DEPRECIATION

DEPRECIATION
■ Defined as the systematic allocation of the
depreciable amount of an asset over the
useful life.
■ A matter of cost allocation in recognition of the
exhaustion of the useful life of an item of
property, plant and equipment.
Factors of Depreciation
■ Depreciable amount
– Cost of an asset less the residual value
■ Residual value
– Estimated net amount currently obtainable if the
asset is at the end of the useful life
■ Useful life
– Period over which an asset is expected to be
available for use or the number of production
units expected to be obtained from the asset
Methods of Depreciation
1. Equal or uniform charge methods
2. Variable charge or use-factor or activity methods
3. Decreasing charge or accelerated or diminishing
balance methods
Methods of Depreciation
1. Equal or uniform charge methods
• Straight line method
• Composite method
• Group method
Straight line method
ILLUSTRATION
■ The following data relate to an equipment
acquired at the beginning of 2024:
Equipment 105,000
Residual value 5,000
Useful life 5 years

What amount should be reported as depreciation for

2024?
SOLUTION
Annual Depreciation = (105,000 – 5,000) / 5
Annual Depreciation = 20,000
Year Annual Depreciation
2024 20,000
2025 20,000
2026 20,000
2027 20,000
2028 20,000
Composite Method
■ Assets that are
dissimilar in
nature or assets
that have different
physical
characteristics and
vary widely in
useful life, are
grouped and
treated as a single
unit.
ILLUSTRATION
Asset Cost Residual Useful
Value Life
Building 650,000 50,000 15
Machinery 220,000 20,000 8
Equipment 130,000 30,000 4
ILLUSTRATION
Asset Cost Residual Useful
Value Life
Building 650,000 50,000 15
Machinery 220,000 20,000 8
Equipment 130,000 30,000 4
■ Steps to do:
1. Identify the depreciable amount per asset
2. Identify the annual depreciation per asset
 SOLUTION
Asset Cost Residual Useful Depreciable Annual
Value Life Amount Depreciation
Building 650,000 50,000 15 600,000 40,000
Machinery 220,000 20,000 8 200,000 25,000
Equipment 130,000 30,000 4 100,000 25,000
1,000,000 100,000 900,000 90,000

Composite Rate = 90,000 / 1,000,000 = 9%

Annual Depreciation = 1,000,000 x 9% = 90,000
 SOLUTION
Asset Cost Residual Useful Depreciable Annual
Value Life Amount Depreciation
Building 650,000 50,000 15 600,000 40,000
Machinery 220,000 20,000 8 200,000 25,000
Equipment 130,000 30,000 4 100,000 25,000
1,000,000 100,000 900,000 90,000

Composite Life = 900,000 / 90,000 = 10 years

Annual Depreciation = 900,000 / 10 years = 90,000
Group Method
■ Assets that are similar in nature are grouped and treated as a
single unit
■ Accounting procedure and the method of computation is the
same with Composite Method
Methods of Depreciation
2. Variable charge or use-factor or activity
methods
• Working hours or service hours
• Output or production method
Working Hours/Service Hours
Method
ILLUSTRATION
Machinery, at cost 2,600,000
Residual value 100,000
Estimated useful life:
Years 5 years
Service hours 125,000
Production units 500,000
Actual Operations Service hours Unit produced
2024 30,000 110,000
2025 25,000 130,000
2026 20,000 100,000
2027 22,000 120,000
2028 28,000 40,000
TOTAL 125,000 500,000
SOLUTION
Dep. Rate /hr = (2.6M – 100,000) / 125,000 hours
Dep. Rate /hr = P20
Year Computation Annual Depreciation
2024 30,000 hrs x P20 600,000
2025 25,000 hrs x P20 500,000
2026 20,000 hrs x P20 400,000
2027 22,000 hrs x P20 440,000
2028 28,000 hrs x P20 560,000
Output/Production Method
ILLUSTRATION
Machinery, at cost 2,600,000
Residual value 100,000
Estimated useful life:
Years 5 years
Service hours 125,000
Production units 500,000
Actual Operations Service hours Unit produced
2024 30,000 110,000
2025 25,000 130,000
2026 20,000 100,000
2027 22,000 120,000
2028 28,000 40,000
TOTAL 125,000 500,000
SOLUTION
Dep. Rate /unit = (2.6M – 100,000) / 500,000 units
Dep. Rate /unit = P5
Year Computation Annual Depreciation
2024 110,000 units x P5 550,000
2025 130,000 units x P5 650,000
2026 100,000 units x P5 500,000
2027 120,000 units x P5 600,000
2028 40,000 units x P5 200,000
Methods of Depreciation
3. Decreasing charge or accelerated
or diminishing balance methods
• Sum of years’ digits
• Declining balance method
• Double declining balance
Sum of years’ digits
ILLUSTRATION
■ The following data relate to an equipment
acquired at the beginning of 2024:
Equipment 105,000
Residual value 5,000
Useful life 5 years

