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SET A

1.DEPRECIATION

-is the decrease in the value of phsical propert !ith the passa"e of

ti#e.

a$ Purpose of Depreciation1. To provide for the recover of capital !hich has %een invested in

phsical propert.

&. To ena%le the cost of depreciation to %e char"ed to the cost of

producin" products or services that result fro# the use of the propert.

%$ Tpes of Depreciation

1. Nor#al Depreciation

a. phsical ' is due to the lessenin" of the phsical a%ilit of a propert

to produce results. It(s co##on causes are !ear and deterioration.

%. functional ' is due to the lessenin" in the de#and for the function

!hich the propert !as desi"ned to render. It(s co##on causes are

inade)uac* chan"es in stles* population center shift* saturation of #ar+ets*

or #ore e,cient #achines are produced.

&. Depreciation due to chan"es in price levels ' is al#ost i#possi%le to

predict and therefore is not considered in econo# studies

. Depletion ' refers to the decrease in the value of a propert due to

the "radual etraction of its contents.

c$ Re)uire#ents of a depreciation #ethod

1. It should %e si#ple.

&. It should recover capital. The %oo+ value !ill %e reasona%l close to the #ar+et value at an

ti#e

/. The #ethod should %e accepted % the 0ureau of Internal Revenue.

d$ The Strai"ht line #ethod

-This #ethod assu#es that the loss in value is directl proportional to

the a"e of the propert.

d 2Co ' Cl$34

Dn n2Co-Cl$34

Cn Co-Dn

e. Sin+in" fund

-This #ethod assu#es that a sin+in" fund is esta%lished in !hich funds

!ill accu#ulate for replace#ent. The total depreciation that has ta+en place

up to an "iven ti#e is assu#ed to %e e)ual to the accu#ulated a#ount in

the sin+in" fund at that ti#e.

d 2Co ' Cl$3253A* i6*4$

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Dn d253A* i6* n$

Cn Co-Dn

f. Declinin" %alance

In this #ethod* so#eti#es called the constant percenta"e #ethod or

the 7atheson 5or#ula* it is assu#ed that the annual cost of depreciation is a

8ed percenta"e of the salva"e value at the %e"innin" of the ear. The ratio

of the depreciation in an ear to the %oo+ value at the %e"innin" of that

ear is constant throu"hout the life of the propert and is desi"nated % +

the rate of depreciation. This #ethod does not appl* if the salva"e value is

9ero* %ecause + !ill %e e)ual to one and d1 !ill %e e)ual to Co.

dndepreciation durin" the nth ear

dn2Co21-+$:n-1$+

Cn Co21-+$:n Co 2Cl3Co$:n34Cl Co21-+$:4

+ 1-2Cn3Co$:13n 1-2Cl3Co$:4

&. CAPITA4

a$ E)uit Capital or o!nership funds are those supplied and used % the

o!ners of an enterprise in the epectation that a pro8t !ill %e earned.

%$ 0orro!ed funds or capital are those supplied % others on !hich a 8ed

rate of interest #ust %e paid and the de%t #ust %e repaid at a speci8ed ti#e.

c. 0ond 5inancin"

A %ond is a certi8cate of inde%tedness of a corporation usuall for a

period not less than ten ears and "uaranteed % a #ort"a"e on a certain

assets of the corporation or its su%sidiaries. 0onds are issued !hen there is

need for #ore capital such as for epansion of the plant or the services

rendered % the corporation.

The face or par value of a %ond is the a#ount stated on the %ond.

;hen the face value has %een repaid* the %ond is said to have %een retired

or redee#ed. The %ond rate is the interest rate )uoted on the %ond.

d. The Corporation ' is a distinct le"al entit* separate fro# the individuals

!ho o!n it* and !hich can en"a"e in al#ost an tpe of %usiness transactionin !hich a real person could occup hi#self or herself.

Advanta"es