Chapter 23 - Depreciation

CHAPTER 23
DEPRECIATION
Chapter Overview and Objectives

After this chapter, readers are expected to comprehend:

1. Thesubsequent measurement of PPE items.
2. The application of subsequent measurement provisions.
3. The concept of depreciation and inputs in the computation of depreciation.
4. The different classifications of depreciation methods.
5. The specific depreciation methods (e.g., straight-line, sum-of-the-years’-digits,
declining balance, unit of production, etc.).
6. The accounting for derecognition of PPEs,

SUBSEQUENT MEASUREMENT
In the previous chapters, concepts involving the determination of the initial
measurement of PPEs were discussed. By this time, the readers should realize that
proper measurement of the initial cost of PPEs is very crucial since these amounts
will be the bases of subsequent accounting for PPEs.

PPE items shall be subsequently measured using either the cost model or the
revaluation model:
Cost model Revaluation model
Cost less any accumulated | Fair value on the date of the revaluation
depreciation and any accumulated | less any subsequent accumulated
impairment losses. depreciation and subsequent
accumulated impairment losses.

APPLICATION OF COST MODEL AND REVALUATION MODEL

The application of cost model and revaluation model shall be applied ona per class
basis (i.e., not on an asset-by-asset nor all-PPE basis). A class of PPE is a grouping of
assets of a similar nature and use in an entity’s operations. The following are
examples of separate classes:
land;
oe

land and buildings;

machinery;
mean

ships;
aircraft;
motor vehicles;
furniture and fixtures;
rom

office equipment; and

bearer plants. [PAS 16.37].

209

The
The Book R̶e̶a̶d̶e̶r̶s̶ Raiders
Book Readexs- Raiders || Nevule
Nevule cS CamScanner
 Chapter 23 — Depreciation

For example, if an entity decided to apply the cost model to one of its machineries,
it shall also apply the cost model to all of its machineries (i.e, PPEs in the same
class). On the other hand, an entity may apply either cost model or revaluation
model to all of its furniture and fixtures regardless of the model applied to all of its
land since land and furniture and fixtures are considered as separate classes.
This limitation is done to prevent an entity from being selective between two methods
to the point that it can manipulate the amount of its income and total assets. For the
rest of the chapter, the focus will be on the cost model. The revaluation model was
discussed on Chapter 24. Impairment procedures were discussed in Chapter 28.
DEPRECIATION - GENERAL PRINCIPLES
Depreciation is the systematic allocation of the cost of a PPE to the periods that
benefited from the use of such PPE. Cumulative depreciation starting from the initial
recognition is called accumulated depreciation. This accumulated depreciation is
deducted from the cost of the PPE (i.e., contra-asset account) to determine that
PPE’s carrying amount (i.e, carrying amount = cost less accumulated depreciation).
This carrying amount does not indicate the value of the PPE, but it merely shows
the remaining cost that is subject to depreciation in the future periods.
Generally, depreciation charge for each period shall be recognized in profit or loss
unless it is included in the carrying amount of another asset. [PAS 16.48]. The
following is a non-exhaustive list of circumstances that depreciation is included in
the carrying amount of another asset:
a. Depreciation of PPEs used in the production of inventories will be included in
the carrying amount of inventories as part of conversion costs. For example,
depreciation of factory building and production equipment are capitalized as
factory overhead in the cost of inventories manufactured.
b. Depreciation of PPEs used in construction, testing or assembly of other PPEs as
previously discussed in Chapter 21.
INPUTS IN DETERMINING DEPRECIATION
To compute for the periodic depreciation, the following information are needed:
Cost Determined using the concepts in Chapters 20, 21 and 22
Residual value or salvage value of an asset is the estimated amount
that an entity would currently obtain from disposal of the asset after
Residual
deducting the estimated costs of disposal of the asset at the end of its
value
useful life where it is already of the age and in the condition
expected.
Equal to cost less residual value. Generally, this is the amount from
Depreciable | Which the depreciation is computed.
amount
However, if the amount of residual value is immaterial, then
depreciable amount is equal to the PPE’s cost.
210

The
The Book R̶e̶a̶d̶e̶r̶s̶ Raiders
Book Readexs- Raiders || Nevule
Nevule cs CamScanner
CamScanner
 Chapter 23 - Depreciation

Useful life is:

a. the period over which an asset is expected to be available for
use by an entity; or
b. the number of production or similar units expected to be
obtained from the asset by an entity (i.e., usage method).
All the following factors are considered in determining the useful
life of an asset:
« Useful life expected usage of the asset.
P

expected physical wear and tear (operational factors).

a A-o

technical or commercial obsolescence.

legal or similar limits on the use of the asset, such as the expiry
dates of related leases. [PAS 16.56].
As a rule of thumb, the shortest useful life assessed using each of
these factors shall be used as the useful life in computing
depreciation.
The method to be used shall reflect the pattern in which the asset’s
Depr Sande future economic benefits are expected to be consumed by the entity.
metho
Details of depreciation methods are discussed later in the chapter.

Other principles related to depreciation are as follows:

1. Depreciation is recognized even if the fair value of the asset is higher than
its carrying amount, as long as the asset’s residual value does not exceed its
carrying amount. For example:

Scenario | Fair Value | Carrying Amount! Residual Value

1 P500,000 P400,000 P200,000
2 600,000 500,000 500,000

Depreciation shall still be recorded for scenario 1 since the carrying amount is
still higher than residual value. However, no depreciation shall be recorded for
scenario 2 since the carrying amount is already equal to residual value. Under
both scenarios, the amounts of current fair value are totally ignored in computing
depreciation.

. In general, the useful life of land is considered to be indefinite and that no

depreciation shall be charged. This is the reason why land and building that
were acquired together are accounted for separately since the /and has an
indefinite useful life and is not subject to depreciation while building has a definite
useful life and is subject to depreciation.
Despite this general rule, some land may be subjected to depreciation as an
exception. Examples include the land used in natural resources extraction, land
used as landfill, right-of-use asset involving land, etc.
211

The
The Book R̶e̶a̶d̶e̶r̶s̶ Raiders
Book Readexs- Raiders || Nevule
Nevule cs CamScanner
CamScanner
 Chapter 23 — Depreciation

3. In practice, an entity may adopt specific accounting policies related to PPE’s

useful life. For example:
a. Fixed useful life in years for each class of PPE, for example, five years for all
vehicles; thirty years for all buildings; seven years for all machineries, etc.
b. An entity may also have a policy of no depreciation on the month of
acquisition and full amount of depreciation on the month of derecognition.
c. An entity may also have a policy of full depreciation on the year of
acquisition and no amount of depreciation on the year of derecognition.

4. Depreciation shall also be recorded even though the item of depreciable PPE is
regularly maintained and/or repaired.

START DATE AND END DATE OF RECOGNIZING DEPRECIATION

Depreciation shall be recognized between the following dates:
Start Date End Date
Depreciation of an asset begins when it is Depreciation of an asset ceases at the
available for intended use. earlier of the following: .
a. the date that the asset is classified
Consequently, the assets that are not yet as held for sale; and
ready for the intended management's b. the date _ that the asset is
use Shall not be depreciated. derecognized.

Additional related concepts are the following:

a. The period of time between the start date and end date may span across many
years.
b. Items of PPE which are still under construction shall not be depreciated before
they are ready for management's intended use.
c. Depreciation does not cease when the asset becomes idle or is retired from
active use unless the asset is fully depreciated or sold.

Illustration 1 - Start Date of Depreciation. An item of PPE was acquired last

January 1, 2023 but became available for intended use only on April 1, 2023.

In this case, depreciation shall start only on April 1, 2023 and no depreciation shall
be recognized from January 1, 2023 to March 31, 2023.

DEPRECIATION METHODS
Depreciation methods can be classified in to the following general categories:
Time-Based - Activity-Based Other Basis
Based on mere passage of Based on the asset usage. All other methods.
time. Depreciation will The amount of depreciation
continue to be recorded will depend on the level of
even if the asset is unused. its utilization.

212

The
The Book R̶e̶a̶d̶e̶r̶s̶ Raiders
Book Readexs- Raiders || Nevule
Nevule cs CamScanner
CamScanner
 Chapter 23 — Depreciation

The entity selects the method that most closely reflects the expected pattern of
consumption of the future economic benefits embodied in the asset. That method
is applied consistently from period to period unless there is a change in the
expected pattern of consumption of those future economic benefits. [PAS 16.62).

TIME-BASED DEPRECIATION METHODS

These methods include the following methods:
1. straight-line method; and
2. diminishing balance methods:
a. sum-of-the-years’-digits method; and
b. declining balance method.

These are discussed in detail in the succeeding sections.

Straight-Line Method
This method generally results in a constant charge over the useful life and is the
simplest of all the methods. Generally, this is applicable when there is a uniform use
of a PPE over its useful life and/or the PPE provides substantially equal benefits over
its useful life. The formulas to compute for the amount of depreciation per year and
per month, respectively are the following:
Cost of PPE less Residual Value
Depreciation per Year = Useful life in years

Cost of PPE less Residual Value

Depreciation per Month =
Useful life in months

The readers should recall that cost of PPE less its residual value is its depreciable
amount.

