Tell me the story!A forklift purchase for a warehouse!
At time of purchase …..5 years later
Is there an impact on the Financial Statements?
Profit and LossStatement Balance Sheet
If so how, which, what, where, why?
Cash Flow Statement
• A non-current asset undergoes wear and tear, so that its expected selling price declines over time.
• Depreciation is the allocation of the cost of a non current asset over its effective working life
• The difference between a non-current asset’s original purchase price and its final selling price is allocated as an expense each year called depreciation
Depreciation
Cost of non-current asset
• The original cost (historical cost)
• Any other costs required to get the asset into a condition to be able to earn revenue
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Farmer Fred!
Fred owns a sheep and cattle farm. A variety of machinery helps him to successfully run this farm.
Purchase of a Tractor
• Farmer Fred wants to add a front end loader to his new tractor purchase on 1 July 2012.
Cost $70000
$10000 for the front end loader
Historical cost = $70000+$10000+$1000=$81000
Cost of installation $1000
The value of the tractor
Purchase Price = $81000
Estimated scrap value = $21000
Fred expects to keep it for 5 years (Useful Life)
Calculating Depreciation
Two methods studied
Straight LineUnit 3
Diminishing BalanceUnit 4
Same amount expensed each
reporting period
Amount of depreciation reduces each
reporting period
How do you know which depreciation method to choose?
Reducing Balance Method
• Reducing balance method is used when….a non-current asset is more efficient in its earlier years of its life. The asset does not breakdown as much, and repairs are kept to a minimum. As it gets older it is likely to be out of operation for periods of time while it is being repaired. Income needs to be matched with expenses over that time.
Straight Line Depreciation
The formula:-
Cost – ScrapUseful Life
Including costs incurred to get non current asset ready
to earn revenue
Reducing Balance Depreciation
Calculating the amount of depreciation
Cost – ScrapUseful Life
Including costs incurred to get non current asset ready
to earn revenue
X 1.5
Tractor
$81000 - $21000 (scrap value)5 (years)
=$12000 depreciation x 1.5= 22% per annum
Where does depreciation appear?General journal
The General Ledger
Depreciation Tractor (expense)
Accumulated Depreciation Tractor
Profit and LossBalance Sheet
Non current AssetsTractorLess accumulated depreciation
How does it look?
Tell me the story of what you can see in the figures above?
• Where will each of the above calculations appear in the financial statements? Why do they appear there?• How would it be different if straight
line depreciation was used?
Which depreciation method would you use for each of the following?
1. Draw up a table with 3 columns/9rows2. List the non-current asset 3. Choose the method4. Explain and justify your choice
Tool Chest
1. Woolshed and 2. The sheepyards
Furniture and Fittings
Shop shelving
• Goto http://www.wordle.net and create your own word cloud – “reducing balance depreciation in a wordle”
Reducing Balance Depreciation in a
Word Cloud
or…
Find all the term(s) in the above word cloud and explain their relevance to depreciation.
• Reflections• What did you find easy?• What did you find most challenging?• What do you need to do?
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