What amount should be reported as depreciation for

2024?
SOLUTION
SYD = 5+4+3+2+1 = 15
Depreciable Amount = 105,000 – 5,000 = 100,0000
Year Fraction Computation Annual Depreciation
2023 5/15 100,000 x 5/15 33,333
2024 4/15 100,000 x 4/15 26,667
2025 3/15 100,000 x 3/15 20,000
2026 2/15 100,000 x 2/15 13,333
2027 1/15 100,000 x 1/15 6,667

SYD = L [(L + 1) / 2]
= 5 [(5 + 1) / 2]
SYD = 15
Declining Balance Method

■ The formula cannot be used unless there is a residual value.

■ In the absence of any residual value, a nominal amount of P1
should be assumed.
Double Declining Balance Method /
200% Declining Balance Method

■ Ignore residual value

ILLUSTRATION
■ The following data relate to an equipment
acquired at the beginning of 2024:
Equipment 105,000
Residual value 5,000
Useful life 5 years

What amount should be reported as depreciation for

2024?
SOLUTION
Rate = (100% / UL) x 2
= (100% / 5) x 2
= 40%

Year Computation Annual

Depreciation
2024 105,000 x 40% 42,000
2025 (105,000 – 42,000) x 40% 25,200
2026 (105,000 – 42K – 25.2K) x 40% 15,120
2027 (105K – 42K – 25.2K – 15,120) x 40% 9,072
2028 (105K – 42K – 25.2K – 15,120 – 9,072) x 40% 5,443
150% Declining Balance Method

■ Ignore residual value

ILLUSTRATION
■ The following data relate to an equipment
acquired at the beginning of 2024:
Equipment 105,000
Residual value 5,000
Useful life 5 years

What amount should be reported as depreciation for

2024?
SOLUTION
Rate = (100% / UL) x 150%
= (100% / 5) x 150%
= 30%

Year Computation Annual

Depreciation
2024 105,000 x 30% 31,500
2025 (105,000 – 31,500) x 30% 22,050
2026 (105,000 – 31,500 – 22,050) x 30% 15,435
2027 (105,000 – 31,500 – 22,050 – 15,435) x 30% 10,805
2028 (105,000 – 31,500 – 22,050 – 15,435 – 10,805) x 30% 7,563
 CHANGE IN
DEPRECIATION
METHODS
Changes in depreciation amounts may arise
from one or combination of the following:
a. Change in total or remaining useful life
b. Change in depreciation method due to change in
manner of realization of the benefits from the PPE
c. Change in depreciable amount due to changes in the
amount of residual value or capitalization of
subsequent costs
d. Changes based on the combination of two or more
changes above
Change in accounting estimate
(prospective application)
a. On the date of change, determine the updated
carrying amount of the PPE
b. Depreciable amount is computed as the updated
carrying amount less the updated residual value,
if there is any.
c. The computed depreciable amount will then be
used for the revised depreciation computation
Change in accounting estimate
(prospective application)
d. No revisions shall be made on the previously
reported depreciation and carrying amounts of
PPEs in the prior years.
ILLUSTRATION
■ At the beginning of January 1, 2024, Ben Company
acquired an equipment for P4,000,000. This
equipment will be depreciated using the double-
declining balance method over its eight-year
useful life. On January 1, 2027, the company
changed its estimate of depreciation.

■ Case 1 – The depreciation method is changed to

straight-line method and the total useful life of the
equipment is changed to seven year.
ILLUSTRATION
■ At the beginning of January 1, 2024, Ben Company
acquired an equipment for P4,000,000. This
equipment will be depreciated using the double-
declining balance method over its eight-year
useful life. On January 1, 2027, the company
changed its estimate of depreciation.

■ Case 2 – The depreciation method is changed to

SYD method, and the remaining useful life of the
equipment is changed to four years.