Lesson 10-8

Depreciation

Prepared By:
John Carlo A. De Ocampo
 Depreciation in General
Depreciation is the gradual reduction in the useful
value of property used in trade or business as a result
of wear and tear obsolescence.
 there is a depreciation when an item gradually loses
value due to frequent use.
(e.g. A laptop was bought in 10 years and choose to
sell it as another income)
- It means to say that when an item was already used
and choose to sell it to a customer the value of the
item will depreciate or lower the value and also the
value people will place on “2nd hand” or what we called
as the second user of that item so that the item will no
longer be the same as the brand new item.
 Requisites for Deductibility
1. Allowance for depreciation must be reasonable.
SEC 34. (F) (2) of National Internal Revenue Code
(NIRC) provides some methods of computing the
depreciation these are the following:
o Straight line method (SLN)
- Straight line depreciation is the default
method used to recognize the carrying amount of a
fixed asset evenly over its useful life.
- It is employed when there is no particular
pattern to the manner in which an asset is to be
utilized over time.
A. Straight Line Depreciation Example
• Pensive Corporation purchases the Procrastinator
Deluxe machine for $60,000. It has an estimated
salvage value of $10,000 and a useful life of five
years. Pensive calculates the annual straight-line
depreciation for the machine as:
-Purchase cost of $60,000 – estimated salvage
value of $10,000 = Depreciable asset cost of $50,000
-1 / 5-year useful life = 20% depreciation rate per
year- (Divide the estimated useful life (in years) into 1 to
arrive at the straight-line depreciation rate.)
-20% depreciation rate x $50,000 depreciable asset
cost = $10,000 annual depreciation
B. Declining Balance Method (DB)- declining Balance
Method is one among the several methods of allocating
depreciation over the useful life of an asset.
DECLINING BALANCE METHOD EXAMPLE #1
• Ram purchased a Machinery costing $11000 with a useful life
of 10 years and residual value of $1000.The rate of
Depreciation is 20%. Depreciation as per the DBM is
computed as follows:
C. Sum of years digit method (SYD)- The sum of
years’ digits method is a form of accelerated depreciation
that is based on the assumption that the productivity of the
asset decreases with the passage of time.
Formula:
The following formula is used to calculate depreciation expense
under sum of years’ digits method:
Example:
The Monster company purchased a machine on January 1, 2015. The
relevant information is given below:
• Cost of the machine: $250,000
• Expected useful life of machine: 5 years
• Salvage value: $25,000
• Required: Prepare a schedule showing the depreciation expense
of each year of the useful life of the machine using sum of years’
digits method.
• Solution:
D. Any other method which may be prescribed by the
Secretary of finance as recommended by the
Commissioner.
2. It must be for property arising out of use in the
business or trade. Property could be tangible or
intangible
Note: However that of various properties used in a
business, land is among some which are not
depreciable
3. It must be charged-off during the taxable year.
4. A statement on the allowance must be attached
to the income tax return
 Commencement and Basis of
Depreciation
- it begins with the acquisition of the property
- the basis of the computation would be the cost of the property
- Cost necessary to bring the equipment to its use (of custom
dues of Bureau of customs to release the equipment,
insurance etc.)
- Cost of improvements, additions, or the estimated value once
it has been fully utilized.
Note: The depreciation is not allowed beyond the property
acquisition cost because the purpose of depreciation is to
merely recover the investment made on the property and not to
general profit by “over-deducting” the value of the property
beyond its useful years.
Illustration: