[Finals] Depreciation Flashcards
is the decrease in the values of physical property with the passage of time.
DEPRECIATION
is the present worth of all future profits that are to be received through ownership of a particular property.
VALUE
is the amount which a willing buyer will pay to a willing seller for the property where each has equal advantage and is under no compulsion to buy or sell.
MARKET VALUE
is what the property is worth to the owner as an operating unit.
UTILITY OR USE VALUE
is the value which is usually determined by a disinterested third party in order to establish a price that is fair to both seller and buyer.
FAIR VALUE
is the worth of a property as shown on the accounting records of an enterprise
BOOK VALUE/ DEPRECIATED BOOK VALUE
is the price that can be obtained from the sale of the property after it has been used.
SALVAGE VALUE/ RESALE VALUE
is the amount the property would sell for if disposed off as junk.
SCRAP VALUE
- To provide for the recovery if capital which has been invested in physical property.
- To enable the cost of depreciation to be charged to the cost of producing products or services that results from the use of the property.
PURPOSE OF DEPRECIATION
TYPES OF DEPRECIATION
- Normal Depreciation
- Depreciation due to changes in price levels
- Depletion
TYPES OF NORMAL DEPRECIATION
- Normal and Functional
is the length of time during which it is capable of performing the function for which it was designed and manufactured.
PHYSICAL LIFE OF A PROPERTY
is the length of time during which the property may be operated at a profit.
ECONOMIC LIFE OF PROPERTY
Symbol, Useful life of the property in years
L
Symbol, the original cost
C_o
Symbol, the value at the end of the life (e.g. scrap value, salvage value)
C_L
Symbol, the annual cost of depreciation
d
Symbol, the book value at the end of n years
C_n
Symbol, depreciation up to age n years
D_n
Depreciation Methods
- Straight Line Method
- Sinking Fund Method
- Declining Balance Method
- Double Declining Balance Method
- Sum of the Year Digits Method
- Service Output Method
This method assumes that the loss in value is directly proportional to the age of the property.
STRAIGHT LINE METHOD
This method assumes that a sinking fund is established in which funds will accumulate for replacement. The total depreciation that has taken place up to any given time is assumed to be equal to the accumulated amount of the sinking fund at that time.
SINKING FUND FORMULA
In this method, sometimes called the constant percentage method or the Matherson Formula, it is assumed that the annual cost of depreciation, is a fixed percentage of the salvage value at the beginning of the year. The ration of the depreciation in any year to the book value at the beginning of the year is constant throughout the life of the property and is designated by “k”, the rate of depreciation.
DECLINING BALANCE METHOD
Symbol, rate of depreciation
k
This method does not apply if the salvage value is zero.
DECLINING BALANCE METHOD
This method is very similar to the declining balance method except that the rate of depreciation k is replaced by 2/L
DOUBLE DECLINING BALANCE METHOD
This method assumes that the total depreciation that has taken place is directly proportional to the quantity of output of the property up to that time. This method has the advantage of making the unit cost of depreciation constant and giving low depreciation expense during periods of low production.
SERVICE OUTPUT METHOD
