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Dear sir,
I completely agree with the debit i.e Depreciation expense, but what is the reason behind crediting the acc.depreciation a/c, when performing the double entry for depreciation expense..
Waiting..thankyouTo reduce the value of the asset in the Statement of financial position. The net book value shown on the SOFP is the cost less the accumulated depreciation.
You should watch the free lecture on depreciation.
I need help in this question.
A business purchased an asset on 1 Jan 20X1 at a cost of $160,000. The asset had an expected life of 8years and a residual value of $40,000. Straight line method is used to measure depreciation. The financial year ends on 31 Dec.
At 31 Dec 20X3 the estimated remaining life of the asset from that date is now expected to be only 3 more years, but the residual value remains unchanged.
What will be the net book value of the asset as at 31 December 20X3, for inclusion in the statement of financial position?
The depreciation initially is (160000-40000) / 8 = 15,000 per year.
At at 31 Dec 20X3 there will have been 3 years depreciation (X1, X2, and X3) and therefore the carrying value will be 160,000 – (3 x 15,000) = 115,000.
(Are you sure that you have typed the dates correctly, because if you have then the estimated remaining life at 31 Dec X3 is not relevant to the question!!!).
This question is from BPP mixed banks. I have checked that the dates are correct and the answer which I got was 115,000 which seems to be wrong. According to the book the answer is 107,500. It seems that they take 2 years depreciation in the beginning before the year of revaluation which is 31 Dec 20X3 and charges new depreciation from 1 Jan 20X3 onwards.
I am quite confused by the explanation given in the book. Please advice.
Thanks
I have just realised that I answered too quickly before, and that I was wrong!
Sorry 🙁It is at the end of X3 that they will calculate the depreciation for X3. Since they have the new information (that is now expected to last for only 3 more years) they will take this into account when they calculate the depreciation for X3.
At the end of X2, they will have charged two years depreciation at the original rate, so the carrying value at the end of X2 will have been 160,000 – (2 x 15,000) = 130,000.
When they come to calculate the depreciation for X3 (at the end of X3) they will use the new expected life of 3 years (so a total of 4 years since the end of X2) and charge depreciation of (130,000 – 40,000) / 4 = 22,500.
This brings down the carrying value to 130,000 – 22,500 = 107,500.I really do apologise for confusing you, but I hope that it is clear now.
But I fail to understand why do we charge new depreciation for X3 as the year is very close to end? Shouldn’t this new information be used from the period the revaluation occurs i.e. 1 Jan 20X4?
There is no revaluation!
We calculate the depreciation at the end of the year, and at the end of the year we calculate based on what we then know.
I’m really sorry but I still don’t understand this concept.
Could you please explain this concept ?
There is no concept, so I don’t really know what you mean.
First – there is no mention of revaluing, so that is irrelevant.
Secondly – depreciation is calculated at the end of each year. At the end of each year we asses the remaining life and the expected scrap proceeds and calculate the depreciation on that basis.
What I don’t understand is that why don’t we calculate old depreciation till the point when we realise that the useful life has reduced ( in this case 31 Dec ) and after the point of realisation ( 1 Jan onwards) charge new depreciation.
It is on 31 December that we calculate the depreciation, and we use whatever information that we have on 31 December when we do the calculation.
Why on earth would we wait until next year to change things when we already knew that things had changed when we came to calculate the depreciation? It would be silly.
So if the company realised that the useful life of the asset is reduced on 30 Jun instead of 31 Dec, would the calculation still remain the same?
( I had seen the lecture on revaluation and I tried to solve this question in that way )
At 31st Oct 2013 a biz had machine with a cost of $120,000 and with accumulated dep of $25,000. On Jan 1st 2014, they sold a machine for $10,000. This machine had originally cost $30,000 on 1 Apr 2012. The business had a dep policy of charging straight line dep at the rate of 20% per annum on a monthly basis. What is the dep exp for the year ended 31st Oct 2014?
Why are you simply setting me a question?
The book in which you found the question will also have an answer. You should use these forums to ask for help on things in the answers that you do not understand – not simply expect an answer to be provided.
Machines costing $90,000 (120,000 – 30,000) will have been owned all year, so the depreciation on these is 90,000 x 20% = 18,000
The machine sold, was only owned for 2 months of year to 31 October 2014. Its cost was 30,000, so the depreciation on this is 30,000 x 2/12 x 20% = 1,000.
So the total depreciation is 19,000.
Pardon me Sir, the accum dep is 25000, where did get 30000 subtracted from the 120000? Is it original cost of the other machine?
The accumulated depreciation is irrelevant because you are asked for the expense this year, and the depreciation policy is to use the straight line basis.
I subtracted 30,000 from the 120,000 because the 120,000 will have been the cost of all of the machines (including the one that was later sold).
Hello sir Moffat, I still believe that $115,000 is the answer.
In so far as depreciation is concerned, IAS 16 allows only Depreciation Methods to be applied retrospectively to reflect the pattern of use.
So, had it been a change from say straight line to reducing balance, then acting retrospectively would have been fine.
What about that sir? What does the IAS actually require?
But if you look at my earlier post, we have not done anything retrospectively at all, and the correct answer is $107,500.
When we come to calculate the depreciation at the end of the year we use the information that we then know. It would be silly to calculate that years depreciation based on the original expected life when we then know that the expected life is different. That is not doing things retrospectively
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