Example
Figure out the inventory valuation the end-of-period using first-in
first-out or last-in first-out methods.
Assumes items stocked
first have been shipped
First-in first-out method
Purchase Units Unit Shipped Invenprice
tory
Reference
Statutory useful life
“Statutory useful life” refers to the years
of service established by the Finance
Ministry of Japan based on its “Years of
Service for Fixed Assets Including Machinery, Buildings, and Equipment.” In
the tax code and other regulations,
years of service are also established for
different categories of assets.
Reference
Acquisition cost
“Acquisition cost” is the price required
to purchase the equipment. This is the
total amount, which may include handling fees, etc.
Reference
Residual value
“Residual value” is the expected value
of an asset after the statutory useful life
have passed. It is typically 10% of the
acquisition cost.
Reference
Undepreciated balance
“Undepreciated balance” is the acquisition cost less the depreciation expense.
Reference
Depreciation rate
“Depreciation rate” is a fixed rate corresponding to the statutory useful life, given in the tax code.
Reference
Guaranteed rate
“Guaranteed rate” is a fixed rate corresponding to the statutory useful life;
used to calculate the guaranteed depreciation amount.
35
Assumes items stocked
last have been shipped
Last-in first-out method
Inventory Shipped Invenvaluation
tory
Inventory
valuation
Beginning 3 units 10 3 units 0 units
inventory
yen
3 units 3 units × 10
yen = 30 yen
April
1 unit
11
yen
1 unit
0 units
1 unit
1 unit ×11
yen = 11 yen
June
2 units
12
yen
1 unit
1 unit
2 units
2 units ×12
yen = 24 yen
July
3 units
13
yen
3 units 3 units × 13 1 unit
yen = 39 yen
September 4 units
14
yen
4 units 4 units × 14 4 units 0 units
yen = 56 yen
Ending
inventory
1 unit × 12
yen = 12 yen
2 units 2 units × 13
yen = 26 yen
8 units
107 yen
91 yen
Therefore, inventory valuation is 107 yen using the first-in first-out method, and 91 yen using the last-in first-out method.
(4)Depreciation
Machinery, buildings, and other fixed assets reduce asset value over time.
This is called “depletion.” The tax code stipulates that this depletion be
calculated in a certain way, and spread out over accounting periods.
This is called “depreciation.” Two methods for figuring depreciation are
the “straight-line method” and the “declining-balance method.”
Revisions to the Japanese tax code in 2008 changed depreciation methods
so that for equipment acquired after April 1, 2008, a new depreciation
method could be applied that allows for depreciation down to a residual
value of 1 yen.
Methods of
depreciation
Description
Formula for calculating depreciation
Straightline
method
The purchase price
is depreciated by a
fixed amount every
accounting period.
■ Equipment
acquired March 31, 2008 or before:
(acquisition cost – residual value) ÷ Useful
life
■ Equipment acquired April 1, 2008 or after:
acquisition cost × depreciation rate corresponding to useful life (revised)
Decliningbalance
method
In this method of
depreciation, the
original acquisition
cost minus the full
depreciation expenses up to that
point are taken as
the Undepreciated
balance, and the
asset is depreciated by a fixed percentage rate every
period.
■ Equipment
acquired March 31, 2008 and before:
Undepreciated balance × depreciation rate
corresponding to useful life
■ Equipment acquired April 1, 2008 and after:
Undepreciated balance × depreciation rate
corresponding to useful life (revised)
* In Japan, the limit on the amount depreciated =
acquisition cost × useful life corresponding to a
guaranteed rate.
* However, if the calculation of the depreciation
expense is smaller than the limit on the amount
depreciated, then the depreciation expense for
that period is recomputed as follows.
Undepreciated balance × useful life corresponding to revised depreciation rate – 1 yen