Illustration 2. On January 1, 2023, ADVENTUROUS Company acquired an office

equipment for P2,600,000. The Company expects to use the office equipment for
five years and after such time it expects to sell it at an estimated amount of
P200,000. Required: Determine the periodic depreciation expense and the carrying
amount of the office equipment at the end of each year.

Solution:
P2,600,000 - P200,000
Depreciation per year
5 years

Depreciation per year P480,000 per year

At the end of each year, the Company shall record P480,000 annual depreciation:
Depreciation expense 480,000
Accum. depre. - equipment 480,000

213

The
The Book R̶e̶a̶d̶e̶r̶s̶ Raiders
Book Readexs- Raiders || Nevule
Nevule oJ CamScanner
CamScanner
 Chapter 23 - Depreciation

The annual depreciation, the amounts of accumulated depreciation and the

carrying amounts of the equipment are summarized in the lapsing schedule as
follows:

[B] [A] -[B]

Annual [A] Accumulated Carrying
Date Depreciation Cost Depreciation Amount
Dec. 31, 2023 P480,000 P2,600,000 P480,000 P2,120,000
Dec. 31, 2024 480,000 2,600,000 960,000 1,640,000
Dec. 31, 2025 480,000 2,600,000 1,440,000 1,160,000
Dec. 31, 2026 480,000 2,600,000 1,920,000 680,000
Dec. 31, 2027 480,000 2,600,000 2,400,000 200,000
The readers should note that the carrying amount of the equipment at the end of
each year decreases by the amount of the annual depreciation. In addition, the
carrying amount of the equipment at end of its useful life (i.e. December 31,
2027) is equal to its residual value (i.e., P200,000).
The amount of annual depreciation can also be computed in percentage terms.
Using this method, the amount of depreciation can be determined as follows:
Annual 2 Total depreciable 1
depreciation amount Useful life in years

In the example with useful of five years, the relevant depreciation percentage is
20% (1 divided by five-year useful life). Consequently, the annual depreciation can
also be computed as:
1
P480,000 = P2,400,000 «x 5 year-useful life
If a problem does not mention the depreciation method to be used, then the
straight-line method shall be applied.

DIMINISHING BALANCE METHODS

These methods result to decreasing depreciation charge each year. These methods
are used due to the following rationale:
a. Assets are more efficient in their initial years. Consequently, the assets provide
more benefits in their initial years relative to the latter years of their useful lives.
b. Maintenance and repair costs are generally higher during the latter years of
useful life of PPE. To counter these increasing costs, a decreasing depreciation
charge may be made.

214

The
The Book R̶e̶a̶d̶e̶r̶s̶ Raiders
Book Readexs- Raiders || Nevule
Nevule cs CamScanner
CamScanner
 Chapter 23 - Depreciation

SUM-OF-THE-YEARS ’-DIGITS (SYD) METHOD

Under this method, a fraction is used where the numerator is equal to the number
of years remaining at the beginning of the year while the denominator is the total
of such number of years all throughout the asset's total useful life.
For example, if the useful life of a PPE is three years, the denominator to be used is
6 (3+2+1), while the numerator to be used for first year is 3, second year is 2 and
third year is 1. Consequently, the fraction to be used for first year is 3/6, second
year is 2/6 and third year is 1/6.
Each of these fractions is multiplied to the depreciable amount to get the
depreciation for each year. The readers should note that the fraction used for
each year is decreasing, thus depreciation for each year is also decreasing.
There could be instances where the useful life is 10 or more years, which in those
cases, the manual addition of remaining years at the beginning of each year is very
tedious. Luckily, there is a formula to easily compute for the denominator:

SYD Denominator = suo Ne SO

a 2

Where N = useful life in years.

So, using this formula, the corresponding SYD denominators can easily be
determined for every number of useful lives, for example the following:
Useful Life | SYD Denominator Useful Life | SYD Denominator
5 15 13 91
8 36 14 105
10 55 4 15 120
11 66 20 210
12 7B 2 25 325

Illustration 3. On January 1, 2023, CALM Company acquired a furniture and fixture

for P4,500,000. The Company expects to use it for a number of years, after which it
will be sold for P300,000. This resulted to P4,200,000 depreciable amount.
Required: Under the SYD method, determine the periodic depreciation expense and
the carrying amount of the furniture and fixture at the end of each year, assuming
the useful life of the furniture and fixture is (a) six years and (b) seven years.
Solution - Useful Life is Six Years:
The first step would be to compute for the SYD Denominator:

SYD Denominator ee —

SYD Denominator 21

215

The
The Book R̶e̶a̶d̶e̶r̶s̶ Raiders
Book Readexs- Raiders || Nevule
Nevule cs CamScanner
 Chapter 23 — Depreciation

The depreciation per year shall be determined as follows:

Remaining [A] [A] x P4,200,000
Year Year/s Fraction Depreciation
2023 6 6/21 P1,200,000
2024 5 5/21 1,000,000
2025 4 4/21 800,000
2026 3 3/21 600,000
2027 2 2/21 400,000
2028 1 1/21 200,000
21 21/21 P4,200,000

The annual depreciation, the amounts of accumulated depreciation and the

carrying amounts of the equipment are summarized in the lapsing schedule as
follows:

| [B] [A}-[B]
Depreciation [A] Accumulated Carrying
Date for the Year Cost . Depreciation Amount
Dec. 31, 2023 P1,200,000 P4,500,000 P1,200,000 P3,300,000
Dec. 31, 2024 1,000,000 4,500,000 2,200,000 2,300,000
Dec. 31, 2025 800,000 4,500,000 3,000,000 1,500,000
Dec. 31, 2026 600,000 4,500,000 3,600,000 900,000
Dec. 31, 2027 400,000 4,500,000 4,000,000 500,000
Dec. 31, 2028 200,000 4,500,000 4,200,000 300,000

The amounts of depreciation are higher in the initial years and lower in later years.
Consequently, the amount of decrease in carrying amount is higher in the initial
years but continues to decline in the later years. Again, the carrying amount at the
of useful life is equal to residual value.

Solution - Useful Life is Seven Years:

The first step would be to compute for the SYD Denominator:

SYD Denominator = Ae

SYD Denominator = 28 ‘

The depreciation per year is computed as follows:

216

The
The Book R̶e̶a̶d̶e̶r̶s̶ Raiders
Book Readexs- Raiders || Nevule
Nevule 8) CamScanner
 Chapter 23 - Depreciation

Remaining [A] [A] x P4,200,000

Year Year/s Fraction Depreciation
2023 7 7/28 P1,050,000
2024 6 6/28 900,000
2025 5 5/28 750,000
2026 4 4/28 600,000
2027 3 3/28 450,000
2028 2 2/28 300,000
2029 1 1/28 150,000
28 28/28 P4,200,000

The annual depreciation, changes in accumulated depreciation and changes in the

carrying amounts of the equipment are summarized in the lapsing schedule as
follows:

[B] [A] -[B]

Depreciation [A] Accumulated Carrying
Date for the Year Cost Depreciation Amount
Dec. 31, 2023 P1,050,000 P4,500,000 P1,050,000 P3,450,000
Dec. 31, 2024 900,000 4,500,000 1,950,000 2,550,000
Dec. 31, 2025 750,000 4,500,000 — 2,700,000 1,800,000
Dec. 31, 2026 600,000 4,500,000 3,300,000 1,200,000
Dec. 31, 2027 450,000 4,500,000 3,750,000 750,000
Dec. 31, 2028 300,000 4,500,000 4,050,000 450,000
Dec. 31, 2029 150,000 4,500,000 4,200,000 300,000

DECLINING BALANCE METHOD

Under this method, a fixed percentage is multiplied to the beginning carrying
amount of PPE to determine the depreciation for the year. As a result, the amount of
residual value shall be ignored except during the last period of its useful life.
Consequently, the amount of depreciation for the /ast period is equal to the amount
needed to bring the beginning carrying amount of the PPE down to its residual value.

The fixed percentage to be used will depend on the variation of the declining
balance method used. The most frequent variations are the double-declining
balance method (also known as 200%-declining balance method) and the 150%-
declining balance method. The formulas to compute for this fixed percentage for
each variation are the following:

Double-declining balance _ 1 x 200%

depreciation rate Useful life in years

150%-declining balance _ 1 : x 150%

depreciation rate Useful life in years

217

The
The Book R̶e̶a̶d̶e̶r̶s̶ Raiders
Book Readexs- Raiders || Nevule
Nevule cs CamScanner
 Chapter 23 — Depreciation

The readers should note by this time that the double-declining balance depreciation
rate is 200% of the straight-line depreciation rate, while 150%-declining balance
depreciation rate is 150% of the straight-line depreciation rate.

Illustration 4. On January 1, 2023, PEACE Company acquired an item of PPE for

P5,000,000. The Company expects to use the PPE for five years after which it can
sell the PPE for a certain amount. Required: Determine the periodic depreciation
expense and the carrying amount of the furniture and fixture at the end of each year
under each of the following independent variations:
1. double-declining balance and residual value of P500,000
2. 150%-declining balance and residual value of P800,000

Variation 1 - Double-Declining Balance Method

Depreciation rate is computed as follows:
Double-declining balance _ 1
depreciationrate ~~ = Syears see
Hoaceseene balance = 40%
epreciation rate

The relevant lapsing schedule is as follows:

[A] [B]=[A] x40% [C] [A] - [C]

[Link] Depreciation Accumulated’ End. Carrying
Date Amount Expense Depreciation Amount
Dec. 31, 2023 P5,000,000 P2,000,000 P2,000,000 P3,000,000
Dec. 31, 2024 3,000,000 1,200,000 3,200,000 1,800,000
Dec. 31, 2025 1,800,000 720,000 3,920,000 1,080,000
Dec. 31, 2026 1,080,000 432,000 4,352,000 648,000
Dec. 31, 2027 648,000 *148,000 4,500,000 500,000
*P148,000 = P648,000 - P500,000. The reason for this is that the minimum carrying
amount of the PPE should be equal to its residual value.

