5. Example For all illustrations in this appendix, we will assume that a delivery van was purchased for $40,000. It has a five-year useful life and salvage value of $4,000.

6. Straight-line Method Under this method, an equal amount of depreciation will be taken each period. STEP #1: Compute the depreciable cost. COST SALVAGE VALUE = DEPRECIABLE COST $40,000 $4,000 = $36,000 – –

7. Straight-line Method STEP #2: Divide the depreciable cost by the expected life of the asset. Depreciation Expense per Year = Depreciable Cost Years of Life $36,000 5 years = $7,200 per year

8. Straight-line Method It is often convenient to use a depreciation rate per year. Depreciation Rate per Year = 100% Years of Life 100% 5 years = 20% 20% of the asset’s depreciable cost will be recognized as Depreciation Expense each year.

9. Straight-line Depreciation Schedule Year Depreciable Cost Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 $36,000 × = Original Cost – Salvage Value ($40,000 – $4,000)

10. Straight-line Depreciation Schedule Year Depreciable Cost Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 $36,000 × = 100% ÷ Years of Life (100% ÷ 5-year life) 20%

11. Straight-line Depreciation Schedule Year Depreciable Cost Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 $36,000 × = Depreciable Cost × Depreciation Rate ($36,000 × 20%) 20% $7,200

12. Straight-line Depreciation Schedule Year Depreciable Cost Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 $36,000 × = Since this is the first year of the asset’s life, only this year’s depreciation has accumulated. 20% $7,200 $7,200

13. Straight-line Depreciation Schedule Year Depreciable Cost Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 $36,000 × = Cost – Accumulated Depreciation ($40,000 – $7,200) 20% $7,200 $7,200 $32,800

14. Straight-line Depreciation Schedule Year Depreciable Cost Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 $36,000 × = Depreciable Cost does not change. 20% $7,200 $7,200 $32,800 2 $36,000

15. Straight-line Depreciation Schedule Year Depreciable Cost Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 $36,000 × = Depreciation Rate does not change. 20% $7,200 $7,200 $32,800 2 $36,000 20%

16. Straight-line Depreciation Schedule Year Depreciable Cost Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 $36,000 × = Depreciation Expense remains the same each year. 20% $7,200 $7,200 $32,800 2 $36,000 20% $7,200

17. Straight-line Depreciation Schedule Year Depreciable Cost Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 $36,000 × = Now two years of depreciation has accumulated. ($7,200 + $7,200) 20% $7,200 $7,200 $32,800 2 $36,000 20% $7,200 $14,400

18. Straight-line Depreciation Schedule Year Depreciable Cost Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 $36,000 × = Cost – Accumulated Depreciation ($40,000 – $14,400) 20% $7,200 $7,200 $32,800 2 $36,000 20% $7,200 $14,400 $25,600

19. Straight-line Depreciation Schedule Year Depreciable Cost Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 $36,000 × = Book Value declines over the life of the asset. 20% $7,200 $7,200 $32,800 2 $36,000 20% $7,200 $14,400 $25,600

20. Straight-line Depreciation Schedule Year Depreciable Cost Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 $36,000 20% × = $7,200 $7,200 $32,800 2 $36,000 20% $7,200 $14,400 $25,600 3 $36,000 20% $7,200 $21,600 $18,400 4 $28,800 $36,000 20% $7,200 $11,200 5 $36,000 20% $7,200 $36,000 The entire Depreciable Cost has now been recognized as Depreciation Expense.

21. Straight-line Depreciation Schedule Year Depreciable Cost Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 $36,000 20% × = $7,200 $7,200 $32,800 2 $36,000 20% $7,200 $14,400 $25,600 3 $36,000 20% $7,200 $21,600 $18,400 4 $28,800 $36,000 20% $7,200 $11,200 5 $36,000 20% $7,200 $36,000 Book Value now matches the Salvage Value. $4,000

24. Sum-of-the-years’-digits FORMULA : DEPRECIABLE COST Remember, Depreciable Cost = Original Cost – Salvage Value.

25. Sum-of-the-years’-digits FORMULA : DEPRECIABLE COST × YEARS REMAINING This is measured from the beginning of the year. For example, to calculate the first year’s depreciation…we would say there are 5 years remaining.

