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    Chapter 20 Depreciation - Method of Depreciation

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    Ronnie Goh Juh Yeh
    Depreciation is a method of allocating the cost of a fixed asset over its useful life. There are two main methods of calculating depreciation: straight line and reducing balance. Straight line depreciation allocates an equal amount of depreciation each year over the asset's useful life. It is calculated by subtracting the estimated residual value from the original cost and dividing by the number of years. Reducing balance depreciation applies a fixed depreciation rate to the net book value each year, where the net book value is reduced by the accumulated depreciation. This results in a higher depreciation expense in the early years of an asset's life. The document then provides examples

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    Chapter 20 Depreciation - Method of Depreciation

    Uploaded by

    Ronnie Goh Juh Yeh
    111 views5 pages
    Depreciation is a method of allocating the cost of a fixed asset over its useful life. There are two main methods of calculating depreciation: straight line and reducing balance. Straight line depreciation allocates an equal amount of depreciation each year over the asset's useful life. It is calculated by subtracting the estimated residual value from the original cost and dividing by the number of years. Reducing balance depreciation applies a fixed depreciation rate to the net book value each year, where the net book value is reduced by the accumulated depreciation. This results in a higher depreciation expense in the early years of an asset's life. The document then provides examples

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    Depreciation is a method of allocating the cost of a fixed asset over its useful life. There are two main methods of calculating depreciation: straight line and reducing balance. Straight line depreciation allocates an equal amount of depreciation each year over the asset's useful life. It is calculated by subtracting the estimated residual value from the original cost and dividing by the number of years. Reducing balance depreciation applies a fixed depreciation rate to the net book value each year, where the net book value is reduced by the accumulated depreciation. This results in a higher depreciation expense in the early years of an asset's life. The document then provides examples

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    111 views5 pages

    Chapter 20 Depreciation - Method of Depreciation

    Uploaded by

    Ronnie Goh Juh Yeh
    Depreciation is a method of allocating the cost of a fixed asset over its useful life. There are two main methods of calculating depreciation: straight line and reducing balance. Straight line depreciation allocates an equal amount of depreciation each year over the asset's useful life. It is calculated by subtracting the estimated residual value from the original cost and dividing by the number of years. Reducing balance depreciation applies a fixed depreciation rate to the net book value each year, where the net book value is reduced by the accumulated depreciation. This results in a higher depreciation expense in the early years of an asset's life. The document then provides examples

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOCX, PDF, TXT or read online from Scribd
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    of 5

    Chapter 20 Depreciation - method of depreciation

    20.1 Depreciation
    Q What is depreciation?

    A Fixed assets have a limited useful life. When an asset is purchased and used over a period of
    time, it loses value. The purpose of depreciation is to spread this cost of asset over its limited
    useful life.

    Q Why do we provide depreciation?

    A Accruals concepts – allocating the cost of assets less estimated residual value over its useful
    life.

    Q How do we calculate depreciaton?

    A The most commonly method of calculating depreciation are:


    o Straight line method
    o Reducing balance method

    20.2 Straight line method


    Q What is straight line method of depreciation?

    A Depreciation of equal amount over its estimated useful life

    Q How do we calculate depreciaton using straight line method?

    Cost – estimated residual value


    A Formula: Annual depreciation =
    No of years in use

    Example 1

    A firm acquired a motor car for RM5,000. It will be kept for 4 years and then sold for RM1,000.

    Required
    Calculate the annual depreciation.

    Solution to Example 1

    Cost = RM5,000
    Residual value = RM1,000
    Years in use =4

    Annual depreciation = 5,000 – 1,000


    4
    = RM1,000

    20 - 1
    20.3 Reducing balance method
    Q What is reducing balance method of depreciation?

    A Depreciation based on fixed percentage on net book value at the beginning of the year

    Q How do we calculate depreciaton using reducing balance method?

    A Formula: Annual depreciation = depreciation rate x net book value (NBV)


    Where : NBV = cost less total depreciation to date

    Example 2

    Encik Faisal acquired a motor car for RM20,000 on 1 January 20X1. He decided to depreciate it at the
    rate of 60% using the reducing balance method.

    Required:
    Calculate the annual depreciation.

    Solution to Example 2

    Annual depreciation = depreciation rate x net book value (NBV)

    Cost at the start of 20X1 20,000


    Depreciation for year 20X1 (60% x 20,000) 12,000
    Net book value at the end of 20X1 8,000
    Depreciation for year 20X2 (60% x 8,000) 4,800
    Net book value at the end of 20X2 3,200
    Depreciation for year 20X3 (60% x 3,200) 1,920
    Net book value at the end of 20X3 1,280
    Depreciation for year 20X4 (60% x 1,280) 768
    Net book value at the end of 20X4 512

    20 - 2
    20.4 Summary

    Depreciation

    Definition

    allocating the cost of assets less


    estimated residual value over its
    useful life.

