 Hello. In this lecture, we'll take a look at a problem related to depreciation. We'll be calculating depreciation three different ways. In this lecture, we'll be working on the straight line method. Then we'll move to the double declining method and then we will move to the units of production method. We'll be using in essence the same numbers over here. So this would be the idea that we have the same piece of equipment that we have decided to depreciate in these three different ways in order to see the estimates and the differences from different types of estimates that can be used when we depreciate. We'll do the calculation over here in order to calculate depreciation. I'm going to calculate depreciation using a longer format, a more vertical format so that we can see each piece of the calculation. Obviously, depreciation can be simplified in a lot of ways. We can write a linear formula for it that would be shorter than a longer formula, but it's often a lot easier to write out each step of the formula. This is why I really recommend oftentimes just to do depreciation in this longer format or to do it by hand on a piece of paper so you can write out some of the activities in such a way that is a little bit easier than possibly just putting one long formula into Excel and hope they'll show that as we go and see the format that we have. Once you get that down, however, then calculate depreciation however you feel you would like to do so. Then we will then put that information into this scenario over here which will give us just a snapshot of the depreciation per period, in this case the four years as well as how to calculate the book value just in terms of the book value. Then we want to look at the journal entry. It's going to be the same journal entry for depreciation each time, but we want to see the effect over the life of the depreciation. We're going to put it in to this journal entry. It'll automatically post to a trial balance that we have created here and in such a way that we can then analyze the depreciation in a larger context. Let's go through this process of depreciation. We're going to use the data below to complete blue areas of the worksheet, calculate depreciation using the following methods. We're going to start off with the straight line method. What we have here is the equipment cost. We purchased the equipment on January 1st. That is going to simplify our calculation in a bit in that we bought it right at the beginning of the year so we don't have to worry about a mid-year convention. Later on if you bought it in the middle of the year we would have to worry about that. We have estimated salvage value. What is salvage value? That's the value that we think that we can dispose of the equipment for or scrap it for or sell it for at the end of its useful life. So in this case the useful life being the next number being four years. At the end of that four years we don't think it's going to be used up and just gone. Of course it's a piece of equipment. If it's a car or a forklift or something like that we can at least scrap the forklift you would think and the value of us to dispose of the equipment at the end of that time period is the salvage value being 20,000 in this case. Aspated units of production for 75 that does not have anything to do with this particular problem because it's going to be used in the units of production method. And then we have the actual production down here. Once again that's the units of production method so we're actually not going to need that because we're not going to estimate on production in the straight line method. Do not depreciate the equipment below the salvage value. What does that mean? It means that we think that after four years it's going to be worth 20,000 therefore we don't want to depreciate it below 20,000 meaning the book value should not go below 20,000. If there was no salvage value it may be easier to think of this concept being that if we happen to use it for more than four years the thing would be fully depreciated if there was no that salvage value meaning the value of it would be zero. If we continued to depreciate the equipment we would actually have say a forklift on the books that not only has zero value that we may still be using but it actually it would be having negative value which clearly makes no sense. So the goal here is to allocate the cost over the useful life and of course we have to stop expensing the cost once the cost has reached the cost of the equipment or the floor that we've put for the salvage value being 20,000 in this case. So if we're going to think about depreciation the straight line method is usually the easiest method to think about and if we say that the depreciation the equipment went on the books for a certain amount in this case 257.5 we're just going to put it on the books the costs would be then 257.5 and if we were to then look at the in terms of a trial balance then we would see the equipment on there of course at the 257 purchase price whether we paid cash for it or not and that would be what the value is on the books then we're going to have to depreciate that note what this value is it's an asset not an expense. So now the reason it's an asset is because we haven't not yet used it we're going to use it in the future that's the idea of depreciation if we're going to have this thing for four years then the simple most simplified thing that most people would probably think of in terms of how are we going to allocate depreciation over four years we can divide it by four and that's basically the straight line method. So if we did that and again a long kind of format to calculate this so I'm going to say less salvage value and I'm going to say the salvage value is the 20,000 here now we could represent in Excel the less salvage value with a negative number in the calculation or we could say in words it's going to be a subtraction problem by saying less or minus or something I'm going to say it's a subtraction problem in the words in this case if you put something into a different format many other softwares may put a negative in front of it it's just really the convention of the software a lot of financial statements will actually like to say it in words basically less and that's one way to do it I'm going to put 20,000 here and that will give us equal the amount to be depreciated. So we're going to take this minus this I'm going to do that with a formula in Excel using an equal sign going to use formulas as whenever possible going to point to the 257.5 minus the 20,000 then if you select enter it should do that calculation to receive the 237.5 if you wanted to use types of formatting within the cell you know you could underline this one like like this and show that calculation there next thing we need to do is allocate that over the useful life so this is what we're going to allocate out why because this is what we bought it for and we want to bring it down to 20,000 over the four years the 257.5 minus the 237.5 will bring us to the 20,000 we want that to happen over the four-year period therefore we will divide it by the useful life. So the useful life is four years in this case you might be asking well how do they come up with that four years and the answer is that under general accepted accounting principles you could basically estimate the useful life what you believe the useful life would be a reasonable estimate of course under general accepted accounting under the tax code it's a lot more restricted and that they basically have categories that we would have to adhere to under that setting but if we do this calculation then we would get the depreciation expense per year so what we're going to do is we're going to take this number what we left off of course and divide it by four going to do that with a formula of course the divide sign on a computer is this slash button so we're going to say equals up to I'm going to use the arrows and then I'm going to divide by with the slash divided by four so 237.5 divided by four is the 59 375 so that's this two depreciation and that's all we have to do to calculate the depreciation not just for year one but for the entire four year period now remember it could be a little bit more confusing if we had not purchased it in January because then we would not have a four years depreciation in the first year so we would then have to calculate how many months out of the year so whatever the months that were left if we bought it in December 1st it would be 112th one divided by 12th of that or we can divide it by 12 multiplied times one that would be the type of calculation but let's put this in the context in terms of what happens over those four years and if we look at the depreciation we know that it's easy it's just the same I'm going to say this equals for each year the 59 375 and I'm just going to say this equals the same amount each year that's why it's straight line because it's an even amount each year also note that if something did not come out even here that if there's pennies if there's decimals to it then you can go to the home tab you can go to the numbers group and you can check that by increasing the decimals and we can see that this one happened to come out even but note that if it did not come out even and I had no decimals that Excel will round it so whenever you use an Excel keep that in mind check that out now we're going to calculate the book value the book value is going to start off with the cost so I'm going to say the cost equals what we bought it for the 257 5 before the salvage not not the amount we're going to depreciate the entire the full cost less accumulated depreciation now you might be thinking what is accumulated depreciation I only see depreciation that's all we have so far the accumulated depreciation will be the depreciation that has accumulated over the useful life and so the depreciation itself depreciation expense is for one period the accumulated depreciation is for the whole life of course there's only one year as of this point so the accumulated depreciation is the same so I'm gonna say it equals that amount same amount and if we subtract those out then that will equal the book value so that's how you calculate the book value I'm going to take the cost less the accumulated depreciation keep those separate in your mind accumulated depreciation is different than depreciation expense going to point to this asset minus the accumulated depreciation and that will give us a book value of 198 125 at that point in time now if we were to think about the journal entry as of that point in time I'm going to go over here we did the journal entry in accounting the first accounting class but they just gave us the number so they would have just given us this number now we're calculating that number now that we've done the calculation it may be more clear to see what the