Depreciation Example 2 – ACCA Financial Accounting (FA) lectures
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Hello, John. Thanks a lot for your useful lectures.
Can you tell me, when we make statements monthly, will we divide to 12 for each month the depreciation accounted in balance reducing method and get equal amount for each month?
That would make sense (but it irrelevant for the exam 馃檪 )
A New vehicle has an estimated six year life and nil residual value depreciation is currently charged at 20 Percent on a reducing balance method on this type of asset the company is considering changing to a straight line method of depreciation ?
And
Depreciation would be lower in year 1 if the straight line method is used but higher in year 6 compared to existing method
I can’t understand this mcqs
In future please ask this sort of question in the Ask the Tutor Forum and not as a comment on a lecture.
With straight line depreciation the depreciation charge in the SOPL is the same amount each year.
With reducing balance depreciation it is always higher in the early years and lower in the later years.
Watch again the examples of both methods in the lectures and you will see what I mean.
So if we have scrap value and total cost of a car along with it’s useful life ? But we have also have been given rbm % , we have to find out rbm depreciation charge? How do we solve these type of question?
With reducing balance depreciation, any expected scrap value mentioned is irrelevant and is ignored. It is always as I explain in my free lectures.
I have a problem. I can understand the concept well but when I try to apply it in actual I cannot solve it. Can some one help me with this problem ?
I cannot help unless I know the problem you are having!!
Best is to type out one of the questions you are having a problem with (but do not type it here as a comment on a lecture – type it out in the Paper FA Ask the Tutor Forum.
Hi John, thank you for the awesome lecture.
Thank you for your comment 馃檪
Hi, if using %reducing balance method, and 拢0 scrap value, do you carry on depreciating forever (assuming you still own the asset), or at some point do you just depreciate the final amount when it is v small? If so what are the rules around that? Thanks
There are no rules as such, but once it gets small then you write it down to zero.
As I know, in real life, companies usually use a combination of both reducing balance and straight-line method. For example, companies can apply reducing balance for the first few years of the life of the asset, and at a certain point adopt straight-line method to the rest of the life of asset (thus allowing it to depreciate completely).
Hope this helps.
That is not true. They must continue to use the same method each year and the same method for all assets of a similar type. If they do decide to change the method then they must state that they have changed and must also show the effect of the change as a prior year adjustment.
Is it possible that using the straight-line method, where the annual charge is the percentage of the original cost the asset would have a scrap value?
If yes when do we substrate the residual value? Before or after we have found the percentage of the cost of the asset?
If it given as a % of cost then we ignore the residual value when calculating the depreciation.
Hi
Suppose in the working of
year 2
We show in the
SOFP
Cost $ 12000 instead $15000
Acc Deprn $2400
Year 3
SOFP
Cost $9600
Acc Deprn $1920
will it be fine or we have to keep the original cost always
and show The acc depreciation changing?
Thank you 馃檪
It would not be fine. The cost must always show the original cost and the accumulated depreciation must show the total depreciation (accumulated means totalled).
Hi John, thank you so much for the lecture.
Thank you for the comment 馃檪
This is so wholesome 馃檪
馃檪
I confused how percent coming? Example, Machine Cost 15,000 and reducing line method 20% so can I change this percentage by value, I want to understood the originally and can change percentage value?
As I do state in the lectures, the business can use whatever % they want – whatever they think is the most sensible.
There is no rule as to what % to charge.
(In exam questions you will obviously be told what % to use)
Thank you John.
You are welcome 馃檪
Hi John,
For some assets we keep the scrape value separate then we charge depreciation on (Cost minus scrap value). However, for some assets we do not keep the scrap value aside. In both cases, the asset remains of some value even after full depreciation. So why is it optional to determine (or not determine) the scrap value of an item.
I asked this question in context of straight line method of depreciation.
How can you possibly determine what the sale value will be some years in the future? If a business wants to estimate what it will be then they can – it is their choice – but it would be ridiculous to force them.
Remember that the only purpose of depreciating is to spread the cost of using the asset against the profit as it is being used.
Now understanding reducing balance method
Excuse sir what will happen if didn’t mention the purchase month or date of asset
Hi, I realise this won’t come up in an exam I’m just curious what would happen if you decided to change depreciation policy. If you can’t have different styles of depreciation on the same SOFP would business have to recalculate all their accumulated depreciation?
Yes – if a business changes its policy then they should recalculate as though that policy had always been in place.
I’m on AAT level 3 Advanced bookkeeping, I am watching ACCA videos as well.
It stated in the book businesses only tend to change their policies on an annual basis, but tend to stick to the same method every year. It states businesses constantly review the situation annually.
why in this example did you not account for the 9 months while calculating depreciation?
for the first year*
Because the question says that the policy is to charge a full tears depreciation in the year of purchase, which is a very common policy.
(I assume you have downloaded the free lecture notes and so have the question in front of you?)
Thank you Sir. You said to do a pro rata to the nearest month. In a situation where the date is, say, 30th April,do we take May as the nearest month?
If it was bought on 30th April, then yes – you start counting from May 馃檪
But do appreciate, that this only applies if it is pro-rata depreciation, and also this is only for the exam – in practice you can have any policy you want.
Noted with thanks:)
You are welcome 馃檪
Dear John! Perhaps I missed this in one of the lectures, but, on the reducing balance method the amount to be depreciated should be = original cost – residual value, (same as in the straight line method) right? It’s just that I couldn’t find in any of the examples a residual amount with the reducing balance method and I don’t want to take it for granted.
No – with reducing balance, the residual value is irrelevant for the depreciation calculation. It is only relevant when doing straight-line depreciation.
Thank you John for clarifying it.
You are welcome 馃檪
Excuse me sir, i still dont understand how 10%*(cost / 20.000) = 2.000. What is the value of “cost”, sir? I think the word “cost” mean the cost of the car? = 20.000, or i get it wrong somewhere?
Looking forward to hearing your explain. Thank you sir!
The cost is 20,000. 10% x 20,000 = 2,000.
At the first time I was confused too. But later i recognized that the cost is $20,000 not cost divided $20,000
Haha yes, i thought the same initially too 馃檪