Agribusiness Library

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Agribusiness Library

• Lesson L060091 Calculating Depreciation

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Objectives

• 1. Define depreciation, describe why assets are
  depreciated, and identify examples of depreciable
  assets.
• 2. Calculate depreciation using the straight-line
  method.
• 3. Calculate depreciation using the
  sum-the-digits method.
• 4. Calculate depreciation using the double
  declining-balance method.

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Terms

• Depreciable assets
• Depreciation
• Double declining-balance method
• Salvage value
• Straight-line method
• Sum-the-digits method
• Useful life

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What is depreciation, why are assets depreciated,
and what are some examples of depreciable assets?

• Depreciation is a term that describes the decline
  in value of an asset over time.
• Depreciation is listed as an expense
  on an income statement because of
  the loss of value
  that occurs each year.
• A. Assets are depreciated because, over time and
  due to use, the total value declines.
• Assets are not worth as much as they were when
  they were originally purchased due to wear and
  tear and extended use of the items.
• Assets are also depreciated for tax deduction
  purposes because they count as an expense in tax
  preparation.

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What is depreciation, why are assets depreciated,
and what are some examples of depreciable assets?

• B. Depreciable assets are any assets that have a
  useful life of more than one year, normally
  capital assets.
• Examples of depreciable assets include machinery,
  equipment, and breeding livestock.
• Items that appreciate in value, such as land,
  cannot be depreciated.

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How do you calculate depreciation using the
straight-line method?

• Straight-line method is a form of depreciation
  that considers original cost, salvage value, and
  life of an item and deducts the same amount of
  depreciation each year of its useful life.
• It is the easiest and most
  commonly used method of
  
  depreciation.
• A. Salvage value is the
  remaining value of an asset
  at the end
  of its useful life.

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How do you calculate depreciation using the
straight-line method?

• B. Useful life is the number or years that a
  depreciable asset is expected to be in use.
• The Internal Revenue Service provides a table to
  use as a guide to determine the useful life of
  most assets.
• C. The straight-line method of depreciation is
  calculated by taking the original cost of the
  item minus the salvage value, divided by useful
  life in years.
• The same amount of depreciation is taken each
  year of the items useful life.

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How do you calculate depreciation using the
sum-the-digits method?

• Sum-the-digits method is a form of depreciation
  that uses the sum of the years of useful life,
  original cost, and the salvage value of an asset.
• The percentage of depreciation declines each year
  of useful life of the asset.
• A. The sum-the-digits method is calculated by
  taking the total years of useful life of the
  asset, divided by the sum of the digits of the
  life, multiplied by the original cost, minus the
  salvage value.
• B. To calculate the sum-the-digits method of
  depreciation, the following variables are
  required
• 1. Useful life of an item
• 2. Salvage value
• 3. Original cost

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How do you calculate depreciation using the
double declining-balance method?

• Double declining-balance method is an accelerated
  form of depreciation that takes into account the
  original cost, salvage value,
  and useful life of an
  asset
  while also considering the fact
  that an asset will lose most
  of its
  value during the first few
  years of its useful life.
• The double declining-balance
  method of depreciation also converts
  to the straight line method of depreciation once
  the straight line value exceeds the amount
  calculated from the double declining-balance
  method.

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How do you calculate depreciation using the
double declining-balance method?

• B. For any given year during the useful life of
  an asset, the owner should use the straight line
  method of depreciation if it provides a larger
  depreciation amount.
• A. To calculate the double declining-balance
  method of depreciation, the following variables
  are required
• 1. Current value of the asset
• 2. Useful life of the item
• C. The algebraic equation is written as
• Amount (Current Value) (2 Life)

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REVIEW

• What is depreciation, why are assets depreciated,
  and what are some examples of depreciable assets?
• How do you calculate depreciation using the
  straight-line method?
• How do you calculate depreciation using the
  sum-the-digits method?
• How do you calculate depreciation using the
  double declining-balance method?