Chapter 20 Depreciation of Fixed Assets Nature and

Chapter 20 : Depreciation of Fixed Assets (Nature and Calculation)

Content Revision: What are Fixed Assets? What is Depreciation ? Example 1 Example 2 Causes of Depreciation 2 Methods of Calculating Depreciation Charges Straight line Method (直線法) Reducing Balance Method (餘額遞減法) More Examples Exercise 1 Exercise 2

Content Revision: What are Fixed Assets (固定資產) ? • Long life; • Used in the business; • Not bought for resale;

Content What is Depreciation (折舊)? • Depreciation is an expense resulting in a loss of value of the cost of a fixed asset lost during a period of time.

Content What is Depreciation (折舊)? • Depreciation is an expense resulting in a loss of value of the cost of a fixed asset lost during a period of time. I bought a computer in 1. 1. 98 at $10, 000 but now its value is only $6, 000. Depreciation = ? One year later COST = $10, 000 VALUE = $6, 000

Content What is Depreciation (折舊)? • Depreciation is an expense resulting in a loss of value of the cost of a fixed asset lost during a period of time. I bought a computer in 1. 1. 98 at $10, 000 but now its value is only $6, 000. Depreciation = $10, 000 - $6, 000 = $4, 000 One year later COST = $10, 000 VALUE = $6, 000

Content What is Depreciation? • Depreciation = Cost (成本) - Disposal Value(賤賣價值)

Content What is Depreciation? • Depreciation = Cost (成本) - Disposal Value(賤賣價值) Example 1: Cost of buying Machine is $1, 000 in 1 -1 -96 Cost = $1, 000 31 -12 -96 Disposal value = $800 Machine

Content What is Depreciation? • Depreciation = Cost (成本) - Disposal Value(賤賣價值) Example 1: Cost of buying Machine is $1, 000 in 1 -1 -96 Cost = $1, 000 Machine Find depreciation in 1996. Depreciation = Cost - Disposal value =? 31 -12 -96 Disposal value = $8, 00 Machine

Content What is Depreciation? • Depreciation = Cost (成本) - Disposal Value(賤賣價值) Example 1: Cost of buying Machine is $1, 000 in 1 -1 -96 Cost = $1, 000 Machine Find depreciation in 1996. Depreciation = Cost - Disposal value = $1, 000 - $800 31 -12 -96 Disposal value = $8, 00 = $200 Machine

Content What is Depreciation? • Depreciation = Cost - Disposal Value Example 2: Cost of buying Machine is $1, 000 in 1 -1 -96 Cost = $1, 000 31 -12 -98 Disposal value = $100 Machine

Content What is Depreciation? (continued) • Depreciation = Cost - Disposal Value Example 2: Cost of buying Machine is $1, 000 in 1 -1 -96 Cost = $1, 000 Machine Find the amount of depreciation for 3 years. Depreciation = Cost - Disposal value 31 -12 -98 Disposal value = $100 =? Machine

Content What is Depreciation? (continued) • Depreciation = Cost - Disposal Value Example 2: Cost of buying Machine is $1, 000 in 1 -1 -96 Cost = $1, 000 Machine Find the amount of depreciation for 3 years. Depreciation = Disposal value - Cost 31 -12 -98 Disposal value = $100 = $1, 000 - $100 Machine = $900

Content Causes of Depreciation • • • Physical Depreciation Economic Factors Obsolescence Inadequacy The Time Factor Depletion

Content 2 Methods of Calculating Depreciation Charges. Straight line Method (直線法) Example 1 Example 2 Example 3 Reducing Balance Method (餘額遞減法) Example 1 Example 2 Example 3

Content Straight Line Method (直線法) • Depreciation each year =

Content Straight Line Method (Continued) • Depreciation each year = Example 1: Cost of machine in 1. 1. 1996 = $2, 000; Disposal Value in 1. 1. 1999 = $500; Useful Year = 3 Years. Depreciation each year = ?

