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Calculating Depreciation (Straight-Line, Units of Activity & Declining Balance Methods) - YouTube
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in Chapter ten you learned about
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depreciation so there's three different
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depreciation methods we have the
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straight-line method the units of
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activity method and the declining
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balance method let's first look at the
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straight-line method so to calculate
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your depreciation expense in the
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straight-line method we take our cost
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minus the salvage value to get our
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depreciable cost and then we take that
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depreciable cost and we divide it by our
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useful life in years to get our annual
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depreciation expense under units of
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activity we're gonna start off a similar
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way we start off with cost minus salvage
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to get our depreciable cost but then it
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changes up a bit we take that
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depreciable cost and we divide it by the
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total units of activity in that assets
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life and that's going to get us a
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depreciable cost per unit then we take
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that depreciable cost per unit and
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multiply it by the units of activity
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during this one year and that will get
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you your depreciation expense for the
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declining balance method it's a little
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bit different we start off by taking
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cost minus accumulated depreciation to
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get our book value then your textbook
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says you take the book value and you
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multiply it by double the straight-line
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rate
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well that's the same thing as your book
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value times two over the number of
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useful years and then that will equal
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your depreciation expense so let's work
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through an example
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maz贸n a Tico purchased equipment on
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November 1st 2019 the equipment cost
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$40,000 and has a salvage value of $2000
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it's expected useful life is five years
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and 10,000 working hours in 2019 the
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equipment was used for 300 hours and in
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2020 the
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equipment was used for 2,800 hours so we
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need to calculate the depreciation
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expense for 2019 and 2020 under each
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depreciation method so there's a few
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pieces that we can take from this
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problem that's going to help us figure
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out our depreciation expense first is
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our cost so we look to see how much did
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this equipment originally cost and we
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see that's $40,000
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then it's salvage value at the end of
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its life
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what could we sell this equipment for
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that's 2,000 its life in years is five
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years and its life in units is 10,000
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hours so now we can work on calculating
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our depreciation expense let's start off
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with straight-line so we start off with
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cost minus salvage equals depreciable
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cost so our cost is 40,000 we subtract
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out the 2,000 salvage and our
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depreciable cost is $38,000 then we take
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that depreciable cost divide it by its
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useful life in years to get its annual
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depreciation expense so 38,000 divided
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by five is seventy six hundred as your
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annual depreciation expense
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however in 2019 we didn't have this
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equipment for the entire year we
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purchased it on November 1st so we only
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had it for two months so we take 7600
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times two over 12 so our depreciation
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expense in 2019 is 1266 and 67 cents in
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2020 we have it for the full year so
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it's depreciation expense that year is
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7600
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now units of activity again we start off
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with cost minus salvage so we find our
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depreciable cost to be 38,000 now we
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take that depreciable cost and we divide
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it by its total units of activity in its
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life so 38,000 divided by the 10,000
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hours in its life and we will be
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depreciating at 3 dollars and 80 cents
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per hour so in 2019 tells us that the
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equipment was used for 300 hours so 3
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dollars and 80 cents times 3 hundred
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equals 1140 in 2020 we use this
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equipment for 2,800 hours so 3.8 zero
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times 2,800 equals 10,000 640 you'll
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notice we didn't have to take two
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twelfths of our 2019 depreciation amount
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that's because under units of activity
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it doesn't matter how long you've had
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this equipment for what matters is how
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much you used this equipment during that
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time now our declining balance method we
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want to take our book value and multiply
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it by 2 over the number of useful years
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well remember our book value is cost
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minus accumulated depreciation so for
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our first year here we haven't
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depreciated our equipment yet so our
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cost minus accumulated depreciation is
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still just 40,000 multiplied by 2 over 5
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to get an annual depreciation expense of
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16,000 so 2019 s depreciation we need to
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take that 16,000 multiply it by 2 over
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12 because we've only had it for 2
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so we find out that our depreciation is
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2666 dollars and 67 cents now when we
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need to do this for 2020 we need to find
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our new Book value so our new Book value
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is 40,000 minus our accumulated
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depreciation so our depreciation amount
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from the previous year and then we
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multiply that book value by two over
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five once again to get our depreciation
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expense of that 14,000 9:33 so 2020s
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depreciation since we had it for the
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full year in 2020 it's the full 14,000
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amount so here's all of our depreciation
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expense amounts under straight-lined
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units of activity and declining balance
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declining balance is going to depreciate
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more at least beginning at the start of
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an assets life so you're gonna have more
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depreciation in the early years under
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declining balance straight line straight
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line is the same amount each year as
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long as it's been a full year right so
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if we had it for all of 2019 we would
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see that our straight-line depreciation
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amount was 7600 for both 2019 and 2020
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units of activity units of activity can
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fluctuate right it's all based off of
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how much you use that equipment in that
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year
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