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Depreciation

The term 'depreciation' in general usage usually refers to the loss of value of some asset, such as the loss in value of a family vehicle over time. However, depreciation in accounting is note measured in relation to the loss of market value of an asset over time. The term depreciation in accounting refers to the allocation of the cost of an asset over its useful life. Instead of expensing the cost of a long-term asset when it is acquired, we "capitalize" the cost of the asset and expense a portion of this cost each period that the asset is used. In this way we are better able to match the cost of the asset against revenues over multiple periods that it helps earn. 

There are three basic factors that determine the amount of depreciation expense that is allocated each year: (1) the amount to be depreciated, (2) the asset's useful life, and (3) the method/pattern of allocation that best for the particular asset. 

The Amount to Be Depreciated

The amount to be depreciated is calculated based on the assets historical cost (or book value) and its salvage value (or residual value). The salvage value is an estimate of the amount of money that will be recovered in the disposal of the asset at the end of its useful life. For example, salvage value could be the trade-in-value expected to be received for an old vehicle. Salvage vaue and residual value are usually estimates. 

Useful Life

The useful life of an asset is estimated as the amount of time that the asset is expected to contribute economic benefits to the company. An assets useful life represents the amount of time the asset is expected to be employed by the company, even if this amount of time is less than the actual, physical life of the asset. 

Methods of Cost Allocation

The pattern and method of cost allocation must also be determined in order to depreciate the asset. There is a variety of methods available including the straight-line method, accelerated methods (such as the declining balance method or sum-of-the-years' methods), activity methods (such as units of use or units of production), and special methods (such as group, composite, hybrid, or combination methods). 

Categories within Depreciation

Straight-Line Method of Depreciation

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The straight-line method is a popular method of depreciation because of its simplicity as well as the fact that a constant amount of depreciation over time often matches a machine's creeping obsolescense.

Units-of-Production Method of Depreciation

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This activity-based method of depreciation recognizes that wear and tear on a machine may come from use; therefore, a greater depreciation expense should be allocated during periods that that machine is used more.

Declining-Balance Method of Depreciation

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The declining balance method is one type of 'decreasing charge method.' Under this method, a greater depreciation expense is charged in earlier periods than later periods. This method is usually justified on the grounds that new assets provide their greatest benefits in their early years.

Straight Line, Unit of Production and Double Declining

Bob Xerox Company purchased a copier on January 1, 2013, for $22200 and paid an additional $200 for delivery charges. The copier was estimated to have a life of five years or 500,000 copies. Salvage was estimated at $2400. The copier produced 120000 copies in 2013 and 140,000 copies in 2014 .Compute the amount of depreciation

Capitalizing a trash can

There was a purchase of a trash can that is likely to last for five years. Argue for or against the capitalization of the trash can and defend your own position in relation to objective of financial reporting and qualitative characteristics of accounting information.

11-45 Present Value of MACRS Depreciation

11-45 Present Value of MACRS Depreciation Compute the PV of the MACRS tax savings for each of the following five assets: Asset Cost Recovery Period Discount Rate Tax Rate a.. $240,000 3-year 12% 35% b.. $650,000 5-year 10% 40% c.. $55,000 7-year 16% 50% d.. $900,000 10-year 8% 35% e.. $400,000

Determining Depreciation Value

On January 3, 2008, John acquired and placed into service business tools costing $10,000. The tools have a 3-year class life. No other assets were purchased during that year. The depreciation in 2011 for those tools is (ignoring Sec. 179). A. $0. B. $741. C. $1,920. D. $3,333.

Maximum Depreciation Deduction: Professor's Computer

In August of 2011, George, a college professor, acquired a computer system (5-year property) for $3,000 and used the computer 80% for teaching and research-related activities and the remaining 20% for personal use. Because George's employer provides him with a computer in his office at the university, the employer does not requi

Long Term Assets - depreciation

Disposal of Plant Assets E 14. Samson Company purchased a computer on January 2, 2009, at a cost of $1,250. The computer is expected to have a useful life of five years and a residual value of $125. Assume that the computer is disposed of on July 1, 2012. Record the depreciation expense for half a year and the disposal under

Comparison Of Depreciation Methods

Relax Designs, Inc. purchased a computerized blueprint printer that will assist in the design and display of plans for factory layouts. The cost of the printer was $45,000, and its expected useful life is four years. The company can probably sell the printer for $5,000 at the end of four years. The printer is expected to last 6,

A Discussion on Depreciation Expense

Jason sold equipment that he uses in his business for $125,000. He bought the equipment three years ago for $110,000 and has claimed $35,000 of depreciation expense. What is the amount and character of Jason's gain or loss?