Based on the above lapsing schedule, the formula to determine the depreciation
expense for each year is beginning carrying amount x 40%.

The accumulated depreciation as of the end of each year is equal to the total of
depreciation expense during the current year and previous year/s, For example,
P3,200,000 as of December 31, 2024 is equal to P2,000,000 depreciation in 2023
plus P1,200,000 depreciation in 2024.
The carrying amount at the end of each year can also be computed as the beginning
carrying amount multiplied by 1 less depreciation rate. For example, the
ih of P1,800,000 as of December 31, 2024, can also be determined as P3M x
1 - 40%).
218

The
The Book R̶e̶a̶d̶e̶r̶s̶ Raiders
Book Readexs- Raiders || Nevule
Nevule cs CamScanner
CamScanner
 Chapter 23 — Depreciation

Variation 2 - 150%-Declining Balance Method

Depreciation rate is computed as follows:
150%-declining balance _ 1
depreciationrate ~ = S years sedi
sire tcavl
150% San balance = 30%
epreciation rate
The related lapsing schedule is as follows:

[A] [B]=[A] x 30% [C] [A] - [B]

[Link] Depreciation Accumulated End. Carrying
Date Amount Expense Depreciation Amount
Dec. 31, 2023 P5,000,000 P1,500,000 P1,500,000 P3,500,000
Dec. 31, 2024 3,500,000 1,050,000 2,550,000 2,450,000
Dec. 31, 2025 2,450,000 735,000 3,285,000 1,715,000
Dec. 31, 2026 1,715,000 514,500 3,799,500 1,200,500
Dec. 31, 2027 1,200,500 *400,500 4,200,000 800,000
*P400,500 = P1,200,500 - P800,000. The reason for this is that the minimum carrying
amount of the PPE should be equal to its residual value.

Based on the above lapsing schedule, the formula to determine the depreciation
expense for each year is beginning carrying amount x 30%. The concepts in
determining the accumulated depreciation and carrying amount as of each year is
the same as in the double-declining balance method.

ACTIVITY-BASED DEPRECIATION
Under this method, the amount of depreciation is based on an asset's utilization.
The utilization of an asset can be based either on inputs (e.g., number of hours used)
or based on outputs (e.g., number of units produced). So, if an entity used more of a
PPE, more of its depreciable amount is charged to depreciation. If an entity used less
of a PPE, then less of its depreciable amount is charged to depreciation.
Nonetheless, the same accounting procedures will be used whether the basis of
utilization is inputs or outputs. The most popular variation of activity-based
depreciation is the unit-of-production method.
Under this method, the depreciation is computed by following these steps:
a: Depreciation rate per input usage (e.g., total usage in hours) or output is
computed as follows:

Cost of PPE less residual value

Depreciation r, = : :
P ae Total estimated inputs or outputs

b. Depreciation during a period = depreciation rate x actual input usage or

output during that period.
219

The
The Book R̶e̶a̶d̶e̶r̶s̶ Raiders
Book Readexs- Raiders || Nevule
Nevule cs CamScanner
 Chapter 23 - Depreciation

Illustration 5. On January 1, 2023, SLEEK Company acquired a machinery for

P3,900,000 to be used in its production process. Physically, the machinery has an
estimated economic life of five years. The Company expects that it can be used fora
total of 200,000 machine hours, after which it can be sold for P300,000. Assume
that for the next five years, the Company used the machinery as follows:

Year 2023 2024 2025 2026 2027

Hours 27,000 40,000 32,000 53,000 48,000
Under the unit-of-production method, determine the periodic depreciation expense
and the carrying amount of the office equipment at the end of each year.

Solution:
Depreciation rate per machine hour shall be determined as follows:

P3,900,000 - P300,000
Depreciation Rate
200,000 hours

Depreciation Rate P18/hour

Then, depreciation for each year shall be determined as follows:

[B] [A] x [B]

[A] Depreciation Depreciation
Year Hours Rate for the Year
2023 27,000 P18 P486,000
2024 40,000 18 720,000
2025 32,000 18 576,000
2026 53,000 18 954,000
2027 48,000 18 864,000
200,000 P3,600,000

The related lapsing schedule is as follows:

[B] [A]-[B]
Depreciation [A] Accumulated Carrying
Date for the Year Cost Depreciation Amount
Dec. 31, 2023 P486,000 P3,900,000 P486,000 P3,414,000
Dec. 31, 2024 720,000 3,900,000 1,206,000 2,694,000
Dec. 31,2025 576,000 3,900,000 1,782,000 2,118,000
Dec. 31, 2026 954,000 3,900,000 2,736,000 1,164,000
Dec. 31, 2027 864,000 3,900,000 3,600,000 300,000

The readers should take note that since the Company used the highest number of
hours during 2026 (i.e., 53,000), it charged the highest amount of depreciation
220

The
The Book R̶e̶a̶d̶e̶r̶s̶ Raiders
Book Readexs- Raiders || Nevule
Nevule cS CamScanner
 Chapter 23 — Depreciation

during that year. Conversely, the Company used the lowest number of hours during
2023 (i.e., 27,000), resulting to the smallest amount of depreciation for that year.

OTHER METHODS OF DEPRECIATION

Other methods of depreciation to be discussed in this chapter are the following:
a. Group or composite method
b. Component method

GROUP METHOD AND COMPOSITE METHODS

So far, the previous examples involve single or stand-alone PPEs. Most of the time,
group of PPEs are used together, for example, in the production process. Under the
group and composite methods, these PPEs are depreciated as if they are a single
item of PPE.
Group method is used when the PPEs comprising the group are similar and have
almost the same length of useful lives. Composite method is used when the PPEs
comprising the group are dissimilar and have different length of useful lives.
Despite these perceived differences of circumstances between these methods, the
relevant mathematical calculations under each method are identical. The following
concepts are relevant:

a. To compute for the depreciation rate, the following formula is relevant:

Total annual depreciation

Deprenanontare Total cost of all the PPEs in the group

Total annual depreciation is the aggregate annual depreciation of each PPE

computed using the straight-line method. To obtain the annual amount of
depreciation, the following formula is relevant:
Annual Depreciation = Total COST of all PPEs in the group x Depreciation Rate

The readers should take note that the depreciation rate is NOT multiplied to the
total depreciable cost.
b. Another relevant metric is the composite life, which is computed as follows:
Total depreciable cost of all the PPEs in the group
Composite life = Total annual depreciation

Composite life simply means the number of years to fully depreciate the total
depreciable cost of all the PPEs in the group.

c. Whenever a PPE in the group is sold or retired, no amounts of gain or loss are
to be recognized. |nstead, the cost of the derecognized PPE is credited, while the

221

The
The Book R̶e̶a̶d̶e̶r̶s̶ Raiders
Book Readexs- Raiders || Nevule
Nevule cs CamScanner
 Chapter 23 — Depreciation

debit will be to accumulated depreciation less proceeds, if there are any. This
can be seen in the following pro-forma journal entry:
Cash (if any) XX
Accumulated depreciation (squeeze) XX
Cost of sold or retired PPE XX

Consequently, the total accumulated depreciation account cannot be attributed

specifically to each of the PPEs in the group, and as a result, the carrying amount
of each PPE cannot be computed.

d. Ifa PPE that is substantially similar to the assets comprising the group is added,
the depreciation rate previously computed shall not be changed. On the other
hand, if the PPE added is significantly different from those assets in the group, a
revised depreciation rate shall be computed.

Illustration 6. On January 1, 2023, UNITY Company acquired three: machineries

that are to be used as a group in one of the Company’s production processes. The
following information is relevant:

Cost Residual Value - Useful Life

Equipment A P5,000,000 P1,000,000 5 years
Equipment B 3,000,000 800,000 8 years
Equipment C 2,000,000 200,000 4 years
P10,000,000 P2,000,000

Required: Using the group/composite method, determine the depreciation rate,

composite life and the lapsing schedule.

