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

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

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

6. 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

7. 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 I bought a computer in 1.1.98 at $10,000 but now its value is only $6,000. Depreciation = ? COST = $10,000 One year later VALUE = $6,000

8. 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 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 COST = $10,000 One year later VALUE = $6,000

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

10. 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. Machine 1-1-96 Cost = $1,000 Machine 31-12-96 Disposal value = $800 Content

11. 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. Machine 1-1-96 Cost = $1,000 Machine 31-12-96 Disposal value = $8,00 Find depreciation in 1996. Depreciation = Cost - Disposal value = ? Content

12. 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. Machine 1-1-96 Cost = $1,000 Machine 31-12-96 Disposal value = $8,00 Find depreciation in 1996. Depreciation = Cost - Disposal value = $1,000 - $800 = $200 Content

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

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

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

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

17. 2 Methods of Calculating Depreciation Charges. Straight line Method ( 直線法 ) Content Reducing Balance Method ( 餘額遞減法 ) Example 1 Example 2 Example 3 Example 1 Example 2 Example 3

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

19. 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. Content Depreciation each year = ?

20. 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. Content Depreciation each year = = $500

21. 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. Content 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 - $500 = $1,000 (BOOK VALUE) 31.12.98$2,000 - $500 - $500 - $500 = $500 (DISPOSAL VALUE)

22. 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 ?

23. 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

24. 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.

25. 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

26. 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 (b) Accumulated depreciation of the machine = $4,000 3 = $12,000

27. 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 1.1.19-1 Cost = $20,000 31.12.19-1 Book Value = $16,000 -$4,000 Depreciation 31.12.19-2 Book Value = $12,000 31.12.19-3 -$4,000 Depreciation Book Value = $8,000

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

29. 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. Content Cost of machine = $10,000 Cost of machine = $10,000 1.1.9731.12.9731.12.98 Answers:

30. 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. Content Cost of machine = $10,000 Cost of machine = $10,000 Cost of machine = $10,000 Cost of machine = $10,000 Depreciation (97) = $10,000 50% = $5,000 Book Value = $5,000 1.1.9731.12.9731.12.98 Answers: 97 Annual depreciation = $5,000

31. 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. Content Cost of machine = $10,000 Cost of machine = $10,000 Cost of machine = $10,000 Cost of machine = $10,000 Cost of machine = $10,000 Cost of machine = $10,000 Depreciation (97) = $10,000 50% = $5,000 Book Value = $5,000 1.1.9731.12.9731.12.98 Depreciation (97) = $10,000 50% = $5,000 Book Value = $2,500 Depreciation (98) = $5,000 50% = $2,500 Answers: 97 Annual depreciation = $5,000 98 Annual depreciation = $2,500

32. Reducing Balance Method (continued) Content 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

33. Reducing Balance Method (continued) Content 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.

34. Reducing Balance Method (continued) Content 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.

35. Reducing Balance Method (continued) Content 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.

36. Reducing Balance Method (continued) Content 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.

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

38. 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. A.$20,000 B.$18,000 C.$12,500 D.$13,500 Q1) Find the depreciation for the year ended 31 December 1991?

39. 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. A.$20,000 B.$18,000 C.$12,500 D.$13,500 Q1) Find the depreciation for the year ended 31 December 1991?

40. 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. A.$14,500 B.$11,250 C.$15,500 D.$13,500 Q3) Find the depreciation for the year ended 31 December 1993?

41. 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

42. 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%. Content