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Depreciation Amortization

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					Depreciation

 Jun 1, 2012
  Depreciation (Amortization)
• An allowance made for the
  decrease in value of an asset
  over time.
    Purpose of Depreciation
• So expenses are matched with
  revenues (matching principle)
     Salvage/Residual Value
• Estimate of the asset’s value at
  the end of it’s useful life. (ex.
  Vehicles)
     Depreciation Methods
• Straight-line
• Declining-balance
• Units-of-activity
           Straight-Line
• Residual value is deducted from
  the cost of the asset to determine
  an asset’s amortizable cost (total
  amount that can be amortized)
• Amount is same for each year
               OriginalCostofAsset  Re sidualValue
Depreciation 
                       EstimatedUsefulLife
            Example

• Suppose a Truck purchased
  Jan 1st costs $20,000 has a
  useful life of 5 years and a
  residual value of $5000.
     Depreciation Amount
• Depreciation = $20,000-$5,000
                       5years
=15,000 = 3000
    5

The Truck depreciates $3000/year
            Straight-Line

                  Accumulated
Year Depreciation Depreciation BookValue
 0        0            0         20000
 1      3000         3000        17000
 2      3000         6000        14000
 3      3000         9000        11000
 4      3000         12000        8000
 5      3000         15000        5000
Adjusting for Depreciation
       Accounts involved:
• Accumulated Depreciation - Truck
• Depreciation Expense – Truck
  Why use the accumulated
depreciation account instead of
     just crediting truck?
Allows us to see more
     information.
 Declining-balance method
• Produces a decreasing annual
  amortization expense over the
  asset’s useful life.
• Amortization is determined as a
  percentage of the book value.

• Amortization = rate(%) x Book
  value($)
         When to use it?
• When asset is more useful earlier
  on (Follows matching principle)
• When asset losses usefulness
  quickly (Sometimes items
  become obsolete quickly)
               Example
• Suppose a vehicle costs $100,000, which
  was purchased Jan 1, 2012 and declines
  at a rate of 30% per year.
• Calculate the amortization and book value
  at the end of 2012 as well as 2013
             2012
• Amortization
= 100,000*30%
=$30,000

New Book Value
=100,000-30,000
=$70,000
                 2013
• Amortization
= 70,000*30%
=$21,000

New Book Value
=70,000-21,000
=49,000
                   Remark
• After only two years,   120000



  the vehicle is worth    100000


  have of its original    80000

  book value.
                                                           Year
                          60000
                                                           BookValue


                          40000



                          20000



                              0
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posted:10/30/2012
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