Depreciation Appreciation

Depreciation Appreciation 

Here’s a problem you might encounter later on. I’m clairvoyant, I know! Just joking, I’m not clairvoyant. But, just in case you do here’s a little nugget of information for you.

Your friend has ₱52,000 laptop he uses for a small business. Let’s say that he’s had it for 4 years and he rents it to you for the same amount as he purchased it. What will you do? Will you take the offer right away? Bargain with your friend?

The answer is neither. You must never ignore that little voice in your head that questions the prices of the equipment you purchase second hand, or the ones you rent. There are factors that you need to consider. Actually, there’s only one: Time. The question you’ll need to ask is, “How long? Yes, amount is important, capacity/usability is important, But, these two are both attributed to the time the equipment is used.

Since your friend is a businessman he’ll have to have recorded a Depreciation Schedule. If he doesn’t, then he should read this.

What’s this you ask? That is the topic of this post.

Depreciation

Depreciation is the lost in value over a tangible asset through its use.

Depreciation Schedule

Year	Hrs. In Operation		Depreciation Charge	Amount in Depreciation Fund	Book Value at End of the Yr.
0	0		0	0	₱52,000
1	₱4,700
2	₱4,095
3	₱3,650
4	₱4,000

Another set of gibberish on the table above that I am compelled to explain.

• Year you know what that is...

• Hrs. of Operation is self explanatory

• Depreciation Charge- the yearly deposits into the Depreciation Fund

• Amount in Depreciation Fund- the portions of a given amount at the end of its useful life or the difference between the original cost of the asset.

• Book Value at the End of the Yr.- sum of the depreciation fund

In order to fill in the table above you’re going to have to learn how to get each of these variables.

                            Depreciation = Cost  –  Scrap value

·        Depreciation Charge per Hr. =                  ____________________________

                                       Probable Usability

·        Amount in Depreciation Fund = sum of Depreciation Charge of  

Succeeding Yrs.

·        Book Value  for the 1^st Yr. = Cost – Depreciation Charge

·        Book Value for Succeeding Yrs. = Cost – Depreciation Charge of

                                                                                Succeeding Yrs.

So let's go back to the problem at the beginning of this post.

Your friend has ₱52,000 laptop he uses for a small business. Let’s say that he’s had it for 4 years. Assuming that usability is at 84,000 hrs. It has a scrap value of ₱11,000.

      Depreciation = ₱52,000 - ₱11,000

                              = ₱41,000 / ₱84,000 = ₱0.49/hr. = Depreciation Charge per Hr.

Year	Hrs. In Operation		Depreciation Charge	Amount in Depreciation Fund	Book Value at End of the Yr.
0	0		0	0	₱52,000
1	₱4700	(.49)	₱2,303	₱2,303	₱49,697
2	₱4095	(.49)	₱2,006.55	₱4,309.55	₱47,690.45
3	₱3650	(.49)	₱1,788.50	₱6,098.05	₱41,592.40
4	₱4000	(.49)	₱1,960	₱8,058.05	₱33,534.35

Now that you’ve determined the correct amount you have to pay, you can start bargaining. If he's willing, then you might get it at a much lower price

If you plan to start a business, then you’ll also have to monitor your equipment. This will determine whether or not you’re paying good money for the equipment you buy or you’ll have to switch brands.

A reminder: if there are decimals involved, remember to include 2 decimal places.

Information on this blog are from discussions provided by our professor.