BAF3MCalculating

Depreciation II

Homework check

Page 348 Exercise 1 (A,B,C)

Page 358 Exercise 4 (A,B)

Homework: Page 348 Exercise 1 (A,B,C)

Homework: Page 358 Exercise 4 (A,B)

The TWO main ideas on how to calculate depreciation:

Straight Line Depreciation

Declining Balance Depreciation

Straight Line Depreciation

original cost – residual value---------------------------------- years of life of the asset

(Straight line depreciation spreads the use of our asset evenly over the amount of time it is used.)

Declining Balance

Let’s say we bought a car… does it lose its value evenly?

Declining Balance

With declining balance, we take off a certain percentage each year.

Year 1 Depreciation= 30% * $100,000

car= $30,000

Declining Balance

Year 2 Depreciation

Undepreciated Value of $70,000

x 30% = $21,000

Declining Balance

Let’s look at a depreciation schedule…

Year30% Depreciation

UndepreciatedValue

0 $100,0001 $30,000 $70,0002 $21,000 $49,0003 $14,700 $34,3004 $10,290 $24,0105 $7,203 $16,807

30% is taken off each year

Compare! (Straight Line vs. Declining Balance)

Year30% Depreciation

UndepreciatedValue

0 $100,0001 $30,000 $70,0002 $21,000 $49,0003 $14,700 $34,3004 $10,290 $24,0105 $7,203 $16,807

Year Straight LineUndepreciatedValue

0 $100,0001 $18,000 $82,0002 $18,000 $64,0003 $18,000 $46,0004 $18,000 $28,0005 $18,000 $10,000

* 10,000 residual value: 5 year useful life*

The TWO main ideas on how to calculate depreciation:

Straight Line Depreciation

Declining Balance Depreciation

NoteNote:DepreciationWith the exception of Land, all fixed assetsare expected to be ‘used up’ over a certainperiod of time. These assets decrease(or depreciate) in value.

Methods of DepreciationStraight-Line depreciation dividesthe price of an asset over its useful life. (minus itssalvage or residual value)

Declining Balance methoddecreases the value of an assetby a pre-determinedpercentage each fiscal period.

The following ‘Depreciation Schedules’ compare the two approaches.

Year30% Depreciation

UndepreciatedValue

0 $100,0001 $30,000 $70,0002 $21,000 $49,0003 $14,700 $34,3004 $10,290 $24,0105 $7,203 $16,807

Year Straight LineUndepreciatedValue

0 $100,0001 $18,000 $82,0002 $18,000 $64,0003 $18,000 $46,0004 $18,000 $28,0005 $18,000 $10,000

* 10,000 residual value: 5 year useful life*

Declining Balance

HomeworkPage 348, Exercise 1 (D,E) Exercise 2 (A,B)