Solution:
1. First, compute for the total annual depreciation by aggregating the annual
depreciation of each equipment using straight-line method:

[B] [c]}=A-B [D] C+D

[A] Residual Depreciable Useful Annual
Eqpt. Cost Value Amount Life Depreciation
A P5,000,000 P1,000,000 P4,000,000 Syears P800,000
B 3,000,000 800,000 2,200,000 8years 275,000
C 2,000,000 200,000 1,800,000 4years 450,000
Total annual depreciation P1,525,000

From this total annual depreciation, the depreciation rate is computed as:

Depeprrececiiatatii on P1,525,000
rate = P10,000,000

222

The
The Book
Book R̶Readexs-Raiders
e̶a̶d̶e̶r̶s̶ Raiders || Nevule
Nevule cs CamScanner
 Chapter 23 — Depreciation

Depreciation rate = 15.25%

The composite life shall be computed as:

P4,000,000 + P2,200,000 + P1,800,000
Composite Life
P1,525,000

"
Composite Life 5.25 years (rounded off)

2. Assuming that there are no changes to the components of the group, the lapsing
schedule is as follows:
Deprecia- [B] [A] - [B]
tionforthe Accumulated Carrying
Date [A] Cost Year Depreciation Amount
Dec. 31,2023 P10,000,000 P1,525,000 P1,525,000 P8,475,000
Dec. 31,2024 10,000,000 1,525,000 3,050,000 6,950,000
Dec. 31, 2025 10,000,000 1,525,000 4,575,000 5,425,000
Dec. 31, 2026 10,000,000 1,525,000 | 6,100,000 3,900,000
Dec. 31, 2027 10,000,000 1,525,000 7,625,000 2,375,000
Dec. 31, 2028 10,000,000 375,000 8,000,000 2,000,000

The depreciation of P375,000 during 2028 is computed as the amount of

depreciation needed to bring the beginning carrying amount (i.e., P2,375,000)
down to the total residual value of the group (i.e., P2,000,000).

3. Assuming Equipment B was sold on December 31, 2025 for P800,000, the entry
to record this transaction is as follows:
Accumulated depreciation (squeeze) 2,200,000
Cash 800,000
Equipment 3,000,000

Again, there is no gain or loss on the sale of equipment. Instead, the accumulated
depreciation absorbs the difference between the cost of the PPE sold and the
proceeds received.

COMPONENT DEPRECIATION
This depreciation method is somewhat the opposite of the group (or composite)
method. For the purposes of computing depreciation, the group/composite method
combines individual PPEs as a single PPE while the component depreciation splits
a single PPE into separate components. Component depreciation is mainly used
when a component of PPE has a cost that is significant in relation to the total
cost of the PPE. [PAS 16.43].

223

The
The Book R̶e̶a̶d̶e̶r̶s̶ Raiders
Book Readexs- Raiders || Nevule
Nevule cs CamScanner
 Chapter 23 — Depreciation

A very good example is an aircraft, wherein the costs of engines, aircraft body and
seats are normally significant in relation to the total cost of the aircraft. In those
cases, the components are separately depreciated as if they are separate items of
PPE. Other items of PPEs to which the component depreciation can be applied also
include ships and complex machineries.
On the other hand, components with cost that is insignificant in relation to the total
_ cost of the overall PPE are aggregated and depreciated together. An entity may use
approximation methods in depreciating these components. [PAS 16.46].

Depending on the depreciation method applied to each component, component

method is either time-based or usage-based or both. Most of the time, straight-line
method is used in conjunction with component method.

Illustration 7. On January 1, 2023, SIMPLIFIED Company acquired an aircraft for a

total cost of P30,000,000. This aggregate cost can be attributed to aircraft’s
components as follows:
Component Cost Useful Life
Aircraft frame P13,000,000 16 years
Engines 9,000,000 10 years
Seats and internals 4,000,000 5 years
Miscellaneous 4,000,000 4 years
P30,000,000

Residual values are immaterial. Required: Using the component depreciation,

determine the annual depreciation expense for the first four years.

Solution:
Depreciation is computed for each componentas if they are separate items of PPE:
Annual
Component Cost UsefulLife Depreciation
Aircraft frame P13,000,000 16 years P812,500
Engines 9,000,000 10 years 900,000
Seats and internals 4,000,000 5 years 800,000
Miscellaneous 4,000,000 4 years 1,000,000
P30,000,000 P3,512,500

The annual depreciation from 2023 to 2026 will total P3,512,500. Thereafter,
miscellaneous components will be replaced and will warrant an updated
computation of depreciation for each succeeding year. Nevertheless, the annual
depreciation of aircraft frame and engines will not be changed for the next 16 years
and 10 years respectively.

224

The
The Book R̶e̶a̶d̶e̶r̶s̶ Raiders
Book Readexs- Raiders || Nevule
Nevule cS CamScanner
 Chapter 23 - Depreciation

SPECIAL CONSIDERATIONS ON DEPRECIATION

In this section, we will be discussing the concepts related to the following:
a. Partial period depreciation
b. Changes in depreciation computation

PARTIAL PERIOD DEPRECIATION

So far, the previous examples illustrate PPEs that were acquired and ready for
intended use on January 1 of each year. In reality, there is a very slim chance of this
happening. Instead, an item of PPE may be acquired and/or become ready for
intended use on any day of the year. Consequently, partial period depreciation is
relevant to time-based depreciation methods.

For example, if an equipment was acquired on July 1, 2023, the first-year

depreciation is from July 1, 2023 to June 30, 2024, the second-year depreciation is
from July 1; 2024 to June 30, 2025 and so on. If an entity’s reporting date is every
December 31 of each year, these depreciation amounts span multiple calendar
years and shall be allocated to the proper calendar-year reporting periods.

Illustration 8. In illustrating the partial year depreciation, the previous examples

under each of the time-based methods shall be used. However, instead of January
1, 2023, it is assumed that they were all acquired on April 1, 2023. As a result,
first year depreciation is from April 1, 2023 to March 31, 2024, second year
depreciation is from April 1, 2024 to March 31, 2025 and so on. All the entities in
this illustration are utilizing December 31 as their reporting date. The depreciation
for the first three years for each entity are as follows:

ADVENTUROUS Company - Straight-Line Method (from Illustration 2)

2023 2024 2025
First Year Depreciation (P480,000)
4/1/23 to 12/31/23 (P480,000x 9/12) P360,000
1/1/24 to 3/31/24 (P480,000x 3/12) P120,000
Second Year Depreciation (P480,000)
4/1/24 to 12/31/24 (P480,000x 9/12) 360,000
1/1/25 to 3/31/25 (P480,000 x 3/12) P120,000
Third Year Depreciation (P480,000)
4/1/25 to 12/31/25 (P480,000x 9/12) 360,000
1/1/26 to 3/31/26 (P480,000
x 3/12)
Total depreciation for the year P360,000 P480,000 P480,000

225

The
The Book R̶e̶a̶d̶e̶r̶s̶ Raiders
Book Readexs- Raiders || Nevule
Nevule cs CamScanner
 Chapter 23 — Depreciation

CALM Company - SYD Method, Useful Life is Six Years (from Illustration 3)
2023 2024 2025
First Year Depreciation (P1,200,000)
4/1/23 to 12/31/23 (P1,200,000x 9/12) P900,000
1/1/24 to 3/31/24 (P1,200,000 x 3/12) P300,000
Second Year Depreciation (P1,000,000)
4/1/24 to 12/31/24 (P1,000,000x 9/12) 750,000
1/1/25 to 3/31/25 (P1,000,000x 3/12) P250,000
Third Year Depreciation (P800,000)
4/1/25 to 12/31/25 (P800,000x 9/12) 600,000
1/1/26 to 3/31/26 (P800,000 x 3/12)
Total depreciation for the year P900,000 P1,050,000 P850,000

PEACE Company - Double Declining Balance Method (from Illustration 4)

2023 2024 2025
First Year Depreciation (P2,000,000)
4/1/23 to 12/31/23 (P2,000,000x 9/12) — P1,500,000
1/1/24 to 3/31/24 (P2,000,000x 3/12) P500,000
Second Year Depreciation (P1,200,000)
4/1/24 to 12/31/24 (P1,200,000x 9/12) 900,000
1/1/25 to 3/31/25 (P1,200,000x 3/12) P300,000
Third Year Depreciation (P720,000)
4/1/25 to 12/31/25 (P720,000x 9/12) 540,000
1/1/26 to 3/31/26 (P720,000x 3/12)
Total depreciation for the year P1,500,000 P1,400,000 P840,000

Needless to say, the accumulated depreciation and carrying amounts as of the end
of each year will also be affected.

CHANGES IN THE ESTIMATE OF DEPRECIATION

Depreciation, being an accounting estimate, cannot be said to provide exact figures
in the financial statements. Instead, it provides reasonable figures. As such, changes
in depreciation amounts may arise from one or combination of the following:
a. Change in total or remaining useful life.
b. Change in depreciation method due to change in the manner of realization of the
benefits from the PPE.
c. Change in depreciable amount due to changes in the amount of residual value or
capitalization of subsequent costs.
d. Changes based on the combination of two or more changes above.

When there are changes in depreciation computation, an entity shall apply these
changes prospectively. In other words, the following shall be made by an entity:
a. On the date of change, determine the updated carrying amount of the PPE.

226

The
The Book
Book R̶Readexs-Raiders
e̶a̶d̶e̶r̶s̶ Raiders || Nevule
Nevule cS CamScanner
 Chapter 23 - Depreciation

b. Depreciable amount is [Link] the updated carrying amount less the

updated residual value, if there is any.
c. Moving forward, this depreciable amount is the basis for the revised
depreciation computation (revised useful life and/or depreciation method).
d. No revisions shall be made on the previously reported depreciation and
carrying amounts of PPEs in the prior years.

