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Contemporary Business Mathematics

With Canadian Applications


Ninth Edition

S. A. Hummelbrunner/K. Suzanne Coombs

PowerPoint: D. Johnston, Revised by P. Au

Appendix Depreciation
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Depreciation
Loss in value of asset due to physical deterioration or obsolescence Can be treated as a business expense and used to reduce taxes

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Residual Value
Value of asset after it is no longer useful. May be referred to as scrap value, salvage value, or trade-in value. Used to calculate wearing value where the wearing value is the total amount of depreciation over the life of the asset.

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Depreciation Terminology

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Methods of Depreciation
Straight-line Units - of - Product Declining Balance Declining Balance with Constant Percent

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Straight-line Depreciation

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Straight Line
Original cost of asset --- $50,000 Residual value --- 10,000 Useful life --4 years Yearly Depreciation = 50000 10000 4 = $10,000
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Depreciation Schedule
Straight Line
YearAnnual Accumulated End Depreciation Depreciation 0 1 2 3 4 10000 10000 10000 10000 10000 20000 30000 40000 Book Value 50000 40000 30000 20000 10000
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Units-of-Product Method

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Units-of-Product
Original cost --- $50,000 Residual value --- 10,000 Life of asset --- 200,000 units Depreciation per unit = 50,000 10,000 200,000 = 0.20 per unit
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Declining Balance

where n = the number of years of useful life

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Declining Balance
Original Cost Residual Value Useful life --- $50,000 --- 10,000 --- 5 years

The rate of depreciation d = 2 = 40% 5

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Constant Percentage
An arbitrarily established maximum yearly rate of depreciation is established by the Income Tax Act for different classes of assets. Class 3 Buildings 3% rate Class 8 - Machinery, equipment 20% rate Class 10 - Cars, trucks,vans - 30%

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Summary
Various methods of depreciation can be used to calculate the loss of value in assets over time.

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