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Depreciation Company policy

Forums › ACCA Forums › ACCA FA Financial Accounting Forums › Depreciation Company policy

  • This topic has 1 reply, 2 voices, and was last updated 7 years ago by Chris.
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  • November 21, 2017 at 8:51 pm #417207
    chviet
    Member
    • Topics: 4
    • Replies: 1
    • ☆

    What does ” A full year of depreciation is charged in the year of purchase and none in the year of disposal” mean?

    November 21, 2017 at 9:11 pm #417210
    Chris
    Member
    • Topics: 7
    • Replies: 600
    • ☆☆☆☆

    Let’s use an example to illustrate:

    If an asset is bought on the 1st October 2017 and the company’s year end is the 31st December 2017, then with this policy the asset will be depreciated by a full year, even though it is only 3 months old. So if the asset value was $10,000 and it has a predicted useful life of 10 years, its carrying value at 31st December will be $9,000. Without this policy, the depreciation would be apportioned across the year and its value would be $9,750.

    For the disposal, let’s now say it’s 1st July 2022 and the company wants to sell the asset. The asset has been depreciated for 4 full years and so has a carrying value of $6,000. The company sells the asset for $8,000 and calculates the profit on disposal as $2,000. Without this policy, the depreciation would be apportioned across the year and the value would have been $5,500. This changes the profit on disposal and the depreciation charge for the year.

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