16.5 comparing depreciation methods

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16.5 COMPARING DEPRECIATION METHODS

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  1. 1. 16.5 COMPARING DEPRECIATION METHODS
  2. 2. Michael Allison, Trinity Grammar School. Authors permission required for external use A business purchased a vehicle with the following details: Cost = $32,000 Estimated useful life = 4 years Estimated residual value = $12,800 The firm is debating which depreciation 16.5 COMPARING DEPRECIATION METHODS Reducing Balance Depreciation @ 20% Straight-Line Depreciation or
  3. 3. Michael Allison, Trinity Grammar School. Authors permission required for external use A business purchased a vehicle with the following details: Cost = $32,000 Estimated useful life = 4 years Estimated residual value = $12,800 Straight-Line Depreciation Expense = ResidualCost - Useful Life = $4,800 = 12,80032,000 - 4 Year Depreciation Accumulated Depreciation Carrying Value Year Depreciation Accumulated Depreciation Carrying Value 1 4,800 4,800 27,200 Year Depreciation Accumulated Depreciation Carrying Value 1 4,800 4,800 27,200 2 4,800 9,600 22,400 Year Depreciation Accumulated Depreciation Carrying Value 1 4,800 4,800 27,200 2 4,800 9,600 22,400 3 4,800 14,400 17,600 Year Depreciation Accumulated Depreciation Carrying Value 1 4,800 4,800 27,200 2 4,800 9,600 22,400 3 4,800 14,400 17,600 4 4,800 19,200 12,800 Straight-Line Depreciation 16.5 COMPARING DEPRECIATION METHODS
  4. 4. Michael Allison, Trinity Grammar School. Authors permission required for external use A business purchased a vehicle with the following details: Cost = $32,000 Estimated useful life = 4 years Estimated residual value = $12,800 Reducing Balance @ 20%= Carrying Value at end of period Reducing Balance Depreciation Expense x Reducing Balance Depreciation @ 20% 16.5 COMPARING DEPRECIATION METHODS Depreciation Expense Accumulated Depreciation Carrying Value 1 20% x $32,000 = $6,400 = $6,400 $32,000 - $6,400 = $25,600 2 20% x $25,600 = $5,120 $6,400 + $5,120 = $11,520 $32,000 - $11,520 = $20,480 3 20% x $20,480 = $4,096 $11,520 + $4,096 = $15,616 $32,000 - $15,616 = $16,384 4 20% x $16,384 = $3,277 $15,616 + $3,277 = $18,892 $32,000 - $18,892 = $13,107 Depreciation Expense Accumulated Depreciation Carrying Value 1 20% x $32,000 = $6,400 = $6,400 $32,000 - $6,400 = $25,600 2 20% x $25,600 = $5,120 $6,400 + $5,120 = $11,520 $32,000 - $11,520 = $20,480 3 20% x $20,480 = $4,096 $11,520 + $4,096 = $15,616 $32,000 - $15,616 = $16,384 4 20% x $16,384 = $3,277 $15,616 + $3,277 = $18,892 $32,000 - $18,892 = $13,107 Depreciation Expense Accumulated Depreciation Carrying Value 1 20% x $32,000 = $6,400 = $6,400 $32,000 - $6,400 = $25,600 2 20% x $25,600 = $5,120 $6,400 + $5,120 = $11,520 $32,000 - $11,520 = $20,480 3 20% x $20,480 = $4,096 $11,520 + $4,096 = $15,616 $32,000 - $15,616 = $16,384 4 20% x $16,384 = $3,277 $15,616 + $3,277 = $18,892 $32,000 - $18,892 = $13,107 Depreciation Expense Accumulated Depreciation Carrying Value 1 20% x $32,000 = $6,400 = $6,400 $32,000 - $6,400 = $25,600 2 20% x $25,600 = $5,120 $6,400 + $5,120 = $11,520 $32,000 - $11,520 = $20,480 3 20% x $20,480 = $4,096 $11,520 + $4,096 = $15,616 $32,000 - $15,616 = $16,384 4 20% x $16,384 = $3,277 $15,616 + $3,277 = $18,892 $32,000 - $18,892 = $13,107 Depreciation Expense Accumulated Depreciation Carrying Value 1 20% x $32,000 = $6,400 = $6,400 $32,000 - $6,400 = $25,600 2 20% x $25,600 = $5,120 $6,400 + $5,120 = $11,520 $32,000 - $11,520 = $20,480 3 20% x $20,480 = $4,096 $11,520 + $4,096 = $15,616 $32,000 - $15,616 = $16,384 4 20% x $16,384 = $3,277 $15,616 + $3,277 = $18,892 $32,000 - $18,892 = $13,107 Depreciation Expense Accumulated Depreciation Carrying Value 1 20% x $32,000 = $6,400 = $6,400 $32,000 - $6,400 = $25,600 2 20% x $25,600 = $5,120 $6,400 + $5,120 = $11,520 $32,000 - $11,520 = $20,480 3 20% x $20,480 = $4,096 $11,520 + $4,096 = $15,616 $32,000 - $15,616 = $16,384 4 20% x $16,384 = $3,277 $15,616 + $3,277 = $18,892 $32,000 - $18,892 = $13,107 Depreciation Expense Accumulated Depreciation Carrying Value 1 20% x $32,000 = $6,400 = $6,400 $32,000 - $6,400 = $25,600 2 20% x $25,600 = $5,120 $6,400 + $5,120 = $11,520 $32,000 - $11,520 = $20,480 3 20% x $20,480 = $4,096 $11,520 + $4,096 = $15,616 $32,000 - $15,616 = $16,384 4 20% x $16,384 = $3,277 $15,616 + $3,277 = $18,892 $32,000 - $18,892 = $13,107 Depreciation Expense Accumulated Depreciation Carrying Value 1 20% x $32,000 = $6,400 = $6,400 $32,000 - $6,400 = $25,600 2 20% x $25,600 = $5,120 $6,400 + $5,120 = $11,520 $32,000 - $11,520 = $20,480 3 20% x $20,480 = $4,096 $11,520 + $4,096 = $15,616 $32,000 - $15,616 = $16,384 4 20% x $16,384 = $3,277 $15,616 + $3,277 = $18,892 $32,000 - $18,892 = $13,107 Depreciation Expense Accumulated Depreciation Carrying Value 1 20% x $32,000 = $6,400 = $6,400 $32,000 - $6,400 = $25,600 2 20% x $25,600 = $5,120 $6,400 + $5,120 = $11,520 $32,000 - $11,520 = $20,480 3 20% x $20,480 = $4,096 $11,520 + $4,096 = $15,616 $32,000 - $15,616 = $16,384 4 20% x $16,384 = $3,277 $15,616 + $3,277 = $18,892 $32,000 - $18,892 = $13,107 Depreciation Expense Accumulated Depreciation Carrying Value 1 20% x $32,000 = $6,400 = $6,400 $32,000 - $6,400 = $25,600 2 20% x $25,600 = $5,120 $6,400 + $5,120 = $11,520 $32,000 - $11,520 = $20,480 3 20% x $20,480 = $4,096 $11,520 + $4,096 = $15,616 $32,000 - $15,616 = $16,384 4 20% x $16,384 = $3,277 $15,616 + $3,277 = $18,892 $32,000 - $18,892 = $13,107 Depreciation Expense Accumulated Depreciation Carrying Value 1 20% x $32,000 = $6,400 = $6,400 $32,000 - $6,400 = $25,600 2 20% x $25,600 = $5,120 $6,400 + $5,120 = $11,520 $32,000 - $11,520 = $20,480 3 20% x $20,480 = $4,096 $11,520 + $4,096 = $15,616 $32,000 - $15,616 = $16,384 4 20% x $16,384 = $3,277 $15,616 + $3,277 = $18,892 $32,000 - $18,892 = $13,107 Depreciation Expense Accumulated Depreciation Carrying Value 1 20% x $32,000 = $6,400 = $6,400 $32,000 - $6,400 = $25,600 2 20% x $25,600 = $5,120 $6,400 + $5,120 = $11,520 $32,000 - $11,520 = $20,480 3 20% x $20,480 = $4,096 $11,520 + $4,096 = $15,616 $32,000 - $15,616 = $16,384 4 20% x $16,384 = $3,277 $15,616 + $3,277 = $18,892 $32,000 - $18,892 = $13,107 Depreciation Expense Accumulated Depreciation Carrying Value 1 20% x $32,000 = $6,400 = $6,400 $32,000 - $6,400 = $25,600 2 20% x $25,600 = $5,120 $6,400 + $5,120 = $11,520 $32,000 - $11,520 = $20,480 3 20% x $20,480 = $4,096 $11,520 + $4,096 = $15,616 $32,000 - $15,616 = $16,384 4 20% x $16,384 = $3,277 $15,616 + $3,277 = $18,892 $32,000 - $18,892 = $13,107