Depreciation Method - Disposals of Production

Higher Company had the following disposals of production equipment during 2006: Equipment ID # /Purchase Date/Original Cost/Date of Disposal/Disposal Proceeds/Useful Life/Depreciation Method 301 2/28/1998 $70,300 10/3/2003 $14,300 10 Straight-line 415 7/3/2005 $96,000 7/19/2002 $6,300 5 150% declining-ba

Depreciation: Economics of Welding

A: Which is a better measure of the economics of welding, the way welds are currently charged or Amy Miller's proposed method? B: What assumption is Amy Miller building into her proposed method? C: Would Amy Miller's proposal increase the company's income, or would it only decrease the stated cost per frame? Assume that all

Maserati Corporation depreciation expense under the activity method for 2010

Maserati Corporation purchased a new machine for its assembly process on August 1, 2010. The cost of this machine was $150,000. The company estimated that the machine would have a salvage value of $24,000 at the end of its service life. Its life is estimated at 5 years and its working hours are estimated at 21,000 hours. Year-en

Depreciation Calculation Methods: Kleener Co Acquired A New Delivery Truck

Kleener Co acquired a new delivery truck at the beginning of it's current fiscal year. The truck cost $26k and has an estimated useful life of 4 years and an estimated salvage value of $4k. Calculate depreciation expense for each year of the trucks life using: 1. straight line depreciation. 2. double-declining balanc

Depreciation Expense and Accumulated Depreciation

Jackie Bergez works for Sea Biscuit Co. She and Bob Welch, her manager, are preparing adjusting entries for annual financial statements. Bergez computes depreciation and records it as: Depreciation Expense: Equipment . . . . . . . . . . . . . . . 123,000 Accumulated Depreciation: Equipment . . . . . . . . . 123,000 Welc

Basket Purchase Allocation: Equipment Costs and Depreciation Calculation

Crow Co. purchased some of the machinery of Hare, Inc., a bankrupt competitor, at a liquidation sale for a total cost of $33,600. Crow's cost of moving and installing the machinery totalled $3,200. See the data in the attached file. Required: a) Calculate the amount that should be recorded by Crow Co. as the cost of each

Replacement Cost Depreciation and Historical Cost Depreciation

You purchased an MRI scanner two years ago for $2.0 million. The MRI has a 5-year depreciable life with no salvage value. If that same MRI now costs $3.0 million, what would the difference between replacement cost depreciation and historical cost depreciation be? A. $1,000,000 B. $200,000 C. $600,000 D. None of the abo

Depreciation, Impairment Loss, and Recorded Cost

1. The John Company purchase a machine on Nov 1 ,2002 for $148,000. at the time of acquisition,the machine was estimated to have a useful life of ten years and an estimated salvage value of $4,000. John has recorded monthly depreciation using the straight line method.on July 1,2011,the machine was sold for $13,000. What should

Calculating Depreciation Expense

On April 2, 2013, Premier Plumbing Corporation purchased machinery for $70,000. Salvage value was estimated to be $5,000. The machinery will be depreciated over ten years using the double-declining balance method. If depreciation is computed on the basis of the nearest full month, Premier should record depreciation expense on th

Unadjusted Rated of Return

Dennis Harper lives in an area of the west that is becoming a popular tourist destination. Dennis is considering starting an off-road jeep tour business by purchasing a four-wheel-drive jeep. Because he plans to work from his house, the jeep is the only asset he will need to purchase. The jeep will cost $20,000 and will have a l

Nike 10K Form - Depreciation and Impairments

-How does Nike, Inc. address depreciation? How is it handled, and what happens if they have estimated useful life incorrectly? -How do the notes in Nike, Inc.'s Form 10-K discuss impairments, and how do they handle these in their records?

Basket purchase allocation Crow Co, depreciation calculation

Basket purchase allocation Crow Co purchased some of the machinery of Hare, Inc., a bankrupt competitor, at a liquidation sale for a total cost of $33,600. Crow's cost of moving and installing the machinery totaled $3,200. The following data are available. Hare's Net B

Capital Expenditures, Depreciation, and Disposal

Merton Company purchased a building on January 1, 2007 at a cost of 364,000. Merton estimated that the building life would be 25 years and the residual value at the end of 25 years would be 14,000. On January 1, 2008, the company made several expenditures related to the building. The entire building was painted and floors were

Depreciation of a Car

You want to buy a certain car on your 25th birthday. The car sells currently for $25,000. You estimate that the price will increase by 10 percent per year until you are ready to buy. If you just turned 18 years old and can invest to earn 12 percent, how much must you invest at the end of each year to be able to purchase the car?

Accounting ?:interest rates,bonds, depreciation,fin.statemnt

Assume that you are the financial advisor for a recently retired couple. Your clients want to invest their savings in such a way as to receive a stable stream of cash flow every year throughout their retirement. They have expressed their concerns to you regarding the volatility of long-term bond prices when interest rates fluctu

Depreciation schedule

DuPage Company purchased a factory machine at a cost of $18,000 on January 1, 2007. DuPage expected the machine to have a salvage value of $2,000 at the end of its 4-year useful life. Prepare a depreciation schedule using the straight-line method. What did you find to be the most challenging part of the problems? Explain why.

Computing depreciation expense

On January 2, 2010, Half, Inc., purchased a manufacturing machine for $864,000. The machine has an eight-year estimated life and a $144,000 estimated salvage value. Half expects to manufacture 1,800,000 units over the machine's life. During 2011, Half manufactured 300,000 units. For each item, calculate depreciation expense fo

correct land, building, and depreciation accounts

Spitfire Company was incorporated on January 2, 2013, but was unable to begin manufacturing activities until July 1, 2013, because new factory facilities were not completed until that date. The Land and Building account reported the following items during 2013: January 31 Land and building $164

accounting problem

6-24.) Problem 6-24 Purchase and use of tangible asset: three accounting cycles, double declining -balance depreciation The following transactions pertain to Optimal Solutions Inc. Assume the transactions for the purchase of the computer and any capital improvements occur on January 1 each year. 2012 1. Acquired $60,000 c