DEPRECIATION

Depreciation Purpose of Depreciation

Value Types of Depreciation
Market Value Normal
Utility or Use Value Physical
(Useful Value) Functional
Fair Value Depreciation due to depletion
Book Value Physical and Economic Life
Salvage or Resale Value
Scrap Value
 DEPRECIATION

Depreciable Property
1. Be used in business or held for the production of income;
2. Have a definite service life, which must be longer than one
year; and
3. Be something that wears out, decays, gets used up, becomes
obsolete, or loses value from natural causes.
 DEPRECIATION

Properties that depreciates

Buildings
Machinery
Equipment
Vehicles
Intangible properties (copyrights and patents; customer subscription
lists; franchises)
Driveways
Parking lots
Landscaping
Automobile for business purpose
 DEPRECIATION

Cost Basis
Includes the actual cost of an asset and all incidental expenses,
such as freight, site preparation and installation.
Total cost, rather than the cost of the asset only.

As assets cost basis is used in figuring depreciation deductions

and in calculating the gain or loss to the firm if the asset is ever
sold or salvaged.
 DEPRECIATION

Cost Basis
1. Raymond Stamping Services purchased a stamping machine
prices at $21,500. The firm had to pay a sales tax of $1,200
on this purchase. Raymond also paid the inbound
transportation charges of $525 on the new machine, as well
as a labor cost of $1,350 to install the machine in the factory.
In addition, Raymond has to prepare the site before
installation at a cost of $2,125. Determine the cost basis for
the new machine for depreciation purposes.
 DEPRECIATION

Cost Basis
Cost of a new stamping machine $22,700
Freight 525
Installation labor 1,350
Site preparation 2,125
Cost of machine (cost basis) $26,700
 Ways of DEPRECIATION

1. Book depreciation method

a. Straight Line Method
b. Sinking Fund Method
c. Declining Balance Method
d. Double Declining Balance Method
e. Sum-of-the-Years Digits Method
f. Units-of-Production
2. Tax depreciation method
a. MACRS Depreciation for Personal Property
b. MACRS Depreciation for Real Property
THE NATIONAL INTERNAL REVENUE
CODEOF THE PHILIPPINES
[Tax Reform Act of 1997]
Republic Act No. 8424
 Tax Reform Act of 1997

TITLE II - TAX ON INCOME

CHAPTER VII - ALLOWABLE DEDUCTIONS

SEC. 34. Deductions from Gross

Income
 Tax Reform Act of 1997

(F) Depreciation.
(1) General Rule. - There shall be allowed as a depreciation deduction a
reasonable allowance for the exhaustion, wear and tear (including reasonable
allowance for obsolescence) of property used in the trade or business. In the case
of property held by one person for life with remainder to another person, the
deduction shall be computed as if the life tenant were the absolute owner of the
property and shall be allowed to the life tenant. In the case of property held in
trust, the allowable deduction shall be apportioned between the income
beneficiaries and the trustees in accordance with the pertinent provisions of the
instrument creating the trust, or in the absence of such provisions, on the basis of
the trust income allowable to each.
 Tax Reform Act of 1997

(2) Use of Certain Methods and Rates. - The term "reasonable

allowance" as used in the preceding paragraph shall include, but not limited to,
an allowance computed in accordance with rules and regulations prescribed by
the Secretary of Finance, upon recommendation of the Commissioner, under any
of the following methods:(a) The straight-line method;
(b) Declining-balance method, using a rate not exceeding twice the rate which
would have been used had the annual allowance been computed under the
method described in Subsection (F) (1);
(c) The sum-of-the-years-digit method; and
(d) any other method which may be prescribed by the Secretary of Finance
upon recommendation of the Commissioner.
 DEPRECIATION

L : useful life of the property in years

Co : original cost / first cost
CL : value at the end of L / scrap value / salvage value
d : annual cost of depreciation / depreciation per year
Cn : book value at the end of n years
Dn : depreciation up to n years / total depreciation after n
years
 DEPRECIATION METHODS

1. Straight Line Method

2. Sinking Fund Method (Sinking Fund Formula)
3. Declining Balance Method
4. Double Declining Balance Method
5. Sum-of-the-Years Digits Method
6. Units-of-Production
 DEPRECIATION METHODS

1. Straight Line Method

=

( )
= =

=
 DEPRECIATION

1. A man bought an equipment which cost P524,000.00.

Freight and installation expenses cost him P31,000.00. If
the life of the equipment is 15 years with an estimated
salvage value of P120,000.00, find its book value after 8
years.
 DEPRECIATION

2. A machine costs Php 8,000.00 and an estimated life of 10

years with a salvage value of Php 500.00. What is its book
value after 8 years using straight line method?
3. Compute the annual depreciation of an automobile with
the following data:
Cost basis of the asset = $10,000;
Useful life = 5 years;
Estimated salvage value = $2,000.
 DEPRECIATION METHODS

1. Straight Line Method

2. Sinking Fund Method

= =
, %, 1+ 1
= , %,
=
 DEPRECIATION METHODS

3.Declining Balance Method (Matheson Formula)

= 1 1

= 1 = ; =

= 1

=1 =1

 DEPRECIATION METHODS

4. Double Declining Balance Method

1
2 2
= 1


2
= 1


2
= 1

 DEPRECIATION METHODS

5. Sum-of-the-Years-Digits (SYD) Method

=

= 1 + 2 + +
 DEPRECIATION

1. An equipment costing P250,000 has an estimated life of 15 years

with a book value of P30,000 at the end of the period. Compute the
depreciation charge and its book value after 10 years using sinking
fund method at 4% interest rate.
2. An industrial plant bought a generator set for P90,000. Other
expenses including installation amounted to P10,000. The generator
set is to have a life of 17 years with a salvage value at the end of life of
P5,000. Determine the depreciation charge during the 13th year and
the book value at the end of 13 years by the
a) declining balance method
 DEPRECIATION

1. A telephone company purchased a microwave radio equipment for

P6,000,000. Freight and installation charges amounted to 3% of the
purchase price. If the equipment shall be depreciated over a period of 8 years
with a salvage value of 5%, determine the following:
a. Annual depreciation charge using the straight line method.
b. Depreciation charge and total depreciation during the fifth year using the
sum-of-the-years-digit method.
2. An asset costing P50,000 has a life expectancy of 6 years and an estimated
salvage value of P8,000. Calculate the depreciation charge and the book
value at the end of the fourth period using fixed-percentage method.