26. Sum-of-the-years’-digits FORMULA : DEPRECIABLE COST × YEARS REMAINING 5-YEAR LIFE = 5 + 4 + 3 + 2 + 1 OR 15 10-YEAR LIFE = 10 + 9 + 8 + 7 + 6 + 5 + 4 + 3 + 2 + 1 OR 55 SUM-OF-THE-YEARS’-DIGITS

27. Sum-of-the-years’-digits Depreciation Schedule Year Depreciable Cost Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 $36,000 × = Original Cost – Salvage Value ($40,000 – $4,000)

28. Sum-of-the-years’-digits Depreciation Schedule Year Depreciable Cost Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 $36,000 × = Original Cost – Salvage Value ($40,000 – $4,000) 5/15

29. Sum-of-the-years’-digits Depreciation Schedule $36,000 Five years remaining divided by sum-of-years’-digits of 15 (5 + 4 + 3 + 2 + 1) 5/15 Year Depreciable Cost Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 × =

30. Sum-of-the-years’-digits Depreciation Schedule $36,000 $36,000 × 5/15 5/15 $12,000 Year Depreciable Cost Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 × =

31. Sum-of-the-years’-digits Depreciation Schedule $36,000 The sum-of-the-years’-digits method recognizes large amounts of depreciation in the first year of the asset’s life and smaller amounts each subsequent year. 5/15 $12,000 Year Depreciable Cost Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 × =

32. Sum-of-the-years’-digits Depreciation Schedule $36,000 Only this first year of depreciation has accumulated so far. 5/15 $12,000 $12,000 Year Depreciable Cost Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 × =

33. Sum-of-the-years’-digits Depreciation Schedule $36,000 Original Cost – Accumulated Depreciation ($40,000 – $12,000) 5/15 $12,000 $12,000 $28,000 Year Depreciable Cost Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 × =

34. Sum-of-the-years’-digits Depreciation Schedule $36,000 Depreciable Cost does not change. 5/15 $12,000 $12,000 $28,000 2 $36,000 Year Depreciable Cost Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 × =

35. Sum-of-the-years’-digits Depreciation Schedule $36,000 Now there are four years remaining. 5/15 $12,000 $12,000 $28,000 2 4/15 $36,000 Year Depreciable Cost Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 × =

36. Sum-of-the-years’-digits Depreciation Schedule $36,000 Since the rate (fraction) is smaller, the depreciation expense is also smaller in the second year. 5/15 $12,000 $12,000 $28,000 2 4/15 $9,600 $36,000 Year Depreciable Cost Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 × =

37. Sum-of-the-years’-digits Depreciation Schedule $36,000 There are now two years of depreciation accumulated. ($12,000 + $9,600) 5/15 $12,000 $12,000 $28,000 2 $36,000 4/15 $9,600 $21,600 Year Depreciable Cost Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 × =

38. Sum-of-the-years’-digits Depreciation Schedule $36,000 Book Value falls as the asset ages. 5/15 $12,000 $12,000 $28,000 2 4/15 $9,600 $21,600 $18,400 $36,000 Year Depreciable Cost Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 × =

39. Sum-of-the-years’-digits Depreciation Schedule 5/15 $12,000 $12,000 $28,000 2 4/15 $9,600 $21,600 $18,400 3 3/15 $7,200 $28,800 $11,200 4 2/15 $4,800 $33,600 $6,400 5 2/15 $36,000 The entire depreciable cost has been recognized as Depreciation Expense. $36,000 $36,000 $36,000 $36,000 $36,000 $2,400 Year Depreciable Cost Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 × =

40. Sum-of-the-years’-digits Depreciation Schedule $36,000 5/15 $12,000 $12,000 $28,000 2 4/15 $9,600 $21,600 $18,400 3 3/15 $7,200 $28,800 $11,200 4 2/15 $4,800 $33,600 $6,400 5 2/15 Book Value now matches the Salvage Value. $4,000 $36,000 $36,000 $36,000 $36,000 $2,400 $36,000 Year Depreciable Cost Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 × =

43. Double-declining-balance Method FORMULA: Book Value Cost – Accumulated Depreciation = Book Value For an asset’s first year depreciation, Book Value = Original Cost.

44. Double-declining-balance Method FORMULA: Book Value × (Straight-Line Rate) 2 100% ÷ Useful Life For our example…… 100% ÷ 5 years = 20%

45. Double-declining-balance Depreciation Schedule Year Book Value (Beginning of Year) Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 $40,000 × = Original Cost – Accumulated Depreciation ($40,000 – $0)

46. Double-declining-balance Depreciation Schedule Year Book Value (Beginning of Year) Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 $40,000 × = Double the Straight-Line Rate 2 × (100% ÷ 5) or 2 × 20% 40%

47. Double-declining-balance Depreciation Schedule Year Book Value (Beginning of Year) Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 $40,000 × = Book Value × Double the Straight-Line Rate ($40,000 × 40%) 40% $16,000

48. Double-declining-balance Depreciation Schedule Year Book Value (Beginning of Year) Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 $40,000 × = The first year’s depreciation is all that has accumulated. 40% $16,000 $16,000

49. Double-declining-balance Depreciation Schedule Year Book Value (Beginning of Year) Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 $40,000 × = Original Cost – Accumulated Depreciation ($40,000 – $16,000) 40% $16,000 $16,000 $24,000

