Straight-Line Depreciation
Allocates an equal amount of the depreciable cost based on
time to each year (month) of the asset’s service life.
Straight-Line
Depreciation
Asset cost - Estimated residual value
=
Asset’s service life (Years or Months)
The result of this formula is then expensed annually (can also be monthly).
Date
Accounts
Depreciation Expense
Accumulated Depreciation
Debit
2,000
Credit
2,000
7-1
Activity-Based Depreciation
Allocate an asset’s cost based on use rather than time
Step 1 Compute the average depreciation rate per unit
Depreciable Cost (Cost – Salvage Value)
Total units expected to be produced/used
Step 2 Multiply the average depreciation rate per unit by the number of
units consumed each period
Step 3 Journal entry recording a debit to depreciation expense and a credit
to accumulated depreciation.
7-2
Double Declining Balance (DDB) - STEPS
1.
Straight line Depreciation as a % - Compute straight-line deprec. in the form of a percentage.
For example, 4 year useful life = 25% of the value each year (1 / useful life)
2.
DDB Percentage Rate - Multiply the straight-line percentage rate by 2 (hence, the title of ‘double’ declining balance)
to compute the DDB percentage rate.
3.
First Year Depreciation Expense - Multiply the DDB % rate by the period’s beginning asset book value (cost less
accumulated depreciation).
***Under the DDB method, ignore the residual value of the asset in computing depreciation, except
during the last year. ***
4.
Record Depreciation Expense - Record and post the calculated depreciation expense (debit depreciation expense
and credit accumulated depreciation)
5.
Next Years Depreciation Expense - Multiply the DDB % rate by the period’s beginning asset book value (cost less
accumulated depreciation).
Determine the final year’s depreciation amount—that is, the amount needed to reduce asset book value to its
residual value.
6.
3
DDB – Example – Using
Depreciation Schedule
Date
1/1/2013
12/31/2013
12/31/2014
12/31/2015
12/30/2016
12/30/2017
4
Asset
Cost
DDB
Rate
Asset
Book Value
Depreciation
Expense
Accumulated
Depreciation
Ending Asset
Book Value
Exercise
Facts:
Bought van on January 1, 2013 for $19,000.
The van was expected to be in service for 4 years (36,000) miles.
Residual value = $2,800.
Mileage per year:




Year
Year
Year
Year
1
2
3
4
=
=
=
=
11,000
13,000
5,000
7,000
Show the depreciation for each year for Straight Line (SL), Activity Based (AB), and Double
Declining Balance (DDB).
5
Straight-line Depreciation –
Bought van on 1-1-13
4 year useful life (36,000) miles
Residual value = $2,800

What is book value at the end of year 2?
Activity Based Depreciation
Bought van on 1-1-13; 4 year useful life (36,000) miles; Residual value = $2,800
Actual usage – Year 1 – 11,000 miles; Year 2 – 13,000 miles; Year 3 – 5,000 miles;
Year 4 – 7,000 miles

What is book value at the end of year 2?
Double-declining-balance
Bought van on 1-1-13
4 year useful life (36,000) miles
Residual value = $2,800


Step 1
Step 2
Date
Asset Cost
DDB Rate
Book Value
1/1/2013
12/31/2013
12/31/2014
12/31/2015
12/31/2016
8
Depreciation
Accumulated
Ending
Expense
Depreciation
Book Value
Disposal of Long-Term Assets - STEPS
Calculate Gain or Loss on Sale/Retirement
1. Bring accumulated depreciation up-to-date to:
1.
Record depreciation expense up to date of disposal
2.
Calculate sale amount based on one of 2 scenarios
1.
Sale Price - Equals cash received (sale)
2.
Retirement, $0.00 is received.
3.
Subtract current book value (Updated after Step 1).
1.
If result is positive, record gain (credit); if negative, record loss (debit).
Journal Entry – close out asset and accumulated depreciation
1. Debit Cash if sale (if retirement, no cash is received)
2. Debit accumulated depreciation (to close out account)
3. Credit tangible asset account (to close out account)
4. Record gain (credit) or loss (debit) on disposal (New accounts – Gain with a
normal Credit Balance and Loss with a normal Debit Balance)
Recording Long-Term Asset Disposals
Little King Sandwiches purchased a new delivery truck.
Here are the specific details:
Cost of the new truck
$40,000
Estimated residual value
$5,000
Estimated service life
5 years
Assume a sale after 3 years for 22,000.
7-10