Qus 3205 sum of years digit depreciation method

Presentation

1. Qus 3205 Estimating SUM-OF-YEARS’-DIGIT METHOD Group 10: CHAN HENG KIN (I16010851) CHAN YE CHEN (I16011204) GOH YE SHUANG (I15008386) LYE BI SHAN (I16010865) TAY SIN YING (I15008672)

2. What is Sum of YearS’ Digit Method? A method of accelerated depreciation (higher charges are taken at the beginning of a fixed asset's useful life ). Give each year of the asset's life a digit (1 for the first year, 2 for the second, etc.) and add the digits together . In the case of five years, the sum will equal 15. In the first year, a charge will be taken equal to 5/15 of the total cost of the asset (minus its salvage value ). In the second year, a charge equal to 4/15 will be taken. In the third year, 3/15, etc

3. METHOD OF CALCULATING D epreciable base = the difference between cost and salvage value of the asset Sum of the years’ digits =    

4. EXAMPLE OF SUM OF THE YEARS’ DIGIT DEPRECIATION METHOD ABC Company purchases a machine for RM100000. It has an estimated salvage value of RM 10000 and a useful life of five years. Calculate the depreciation over the useful life of the asset using the sum of the years’ digit method.

5. Step 1: Sum of the years’ digit = = 15 Step 2: Depreciation amount = RM 100000 – RM 10000 = RM 90000 Step 3: Un-depreciated useful life (years)   Year 1 Year 2 Year 3 Year 4 Year 5 5 4 3 2 1

6. Step 4: Depreciation expense of year 1 = x RM 90000 = RM 30000 Depreciation expense of year 2 = x RM 90000 = RM 24000 Depreciation expense of year 3 = x RM 90000 = RM 18000 Depreciation expense of year 4 = x RM 90000 = RM 12000 Depreciation expense of year 5 = x RM 90000 = RM 6000  

7. Example 2 PRO Company purchases a machine for $45000. It has an estimated salvage value of $5000 and a useful life of five years. Calculate the depreciation over the useful life of the asset using the sum of the years’ digit method. Cost $45,000 Salvage Value $5,000 Useful Life in Years 4 Asset is Depreciated Yearly Cost $45,000 Salvage Value $5,000 Useful Life in Years 4 Asset is Depreciated Yearly

8. Solution Sum of the Years' Digits = 1 + 2 + 3 + 4 = 10 Depreciable Base = $45,000 − $5,000 = $40,000 Year Depreciable Base Depreciation Factor Depreciation Expense Accumulated Depreciation 1 $40,000 4/10 40% × 40,000 = $16,000 $16,000 2 $40,000 3/10 30% × 40,000 = $12,000 $28,000 3 $40,000 2/10 20% × 40,000 = $8,000 $36,000 4 $40,000 1/10 10% × 40,000 = $4,000 $40,000

9. COMPARISON Method Straight Line Declining Balance Sum of years digits Description Simplest most commonly used less profitable accelerated depreciation method more accurately accelerated depreciation method better matches costs to revenues more accurately never reach zero using this method progressively falling rate Formula Annual Depreciation expense = (Asset cost – Residual Value) / Useful life of the asset Annual Depreciation = Initial cost * percentage rate from expected useful life and factor Depreciation = Initial cost * remaining useful life (current period) / total of remaining useful life (over entire useful life) Drawing