50. Double-declining-balance Depreciation Schedule Year Book Value (Beginning of Year) Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 $40,000 × = The Book Value at the end of one year becomes the next year’s beginning Book Value. 40% $16,000 $16,000 $24,000 2 $24,000

51. Double-declining-balance Depreciation Schedule Year Book Value (Beginning of Year) Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 $40,000 × = The rate will be the same every year (always double the straight-line rate). 40% $16,000 $16,000 $24,000 2 $24,000 40%

52. Double-declining-balance Depreciation Schedule Year Book Value (Beginning of Year) Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 $40,000 × = Depreciation Expense will be smaller each year because the book value is declining each year. 40% $16,000 $16,000 $24,000 2 $24,000 40% $9,600

53. Double-declining-balance Depreciation Schedule Year Book Value (Beginning of Year) Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 $40,000 × = Two years’ depreciation has accumulated… ($16,000 + $9,600) 40% $16,000 $16,000 $24,000 2 $24,000 40% $9,600 $25,600

54. Double-declining-balance Depreciation Schedule Year Book Value (Beginning of Year) Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 $40,000 × = Original Cost – Accumulated Depreciation ($40,000 – $25,600) 40% $16,000 $16,000 $24,000 2 $24,000 40% $9,600 $25,600 $14,400

55. Double-declining-balance Depreciation Schedule Year Book Value (Beginning of Year) Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 $40,000 × = $16,000 $16,000 $24,000 2 $24,000 Book Value can fall only to the amount of the Salvage Value. ($5,184 – $4,000 = $1,184 to go!!) 40% 40% $9,600 $25,600 $14,400 3 $14,400 40% $5,760 $31,360 $8,640 4 $8,640 40% $3,456 $34,816 $5,184

56. Double-declining-balance Depreciation Schedule Year Book Value (Beginning of Year) Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 $40,000 × = $16,000 $16,000 $24,000 2 $24,000 Book Value × Rate = $2,074. This would be too much depreciation. We can only recognize $1,184. 40% 40% $9,600 $25,600 $14,400 3 $14,400 40% $5,760 $31,360 $8,640 4 $8,640 40% $3,456 $34,816 $5,184 5 $5,184 $1,184

57. Double-declining-balance Depreciation Schedule Year Book Value (Beginning of Year) Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 $40,000 × = $16,000 $16,000 $24,000 2 $24,000 Book Value has reached the Salvage Value. 40% 40% $9,600 $25,600 $14,400 3 $14,400 40% $5,760 $31,360 $8,640 4 $8,640 40% $3,456 $34,816 $5,184 5 $5,184 $1,184 $36,000 $4,000

60. MACRS Example A delivery van was purchased for $40,000. It has a five-year useful life and salvage value of $4,000. The IRS would give this van a six-year life and no salvage value.

61. MACRS Depreciation Schedule Year Cost Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 $40,000 × = The IRS doesn’t allow a salvage value for this asset.

62. MACRS Depreciation Schedule Year Cost Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 $40,000 × = The IRS sets the first-year rate at 20%. 20%

63. MACRS Depreciation Schedule Year Cost Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 $40,000 × = Cost × Rate ($40,000 × 20%) 20% $8,000

64. MACRS Depreciation Schedule Year Cost Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 $40,000 × = Cost – Accumulated Depreciation ($40,000 – $8,000) 20% $8,000 $8,000 $32,000

65. MACRS Depreciation Schedule Year Cost Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 $40,000 × = The IRS has a larger second-year rate. 20% $8,000 $8,000 $32,000 2 $40,000 32%

66. MACRS Depreciation Schedule Year Cost Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 $40,000 × = 20% $8,000 $8,000 $32,000 2 $40,000 32% $12,800 $20,800 $19,200 3 $40,000 19.20% Each year has a different rate.

67. MACRS Depreciation Schedule Year Cost Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 $40,000 × = 20% $8,000 $8,000 $32,000 2 $40,000 32% $12,800 $20,800 $19,200 3 $40,000 19.20% $7,680 $28,480 $11,520 4 $40,000 11.52% $4,608 $33,088 $6,912 5 $40,000 11.52% $4,608 $37,696 $2,304 6 $40,000 5.76% 100% At the end of the 6 years, 100% of the asset’s cost will have been recognized as Depreciation Expense.

68. MACRS Depreciation Schedule Year Cost Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 $40,000 × = 20% $8,000 $8,000 $32,000 2 $40,000 32% $12,800 $20,800 $19,200 3 $40,000 19.20% $7,680 $28,480 $11,520 4 $40,000 11.52% $4,608 $33,088 $6,912 5 $40,000 11.52% $4,608 $37,696 $2,304 6 $40,000 5.76% 100% $2,304 $40,000 $0 $40,000