C hapter 22: Depreciation of fixed assets:

Nature and calculations

Contents of chapter
This chapter explains first of all what depreciation is. It then shows how accountants calculate an amount for
depreciation.

This chapter covers several common methods of calculating depreciation: (i) straight-line (ii) reducing balance
(iii) revaluation (iv) depletion unit. Examples are given.

Notes for teachers

Depreciation simply means that the cost of a fixed asset will be charged over the life of the fixed asset,
1
rather than being charged only in the year when it was bought.

It is charged only for fixed assets.

2

No one knows for certain how long an asset, e.g. a motor lorry, will be used. Depreciation therefore is an
3
estimate.

Get students to think of other assets which may become obsolete or inadequate (Section 22.2).
4

There are many depreciation methods in use in the business world. The straight-line and the reducing
5
balance methods may be the main methods, but they are not appropriate in some cases.

The straight-line method is used much more often in businesses than the reducing balance method.
6

In a sense, the revaluation method is an example of the concept of materiality. It would be

7
time-consuming and expensive to calculate the value of each spanner, crate, barrels etc. Thus, they are
lumped together and revalued as totals.

The depreciation is then the fall in value of these assets over the accounting period.

Some assets where the revaluation method is used could not be easily depreciated in other ways, e.g. a
8
herd of cattle or other livestock.

The depletion unit method is the obvious one for quarries or mines, as depreciation is directly related to
9
the extraction of materials.

This chapter ignores the accounting entries for depreciation, which will be covered in Chapter 23.
10

127
 Answers to MCQs and exercises
22.1 D 22.2 D 22.3 C 22.4 C 22.5 B

22.6
(a) Straight-line (b) Reducing balance
$ $
Cost 12,500 Cost 12,500
Year 1 Depreciation 1,845* Year 1 Depreciation (20% of $12,500) 2,500
10,655 10,000
Year 2 Depreciation 1,845 Year 2 Depreciation (20% of $10,000) 2,000
8,810 8,000
Year 3 Depreciation 1,845 Year 3 Depreciation (20% of $8,000) 1,600
6,965 6,400
Year 4 Depreciation 1,845 Year 4 Depreciation (20% of $6,400) 1,280
5,120 5,120

* $12,500 − $5,120
= $1845
,
4

22.7
(a) Reducing balance (b) Straight-line
$ $
Cost 6,400 Cost 6,400
Year 1 Depreciation (50% of $6,400) 3,200 Year 1 Depreciation 1,240*
3,200 5,160
Year 2 Depreciation (50% of $3,200) 1,600 Year 2 Depreciation 1,240
1,600 3,920
Year 3 Depreciation (50% of $1,600) 800 Year 3 Depreciation 1,240
800 2,680
Year 4 Depreciation (50% of $800) 400 Year 4 Depreciation 1,240
400 1,440
Year 5 Depreciation (50% of $400) 200 Year 5 Depreciation 1,240
200 200

* $6 ,400 − $200
= $1240
,
5

22.8X
(a) Straight-line method (b) Reducing balance method
$ $
Machine cost 5,120 Machine cost 5,120
Year 1 Depreciation 781* Year 1 Depreciation (25% of $5,120) 1,280
4,339 3,840
Year 2 Depreciation 781 Year 2 Depreciation (25% of $3,840) 960
3,558 2,880
Year 3 Depreciation 781 Year 3 Depreciation (25% of $2,880) 720
2,777 2,160
Year 4 Depreciation 781 Year 4 Depreciation (25% of $2,160) 540
1,996 1,620
Year 5 Depreciation 781 Year 5 Depreciation (25% of $1,620) 405
1,215 1,215

* $5,120 − $1215
,
= $781
5

128
22.9
Straight-line Reducing balance
$ $
Cost 4,000 Cost 4,000
Year 1 Depreciation 700 * Year 1 Depreciation (40% of $4,000) 1,600
3,300 2,400
Year 2 Depreciation 700 Year 2 Depreciation (40% of $2,400) 960
2,600 1,440
Year 3 Depreciation 700 Year 3 Depreciation (40% of $1,440) 576
1,900 864
Year 4 Depreciation 700 Year 4 Depreciation (40% of $864) 346
1,200 518
Year 5 Depreciation 700 Year 5 Depreciation (40% of $518) 207
500 311

* $4 ,000 − $500
= $700
5

22.10
(a) The straight-line method is being used for machinery. The reducing balance method is being used for fixtures.

(b) Machinery: $4,800 – $1,600 – $1,600 = $1,600

Depreciation rate for fixtures is 25% per annum.
Fixtures: $2,025 – $506 – $380 = $1,139

(c) Machinery: $8,000 – $2,000 – $1,500 – $1,125 – $844 = $2,531

22.11X
1
(a) The straight-line method is being used for office equipment. The reducing balance method with a rate of 33 %
3
is being used for fixtures.

(b) (A) 12,000 (B) 1,900 (C) 10,100 (D) 8,200 (E) 1,900 (F) 4,400
(G) 1,900 (H) 2,500 (T) 30,375 (U) 10,125 (V) 20,250 (W) 6,750
(X) 13,500 (Y) 2,000 (Z) 4,000

22.12X
(a) As the cost of running the van is likely to be the same each year, then the straight-line method should be used.
$88, 000 − $6,000 (residual value)
Depreciation for each of the 5 years =
5 years
= $16,400
$
Cost 88,000
Year 1 Depreciation 16,400
71,600
Year 2 Depreciation 16,400
55,200
Year 3 Depreciation 16,400
38,800
Year 4 Depreciation 16,400
22,400
Year 5 Depreciation 16,400
6,000

129
 (b) To bring about changes in depreciation and repairs in an equal manner, as per the diagram at the end of
Section 22.4 in the textbook, the reducing balance method should be used.

1
Out of the figures shown, 33 % will bring the net book value at disposal nearest to the amount to be received.
3

Proof:
1
Depreciation rate 50% 33 % 20%
3
$ $ $
Cost 72,000 72,000 72,000
Year 1 Depreciation 36,000 24,000 14,400
36,000 48,000 57,600
Year 2 Depreciation 18,000 16,000 11,520
18,000 32,000 46,080
Year 3 Depreciation 9,000 10,667 9,216
9,000 21,333 36,864
Year 4 Depreciation 4,500 7,111 7,373
Net book value at the date of disposal 4,500 14,222 29,491

22.13
Depreciation for 20X5 = $1,250 + $2,000 + $444 – $2,700 = $994
Depreciation for 20X6 = $2,700 + $1,450 + $885 – $3,340 = $1,695

22.14X
Depreciation for 20X6 = $3,890 + $1,570 + $705 + $500 – $270 – $4,750 = $1,645
Depreciation for 20X7 = $4,750 + $1,990 + $908 + $486 – $330 – $4,620 = $3,184

130