To understand more of the accounting treatment for the changes in accounting

estimates, the readers are advised to read the Intermediate Accounting - Volume 3
by the same author.
Illustration 9. For this illustration, the original information on ADVENTUROUS
Company (from Illustration 2) shall be used. Related lapsing schedule is provided
as follows:

[B] [A] -[B]

Annual [A] Accumulated Carrying
Date Depreciation _ Cost Depreciation Amount
Dec. 31, 2023 P480,000 P2,600,000 P480,000. P2,120,000
Dec. 31, 2024 480,000 2,600,000 960,000 1,640,000
Dec. 31, 2025 480,000 2,600,000 1,440,000 1,160,000
Dec. 31,2026 480,000 2,600,000 1,920,000 680,000
Dec. 31, 2027 480,000 _2,600,000 2,400,000 200,000

Assume that on December 31, 2024, when the carrying amount is P1,640,000, the
inputs in the depreciation estimate have been changed. Under each of the following
independent scenarios, determine the revised depreciation of the office equipment.
1. Remaining useful life is revised to four years.
2. Depreciation method is revised to SYD method but the remaining useful life is
still three years.
3. Remaining useful life is revised to four years and the depreciation method is
revised to SYD method.
4. Residual value increased to P500,000.
Scenario 1
On the date of change, the remaining depreciable amount is P1,440,000
(P1,640,000 - P200,000). By still using the straight-line method, the revised annual
depreciation for each of the remaining four years is P360,000 (P1,440,000/4 years).
Scenario 2
For this scenario, the updated depreciable amount of P1,440,000 will still be used.
SYD denominator shall be determined as follows:

SYD denominator =—2G+i) —

SYD denominator = 6

227

The
The Book R̶e̶a̶d̶e̶r̶s̶ Raiders
Book Readexs- Raiders || Nevule
Nevule cs CamScanner
 Chapter 23 - Depreciation

Three (3) is used since the remaining useful life on the date of change is three years,
Depreciation during each of the succeeding years are the following:
Remaining [A] [A] x P1.44M
Year Year/s Fraction Depreciation
2025 3 3/6 P720,000
2026 2 2/6 480,000
2027 1 1/6 240,000
10 _ 6/6 P1,440,000

Scenario 3
For this scenario, the updated depreciable amount of P1,440, 000 will still be used,
SYD denominator shall be determined as follows:

SYD denominator = ae

SYD denominator = 10

Four (4) is used since the remaining useful life on the date of change is four years.
Depreciation during each of the succeeding years are the following:

Remaining [A] [A] x P1.44M

Year Year/s Fraction Depreciation
2025 4 4/10 PS76,000
2026 3 3/10 432,000
2027 2 2/10 288,000
2028 1 1/10 144,000
10 10/10 P1,440,000

Scenario 4
Under this scenario, the revised depreciable amount is P1,140,000 (P1,640,000 less
P500,000 revised residual value). The revised annual depreciation for each of the
remaining three years is P380,000 (P1,140,000/3 years).

The readers should take note that the ending carrying amount of the PPE at the end
of useful life will now be equal to its revised residual value of P500,000.

Generalizations- Scenarios 1 to 4
Under each of the previous scenarios, the readers should take note thiat the
remaining depreciable amount of the PPE (revised, if relevant) is simply allocated
to the remaining useful life (revised, if relevant) using a depreciation method
(revised method, if relevant).

228

The
The Book
Book R̶Readexs-Raiders
e̶a̶d̶e̶r̶s̶ Raiders || Nevule
Nevule cs CamScanner
 Chapter 23 - Depreciation

DEPRECIATION METHOD BASED ON REVENUES

Under PAS 16, depreciating PPE items based on revenues is not allowed since the
amount of revenues is determined by many factors and not just based on the
utilization of PPE. These other factors include, but are not limited to, the following:
a. Effects of inflation in general selling prices
b. Overall economic conditions affecting the number of sold units, which in turn
will affect the total revenues.

USEFUL LIFE CONSIDERING LEGAL OR CONTRACTUAL LIMITATIONS

Legal or contractual limitations affect the length of useful life to be used in the
computation of depreciation. A good example of these limitations can be found on
leasehold improvements, where the improvements that cannot be removed from
the leased premises are depreciated over the shorter of the following:
a. Useful life
b. Lease term (contractual limitation)
In the absence of additional information, it is presumed that all of leasehold
improvements are nonremovable from the leased premises.

Illustration 10..On January 1, 2023, MOIRA Company made leasehold

improvements on one of its leased commercial spaces. Total cost amounted to
P5,000,000; 60% of which (i.e., P3,000,000) cannot be removed from the leased
premises. These improvements have five-year remaining useful life. Required:
Under each of the following independent scenarios, determine the annual
depreciation for the leasehold improvements:
1. Remaining lease term as of January 1, 2023 is 7 years.
2. Remaining lease term as of January 1, 2023 is 4 years

Scenario 1
Since the useful life of 5 years is shorter than the remaining lease term of 7 years, the
whole P5,000,000 cost of leasehold improvements shall be depreciated over 5
years. Consequently, annual depreciation is P1,000,000 (P5,000,000/5 years).

Scenario 2
Since the remaining lease term of 4 years is shorter than the 5-year useful life, the
leasehold improvements shall be split into removable and nonremovable portions:

Portion % | Cost Depre. Period | Annual Depre.

Nonremovable | 60% | P3,000,000 4 years P750,000
Removable 40% 2,000,000 5 years 400,000
Total P1,150,000

The nonremovable portion shall be depreciated for 4 years since the Company
cannot use the improvements after the 4-year remaining lease term. On the other

229

The
The Book R̶e̶a̶d̶e̶r̶s̶ Raiders
Book Readexs- Raiders || Nevule
Nevule cs CamScanner
 Chapter 23 — Depreciation

hand, removable portion is usable even after the remaining lease term, hence they
were depreciated over their 5-year useful life.
DERECOGNITION OF PROPERTY, PLANT AND EQUIPMENT
The carrying amount of an item of property, plant and equipment shall be
derecognized:
a. on disposal; or
b. when no future economic benefits are expected from its use or disposal.
The gain or loss arising from the derecognition of an item of PPE is recognized in
profit or loss and shall be determined as follows:
Scenario ~ Gain or Loss.
Net proceeds, if any > carrying amount of sold asset | Gain on sale
Net proceeds, if any < carrying amount of sold asset | Loss onsale
The carrying amount shall be updated on the date of sale using the accounting
policy on depreciation.
Illustration 11. On January 1, 2021, an entity acquired a machinery for P2,000,000.
This machinery was intensively tested for a total cost of P700,000, after which it
became ready for intended use on April 1, 2021. This asset can be used for a six-
year useful life. On August 1, 2023, this machinery was sold for P1,600,000.

Required: Under each of the following independent accounting pay scenarios,

determine the amount of gain or loss on sale:
1. The Company uses straight-line method and does not have any other , @peeial
accounting policies on depreciation.
2. The Company uses straight-line method. No depreciation is charged during the
year of purchase, while a full one-year of depreciation is charged during the year
of sale, regardless of the actual date of sale.
Scenario 1
In this scenario, the total amount of depreciation is determined based on the actual
length of time that the machinery is being used by the entity (i.e., from April 1, 2021
to August 1, 2023). Annual depreciation expense is P450,000 /(P2M + P700K)/6].
The machinery’s carrying amount as of August 1, 2023 can now be determined as:
Original cost, 1/1/21 (P2M + P700K) P2,700,000
Less: Accumulated depreciation, 8/1/23
Depreciation, 2021 (P450K x *9/12) (337,500)
Depreciation, 2022 (P450K x 12/12) (450,000)
Depreciation, 2023 (P450K x **7/12) (262,500)
1,050,000)|
Carrying amount, 8/1/23 P1,650,000
*nine months is from April 1, 2021 to December 31, 2021
**seven months from January 1, 2023 to August 1, 2023
230

The
The Book R̶e̶a̶d̶e̶r̶s̶ Raiders
Book Readexs- Raiders || Nevule
Nevule cS CamScanner
 Chapter 23 — Depreciation

Since the carrying amount of P1,650,000 is higher than the P1,600,000 net
proceeds, there is a loss on sale of P50,000 to be recorded as follows:
Accumulated depreciation 1,050,000
Cash 1,600,000
Loss on sale (P1.6M - P1.65M) 50,000
Machinery 2,700,000

Scenario 2
Under this scenario, the total depreciation is computed without regard to the actual
length of time that the entity has used the machinery. Instead, the special accounting
policy shall be followed, resulting to the following computations:
Original cost, 1/1/21 (P2M + P700K) P2,700,000
Less: Accumulated depreciation, 8/1/23
Depreciation, 2021 (P450K x *0/12)
Depreciation, 2022 (P450K x 12/12) (450,000)
Depreciation, 2023 (P450K x **12/12) (450,000)
(900,000)
Carrying amount, 8/1/23 P1,800,000
*no depreciation during the year of purchase in 2021
**whole-year depreciation during the year of sale in 2023

Since the carrying amount of P1,800,000 is higher than the P1,600,000 net
proceeds, there is a loss on sale of P200,000 to be recorded as follows:

