plant asset: Printer

Depreciation method: MACRS

Original cost: $2,000.00

Property class: 5 year

Year Depreciation Rate Annual Depreciation

1

2

3

4

5

6

Totals

20.00%

32.00%

19.20%

11.52%

11.52%

5.76%

100.00%

$400.00

640.00

384.00

230.40

230.40

115.20

$2,000.00

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning

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LESSON 8-4

Plant asset: Coal Mine Depreciation method: Production-unitOriginal cost: $100,000.00Estimated salvage value: $12,250.00

Estimated total depletion: $87,750.00Est. tons of recoverable coal: 50,000 tonsDepletion rate: $1.755 per ton

Year Beginning Book Value

Tons Recovered

Annual Depletion EndingBook Value

12345

Totals

$100,000.0089,470.0068,410.0045,595.0029,800.00

6,00012,00013,000

9,000 6,00046,000

$ 10,530.0021,060.0022.815.0015,795.0010,530.00

$80,730.00

$89,470.0069,410.0045,595.0029,800.0019,270.00

1. Calculate the depletion rate.Original Cost $100,000

– Estimated Salvage Value – 12,250= Est. Total Value of Coal $87,750 Est. Tons of Recoverable Coal 50,000= Depletion Rate per Ton of Coal $1.755

2. Calculate annual depletion for year 1.Tons of Coal Removed 6,000

Depletion Rate $1.755= Annual Depreciation Exp. $10,530.00

DEPLETIONDEPLETION page 247

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CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning

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LESSON 8-4

DEFINE TERMS REVIEWDEFINE TERMS REVIEWIn QuizletIn Quizlet

declining-balance method of depreciation sum-of-the-years’-digits method of depreciation production-unit method of depreciation Modified Accelerated Cost Recovery System depletion

page 248

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning

Exit Ticket for today:Exit Ticket for today:Audit Your Understanding 8-4Audit Your Understanding 8-4

1. Which depreciation method does not use the estimated salvage value to compute annual depreciation?

2. What is the basis for the production-unit method of calculating depreciation?

3. How does a mining company calculate the amount of depletion for a year?

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LESSON 8-4

In a Word Document, SaveAS: Chapter8-4AYUYourNameAnd drop in my Inbox today!

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning

Complete the following assignments for Complete the following assignments for Chapter 8-4 todayChapter 8-4 today

Define Terms Review on page 248. Answer Audit Your Understanding questions on page

248. Complete Work Together 8-4 on Aplia – page 248. Complete On Your Own 8-4 on Aplia – page 248. Complete Application Problem 8-7 on Aplia – page 253. Complete Application Problem 8-8 on Aplia – page 253. Complete Application Problem 8-9 on Aplia – page 253. Complete Application Problem 8-10 on Aplia – page 254.

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LESSON 8-4