Junior and Senior level Ag Bus.

Colorado Agriscience Curriculum

Section: Advanced Agribusiness

Unit: Management of Agricultural Business Records

Lesson Title: Understanding Depreciation

AGB11/12.03 - The student will be able to formulate

Colorado Ag and analyze financial records and use the
Education information for evaluation and planning.
Standards and Understand depreciation.
Competencies
Math Standard 1: Students develop number sense and use numbers and number relationships
Colorado Model in problem-solving situations and communicate the reasoning used in solving these problems.
Content
Math Standard 2: Students use algebraic methods to explore, model, and describe patterns
Standard(s):
and functions involving numbers, shapes, data and graphs in problem-solving situations and
communicate the reasoning used in solving these problems.

Math Standard 3: Students use data collections and analysis, statistics, and probability in
problem-solving situations and communicate the reasoning used in solving these problems.

Math Standard 6: Students link concepts and procedures as they develop and use
computational techniques, including estimation, mental arithmetic, paper-and-pencil,
calculators, and computers, in problem-solving situations and communicate the reasoning used
in solving these problems.

Student Upon completion of this unit The student will be able to:
Learning
1. Calculate depreciation utilizing the straight line method
Objectives:
2. Calculate depreciation utilizing the Declining Balance Method of Depreciation.

3. Calculate depreciation utilizing the sum of the years digits method of depreciation

One 50 Minutes Class

Resource(s): Introduction to Agribusiness Ricketts,Rawlins, 2001

Unit 2, Lesson 8: Depreciation 1

 Farm Business Management cde test 2006

Century 21 Accounting Ross, Hanson, Gilbertson, Lehmon 1995

Instructions, Italicized words are instructions to the teacher; normal style text is suggested script.
Tools,
Equipment, and
Supplies:

Interest Use the Descartes moment to discover what your students’ level of knowledge is regarding
Approach: depreciation. Have students fill out handout # 1. (What they know about depreciation, what
they think they know about depreciation, and what they don’t know about depreciation.) Have
a few students share their responses to those questions.

Objective 1: Good morning class. Today we are going to talk about depreciation. We will start our
discussion with a quick review of what depreciation is. Who can tell me what depreciation is?
That’s right. Depreciation is the decrease in value of assets over the course of their useful life.
As we learned in Intro to Ag Business II, the Straight line Method of Depreciation is a very
simple and easy method to use.

The formula for straight line depreciation is as follows:

Purchase price minus salvage value divided by the expected useful life.

EXAMPLE $25000 pickup with a $1,000 salvage value depreciated over 6 years

25000-1000/6 = 4000 DEPRECIATION PER YEAR

Objective 2: The second method of depreciation we will examine today is the Declining Balance Method of
Depreciation. This is one of the most common methods of depreciation used in Agriculture
today.

The formula for the Declining Balance Method of Depreciation is as follows BOOK VALUE / USEFUL
LIFE X ACCELERATION FACTOR = ANNUAL DEPRECIATION. The most common acceleration
factors are 2 (DOUBLE DECLINING) and 1.5 (TIME AND A HALF DECLINING BALANCE). Let’s
look at an example of each. First we will look at the Double Declining Balance Method. Say we have
a $30000 pickup with a useful life of 5 years and an acceleration factor of 2 and a salvage value of
$5000, The annual depreciation would be calculated as follows:

Year 1 depreciation = $30000 / 5 X 2 = $ 12000 Year 1 ending Book Value = $18000

Year 2 depreciation = $18000 / 5 X 2 = $ 7200 Year 2 ending Book Value = $10800

Year 3 depreciation = $10800 / 5 X 2 = $ 4320 Year 3 ending Book Value = $ 6480

Year 4 depreciation = $ 6480 / 5 X 2 = $ 2592 Year 4 ending Book Value = $ 3888

WE ARE ONLY ALLOWED TO TAKE ENOUGH DEPRECIATION TO EQUAL THE SALVAGE

VALUE, SO THE CORRECT YEAR 4 DEPRECIATION WOULD BE $6480 MINUS $5000 WHICH

Unit 2, Lesson 8: Depreciation 2

 EQUALS $1480.

