ACCA/CAT

9.2 Accounting treatment of depreciation: - a mechanism to reflect the cost of using a non-current asset

(i)Depreciation is charged as an expense in the profit and loss account

(ii)The corresponding credit is accumulated in the provision for depreciation account in the balance sheet to offset against the original cost of the fixed assets.

●Method of depreciation:

Straight-line method

The depreciable amount is spread evenly across the useful life of the fixed asset, resulting in same amount of depreciation charged every year.

Depreciation charge = Cost of asset minus residual value

Expected useful life of the asset

Residual value: the estimated disposal value of the asset at the end of its useful life.

Example:

A non-current asset costing $60,000 has an estimated life of five years and a residual life of $7,000.The annual depreciation charge using the straight line method would be calculated as follows:

$( 60,000 – 7,000)= $10,600 per annum

5 years

The net book value of the fixed assets would reduce each year as follows:

After 1 year　after 2 years　after 3 years　after 4 years　after 5 years

$　　　　　　 $ 　　　　　　$　　　　　　　 $ 　　　　　　$

Cost　　　　 60,000　　　 60,000　　　　60,000　　　　 60,000　　　　 60,000

Accumulated　10,600　　　 21,200　　　　31,800　　　　 42,400　　　 　53,000

Depreciation

Net book value 49,400 　 38,800　　　　28,200　　　　 17,600　　　 7,000 (estimated residual value)

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Reducing balance method

A fixed depreciation rate ( percentage)is applied to the fixed asset’s net book value( cost less accumulated depreciation)every year.Since net book value diminishes yearly, the depreciation charge falls every year.

Depreciation charge = X% x net book value

Net book value = Cost of an asset – accumulated depreciation

Asset bought/sold in the period:

- full year’s depreciation in the year of acquisition and none in the year of disposal

- monthly or pro rata，based on the exact number of months that the assets has been owned.

Exercise 1 :

Hopkins who makes up accounts to 31 December, buys a car on 1 January 20x1 for $5,000. The depreciation policy is 20% pa(每年), using the reducing balance method. What is the depreciation charge for each of the first five years?

Year 　20%on　　　　　 Depreciation　 Accumulated　　 Net book

net book value　　 charge　　　　 Dep.　　　　　 value

20x1 　　20% of $5,000　　 $1,000　　　 $1,000　　　　 $4,000

20x2　　 20% of $4,000　　　 800　　　　 1,800　　　　 3,200

20x3　　 20% of $3,200　　　 640　　　　 2,440　　　　 2,560

20x4　　 20% of $2,560　　　 512　　　　 2,952　　　　 2,048

20x5　　 20% of $2,048　　　 410　　　　 3,362　　　　 1,638

20x6　　 20% of $1,638　　　 328　　　　 3,690　　　　 1,310

Exercise 2:

The following information relates to B & S, a car repair business:

Machine 1　　　　　　 Machine 2

Cost　　　　　 $12,000　　　　　　　$8,000

Purchase date　1 August 20x5　　　　1 October 20x6

Depreciation　 20% straight line　 10% reducing balance

Method　　　　 pro-rata　　　　　　 pro- rata

What is the depreciation charge for years ended 31 December 20x5 and 31 December 20x6?

20x5 　　　　　　20x6

$　　　　　　　 $

A.　　 2,400　　　　　 2,600

B.　　 1,000 　　　　　2,600

C.　　 2,400　　　　　 3,200

D.　　 1,000　　　　　 3,200

Solution:

- for machine 1:

20x5: 20% x 12,000 x 5/12 = 1,000

20x6: 20% x 12,000= 2,400

- for machine 2:

20x6: 10% x 8,000 x 3/12=200

Total depreciation: 20x5: 1,000

20x6: 2,400 + 200 = 2,600

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