Transcript - The Teachers` Beehive

21.5 DEPRECIATION
DEPRECIATION
Depreciation is the amount by which the value of an
item decreases over time.
The new reduced value of an item is known as its
book value.
Once the item has reached the stage where it can
no longer be used profitably by a company, it is sold
off. The price that the item is sold for is known as
scrap value.
TYPES OF DEPRECIATION
There are three main methods used to determine the
depreciated value of an item. These are:
• Unit Cost depreciation
• Flat Rate depreciation
• Reducing Balance depreciation
UNIT COST DEPRECIATION
Sometimes items of equipment are valued according
to the amount of use they have had rather than their
age.
For example 2 cars may have the same age but vary
significantly in relation to the kilometres travelled
(mileage). The value of the 2 cars may be different as
a result.
UNIT COST DEPRECIATION
The process of depreciating an item on the basis of
the amount of use; that is, according to the number
of units it has produced, is called unit cost
depreciation.
To calculate unit cost we use the general rule:
Unit Cost = purchase price – scrap value
total production
UNIT COST DEPRECIATION
To calculate the depreciation, and hence the book
value of the item:
Depreciation and Book Value
Depreciation (D) = unit cost x n
Book value (V) = purchase price – unit cost x n
Where n = the number of units produced
V = the book value after the production of n
units
UNIT COST DEPRECIATION
To determine the length of time the item will be in
use:
Length of time in use
Length of time in use (t) = purchase price – scrap value
average depreciation per year
Refer to Example 14 page 574
FLAT RATE DEPRECIATION
Flat rate depreciation is when the value of an item is
reduced by the same percentage of the purchase price,
or amount, for each year it is in use.
It is equivalent to simple interest.
Flat rate depreciation
D = purchase price x interest rate (p.a) x length of time
100
D = Prt_
100
FLAT RATE DEPRECIATION
To determine the book value of an item ($V), which
has a purchase price of $P, and which is
depreciating at a flat rate of r% per annum annually
for a period of time:
Book Value (flat rate depreciation)
V = purchase price – depreciation
V = P - Prt_
100
FLAT RATE DEPRECIATION
As is the case of simple interest, the relationship
between book value and age for flat rate
depreciation is linear.
For this reason, this form of depreciation is also known
as straight line depreciation.
Refer to Example 15 page 576
FLAT RATE USING CAS
Determining flat rate depreciation and book value
using the TI-Nspire CAS calculator:
Refer to page 577 and work through the example.
REDUCING BALANCE DEPRECIATION
Reducing balance depreciation is when the value of
an item is reduced by a constant percentage for
each year it is in use.
It is the equivalent, but opposite, situation to
compound interest, and the amount of the
depreciation is given by:
D=P–V
BOOK VALUE – REDUCING BALANCE
The book value of an item:
V = P x ( 1 - r_ )t
100
Note that the sign is now negative because the value of the
item is decreasing.
This relationship for reducing balance depreciation is non-linear.
Refer to Example 16 page 579
REDUCING BALANCE USING CAS
Determining reducing balance depreciation and
book value using the TI-Nspire CAS calculator:
Refer to page 580 and work through the example.