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What is the 'Depreciated Cost'
1. The value of an asset net of all accumulated depreciation that has been recorded against it. It follows the formula of:Depreciated Cost = Purchase Price (or cost basis) – {Cumulative Depreciation}
Depreciated cost is also known as the "net book value" or "adjusted cost basis".
2. In a broader economic sense, the depreciated cost for industry is the aggregate amount of capital that is "used up" in a given period, such as a fiscal year. This value can be examined for trends in capital spending and accounting aggressiveness.
Depreciation Methods
| GAAP |
Depreciation is a systematic and rational process of distributing the cost of tangible assets over the life of assets. Depreciation is a process of allocation. Cost to be allocated = acquisition cot - salvage value Allocated over the estimated useful life of assets. Allocation method should be systematic and rational. |
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| Depreciation Methods |
Depreciation methods based on timeStraight line method Declining balance method Sum-of-the-years'-digits method
Depreciation based on use (activity) |
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| Straight Line Depreciation Method |
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Depreciation = (Cost - Residual value) / Useful life [Example, Straight line depreciation] On April 1, 2011, Company A purchased an equipment at the cost of $140,000. This equipment is estimated to have 5 year useful life. At the end of the 5th year, the salvage value (residual value) will be $20,000. Company A recognizes depreciation to the nearest whole month. Calculate the depreciation expenses for 2011, 2012 and 2013 using straight line depreciation method. Depreciation for 2011 = ($140,000 - $20,000) x 1/5 x 9/12 = $18,000 Depreciation for 2012 = ($140,000 - $20,000) x 1/5 x 12/12 = $24,000 Depreciation for 2013 = ($140,000 - $20,000) x 1/5 x 12/12 = $24,000 |
| Declining Balance Depreciation Method | |||||||||||||||||||||||||||||||||||
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Depreciation = Book value x Depreciation rate Book value = Cost - Accumulated depreciation Depreciation rate for double declining balance method = Straight line depreciation rate x 200% Depreciation rate for 150% declining balance method = Straight line depreciation rate x 150% [Example, Double declining balance depreciation] On April 1, 2011, Company A purchased an equipment at the cost of $140,000. This equipment is estimated to have 5 year useful life. At the end of the 5th year, the salvage value (residual value) will be $20,000. Company A recognizes depreciation to the nearest whole month. Calculate the depreciation expenses for 2011, 2012 and 2013 using double declining balance depreciation method. Useful life = 5 years --> Straight line depreciation rate = 1/5 = 20% per year Depreciation rate for double declining balance method = 20% x 200% = 20% x 2 = 40% per year Depreciation for 2011 = $140,000 x 40% x 9/12 = $42,000 Depreciation for 2012 = ($140,000 - $42,000) x 40% x 12/12 = $39,200 Depreciation for 2013 = ($140,000 - $42,000 - $39,200) x 40% x 12/12 = $23,520 Double Declining Balance Depreciation Method
(*1)
$140,000 x 40% x 9/12 = $42,000
(*2) $98,000 x 40% x 12/12 = $39,200 (*3) $58,800 x 40% x 12/12 = $23,520 (*4) $35,280 x 40% x 12/12 = $14,112 (*5) $21,168 x 40% x 12/12 = $8,467 --> Depreciation for 2015 is $1,168 to keep book value same as salvage value. --> $21,168 - $20,000 = $1,168 (At this point, depreciation stops.) |
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[Example, 150% declining
balance depreciation]
On April 1, 2011, Company A purchased an equipment at the cost of $140,000. This equipment is estimated to have 5 year useful life. At the end of the 5th year, the salvage value (residual value) will be $20,000. Company A recognizes depreciation to the nearest whole month. Calculate the depreciation expenses for 2011, 2012 and 2013 using double declining balance depreciation method. Useful life = 5 years --> Straight line depreciation rate = 1/5 = 20% per year Depreciation rate for double declining balance method = 20% x 150% = 20% x 1.5 = 30% per year Depreciation for 2011 = $140,000 x 30% x 9/12 = $31,500 Depreciation for 2012 = ($140,000 - $31,500) x 30% x 12/12 = $32,550 Depreciation for 2013 = ($140,000 - $31,500 - $32,550) x 30% x 12/12 = $22,785 150% Declining Balance Depreciation Method
(*1)
$140,000 x 30% x 9/12 = $31,500
(*2) $108,500 x 30% x 12/12 = $32,550 (*3) $75,950 x 30% x 12/12 = $22,785 (*4) $53,165 x 30% x 12/12 = $15,950 (*5) $37,216 x 30% x 12/12 = $11,165 (*6) $26,051 x 30% x 12/12 = $7,815 --> Depreciation for 2016 is $6,051 to keep book value same as salvage value. --> $26,051 - $20,000 = $6,051 (At this point, depreciation stops.) |
| Sum-of-the-years'-digits method |
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Depreciation expense = (Cost - Salvage value) x Fraction Fraction for the first year = n / (1+2+3+...+ n) Fraction for the second year = (n-1) / (1+2+3+...+ n) Fraction for the third year = (n-2) / (1+2+3+...+ n) ... Fraction for the last year = 1 / (1+2+3+...+ n) n represents the number of years for useful life. |
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[Example, Sum-of-the-years-digits method]
Company A purchased the following asset on
January 1, 2011. What is the amount of depreciation expense for the year ended December 31, 2011? Acquisition cost of the asset --> $100,000 Useful life of the asset --> 5 years Residual value (or salvage value) at the end of useful life --> $10,000 Depreciation method --> sum-of-the-years'-digits method
Calculation of depreciation expenseSum of the years' digits = 1+2+3+4+5 = 15 Depreciation for 2011 = ($100,000 - $10,000) x 5/15 = $30,000 Depreciation for 2012 = ($100,000 - $10,000) x 4/15 = $24,000 Depreciation for 2013 = ($100,000 - $10,000) x 3/15 = $18,000 Depreciation for 2014 = ($100,000 - $10,000) x 2/15 = $12,000 Depreciation for 2015 = ($100,000 - $10,000) x 1/15 = $6,000 Sum of the years' digits for n years = 1 + 2 + 3 + ...... + (n-1) + n = (n+1) x (n / 2) Sum of the years' digits for 500 years = 1 + 2 + 3 + ...... + 499 + 500 = (500 + 1) x (500 / 2) = (501 x 500) / 2 = 125,250 |
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