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Hello Sir,
I have a query with regard to computation of depreciation.
A company XYZ uses straight line method on the rate of 25% for machinery and tools – which means it has a 4 year useful life.
If it purchased at 3rd July 2016 and the year end is 31st March 2020. what would the depreciation charge be as at 31st March 2020?
Based on my computations, 2020 would be the last year of charging depreciation right?
So what would be the number of days used for computing depreciation?
Would it be: i) from 1st April 2019 to 3rd July 2019 or
ii) from 3rd July 2019 to 31st March 2020 or
iii) 365 days as the last year of depreciation charge?Kindly assist.
Thanks.
The machine was purchased in July 2016 and therefore it’s life finishes in July 2020, which is in the year ended March 2021.
Therefore in the year ended March 2020 there will be a full years charge for depreciation.
(Even if it had been sold during the year ended March 2020, we never calculate depreciation in days. We calculate to the nearest month, unless (as is often the case) the question says there is a policy of a full years charge in the year of purchase and none in the year of sale.)
I do suggest that you watch my free lectures on depreciation. The lectures are a complete free course for Paper FA and cover everything needed to be able to pass the exam well.
Thank you.
And I would like to confirm:
If the asset was bought at 5th Jan 2016 and again same year end as at 31.3.2020 and useful life of 4 years then:There won’t be any depreciation charge during the year 2020 as the useful life got over in 2019
Please confirm.
In that case the 4 year life will finish on 5 January 2020 which (to the nearest month) is 9 months through the year ended 31 March 2020.
Therefore the depreciation charge will be 9/12 x 25% x the cost (unless, again, the question says that there is a full years charge in the year of purchase and none in the year of sale, in which case there would be no depreciation expense in the year ended 31 March 2020).
Ok.
So if the asset’s useful life gets over in the 4th year, do we then write off from the books in the 5th year?
It depends on the accounting periods. It will be removed from the books after 4 years of the machine’s life. The fourth year of the machine’s life finishes during the accounting year ended 31 March 2020 and therefore the 9 months depreciation charge write off during the fourth account period. It was bought in the accounting period ending 31 March 2016, and therefore there will have been 3 months depreciation in year end 31 March 2016, 12 months depreciation in each of the years ended 31 March 2077, 2018 and 2019, and 9 months depreciation in the year ended 31 March 2020. So 4 years of depreciation which on the dates in this question would affect five accounting periods.
Again, have you watched my lectures on this?
Thank you so much for your help.
Yes, I watched your lectures but these queries came up out of curiosity.
Once again thank you and your Opentuition team
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