Our second example is of time and a half declining balance. Say we will be depreciating the same
$30000 pickup over 7 years using 1.5 acceleration factor and a $5000 salvage value. The example
follows:

Year 1 depreciation = $30000 / 7 X 1.5 = $6429 Year 1 ending book value =$ 23571

Year 2 depreciation = $23571 / 7 X 1.5 = $5051 Year 2 ending book value = $ 18520

Year 3 depreciation = $18520 / 7 X 1.5 = $3969 Year 3 ending book value = $ 14551

Year 4 depreciation = $14551 / 7 X 1.5 = $3118 Year 4 ending book value = $ 11433

Year 5 depreciation = $11433 / 7 X 1.5 = $2450 Year 5 ending book value = $ 8983

Year 6 depreciation = $ 8993 / 7 X 1.5 = $ 1925 Year 6 ending book value = $ 7068

Year 7 depreciation = $ 7068 / 7 X 1.5 = $1515 Year 7 ending book value = $ 6913

Objective 3: The last method of depreciation we will look at today is the Sum of the Years Digits Method.
This method uses fractions based on the useful life of the asset. For example if you are
depreciating an asset with a 5 year useful life you would add the years digits as follows ( 1 + 2
+ 3 + 4 + 5 = 15). Then a fraction is created for each year with the digits in reverse order. Year
one has a fraction of 5/15 and year 5 has a fraction of 1/15. To calculate the yearly depreciation
would times the fraction by the total depreciation to get the depreciation per year. So for a
$30000 pickup with a 5 year useful life and a $5000 salvage value the yearly depreciation
would look like this

Year 1 5/15 X $25000 = $8333 depreciation

Year 2 4/15 X $25000 = $6667 depreciation

Year 3 3/15 X $25000 = $5000 depreciation

Year 4 2/15 X $25000 = $3333 depreciation

Year 5 1/15 X $25000 = $1667 depreciation

TOTAL DEPRECIATION = $25000 OVER 5 YEARS

Review/Summa Assign students to small groups. Using the Show me What you know Moment review Material
ry: presented in this unit.

Application-- Build an Excel Spreadsheet to calculate the three kinds of depreciation.

Extended
Classroom
Activity:

Unit 2, Lesson 8: Depreciation 3

Application-- Participate in the Farm Business Management CDE
FFA Activity:

Application-- Have students calculate depreciation on assets used in their SAE

SAE Activity:

Evaluation: 1. Calculate depreciation on a $2000 personal computer with a 5-year useful life and a salvage
value of $175 using the Straight line Method of Depreciation.

2. Calculate depreciation on a $2000 personal computer with a 5-year useful life and a salvage value
of $175 using the Declining Balance Method of Depreciation. (Use an acceleration factor of 2).

3. Calculate depreciation on a $2000 personal computer with a 5-year useful life and a salvage value
of $175 using the Sum of the Year’s Digits Method of Depreciation.

4. Write a short paragraph comparing the answers to questions 1, 2 and 3. Be sure to use complete
sentences and proper punctuation in your answer.

Unit 2, Lesson 8: Depreciation 4

Evaluation Asset Personal Computer, Cost $2000, Salvage Value $175, Useful life 5 years
Answer Key:
YEAR STRAIGHT LINE DECLINING BALANCE SUM OF YEAR DIGITS

1 $365 $800 $608.33

2 $365 $480 $486.67

3 $365 $288 $365.00

4 $365 $172.80 $243.33

5 $365 $ 84.20 $121.67

TOTAL $1825 $1825 $1825

4. Answer will vary.

Unit 2, Lesson 8: Depreciation 5