Chapter 8! Chapter 8! The Accounting CycleThe Accounting Cycle

Work Sheet and Adjusting Process

Unit 4 Quest (chapter 8 and 10) will be on December 10 (Wednesday)

Youtube clip: “Straight Line and Declining Balance Method” by Notepirate

The two most common methods of calculating depreciation are the straight line method and declining balance method.

So far we only learned the straight line method.

DepreciationDepreciation

DBM of depreciation calculates the annual depreciation by multiplying the undepreciated cost of the asset by a fixed percentage.

CRA (tax collection agency) has set guidelines for the percentage figures for each long term asset. These rates are called Captial Cost Allownce Rate or Depreciation Rate. For example:

Auto 30% Computers 55% Computer software 100% Office furniture and equipment 20% Buildings acquired after 1988 5%

Declining Balance MethodDeclining Balance Method

Let’s say we purchased several computers for $22000 on March 1, 2011.

Since the CCA rate is 55%, on December 31, we have to calculate:

Depreciation amount = 22000 * 0.55 = 12100 But only in the first year of purchase, CRA

mandates that businesses use Half Year Rule, which means we can depreciate only 6 months portion of the year, so we have to reduce the depreciation expense by 50%

12100 * 0.5 = 6050 Undepreciated Cost in 2012= 22000 – 6050 =

15950

Declining Balance MethodDeclining Balance Method

ON December 31 2012, we have to calculate Depreciation amount = 15950 * 0.55 =

8772.50 Undepreciated Cost for 2013 = 15950 –

8772.5 = 7177.50

On December 31 2013, we have to calculate Depreciation amount = 7177.50 * 0.55 =

3947.63 Undepreciated cost for 2014 = 7177.50 –

3947.63 = 3229.88

Declining Balance MethodDeclining Balance Method

Begining or CCA Depreciation Ending

Undepreciated Rate Expense Undepreciated

Year Cost Cost 2011 22000 55% 6050

159502012 15950 55% 8772 7177.502013 7177.50 55% 3947.63 3229.882014 3229.88 55% 1776.43 1453.44

Declining Balance MethodDeclining Balance Method

In order to calculate DBM depreciation, you just have to use the ending balance of undepreciated cost * CCA rate. In other words,

Depreciation cost = Begining balance * CCA rate Ending Undepreciated cost = Begining

Undepreciated cost – Depreciation Expense We should calculate depreciation expense on Dec 31

of each year until the computers are sold or scrapped. Remember that straight line method gives same

depreciation expense every year whereas the DBM produces depreciation figures which are larger in the early years and smaller in the later years.

Declining Balance MethodDeclining Balance Method

We do not need to estimate the useful life or salvage value when using DBM, so CRA mandates that Canadian businesses use DBM (rather than straight line method) when reporting their income (for income tax purpose) to CRA.

Compared to SLM, using DBM leads to higher depreciation expense in early years, which leads to lower net income in Income Statement.

Many companies would produce two income statements: one for CRA (using DBM) and second one for investors, owners and bankers (using SLM).

By forcing DBM to businesses , CRA is encouraging businesses to buy Long Term Assets.

Declining Balance MethodDeclining Balance Method

Depreciation Adjusting Entry you have to make on December 31 is exactly same as SLM.

How the asset numbers are presented in Balance Sheet is exactly same as SLM.

Only the depreciation expense amount calculation is different from SLM.

Declining Balance Method vs Declining Balance Method vs Straight Line MethodStraight Line Method

Remember that people with Shsm must connect their Shsm with your group project.

Review Q #8, 10,11, 13, 14, 15 (P311)

(P311) Ex 1D, 1E, 1F, 2B, 2C, 5, 6

Classwork / Homework Classwork / Homework (Tuesday)(Tuesday)

Review Q #1, 3, 4, 5, 6, 7, 9 (P311) P311 Ex 1A, 1B, 1C, 2A, 2C, 3, 4 I took up Ex 1A, 1B and 1C after 20

minutes.

Homework (Monday)Homework (Monday)