Accumulated depreciation 900,000

Cash 1,600,000
Loss on sale (P1.6M - P1.8M) 200,000
Machinery 2,700,000

CHAPTER SUMMARY
1. Subsequent to the initial recognition, PPE items shall be accounted for using either
cost model or the revaluation model.
2. Under cost model, PPE is measured at its cost less accumulated depreciation and any
accumulated impairment losses.
3. Under revaluation model, PPE is measured at its fair value on the date of revaluation
less any subsequent accumulated depreciation and subsequent impairment losses.
4, The application of either the cost model or revaluation model shall be made ona per
class basis. A class of PPE is a grouping of assets of a similar nature and use.
5. Depreciation is the systematic allocation of the cost of a PPE to the periods that
benefited from the use of such PPE. Accumulated depreciation is the cumulative
depreciation since the PPE’s initial recognition.
Carrying amount of PPE is equal to cost less accumulated depreciation.
SS

Generally, depreciation is recognized in profit or loss unless it is included in the

carrying amount of another asset.
231

The
The Book R̶e̶a̶d̶e̶r̶s̶ Raiders
Book Readexs- Raiders || Nevule
Nevule oJ CamScanner
CamScanner
 Chapter 23 — Depreciation

8. To determine the amount of depreciation, the following inputs shall be used: cost,
residual value (cost less residual value is equal to depreciable amount), useful life,
and depreciation method.
9. Depreciation shall start when the asset is available for intended use while it shall
end at the earlier of the following:
a. the date that the asset is classified as held for sale; or
b. the date that the asset is derecognized
10. Depreciation methods can be classified in to the following general categories:
Time-Based Activity-Based __Other Basis
Based on mere passage of | Based on the asset usage. | All other methods.
time. Depreciation will | The amount of depreciation
continue to be recorded | will depend on the level of
even if the assetis unused. | its utilization.
11. Time-based depreciation methods include the following:
a. Straight-line method (equal periodic depreciation)
b. Diminishing balance methods (decreasing depreciation charge):
1. Sum-of-the-years’-digits method. The denominator to be used shall be
determined as follows:

N(N+1)
SYD Denominator
2
2. Declining balance methods (e.g. double-declining and 150%-declining).
Depreciation is determined as beginning carrying amount times the
depreciation rate.
12. Activity-based depreciation may be based either on inputs (e.g., number of hours
used) or based on outputs (e.g., number of units produced).
[Link] method/composite method- groups different items of PPEs, and these are
depreciated as if they are a single asset.
[Link] depreciation method- divides a single asset into its major components,
with each component depreciated separately as if they are separate assets.
[Link] asset is acquired not on January 1 and time-based depreciation method is used,
the amount of depreciation shall be allocated to eorresponding calendar-year
periods.
[Link] in the estimate of depreciation shall be seated for prospectively.
Previously ea amounts related to the PPE and its depreciation shall not be
revised.
17. Depreciation basedont revenues is not allowed.
18. The nonremovable components of leasehold improvements shall be depreciated at
the shorter of its useful life and remaining lease term.
19. The carrying amount of PPE shall be derecognized;
a. on disposal; or
b. when no future economic benefits are expected from its use or disposal.
20. Gain or loss on sale is the difference between net proceeds and carrying amount.

232

The
The Book
Book R̶Readexs-Raiders
e̶a̶d̶e̶r̶s̶ Raiders || Nevule
Nevule cS CamScanner
 Chapter 23 — Depreciation

CHAPTER 23: SELF-TEST EXERCISES

True or False
1. Subsequent to the initial recognition, PPEs are accounted using either cost model
or revaluation model.
2. Cost model or revaluation model shall be applied on an item-by-item basis.
3. Depreciation is the recognition of decrease in the fair value of an item of PPE.
4. Notall depreciation amounts are recognized in profit or loss.
5. Thecarrying amount of PPE at the end of the current year is determined as cost less
the current year’s depreciation.
6. Depreciation shall start when the asset becomes ready for its intended use,
regardless of when they were acquired or constructed.
7. Useful life is limited to the period over which an asset is expected to be available for
use by an entity.
8. No depreciation shall be recognized if the fair value of a PPE is higher than its
carrying amount.
9. Generally, land is assumed to have an indefinite useful life and is not subject to
depreciation.
10. Generally, recognition of time-based depreciation shall not cease if the asset
becomes idle or is retired from active use.
11. PPEs under construction shall be depreciated from the time the construction
activities have started with any additional capitalized cost depreciated
prospectively.
12. Time-based methods recognize depreciation based on the passage of time and not
based on usage.
13. Straight-line method recognizes equal amounts of periodic depreciation.
14. Generally, the amount of depreciation is computed based on the asset’s initial cost.
15. SYD method recognizes decreasing amounts of periodic depreciation.
16. Declining balance methods derive the depreciation rate from the straight-line
method rate of depreciation, which is modified accordingly depending on whether
the entity uses double-declining or the 150%-declining variations.
17. Generally, under the declining balance method, the depreciation rate is multiplied
to the remaining depreciable amount of the asset.
18. The amount of depreciation under activity-based methods will depend on the level
of utilization of the PPE.
19. Component depreciation method aggregates separate items of PPEs and
depreciates them as if they are a single asset.
20. Group method of depreciation disaggregates a large item of PPE into different
components and depreciates each component as if they are separate assets.
Multiple Choice - Theories
1, Subsequent to initial recognition, items of PPE shall be measured using either of the
a. Cost model or fair value model
b. Cost model or revaluation model
c. Revaluation model or fair value model
d. Revaluation model or net realizable value model
233

The
The Book R̶e̶a̶d̶e̶r̶s̶ Raiders
Book Readexs- Raiders || Nevule
Nevule oJ CamScanner
CamScanner
 Chapter 23 — Depreciation

2. Recently, an entity acquired a furniture that is the first of its kind in the entity’s
books. The entity is unsure of what accounting policy shall be applied to this asset,
Upon analyzing its accounting policies, the entity determined that the revaluation
model is applied to land while the cost model is applied to buildings and equipment
Based on these,
a. Cost model shall be applied to the furniture since it is a depreciable asset.
b. Revaluation model shall be applied to the furniture in order to balance the
application of the cost model and revaluation model to the entity’s assets.
c. Theentity still has the choice on whether to apply the cost model or revaluation
model to the furniture.
d. None of the above.
3. During the current year, an entity acquired a new building. All of the entity’s other
buildings and all ofits lands are accounted for using revaluation model. On the other
hand, equipment and machineries are accounted for using the cost model. In this
case.
a. The new building shall be accounted for using the revaluation model.
b. The new building shall be accounted for using the cost model.
c. The entity has still the choice on whether to apply the cost model or the
revaluation model to the new building.
d. None of the above.
4. Generally, the following inputs shall be used in determining the amount of
depreciation expense, except
a. Cost
b. Residual value
c. Useful life
d. Depreciation method -
e. None of the above
5. All of the following are true regarding the general classifications of depreciation
methods, except
a. Time-based methods recognize depreciation, even if the asset is not used.
b. Activity-based methods recognize depreciation based on the asset's utilization.
c. Activity-based methods will result to higher amounts of depreciation the more
the asset is used.
d. Time-based methods will result to either an increasing or decreasing amount of
depreciation per year.

6. The following are considered time-based depreciation methods, except

a. Straight-line method
b. Sum-of-the-years’-digits method
c. Declining balance method
d. None of the above
7. All of the following statements are correct under the straight-line method of
depreciation, except
234

The
The Book
Book R̶Readexs-Raiders
e̶a̶d̶e̶r̶s̶ Raiders || Nevule
Nevule cS CamScanner
 Chapter 23 - Depreciation

a. This method assumes that the asset provides a steady level of economic benefits
all throughout its useful life.
b. This method considers the fact that as the asset gets older, the amount of repairs
and maintenance costs increases.
Cc. This method results to equal periodic amounts of depreciation.
d. The amount of periodic depreciation is derived from the depreciable amount.
8. Diminishing balance methods are used due to which of the following rationale?
a. Assets are less efficient during the initial years of their useful lives; as they are
used, they will be more efficient during the latter years of their useful lives.
b. Repair costs are higher during the asset’s initial years compared to its latter
years.
Cc. Botha and b
d. Neither a nor b
9. The following statements are correct regarding the sum-of-the-years’-digits (SYD)
method, except
a. Periodic amount of depreciation is decreasing.
b. Periodic amount of reduction from the carrying amount is increasing.
c. The amounts of annual depreciation during the latter years are less than the
amount of annual depreciation under the straight-line method.
d. The amounts of annual depreciation during the initial years are higher than the
amount of annual depreciation under the straight-line method.
[Link] the double-declining balance method, all of the following statements are
relevant, except
a. Depreciation rate is 200% of the rate used under the straight-line method.
b. To determine the depreciation for the initial years, the beginning carrying
amount shall be multiplied with the relevant depreciation rate.
c. Residual value shall never be considered in determining the amount of
depreciation.
d. None of the above
[Link] entity uses declining-balance method in depreciating some of its assets. In this
case, which of the following is/are true?
a. The ending carrying amount of the asset can also be determined by multiplying
the beginning carrying amount by 1 less the depreciation rate.
b. The depreciation expense during the last period is equal to beginning carrying
amount less residual value,
c. Botha and b
d. Neither a nor b
[Link] using activity-based depreciation method, all of the following are true, except
a. The higher the asset's utilization, the higher the amount of depreciation,
b, If the asset is not used during a particular period, no amount of depreciation is
recognized for that period.
The amount of depreciation is a function of usage.
235

The
The Book R̶e̶a̶d̶e̶r̶s̶ Raiders
Book Readexs- Raiders || Nevule
Nevule oJ CamScanner
CamScanner
 Chapter 23 — Depreciation

d. Residual value will be considered only during the last period of an asset’s useful
life.
[Link] entity uses group method of depreciating its PPE items. In connection with this,
which of the following is correct?
a. The depreciation rate shall be determined as total annual depreciation of all the
PPEs in the group divided by the total depreciable cost of all the PPEs in the
group.
b. Composite life shall be determined as the total cost of PPEs in the group divided
by total annual depreciation.
c. Ifanasset from the group is sold, no amount of gain or loss shall be recognized.
d. All ofthe above.

