Depreciation on fixed assets

System

Hi there,

I am studying the Intermediate level and have some work examples to complete, i just wondered if somebody could point me in the right direction with a few of these questions:

I am familiar with both the straight line and reducing balance methods of calculating depreciation in the profit and loss and balance sheet, but where for instance it asks me to 'calculate depreciation using the straight line method for equipment at 20%p.a.' , do i just input the depreciation figure given or do i need to calclulate it fully(which i can't do because there is no number of years of estimated use given?)

Hope you can help!

And good luck everyone who is waiting for the December exam results!(it will be worth it, we hope!)

System

Re:Depreciation on fixed assets

Let me see if I understand you:

You are going from an initial trial balance to the extended trial balance, and are calculating the amount of depreciation for the year. This is the way it is usually laid out.

You will usually have an 'at cost' and an 'accumulated depreciation' for each class of fixed asset (machinery, motor vehicle, etc)

If it's 20% straight line on equipment, then the charge for the year is 20% of the 'equipment at cost' amount.

If it's 20% reducing balance, then the charge for the year is 20% of the difference between equipment 'at cost' and 'accumulated depreciation'.

Remember in both cases you debit Depreciation (which will appear as an expense on the P&L) and credit Accumulated Depreciation (which will reduce the value of fixed assets on the Balance Sheet)

Hope this helps. If not, ask again but be more specific.

System

Re:Depreciation on fixed assets

Thanks for that,

Here is the question i am struggling with:

I have a trial balance with the following included:

Motor vehicles at cost £12000.00
Provision for depreciation motor vehicles £2400.00


I am then asked at the bottom of the page;

'Depreciate motor vehicles at 20% p.a. using the straight line method,

I assume i just use the 2400 figure?

What would it be for the reducing balance method,

Somebody please help,

By the way, congats to everyone who passed their AAT exams, i passed my ECR and am really pleased, roll on FRA in June!

System

Re:Depreciation on fixed assets

The provision of 2400 is the previos years 20% dep'n ie 20% of 12000, so depreciate the same this year
DR Dep'n expense 2400
CR Provision for dep'n 2400

Dep'n expense P&L 2400
Provision for dep'n B/S 4800

System

Re:Depreciation on fixed assets

I have a trial balance with the following included:

Motor vehicles at cost £12000.00
Provision for depreciation motor vehicles £2400.00


I am then asked at the bottom of the page;

'Depreciate motor vehicles at 20% p.a. using the straight line method,

I assume i just use the 2400 figure?

Not quite. To depreciate at 20% straight line, the charge for the year is 20% of the motor vehicles at cost: £12000×20%. Admittedly, this is £2400, but that's for another reason. Consider the double entry:

Dr Depreciation (Motor Vehicles) £2400
Cr Provision for Depreciation (Motor Vehicles) £2400

At the end of the year, you will transfer the debit balance on the Depreciation account to the Profit and loss account, but the credit balance on the Provision for Depreciation account will accumulate year on year: appearing on the balance sheet.

Next year's opening balance will be
Motor Vehicles at Cost: Dr £12000
Provision for Depreciation: Cr £4800
Depreciation (Motor Vehicles): 0

The depreciation at 20% straight line for next year will still be £12000×20%=£2400.

If you were using 20% reducing balance, the depreciation for each year would be:
(motor vehicles at cost-provision for depreciation)×20%
that is to say
Year 1: (£12000-£2400)×20%= £1920
Year 2: (£12000-(£2400+£1920))×20%= £1536
Year 3: (£12000-(£2400+£1920+£1536))×20%= £1228.80

and so on