    Methods of depreciation

    Straight line method Reducing balance method

    Cost-estimated residual value o Annual depreciation = % x Net book value


    o Annual depreciation =
    No of years in use
    or
    o Annual depreciation = % x Cost

    20.5 Exercises
    Question 1

    A firm acquired a motor car for RM20,000 on 1 January 20X1. It will be kept for 3 years and then sold
    for RM4,320. Calculate the depreciation for each of the 3 years using:
    (a) Straight line method
    (b) Reducing balance method at a rate of 40%

    Question 2

    A firm acquired a motor car for RM12,800 on 1 January 20X1. It will be kept for 4 years and then sold
    for RM800. Calculate the depreciation for each of the 4 years using:
    (a) Straight line method
    (b) Reducing balance method at a rate of 50%

    Question 3

    ABC Enterprise has a year end of 31 December, and depreciates their motor vehicles at a rate of 20% per
    annum using straight line method.
    The following were the purchases of assets for the 3 years ended 31 December:

    Date of purchase Details Cost (RM)


    1 Jan 20X1 Motor vehicle (1) 10,000
    1 Jul 20X2 Motor vehicle (2) 20,000
    1 Mar 20X3 Motor vehicle (3) 30,000

    Required:
    Calculate the depreciation for the year ended 31 December 20X1, 20X2 and 20X3.

    20 - 3
    Question 4

    XYZ Enterprise has a year end of 31 December, and depreciates their machinery at a rate of 25% per
    annum using reducing balance method.
    The following were the purchases of assets for the 3 years ended 31 December:

    Date of purchase Details Cost (RM)


    1 Jul 20X1 Machinery (1) 10,000
    1 Jan 20X2 Machinery (2) 20,000
    1 Jul 20X3 Machinery (3) 30,000

    Required:
    Calculate the depreciation for the year ended 31 December 20X1, 20X2 and 20X3

    20.6 Answers
    Question 1

    a) Cost = RM20,000
    Residual value = RM4,320
    Years in use =3

    Annual depreciation = 20,000 – 4,320


    3
    = RM5,227 per year

    b) Annual depreciation = depreciation rate x net book value (NBV)

    Cost at the start of 20X1 20,000


    Depreciation for year 20X1 (40% x 20,000) 8,000
    Net book value at the end of 20X1 12,000
    Depreciation for year 20X2 (40% x 12,000) 4,800
    Net book value at the end of 20X2 7,200
    Depreciation for year 20X3 (40% x 7,200) 2,880
    Net book value at the end of 20X3 4,320

    Question 2

    a) Cost = RM12,800
    Residual value = RM800
    Years in use =4

    Annual depreciation = 12,800 – 800


    4
    = RM3,000 per year

    b) Annual depreciation = depreciation rate x net book value (NBV)

    20 - 4
    Cost at the start of 20X1 12,800
    Depreciation for year 20X1 (50% x 12,800) 6,400
    Net book value at the end of 20X1 6,400
    Depreciation for year 20X2 (50% x 6,400) 3,200
    Net book value at the end of 20X2 3,200
    Depreciation for year 20X3 (50% x 3,200) 1,600
    Net book value at the end of 20X3 1,600
    Depreciation for year 20X4 (50% x 1,600) 800
    Net book value at the end of 20X4 800

    Question 3

    Motor vehicle (1) Motor vehicle (2) Motor vehicle (3)


    Date of purchase 1 Jan 20X1 1 Jul 20X2 1 Mar 20X3
    Cost 10,000 20,000 30,000 Total
    year ending 31 Dec 20X1 (W1) 2,000 - - 2,000
    year ending 31 Dec 20X2 (W2) 2,000 (W4) 2,000 - 4,000
    year ending 31 Dec 20X3 (W3) 2,000 (W5) 4,000 (W6) 5,000 11,000
    Working Motor vehicle (1) Motor vehicle (2) Motor vehicle (3)
    year ending 31 Dec 20X1 (W1) 10,000 x 20% - -
    year ending 31 Dec 20X2 (W2) 10,000 x 20% (W4) 20,000 x 20% x 6/12 -
    year ending 31 Dec 20X3 (W3) 10,000 x 20% (W5) 20,000 x 20% (W6) 30,000 x 20% x 10/12

    Question 4

    Machinery (1) Machinery (2) Machinery (3)


    Date of purchase 1 Jul 20X1 1 Jan 20X2 1 Jul 20X3
    Cost 10,000 20,000 30,000 Total
    year ending 31 Dec 20X1 1,250 - - 1,250
    year ending 31 Dec 20X2 2,188 5,000 - 7,188
    year ending 31 Dec 20X3 1,641 3,750 3,750 9,141
    Working Machinery (1) Machinery (2) Machinery (3)
    year ending 31 Dec 20X1 (W1) 10,000 x 25% x 6/12 -
    year ending 31 Dec 20X2 (W2) 8,750 x 25% (W4) 20,000 x 25% -
    year ending 31 Dec 20X3 (W3) 6,562 x 25% (W5) 15,000 x 25% (W6) 30,000 x 25% x 6/12

    20 - 5

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