[Link] of the following is/are true concerning the component method of

depreciation?
a. Major components of an asset are identified and depreciated separately.
b. Allinsignificant components may be aggregated and depreciated as if they are a
single asset.
c. Bothaandb
d. Neitheranorb
15. Which of the following is the correct depreciation for leasehold improvements?
a. Removable improvements shall be depreciated over their useful lives while
nonremovable improvements shall be depreciated over the shorter of their
useful lives and the remaining lease term.
b. Nonremovable improvements shall be depreciated over their useful lives while
removable improvements shall be depreciated over the shorter of their useful
lives and the remaining lease term.
c. Both removable and nonremovable improvements shall be depreciated over
their useful lives. ;
d. Bothremovable and nonremovable improvements shall be depreciated over the
shorter of their useful lives and the remaining lease term.

Straight Problems
1, On January 1, 2023, COWRIE Company acquired an equipment for a total cost of
P8,000,000. This equipment can be used for the next five years after which it can be
sold for an estimated amount of P700,000 less estimated selling costs of P50,000. As
additional information, the equipment can be used for a total of 200,000 hours.
Actual number of hours for the next five years are the following:

2023 2024 2025 2026 2027

36,000 45,000 51,000 30,000 38,000
Required: Under each of the following independent depreciation methods,
determine the (a) depreciation expense each year from 2023 - 2027; and (b)
carrying amount of the equipment as of the end of each year from 2023 - 2027:
1. Straight-line method
236

The
The Book
Book R̶Readexs-Raiders
e̶a̶d̶e̶r̶s̶ Raiders || Nevule
Nevule cS CamScanner
 Chapter 23 - Depreciation

2. SYD method
3. Double-declining balance method
4. Activity-based method based on the number of production hours
2. CANON Company acquired a machinery for P6,000,000. Testing costs of P300,000
were incurred while the proceeds received from sample units produced amounted
to P100,000. This machinery can be sold for a net amount of P1,050,000 after its six-
year useful life. Stated in the number of units, this machinery can produce a total of
300,000 units. Number of units produced during each year is as follows:
2023 2024 2025 2026 2027 2028
55,000 48,000 36,000 60,000 56,000 45,000
Required: Under each of the following independent depreciation methods,
determine the (a) depreciation expense each year from 2023 - 2027; and (b)
carrying amount of the equipment as of the end of each year from 2023 - 2027:
-1. Straight-line method :
2. SYD method
3. 150%-declining balance method
4. Activity-based method based on the number of production hours -
_ 3. OnJuly 1, 2023, LULI Company acquired a vehicle for P6,000,000. The vehicle can be
used for four years and can be sold for P500,000 at the end of its useful life.

Under each of the following independent depreciation methods, determine the (a)
depreciation expense each year from 2023 - 2025; and (b) carrying amount of the
equipment as of the end of each year from 2023 - 2025:
1. Straight-line method
2. SYD method
3. 200%-declining balance method
4, BAMBANG Company started its operations during 2021. At the beginning of 2023,
its Machinery account had a balance of P8,000,000 while the related: Accumulated
Depreciation account had a balance of P1,260,000. Based on the Company’s policy,
all machineries are depreciated over five years.
On April 1, 2023, a new machinery costing P1,100,000 was acquired and
immediately put into use. On the other hand, a machinery previously bought for
P900,000 last June 30, 2021 was sold for P515,000 on October 1, 2023.

Required: From the given information, determine the following:

a. Total depreciation expense - machineries for the year 2023.
b. Journal entry to record the sale on October 1, 2023.
c. Ending balances of Machinery and Accumulated Depreciation accounts as of
December 31, 2023.

237

The
The Book
Book R̶Readexs-Raiders
e̶a̶d̶e̶r̶s̶ Raiders || Nevule
Nevule cS CamScanner
 Chapter 23 — Depreciation

5. During 2020, MONCADA Company commenced its delivery operations. On January

1, 2023, its vehicle account had a balance of P9,000,000 while the related
accumulated depreciation account had a balance of P5,400,000. The Company uses
the straight-line method and four-year useful life in depreciating all of its vehicles.
On March 1, 2023, a vehicle costing P1,200,000 and was acquired on January 1, 2021,
was sold for P420,000. The Company also acquired vehicles costing P900,000 and
P1,500,000 on July 1, 2023 and October 1, 2023, respectively.

Required: From the given information, determine the following:

a. Total depreciation expense - vehicles for the year 2023.
b. Journal entry to record the sale on March 1, 2023.
c. Ending balances of Vehicle and Accumulated Depreciation accounts as of
December 31, 2023.

6. At the beginning of 2021, PANIQUI Company acquired an equipment for a total

capitalizable cost of P4,500,000. This equipment is to be depreciated using straight-
line method over its six-year useful life. On January 1, 2023, there were changes in
circumstances warranting the revision of the computation of the depreciation
expense.

Required: Under each of the following independent scenarios of changes in

estimates of depreciation, determine the amount of depreciation expense for the
years 2023 and 2024:
1. Remaining useful life is revised to five years.
2. Remaining useful life is revised to three years.
3. Remaining useful life is revised to three years while the residual value is now
estimated at P300,000.
4. Total useful life is revised to eight years.
5. Depreciation method is changed to SYD method.
6. Depreciation method is changed to SYD method and the remaining useful life is
revised to five years.

7. On January 1, 2020, CAPAS Company acquired a vehicle for P8,000,000. After the
vehicle’s seven-year estimated useful life, it can be sold for P300,000. The Company
has a policy of using the SYD method in depreciating this vehicle. On January 1, 2023,
due to changes in the factors used in initially estimating the depreciation amounts,
the Company decided to change its estimate of depreciation.

Required: Under each of the following independent scenarios of changes in

estimates of depreciation, determine the amount of depreciation expense for the
years 2023 and 2024:
1. Remaining useful life is revised to two years,
2. Remaining useful life is revised to three years while the residual value is now
estimated at P200,000.
3. Depreciation method is changed to straight-line method.
238

The
The Book
Book R̶Readexs-Raiders
e̶a̶d̶e̶r̶s̶ Raiders || Nevule
Nevule cs CamScanner
 Chapter 23 — Depreciation

4. Remaining useful life is revised to five years and depreciation method is revised
to straight-line method.
5. Depreciation method is changed to straight-line method while the residual value
is now estimated at P400,000.

g. On January 1, 2023, GERONA Company acquired a group of assets related to the

manufacturing process of one of its products:
Cost Residual Value Useful Life
Machinery A P4,550,000 P350,000 6 years
Machinery B 2,600,000 200,000 4 years
Equipment A 3,900,000 400,000 5 years
Equipment B 4,950,000 150,000 8 years
P16,000,000 P1,100,000
Required: Using the group or composite method, determine the following:
a. Total annual depreciation
b. Composite life
c. Journal entry to record the assumed sale of Equipment A on December 31, 2024
for P2,500,000.
9. On January 1, 2023, IGNACIA Company completed the construction of its cruise ship
for a total cost of P50,000,000. The ship had the following major and miscellaneous
components:
Component Cost Useful Life
Ship’s frame P20,000,000 40 years
Engines 10,000,000 20 years
Internal fittings (beds, chairs) 8,000,000 10 years
Other improvements 7,000,000 5 years
Miscellaneous components 5,000,000 5 years
P50,000,000
Required: Using the component method, determine the amount of depreciation
expense from 2023 to 2032 based solely on the given information.
10. At the beginning of 2023, CONCEPCION Company started its business operations. As
of the same date, it acquired the following assets and their corresponding
capitalizable costs:
Total cost Depreciation Method Useful lives
Land P5,000,000 not applicable indefinite
Building 8,000,000 straight-line 20 years
Machineries 6,000,000 SYD method 5 years
Furniture 4,000,000 double-declining 4 years
Additional machineries with total cost of P1,500,000 were acquired on March 31,
2023 while additional furniture was acquired on July 1, 2023 for P1,000,000. Lastly,
a machinery acquired on January 1, 2023 costing P900,000 was sold on September
30, 2023 for P700,000.
239

The
The Book R̶e̶a̶d̶e̶r̶s̶ Raiders
Book Readexs- Raiders || Nevule
Nevule cs CamScanner
 Chapter 23 — Depreciation

Required: From the given information, determine the following:

a. Depreciation expense for building
b. Total depreciation expense for machineries
c. Total depreciation expense for furniture
d. Journal entry to record the sale of the machinery on September 30, 2023
e. Netcarrying amount of the Company’s PPEs as of December 31, 2023

Multiple Choice
1. On January 1, 2022, ROXAS Company started the construction of its office building.
The following information may be relevant in determining the initial cost of the
building:
Materials used in the construction P5,000,000
Excavation costs 500,000
Building permit fees 200,000
Demolition costs of the old building 300,000
Labor used in the construction 3,000,000
Other construction costs 2,000,000 .

