Q3 topics for Finals.pdf

Depreciation – it is the decrease in the value of a fixed asset, or the value of physical property, with the passage of time. Value – is the present worth of all the future profits that are to be received through the ownership of a particular property. Market Value of a Property – is the amount, whi...

Depreciation – it is the decrease in the value of a fixed asset, or the value of physical property, with the passage of time. Value – is the present worth of all the future profits that are to be received through the ownership of a particular property. Market Value of a Property – is the amount, which a willing buyer will pay to a willing seller for the property where each has equal advantage and is under no compulsion to buy and sell. Utility or Use Value of Property – is what the property is worth to the owner as an operating unit. Fair Value – is the value which is usually determined by the disinterested third party in order to established a price that is fair to both seller and buyer. Book Value – is the worth of the property as shown in the accounting records of an enterprise. It is sometimes called as depreciated book value. Salvage or Resale Value – is the price that can be obtained from the property after it has been used. Salvage Year is the year when scrap value is equal to book value. Scrap Value or Junk Value – is the price that can be recovered if an asset is disposed as a junk. Purposes of Depreciation To provide for the recovery of capital which has been invested in physical property. To enable the cost of depreciation to be charged to the cost of producing products or services that results from the use of property. Causes of Depreciation Physical Depreciation – it is due to wear and tear of the asset. Functional Depreciation – it is due to the obsolescence of the asset. Depletion – refers to the decrease in the value of a property due to the gradual extraction of its contents. Monetary Depreciation – depreciation due to changes in price level. Physical and Economic Life Physical Life of a Property – is the length of time during which it is capable of performing the function for which it was designed and manufactured. Economic Life or Useful Life – is the length of time during which the property may be operated at a profit. Methods Used to Determine Depreciation Straight Line Method Declining Balance Method Double Declining Balance Method Sum-of-Years’ Digit Method Sinking Fund Method Hour Output Method Service Output Method The straight line method is the simplest way in computing for depreciation. In this method, the depreciation each year is constant and the interest rate is being neglected. Sum-of-Years’ Digit Method This method uses the year’s digit (in reverse order) in computing for the depreciation. Sinking Fund Method Sinking fund method presents the idea of annuity in computing for the depreciation. The interest rate for the worth of money is being considered so as to have the depreciable value. Declining Balance Method or Reducing Balance Method In this method, the net book value at the end of each period can be simply computed by multiplying the original market price by a fix percentage repeatedly until it reaches the salvage value. This method is also called Matheson’s Formula. Double Declining Balance Method This is the same as declining balance method except that k is replaced by 2/n.