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Depreciation of non-current assets: nature and calculations

9 important questions on Depreciation of non-current assets: nature and calculations

What is the straight line method?

The number of years of use is estimated. The cost is then divided by the number of years. This gives the depreciation charge for each year.

Formule:

(cost - estimated disposal value) / number of expected years of use

What do the advocates of the reducing balance method say?

In the early years there is a higher charge for depreciation + a lower charge for repairs and upkeep. This will tend to be close to the sum of;

In the later years there is a lower charge for depreciation and a higher charge for repairs and upkeep.

How are depreciation provisions for assets bought or sold during an accounting period calculated?

1. Ignore the dates during the accounting period that the assets were bought or sold, and simply calculate a full period's depreciation on the assets in use at the end of the period.

2. Provide for depreciation on the basis of 'one month's ownership = one month's provision for depreciation'.

[On the exam, when dates are given, method 2 should be used. Otherwise method 1.]

What are other methods of calculating depreciation?

1. The revaluation method

2. Depletion unit method

3. Machine hour method

4. Sum of the year's digits method

5. Units of output method

What is the revaluation method?

1. Find it cost

2. Estimate it years of use to the business

3. Calculate and provide depreciation

4. Make the adjustments when the asset is disposed of

5. Calculate profit or loss on disposal

What is the depletion unit method?

This is used with non-current assets such as a quarry from which raw materials are dug out to be sold to the building industry.

Formula:

(cost of asset / expected total contents in units) * Number of units taken in period

What is the machine hour method?

The deprecation provision is based on the number of hours that the machine was operated during the period compared with the total expected running hours during the machine's like with the business.

What is the sum of the years' digits method?

This provides for higher deprecation to be charged early in the life of an asset with lower depreciation in later years.

Example:
From purchase the asset will last for 3 years
From purchase the asset will last for 2 years

From purchase the asset will last for 1 years

Total 3+2+1 = 6 --> sum of the digits
Deprecation:
3/6 * amount
2/6 * amount
1/6 * amount

What is the units of output method?

This method establishes the total expected units of output expected form the asset. Depreciation, based on cost less salvage value, is then calculated for the period by taking that period's units of output as a proportion of the total expected output over the life of the asset.

Formula:

(Cost - salvage value) * (period's production / total expected production)

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Depreciation of non-current assets: nature and calculations

9 important questions on Depreciation of non-current assets: nature and calculations

What is the straight line method?

What do the advocates of the reducing balance method say?

How are depreciation provisions for assets bought or sold during an accounting period calculated?

What are other methods of calculating depreciation?

What is the revaluation method?

What is the depletion unit method?

What is the machine hour method?

What is the sum of the years' digits method?

What is the units of output method?

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