Depreciation of Property, Plant and Equipment

Depreciation of Property, Plant and Equipment

1. Depreciation is a process of allocating the cost of a long-lived asset.

2. If an asset is used for more than one accounting period
--> the cost of an asset is allocated to each period

3. Depreciation method should be
--> systematic and rational

4. Depreciation methods
(1) straight line depreciation
(2) double declining balance method
(3) sum-of-the-years'-digits method
(4) production based method

5. straight line depreciation
(1) depreciation base is equally allocated to each period
(2) depreciation base = cost - residual value
(3) depreciation amount = (cost - residual value) x 1/useful life of an asset

6. double declining balance method
(1) depreciation amount = beginning book value x depreciation rate
(2) book value = cost of an asset - accumulated depreciation
(3) beginning book value
= balance of book value at the beginning of period
= equals to book value at the end of previous period
(4) depreciation rate = (1/useful life) x 200%
--> because 200% is multiplied
--> this method is called "double" declining balance method

7. 150% declining balance method
(1) depreciation rate = (1/useful life) x 150%

8. sum-of-the-years'-digits method
(1) depreciation amount
= (cost - residual value) x depreciation rate for that period

(2) depreciation rate is determined as follows:

If the useful life of an asset is N periods
--> Sum-of-the-years'-digits
= 1 + 2 + 3 + ... + N
= N x (N+1) / 2

If useful life is 5 years
--> Sum-of-the-years'-digits
= 1 + 2 + 3 + 4 + 5
= 5 x (5 + 1) / 2
= 30 / 2 = 15

depreciation rate
--> for period 1 = 5 / 15
--> for period 2 = 4 / 15
--> for period 3 = 3 / 15
--> for period 4 = 2 / 15
--> for period 5 = 1 / 15

9. Production based method
(1) If an asset is designed to produce certain number of product units
--> depreciation amount = (cost - residual value) x (A) / (B)
--> (A) = number of products produced during the period
--> (B) = total number of product units expected from an asset

(2) If an asset is designed to be used for certain number of usage hours
--> depreciation amount = (cost - residual value) x (C) / (D)
--> (C) = number of hours used during the period
--> (D) = total number of usage hours expected from an asset