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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
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