1. Type of
Depreciation Funds
Capital Cost Allowance And Depreciation - Types
Of Depreciation
The capital cost allowance (CCA) is a rate of
depreciation used for income tax purposes only.
This term primarily relates to Canadian taxation.
The CCA rate that can be claimed depends on the
asset itself; for example, computer software has a
much higher CCA rate than buildings or furniture.
The CCA is essentially a business tax deduction
that helps Canadian businesses reduce their
taxes.

2. Depreciation
Accounting
 In the United States, businesses can take a
deduction for depreciation. Depreciation is the
reduction in an asset's value caused by the passage
of time due to use or abuse, wear and tear.
 Depreciation is a method of cost allocation. The cost
allocation can be based on a number of factors, but
it is always related to the estimated period of time
the product can generate revenues for the
company, also known as the asset's economic life.
 Depreciation expense is the amount of cost
allocation within an accounting period. Only items
that lose useful value over time can be depreciated.
 Depreciation can be calculated in more than one
way.

3. Straight-line Depreciation
 The simplest and most commonly used method,
straight-line depreciation is calculated by taking the
purchase or acquisition price of an asset, subtracting
the salvage value (value at which it can be sold once
the company no longer needs it) and dividing by the
total productive years for which the asset can
reasonably be expected to benefit the company (or its
useful life).
Example: For $2 million, Company ABC purchased a
machine that will have an estimated useful life of five
years. The company also estimates that in five years,
the company will be able to sell it for $200,000 for
scrap parts.

4.  Depreciation Expense
= Total Acquisition Cost – Salvage Value /
Useful Life
 Year
value

0

cost
salvage
2,000,000
200,000
depreciation expense Balance sheet

1
360,000
1,640,000

2
360,000
1,280,000

3
360,000
920,000
 4
360,000
560,000

360,000
200,000
5
Straight-line depreciation produces a constant
depreciation expense. At the end of the asset's
useful life, the asset is accounted for in the
balance sheet at its salvage value.

5. Unit of Production
Depreciation
 This method provides for depreciation by means of a
fixed rate per unit of production. Under this method,
one must first determine the cost per one production
unit and then multiply that cost per unit with the total
number of units the company produced within an
accounting period to determine its depreciation
expense.
 Depreciation Expense
= Total Acquisition Cost - Salvage Value / Estimated
Total Units
 Estimated total units = the total units this machine
can produce over its lifetime
Depreciation expense = depreciation per unit *
number of units produced during an accounting
period

6.  Example:
Company ABC purchased a machine for $2 million that can
produce 300,000 products over its useful life. The company
estimates that this machine has a salvage value of $200,000.

year
cost
salvage cost


total estimated
production capacity
0
2,000,000

cost per unit

year
200,000
300,000
6
depreciation expense
balance sheet total unit produced

in each period

1
300,000
1,700,000
50,000

2
300,000
1,400,000
50,000

3
450,000
950,000
75,000

4
750,000
200,000
125,000

7.  Unit-of-production depreciation produces a variable
depreciation expense and is more reflective of
production-to-cost (see matching principle).
At the end of its useful life, the asset's accumulated
depreciation is equal to its total cost minus its
salvage value. Furthermore, its accumulated
production units equal the total estimated
production capacity. One of the drawbacks of this
method is that if the units of products decrease (due
to slowing demand for the product, for
example), the depreciation expense also
decreases. This results in an overstatement of
reported income and asset value.
Hours-of-Service Depreciation
This is the same concept as unit of production
depreciation except that the depreciation expense is
a function of total hours of service used during an
accounting period.

8. Accelerated Depreciation
 Accelerated depreciation allows companies to write off their
assets faster in earlier years than the straight-line depreciation
method and to write off a smaller amount in the later years.
The major benefit of using this method is the tax shield it
provides. Companies with a large tax burden might like to use
the accelerated-depreciation method, even if it reduces the
income shown on the financial statement.
 This depreciation method is popular for writing off equipment
that might be replaced before the end of its useful life if it
becomes obsolete ( computers, for example).
 Companies that have used accelerated depreciation will
declare fewer earnings in the beginning years and will seem
more profitable in the later years. Companies that will be
raising financing (via an IPO or venture capital) are more likely
to use accelerated depreciation in the first years of operation
and raise financing in the later years to create the illusion of
increased profitability (and therefore higher valuation).
 The two most common accelerated-depreciation methods are
the sum-of-year (SYD) method and double-decliningbalance method (DDB):

9. Sum-of-Year Method
Depreciation In Year i
= ((n-i+1) / n!) * (total acquisition cost - salvage value)
 Example: For $2 million, Company ABC purchased a
machine that will have an estimated useful life of five
years. The company also estimates that in five
years, the company will be able to sell it for $200,000
for scrap parts.
 n! = 1+2+3+4+5 = 15
n=5
The sum-of-year depreciation method produces a
variable depreciation expense. At the end of the useful
life of the asset, its accumulated depreciation is equal to
the accumulated depreciation under the straight-line
depreciation.

10. Double-DecliningBalance Method
 The DDB method simply doubles the straightline depreciation amount that is taken in the
first year, and then that same percentage is
applied to the un-depreciated amount in
subsequent years.
DDB In year i = (2 / n) * (total acquisition cost accumulated depreciation)
n = number of years
 Example
For $2 million, Company ABC purchased a
machine that will have an estimated useful life
of five years. The company also estimates that
in five years the company will be able to sell it
for $200,000 for scrap parts.

11. The double-declining-balance method
produces a very aggressive depreciation
schedule. The asset cannot be depreciated
beyond its salvage value.

12. Submitted by : Marie
Cris Mondragon
Submitted to :
Evangeline Francisco
A-13
Mathematics
investment