The office building was completed on January 1, 2023. This building is estimated to
be used for the next 20 years.
Annual depreciation expense shall be
a. P550,000 c. P525,000
b. P535,000 d. P500,000
Accumulated depreciation as of December 31, 2026 shall be
a. P2,140,000 c. P2,750,000
b. P2,675,000 d. P2,200,000
Carrying amount of the building as of December 31, 2027 shall be
a. P9,835,000 c. P9,025,000
b. P8,550,000 d. P8,250,000

. At the beginning of 2023, CAPIZ Company acquired a specialized equipment for

P4,000,000, to be used in its operations. Testing costs of P500,000 were incurred
while P200,000 was received as proceeds from selling the sample units produced
during testing. Consequently, the equipment became ready for intended use on
March 31, 2023, This equipment is estimated to have a five-year useful life.
Depreciation for the year 2023 shall be
a. P900,000 c. P860,000
b. P675,000 d, P645,000
Accumulated depreciation as of December 31, 2024 shall be
a. P1,575,000 c. P1,505,000
b. P1,800,000 d. P1,720,000

240

The
The Book R̶e̶a̶d̶e̶r̶s̶ Raiders
Book Readexs- Raiders || Nevule
Nevule oJ CamScanner
CamScanner
 Chapter 23 - Depreciation

Carrying amount of the equipment as of December 31, 2025 shall be

a. P1,935,000 c. P2,025,000
b. P1,720,000 d. P1,800,000

. At the beginning of 2023, AKLAN Company had a P9,000,000 balance in its

Machinery account, composed of the following batches:
Cost Date Acquired
Batch1 2,000,000 January 1,2019
Batch 2 3,000,000 July 1,2019
Batch 3 4,000,000 January 1, 2021

The Company uses four-year useful life and straight-line method in depreciating its
machineries. On April 1, 2023, Batch 4 of machineries were acquired for a total of
P3,500,000. On the other hand, on October 1, 2023, a machinery costing P1,000,000
from Batch 3 was sold for P270,000.

Total depreciation for the year 2023 shall be

a. P2,050,250 c. P1,815,250
b. P1,968,750 d. P1,902,750

Total accumulated depreciation as of December 31, 2023 shall be

a, P8,593,750 c. P7,906,250
b. P8,513,250 d. P7,825,750

Carrying amount of the Company’s machineries as of December 31, 2023 shall be

a. P3,415,250 c. P3,212,250
b. P3,228,750 d. P3,593,750

Gain or loss on sale from October 1, 2023 transaction shall be

a. P42,500 gain c. P62,500 gain
b. P42,500 loss d. P62,500 loss
. On January 1, 2023, CUYA Company acquired a transportation vehicle for a total cost
of P6,900,000. The Company depreciates the vehicle over its six-year useful life
using SYD. Immediately after the acquisition, the vehicle was put into use. At the end
of its useful life, it is reasonably estimated that the Company will receive P600,000
when selling the vehicle.
Depreciation expense for the year 2023 shall be
a. P1,800,000 c, P1,150,000
b. P1,500,000 d. P1,050,000
Accumulated depreciation as of December 31, 2024 shall be
a. P2,100,000 c, P3,300,000
b. P3,600,000 d, P2,300,000

241

The
The Book R̶e̶a̶d̶e̶r̶s̶ Raiders
Book Readexs- Raiders || Nevule
Nevule cs CamScanner
CamScanner
 Chapter 23 — Depreciation

Carrying amount of the vehicle as of December 31, 2025 shall be

a. P1,800,000 c. P3,450,000
b. P2,400,000 d. P3,550,000

5. On April 1, 2023, MINDORO Company, a VAT-registered entity, acquired a computer

equipment for a total invoice price of P5,488,000, including 12% VAT. This computer
was tested intensively for P500,000 and became ready for use on June 1, 2023.
Estimated useful life of the computer is seven years, after which, it can be sold for an
estimated amount of P360,000. The Company uses the SYD method in depreciating
this computer equipment.
Depreciation expense for the year 2023 shall be
a. P945,000 c. P1,260,000
b. P820,750 d. P735,000
Carrying amount of the computer equipment as of December 31, 2024 shall be
a. P3,330,000 c. P3,510,000
b. P2,960,000 d. P3,060,000
Accumulated depreciation as of December 31, 2025 shall be
a. P2,865,000 c. P3,240,000
b. P3,015,000 d. P3,560,000

6. At the beginning of 2023, CALAPAN Company acquired furniture and fixtures at a

total purchase price of P6,272,000. In addition, costs of transporting the asset to the
Company’s premises amounted to P228,000. This asset can be sold at an estimated
amount of P700,000 at the end of its useful life. For purposes of depreciating
furniture and fixtures, the Company has a policy of spreading its cost over an eight-
year useful life using the double-declining balance method.
Depreciation expense for the year 2023 shall be
a. P1,450,000 c. P1,715,000
b. P1,625,000 d. P1,895,000

Accumulated depreciation as of December 31, 2025 shall be

a. P4,443,359 c. P3,757,813
b. P4,957,520 d, P2,843,750
Carrying amount of the furniture and fixtures as of December 31, 2027 shall be
a. P2,056,641 c, P2,742,188
b. P1,542,480 d. P1,156,860

7. On January 1,2023, KALAYAAN Company, a non-VAT-registered entity, acquired an

office equipment for P4,600,000, excluding the 12% VAT. Installation costs
amounted to P248,000. For purposes of depreciating furniture and fixtures, the
Company has a policy of spreading its cost over a six-year useful life using the 150%-
declining balance method. After the designated useful life, this office equipment can
be sold at an estimated amount of P900,000.
242

The
The Book R̶e̶a̶d̶e̶r̶s̶ Raiders
Book Readexs- Raiders || Nevule
Nevule 8) CamScanner
 Chapter 23 — Depreciation

Depreciation expense for the year 2024 shall be

a. 1,212,000 c. P987,000
b. P750,000 d. P1,350,000
Carrying amount of the office equipment as of December 31, 2025 shall be
a. P2,278,125 c. P1,281,445
b. P1,708,594 d. P2,045,250
Accumulated depreciation as of December 31, 2026 shall be
a. P3,314,063 c. P3,691,406
b. P3,697,547 d. P4,118,555
8. At the beginning of January 1, 2020, BENEFICIAL Company acquired an equipment
for P4,000,000. This equipment. will be depreciated using the double-declining
balance method over its eight-year useful life. On January 1, 2023, the Company
changed its estimate of depreciation.
Scenario 1 - The depreciation method is changed to straight-line method, and the total
useful life of the equipment is changed to seven years:
The amount of depreciation for the year 2023 shall be
a. P241,071 c. P337,500
b. P421,875 d. P445,925

The carrying amount of the equipment as of December 31, 2024 shall be

a. P843,750 c. P795,650
b. P1,205,358 d. P1,012,500

Scenario 2 - The depreciation method is changed to SYD method, and the remaining
useful life of the equipment is changed to four years:

The amount of depreciation for the year 2023 shall be

a. P525,750 c. P675,000
b. P316,406 d. P421,875
The carrying amount of the equipment as of December 31, 2024 shall be
a. P168,750 c. P337,500
b. P212,550 d, P506,250

9. On January 1, 2019, ADVANTAGE Company acquired a transportation vehicle for

P4,500,000. For accounting purposes, the vehicle is to be depreciated using the
straight-line method over its seven-year useful life. Residual value after the end of
its useful life is P300,000. On January 1, 2023, circumstances have changed,
requiring the revision of the depreciation computations.
Scenario 1 - The remaining useful live is revised to four years while the residual value
is revised to P200,000;

243

The
The Book
Book R̶Readexs-Raiders
e̶a̶d̶e̶r̶s̶ Raiders || Nevule
Nevule cS CamScanner
 Chapter 23 — Depreciation

The amount of depreciation for the year 2023 shall be

a. P400,000 c. P600,000
b. P390,000 d. P475,000
The carrying amount of the vehicle as of December 31, 2024 shall be
a. P1,150,000 c. P900,000
b. P1,300,000 d. P1,320,000
Scenario 2 - The remaining useful live is revised to five years while the depreciation
method is revised to SYD method. Lastly, estimated residual value has decreased to
P150,000:

The amount of depreciation for the year 2023 shall be

a. P700,000 c. P600,000
b. P650,000 d. P550,000
The carrying amount of the vehicle as of December 31, 2024 shall be
a. P1,240,000 c. P985,000
b. P1,020,000 d. P930,000
10.0n January 1, 2023, ALBERTA Company made improvements to its leased space for
a total cost of P6,000,000, P2,400,000 of which are permanent and non-removable.
On their own, these improvements are usable for eight years. However, the
remaining lease term is only six years. The Company has a policy of using the
straight-line method of depreciating its leasehold improvements
The amount of depreciation for the year 2023 shall be
a. P675,000 c. P850,000
b. P750,000 d. P1,000,000
Carrying amount of the leasehold improvements as of December 31, 2024 shall be
a. P4,300,000 c. P4,500,000
b. P3,850,000 d. P4,000,000

244

The
The Book
Book R̶Readexs-Raiders
e̶a̶d̶e̶r̶s̶ Raiders || Nevule
Nevule cS CamScanner