Reducing balance method for depreciation
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Transcript of Reducing balance method for depreciation
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Tell me the story!A forklift purchase for a warehouse!
At time of purchase …..5 years later
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Is there an impact on the Financial Statements?
Profit and LossStatement Balance Sheet
If so how, which, what, where, why?
Cash Flow Statement
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• 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
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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.
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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
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The value of the tractor
Purchase Price = $81000
Estimated scrap value = $21000
Fred expects to keep it for 5 years (Useful Life)
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Calculating Depreciation
Two methods studied
Straight LineUnit 3
Diminishing BalanceUnit 4
Same amount expensed each
reporting period
Amount of depreciation reduces each
reporting period
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How do you know which depreciation method to choose?
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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.
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Straight Line Depreciation
The formula:-
Cost – ScrapUseful Life
Including costs incurred to get non current asset ready
to earn revenue
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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
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Tractor
$81000 - $21000 (scrap value)5 (years)
=$12000 depreciation x 1.5= 22% per annum
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Where does depreciation appear?General journal
The General Ledger
Depreciation Tractor (expense)
Accumulated Depreciation Tractor
Profit and LossBalance Sheet
Non current AssetsTractorLess accumulated depreciation
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How does it look?
Tell me the story of what you can see in the figures above?
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• 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?
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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
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Tool Chest
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1. Woolshed and 2. The sheepyards
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Furniture and Fittings
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Shop shelving
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• Goto http://www.wordle.net and create your own word cloud – “reducing balance depreciation in a wordle”
Reducing Balance Depreciation in a
Word Cloud
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or…
Find all the term(s) in the above word cloud and explain their relevance to depreciation.
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• Reflections• What did you find easy?• What did you find most challenging?• What do you need to do?
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