2. 1. It is a method of calculating the
cost of a tangible asset over its
useful life.
2. It is a decrease in an asset’s
value caused by unfavourable
market conditions.
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3. Depreciation is a non cash expense which means
there is no cash outflow from a business.
Depreciation is charged in the “Profit and Loss
account”, so depreciation will reduce the net
profit to a more realistic figure. This is an
application of prudence concept.
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5. This may also be called the fixed instalment
method, under this system the same
percentage rate is used each year and the
amount of the depreciation charged is the
same each year.
The formula for calculating the straight line
method of depreciation is
(cost of asset – scrap value) /
number of expected years of use
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6. Solution: 20,000 – 2,000 = 18,000/6 = 3,000 p.a
Now this amount of depreciation will remain constant for 6 yrs of assets life.
cost of fixed asset – accumulated depreciation
1st year = machine 20,000
less dep 3,000 Book value = 17,000
2nd year = machine 20,000
less accumulated dep 6,000 14,000
3rd year = machine 20,000
less accumulated dep 9,000 11,000
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7. This may also be called the diminishing balance
method.
Under this method the same percentage is used
each year but, because it is calculated on
different value each year, the amount of
depreciation will reduce each year.
RBM is used for assets which in the early years
have lower maintenance costs but give greater
benefits than in later years
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8. 1st year = $2,000 x 16/100 = $320 p.a
2nd year = $2,000 – 320= 1,680 x 16/100 = $269 p.a
3rd year = 1,680 – 269 = 1411 x 16/100 = $266 p.a
Calculated the book value by using RBM
Cost of asset depreciation Book value
1st
year
$2,000 320 $1,680
2nd
year
$2,000 589 $1,411
3rd
year
$2,000 855 $1,145
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9. physical deterioration: when a fixed
asset falls in a physical bad condition.
economic reasons: when the asset is out-
dated, and is no longer able to meet the needs of
the business.
passage of time: this arises when a fixed
asset has a fixed life of certain number of years
e.g. a lease.
depletion: this occurs in assets such as wells
or mines when the worth of the asset falls over a
period of time as value is removed from the
asset.
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