MGAB02H3 Lecture Notes - Lecture 2: Cash Flow, Irobot
10 May 2018
School
Department
Course
Professor
Straight line method SFP:
Depreciation : (Original cost - Residual Value)/Life
($ 40,000 - $ 10,000)/5 Cost
6,000 Acc Dep
Carry Value
Depreciation expense 6,000 Net Book value
Accumulated depreciation 6,000
Accelerated Method - Double Declining Method
Depreciation rate 100%/Life
Regular declining balance method - Depreciation Rate : 100%/5 = 20%
Double declining balance method - double the rate 20% x 2 = 40%
Usingh double declining. Depreciation :
Salvage value is not deducted up front
However, you can only depreciare up to the salvage value
Depreciation :
Carrying Value x Depreciation Rate
Year 1 : Carry Value
Depreciation : $ 40,000 x 40% 16,000 $ 40,000 - $ 16,000 = $ 24,000
Year 2 :
Depreciation : $ 24,000 x 40% 9,600 $ 24,000 - $ 9,600 = 14,400
Unit of output
Depreciation : (Cost - residual Value)/Total estimated output x output for the period
Car (Cost)_ 40,000
Residual Value 10,000
estimate mileage for the car 200,000 km
Year 1 - Drove 25,000 km
Depreciation - Year 1
Depreciation rate per output:
Cost 40,000
residual value 10,000
30,000
Total estimated output 200,000
Dep rate per km 0.15
depreciation for Year 1 $ 0.15 x 25,000 = 3,750
Activity 1:
Straight Line depreciation:
($ 3,000 - $ 500)/5 500
Double declining method:
Depreciation rate (non-double declining) 100%/5 20%
Double declining rate 40% (20% x 2)
Year 1 depreciation $ 3,000 x 40% = 1,200
Carrying Value - Year 1 $ 3,000 - $ 1,200 = 1,800
Year 2 depreciation $ 1,800 x 40% =- 720
Unit of Output method:
Depreciation rate per output:
($ 3,000 - $ 500)/6,000 = 0.4167
Year 2 depreciation:
0.4167 x 1,200 500
Every time the asset is disposed, I must record thegain or loss on disposal of assets
Disposal - selling ; Throwing it out; Trade in ; Insurance claim, etc
Gain or loss is claculated by comparing :
Recovery Value
vs
Carrying Value
Using Car example
Cost 40,000
residual value 10,000
Life 5 years
Sold car at end of year 2 for $ 30,000
At end of Year 2,
Carrying Value Accumulate depreciation
Cost 40,000 Cash
Acc depreciation (2 years) 12,000 Gain on dispsoal of car
Carrying Value 28,000 Car
recovery Value 30,000
Gain on dispsoal 2,000
Activity 4:
Trade In Value 3,000 ($ 10,000 - $ 7,000)
Carrying Value (irobot - Yr 4) 1,000 ($ 3,000 - ($ 500 x 4))
Gain on trade in 2,000
Disposal of old New
Trade In Value 3,000 I-robot
Accumulated Depreciation 2,000 Cash
Cost of irobot 3,000 Trade in value
Gain on disposal of old 2,000
Change in estimate (Residual value or life)
Every time when these change, depreciation going forward will need to change
To do the new depreciation
- Calculate the carrying value of the asset
- Assume using straight line, new depreciation = (Carrying value - revsied residual value)/remaining useful life
Car example - above
Assume at the end of year 2 - change the residual value to $ 5,000; adding 2 additional years to the life
Assume we use straight line depreciation
Depreciation per year from Year 3:
carrying value at end of year 2 :
Cost 40,000
Accumulated depreciation 12,000 ($ 40,000 - $ 10,000)/5 x 2
carrying value at end of year 2 : 28,000
Revised depreciation
Carrying value (end of yr2) 28,000
Revised residual value 5,000
23,000
Remaining Life 5 (5 years - depreciated 2 years + 2 years)
Revised depreciation per year 4,600
Problem 8-2
January 2:
Machine 81,400
Common Shares 7,000 ($ 3.50 x 2,000)
Notes Payable 45,000
Accounts Payable 29,400 ($ 82,000 - $ 7,000 - $ 45,000) x 98%
Machine 2,400
Cash 2,400
Clean up expense 100
Cash 100
January 15:
Accounts Payable 29,400
Discount Lost 600
Cash 30,000
April 16:
Notes Payable 45,000
Interest expense 1,500 $ 45,000 x 8%/12 x 3.5
cash 46,500
Document Summary
Depreciation : (original cost - residual value)/life ($ 40,000 - $ 10,000)/5. Regular declining balance method - depreciation rate : Double declining balance method - double the rate. However, you can only depreciare up to the salvage value. Depreciation : (cost - residual value)/total estimated output x output for the period. Straight line depreciation: ($ 3,000 - $ 500)/5. Depreciation rate per output: ($ 3,000 - $ 500)/6,000 = Every time the asset is disposed, i must record thegain or loss on disposal of assets. Disposal - selling ; throwing it out; trade in ; insurance claim, etc. Gain or loss is claculated by comparing : Sold car at end of year 2 for $ 30,000. Every time when these change, depreciation going forward will need to change. Calculate the carrying value of the asset. Assume using straight line, new depreciation = (carrying value - revsied residual value)/remaining useful li.