Content Straight Line Method (Continued) • Depreciation each year = Example 1: Cost of machine in 1. 1. 1996 = $2, 000; Disposal Value in 1. 1. 1999 = $500; Useful Year = 3 Years. Depreciation each year = = $500

Content Straight Line Method (Continued) • Depreciation each year = • Example 1 Cost of machine in 1. 1. 1996 = $2, 000; Disposal Value in 1. 1. 1999 = $500; Useful Year = 3 Years. Depreciation each year = = $500 1. 1. 96 $2, 000 (COST) 31. 12. 96 $2, 000 - $500 = $1, 500 (BOOK VALUE) 31. 12. 97 $2, 000 - $500 = $1, 000 (BOOK VALUE) 31. 12. 98 $2, 000 - $500 = $500 (DISPOSAL VALUE)

Content Straight Line Method (Continued) • Example 2 A firm bought a machine for $50, 000. It is expected to be used for six years then sold for $5, 000. What is the annual amount of depreciation if the straight line method is used? A. $7, 000 B. $8, 000 C. $7, 500 D. $6, 500 How ?

Content Straight Line Method (Continued) • Example 2 A firm bought a machine for $50, 000. It is expected to be used for six years then sold for $5, 000. What is the annual amount of depreciation if the straight line method is used? A. $7, 000 B. $8, 000 C. $7, 500 D. $6, 500 Annual amount of depreciation = = $7, 500

Content Straight Line Method (Continued) • Example 3 A machine costing $20, 000 was bought for business use on 1 January 19 -1. Au estimated that its useful life was 5 years with no residual value. The straight line method was adopted. Required: (a) The annual depreciation of the machine. (b) The accumulated depreciation at the end of 19 -3.

Content Straight Line Method (Continued) • Example 3 A machine costing $20, 000 was bought for business use on 1 January 19 -1. Au estimated that its useful life was 5 years with no residual value. The straight line method was adopted. Required: (a) The annual depreciation of the machine. (b) The accumulated depreciation at the end of 19 -3. Answers: (a) Annual depreciation of the machine = = $4, 000

Content Straight Line Method (Continued) • Example 3 A machine costing $20, 000 was bought for business use on 1 January 19 -1. Au estimated that its useful life was 5 years with no residual value. The straight line method was adopted. Required: (a) The annual depreciation of the machine. (b) The accumulated depreciation at the end of 19 -3. Answers: (a) Annual depreciation of the machine = (b) Accumulated depreciation of the machine = $4, 000 3 = $12, 000

Content Straight Line Method (Continued) • Example 3 A machine costing $20, 000 was bought for business use on 1 January 19 -1. Au estimated that its useful life was 5 years with no residual value. The straight line method was adopted. Answers: (a) Annual depreciation of the machine = $4, 000 (b) Accumulated depreciation at the end of 19 -3 = $12, 000 Cost = $20, 000 Book Value = $16, 000 -$4, 000 Depreciation 1. 1. 19 -1 Book Value = $12, 000 -$4, 000 Depreciation 31. 12. 19 -1 Book Value = $8, 000 -$4, 000 Depreciation 31. 12. 19 -2 31. 12. 19 -3

Content Reducing Balance Method • Annual Depreciation = Book value of Asset Depreciation rate (p. a. ) where Book value = Cost of Asset - Accumulated Depreciation

Content Reducing Balance Method (continued) • Example 1: Mr. Chow bought a machine costing $10, 000 in 1. 1. 97. He decided to use reducing balance method to depreciate it at 50 % per annum. Find the annual depreciation for the years ended 31 December 19 -7 and 19 -8. Cost of machine = $10, 000 Answers: 1. 1. 97 31. 12. 98

Content Reducing Balance Method (continued) • Example 1: Mr. Chow bought a machine costing $10, 000 in 1. 1. 97. He decided to use reducing balance method to depreciate it at 50 % per annum. Find the annual depreciation for the years ended 31 December 19 -7 and 19 -8. Cost of machine = $10, 000 Answers: Book Value = $5, 000 Cost of machine = $10, 000(97) Depreciation = $10, 000 50% = $5, 000 97 Annual depreciation = $5, 000 1. 1. 97 31. 12. 98

Content Reducing Balance Method (continued) • Example 1: Mr. Chow bought a machine costing $10, 000 in 1. 1. 97. He decided to use reducing balance method to depreciate it at 50 % per annum. Find the annual depreciation for the years ended 31 December 19 -7 and 19 -8. Cost of machine = $10, 000 Answers: Book Value = $5, 000 Cost of machine = $10, 000(97) Depreciation = $10, 000 50% = $5, 000 97 Annual depreciation = $5, 000 1. 1. 97 31. 12. 97 Depreciation (98) = $5, 000 50% = $2, 500 Book Value = $2, 500 Cost of machine = $10, 000(97) Depreciation = $10, 000 50% = $5, 000 98 Annual depreciation = $2, 500 31. 12. 98

Content Reducing Balance Method (continued) • Example 2: On 1 January 1992, a lorry costing $100, 000 was purchased. Bao chose the reducing balance method to depreciate the asset. The rate of depreciation was maintained at 30% per annum. Required: (a) The annual depreciation for the year ended 31 December 1992, 1993 and 1994; (b) The net book value of the lorry as at 31 December 1992, 1993 and 1994

Content Reducing Balance Method (continued) • Example 2: On 1 January 1992, a lorry costing $100, 000 was purchased. Bao chose the reducing balance method to depreciate the asset. The rate of depreciation was maintained at 30% per annum.

Content Reducing Balance Method (continued) • Example 2: On 1 January 1992, a lorry costing $100, 000 was purchased. Bao chose the reducing balance method to depreciate the asset. The rate of depreciation was maintained at 30% per annum.

Content Reducing Balance Method (continued) • Example 2: On 1 January 1992, a lorry costing $100, 000 was purchased. Bao chose the reducing balance method to depreciate the asset. The rate of depreciation was maintained at 30% per annum.

Content Reducing Balance Method (continued) • Example 2: On 1 January 1992, a lorry costing $100, 000 was purchased. Bao chose the reducing balance method to depreciate the asset. The rate of depreciation was maintained at 30% per annum.

Content Reducing Balance Method (continued) Answer (a): The depreciation for the year ended 31 December 1992 = $30, 000 The depreciation for the year ended 31 December 1993 = $21, 000 The depreciation for the year ended 31 December 1994 = $14, 700

Content Reducing Balance Method (Continued) • Example 3 A motor van was bought for $80, 000 on 1 January 1991. It was a common practice to adopt the reducing balance method to depreciate the asset. It was depreciated at 25% p. a. Q 1) Find the depreciation for the year ended 31 December 1991? A. $20, 000 B. $18, 000 C. $12, 500 D. $13, 500

Content Reducing Balance Method (Continued) • Example 3 A motor van was bought for $80, 000 on 1 July 1991. It was a common practice to adopt the reducing balance method to depreciate the asset. It was depreciated at 25% p. a. Q 1) Find the depreciation for the year ended 31 December 1991? A. $20, 000 B. $18, 000 C. $12, 500 D. $13, 500

Content Reducing Balance Method (Continued) • Example 3 A motor van was bought for $80, 000 on 1 July 1991. It was a common practice to adopt the reducing balance method to depreciate the asset. It was depreciated at 25% p. a. Q 3) Find the depreciation for the year ended 31 December 1993? A. $14, 500 B. $11, 250 C. $15, 500 D. $13, 500

Content Exercise 1 • A computer costs $15, 000. It will be kept for four years, and then sold for $3, 000. Find depreciation for each of the four years using (a) the straight line method; (b) the reducing balance method, for this method using a depreciation rate of 20 per cent.

Content Exercise 2 • A lorry costs $6, 000. It will be kept for five years, and the disposal value is $1, 000. Calculate the depreciation for each year using (a) the straight line method; (b) the reducing balance method, using a depreciation rate of 50%.