  5. 5. Michael Allison, Trinity Grammar School. Authors permission required for external use Cost $32,000 $4,800 Carrying Value $27,200 Carrying Value $22,400 Carrying Value $17,600 Straight-line depreciation $4,800 $4,800 0 1 2 3 4 $4,800 Carrying Value $12,800 Cost $32,000 32,000 x 20% = $6,400 Carrying Value $25,600 Carrying Value $20,480 Carrying Value $16,384 Reducing balance depreciation 0 1 2 3 4 Carrying Value $13,107 25,600 x 20% = $5,120 20,480 x 20% = $4,096 16,384 x 20% = $3,277 16.5 COMPARING DEPRECIATION METHODS
  6. 6. Michael Allison, Trinity Grammar School. Authors permission required for external use Comparison Reducing Balance Depreciation @ 20% Straight-Line Depreciation 16.5 COMPARING DEPRECIATION METHODS Year Depreciation Accumulated Depreciation Carrying Value 1 4,800 4,800 27,200 2 4,800 9,600 22,400 3 4,800 14,400 17,600 4 4,800 19,200 12,800 Total 19,200 Year Depreciation Accumulated Depreciation Carrying Value 1 6,400 6,400 25,600 2 5,120 11,520 20,480 3 4,096 15,616 16,384 4 3,277 18,892 13,107 Total 18,893 Year Depreciation Accumulated Depreciation Carrying Value 1 4,800 4,800 27,200 2 4,800 9,600 22,400 3 4,800 14,400 17,600 4 4,800 19,200 12,800 Total 19,200 Year Depreciation Accumulated Depreciation Carrying Value 1 6,400 6,400 25,600 2 5,120 11,520 20,480 3 4,096 15,616 16,384 4 3,277 18,892 13,107 Total 18,893 Year Depreciation Accumulated Depreciation Carrying Value 1 4,800 4,800 27,200 2 4,800 9,600 22,400 3 4,800 14,400 17,600 4 4,800 19,200 12,800 Total 19,200 Year Depreciation Accumulated Depreciation Carrying Value 1 6,400 6,400 25,600 2 5,120 11,520 20,480 3 4,096 15,616 16,384 4 3,277 18,892 13,107 Total 18,893 Year Depreciation Accumulated Depreciation Carrying Value 1 4,800 4,800 27,200 2 4,800 9,600 22,400 3 4,800 14,400 17,600 4 4,800 19,200 12,800 Total 19,200 Year Depreciation Accumulated Depreciation Carrying Value 1 6,400 6,400 25,600 2 5,120 11,520 20,480 3 4,096 15,616 16,384 4 3,277 18,892 13,107 Total 18,893 Year Depreciation Accumulated Depreciation Carrying Value 1 4,800 4,800 27,200 2 4,800 9,600 22,400 3 4,800 14,400 17,600 4 4,800 19,200 12,800 Total 19,200 Year Depreciation Accumulated Depreciation Carrying Value 1 6,400 6,400 25,600 2 5,120 11,520 20,480 3 4,096 15,616 16,384 4 3,277 18,892 13,107 Total 18,893 Year Depreciation Accumulated Depreciation Carrying Value 1 4,800 4,800 27,200 2 4,800 9,600 22,400 3 4,800 14,400 17,600 4 4,800 19,200 12,800 Total 19,200 Year Depreciation Accumulated Depreciation Carrying Value 1 6,400 6,400 25,600 2 5,120 11,520 20,480 3 4,096 15,616 16,384 4 3,277 18,892 13,107 Total 18,893
  7. 7. Michael Allison, Trinity Grammar School. Authors permission required for external use Comparison Straight-line charges the same amount of depreciation each period Reducing-balance charges more depreciation in the earlier periods Reducing-balance depreciation decreases as the asset gets older 4,800 4,800 4,800 4,800 6,400 5,120 4,096 3,277 Year 1 Year 2 Year 3 Year 4 Depreciation Expense Straight-Line Reducing-Balance 16.5 COMPARING DEPRECIATION METHODS
