AC 210 Lecture 45: Depreciation of Operating Assets

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Depreciation of Operating Assets
Depreciation is the process of allocating the cost of longlived plant assets other than
land to expense over the asset's estimated useful life. For financial reporting purposes,
companies may choose from several different depreciation methods. Before studying
some of the methods that companies use to depreciate assets, make sure you
understand the following definitions.
Useful life is an estimate of the productive life of an asset. Although usually
expressed in years, an asset's useful life may also be based on units of activity,
such as items produced, hours used, or miles driven.
Salvage value equals the value, if any, that a company expects to receive by
selling or exchanging an asset at the end of its useful life.
Depreciable cost equals an asset's total cost minus the asset's expected
salvage value. The total amount of depreciation expense assigned to an asset
never exceeds the asset's depreciable cost.
Net book value is an asset's total cost minus the accumulated depreciation
assigned to the asset. Net book value rarely equals market value, which is the
price someone would pay for the asset. In fact, the market value of an asset,
such as a building, may increase while the asset is being depreciated. Net book
value simply represents the portion of an asset's cost that has not been allocated
to expense.
Straightline depreciation. There are many depreciation methods available to
companies. Straightline depreciation is the method that companies most frequently use
for financial reporting purposes. If straightline depreciation is used, an asset's annual
depreciation expense is calculated by dividing the asset's depreciable cost by the
number of years in the asset's useful life.
Another way to describe this calculation is to say that the asset's depreciable cost is
multiplied by the straightline rate, which equals one divided by the number of years in
the asset's useful life.
Calculating StraightLine Depreciation
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Suppose a company purchases a $90,000 truck and expects the truck to have a
salvage value of $10,000 after five years. The depreciable cost of the truck is $80,000
($90,000 $10,000), and the asset's annual depreciation expense using straightline
depreciation is $16,000 ($80,000 ÷ 5).
Cost
$90,000
Less: Salvage Value
(10,000)
Depreciable Cost
$80,000
The following table summarizes the application of straightline depreciation during the
truck's fiveyear useful life.
Straight-Line Depreciation
Depreciable
Cost
Cost
$90,000
Year
1
20%
×
$80,000
=
$16,000
74,000
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Straight-Line Depreciation
Depreciable
Cost
Year
2
20%
×
80,000
=
16,000
58,000
Year
3
20%
×
80,000
=
16,000
42,000
Year
4
20%
×
80,000
=
16,000
26,000
Year
5
20%
×
80,000
=
16,000
10,000
At the end of year five, the $80,000 shown as accumulated depreciation equals the
asset's depreciable cost, and the $10,000 net book value represents its estimated
salvage value.
To record depreciation expense on the truck each year, the company debits
depreciation expensevehicles for $16,000 and credits accumulated depreciation
vehicles for $16,000.
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Document Summary

Depreciation is the process of allocating the cost of long lived plant assets other than land to expense over the asset"s estimated useful life. For financial reporting purposes, companies may choose from several different depreciation methods. Before studying some of the methods that companies use to depreciate assets, make sure you understand the following definitions: useful life is an estimate of the productive life of an asset. The total amount of depreciation expense assigned to an asset never exceeds the asset"s depreciable cost: net book value is an asset"s total cost minus the accumulated depreciation assigned to the asset. Net book value rarely equals market value, which is the price someone would pay for the asset. In fact, the market value of an asset, such as a building, may increase while the asset is being depreciated. Net book value simply represents the portion of an asset"s cost that has not been allocated to expense.

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