LESSON 18 2 Calculating Depreciation Expense Depreciation a

LESSON 18 -2 Calculating Depreciation Expense Depreciation – a decrease in value to an asset due to wear and tear, decay, decline in price, etc. CENTURY 21 ACCOUNTING © Thomson/South-Western

2 Straight-Line Depreciation n Easiest & most commonly used form n Business must know: 1. Original cost of the plant asset 2. Estimated salvage value – the amount a business expects to receive when the plant asset is disposed of. 3. Estimated useful life – the number of years the plant asset is expected to be used. CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 18 -2

3 STRAIGHT-LINE DEPRECIATION page 538 Calculating Annual Depreciation Expense 1. Subtract the asset’s estimated salvage value from the original cost. 2. Divide the estimated total depreciation expense by the years of estimated useful life. Original Cost – Estimated Salvage Value = Estimated Total Depreciation Expense $3, 250. 00 – $250. 00 = $3, 000. 00 Years of Estimated Useful Life = Annual Depreciation Expense 5 = $600. 00 Estimated Total ÷ Depreciation Expense $3, 000. 00 ÷ CENTURY 21 ACCOUNTING © Thomson/South-Western 1 2 LESSON 18 -2

4 CALCULATING DEPRECIATION EXPENSE page 539 FOR PART OF A YEAR Calculating Partial Year’s Depreciation Expense 1. Divide the annual depreciation expense by 12. 2. Multiply the monthly depreciation expense by the number of months the plant asset is used in a year. Annual ÷ Depreciation Expense $600. 00 ÷ Monthly × Depreciation Expense $50. 00 × Months in a Year = Monthly Depreciation Expense 12 = $50. 00 Number of Months Asset Is Used = Partial Year’s Depreciation Expense 5 = $250. 00 CENTURY 21 ACCOUNTING © Thomson/South-Western 1 2 LESSON 18 -2

5 CALCULATING ACCUMULATED DEPRECIATION page 540 Accumulated Depreciation – depreciation that “adds up” over time. Accumulated Depreciation of Previous Year $1, 200. 00 Accumulated Current Year + = Depreciation at the Depreciation Expense end of the current year $600. 00 + = $1, 800. 00 CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 18 -2

6 CALCULATING BOOK VALUE page 540 The value of an asset after depreciation has been subtracted. Original Cost – Accumulated Depreciation = Ending Book Value $3, 250. 00 – $1, 800. 00 = $1, 450. 00 Beginning Book Value – Annual Depreciation = Ending Book Value $2, 050. 00 – $600. 00 = $1, 450. 00 CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 18 -2