  8. 8. Michael Allison, Trinity Grammar School. Authors permission required for external use 4,800 9,600 14,400 19,200 6,400 11,520 15,616 18,892 Year 1 Year 2 Year 3 Year 4 Accumulated Depreciation Straight-Line Reducing-Balance Comparison Both methods end up charging the same (or similar) amount of depreciation at the end of the assets useful life But: Reducing balance charges more at the start of the assets life Reducing balance charges less at the end of the assets useful life 16.5 COMPARING DEPRECIATION METHODS
  9. 9. Michael Allison, Trinity Grammar School. Authors permission required for external use 27,200 22,400 17,600 12,800 25,600 20,480 16,384 13,107 Year 1 Year 2 Year 3 Year 4 Carrying Value Straight-Line Reducing-Balance Comparison Both methods end up with the same (or similar) carrying value at the end of the assets useful life The asset is more valuable in the Balance Sheet in the early years under the straight- line method 16.5 COMPARING DEPRECIATION METHODS
  10. 10. Michael Allison, Trinity Grammar School. Authors permission required for external use Which depreciation method should a business choose? The method selected should be the one that best satisfies Reporting Period Principle: Pick the method that best matches the amount of depreciation to the amount of revenue generated each period Relevance: Pick the method that calculate the most accurate profit so good decisions can be made This will be the method which best matches the revenue earned by the asset with the depreciation incurred 16.5 COMPARING DEPRECIATION METHODS
  11. 11. Michael Allison, Trinity Grammar School. Authors permission required for external use To do this, the revenue generating pattern of each asset must be analysed Reducing Balance Depreciation Straight-Line Depreciation used when used when The asset has the same revenue earning capacity over its entire useful life The asset earns more revenue in its earlier years than in its later years 16.5 COMPARING DEPRECIATION METHODS
  12. 12. Michael Allison, Trinity Grammar School. Authors permission required for external use If the asset generates the same revenue throughout its life then straight-line depreciation will best match revenues and expenses If the asset generates the more revenue in its early years then reducing-balance depreciation will best match revenues and expenses 2015 2016 2017 Revenue = $10,000 Revenue = $10,000 Revenue = $10,000 Depreciation = $2,000- Depreciation = $2,000- Depreciation = $2,000- 2015 2016 2017 Revenue = $25,000 Revenue = $17,500 Revenue = $10,000 Depreciation = $10,000- Depreciation = $7,000- Depreciation = $5,000- 16.5 COMPARING DEPRECIATION METHODS
  13. 13. Michael Allison, Trinity Grammar School. Authors permission required for external use In the real world 16.5 COMPARING DEPRECIATION METHODS
  14. 14. Michael Allison, Trinity Grammar School. Authors permission required for external use TASK In-class Homework SQ3 X SQ4 X SQ5 X SQ6 X SQ8 X SQ9 X SQ10 X