CAPITAL

EXPENDITUR

E

Types of Expenditure

Estimated Useful Life – Number of years or time

periods for which the company can use the asset

Depreciation – An estimate of the use or deterioration of an asset

Asset Cost – Amount paid for an asset including freight charges

CONCEPT OF DEPRECIATION

Residual Value (Salvage Value) - Expected cash value at the end of an

asset’s useful life.

14-5

Straight-Line MethodDistributes the same amount of expense to each period of time.

Depreciation expense = Cost -- Residual value each year Estimated useful life in years

Ajax Company bought equipment for $2,500. The company estimates that the equipment’s period of useful life will be 5 years. After 5 years the residual value is $500. Calculate depreciation expense and complete a depreciation schedule.

($2,500 -- $500) 5

100% = 100%# of yrs. 5= $400 = 20%

Example:

Units-of-Production Method

Depreciation determined by how much the company uses the asset.

Depreciation expense = Cost -- Residual value per unit Total estimated units produced

Depreciation = Unit x Units amount depreciation produced

($2,500 -- $500) 4000 = $.50=

Depreciation expense = Book value of equipment x Depreciation each year at beginning of year rate

Accelerated method which computes more depreciation expense in the early years of the asset’s life. Uses up to

twice the straight-line rate.

Declining-Balance Method

Rate = 100% 5 years

x 2 = 40%

MACRS DepreciationRequired method to use for tax depreciation in USA only

Originally developed to offer accelerated depreciation for economic growth

Dt = dtB Where: Dt = depreciation charge for year t B = first cost or unadjusted basis dt = depreciation rate for year t (decimal)

Where: Dj = depreciation in year j ∑ Dj = all depreciation through year t

BVt = B - ∑Djj = 1

j = t

Get value for dt from IRS table for MACRS rates

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