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FIXED ASSETS
Depreciation Accounting
Definition
Depreciable Assets
This accounting standard is applicable to all depreciable assets except, the following:
(i) Forests, plantations and similar regenerative natural resources;
(ii) Wasting assets including expenditure on the exploration for and extraction of minerals,
oils, natural gas and similar non-regenerative resources;
(iii) Expenditure on research and development;
(iv) Goodwill;
(v) Live stock- Cattle, Animal Husbandry
Calculation of depreciation
Methods of depreciation
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Note- A combination of more than one standards may be used Accounting treatment-
selected depreciation methods should be applied consistently applied from period to
period
• Compliance of statute
• Compliance of accounting standards
• For more appropriate presentation of the financial statements
Three Important Notes About Depreciation: PP&E held for sale is not
depreciated
Estimates of useful life and residual value, and the method of depreciation, are
reviewed only when events or changes indicate that the current estimates or
depreciation method no longer are appropriate
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Depreciation under IFRS
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treated as a change in as a change in an the results of current and future
an accounting policy accounting policy periods.
Findings
Facts: A company using IFRS (revaluation model) has a piece of equipment with a cost
of $10,000 and acc. depr. of $2,000. The equipment is revalued to a FMV of $20,000
OBJECTIVES
In general
• The introduction accounting standards there was uniformity in the accounts of
various companies within India.
• Converged Accounting Standards along with IFRS was introduced so that
accounts of India can be compared with companies of the world
Related to Depreciation
• It will charged according to the shelve life of fixed asset.
RECOMMENDATIONS
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Accounting for Depreciation
Fixed assets other than land lose their ability over time to provide
services
Costs of equipment, buildings, and land improvements should be
transferred to expense accounts in a systematic manner during their
expected useful lives.
DEPRECIATION
Adjusting entry to record depreciation is usually made at the end of each
month or at the end of the year Fixed assets other than land lose their
ability over time to provide services
Adjusting Entry
$7,000
Accumulated depreciation - truck
Depreciation
Accumulated depreciation
Shows the amount that the asset has lost in value since
its purchase
Depreciation expense
Shows the amount that the asset has lost in value this
period.
Factors that cause a decline the ability of a fixed asset to
provide services may be identified as
Physical depreciation
Occurs from the wear and tear while in use and
from the action of the weather
Functional depreciation
Occurs when a fixed asset is no longer able to
provide services at the level for which it was
intended.
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The fixed asset’s initial cost
Its expected useful life
Its estimated value at the end of its useful life.
Depreciation Methods
Straight line
Declining balance
Units of production
Example 1
Adjusting entry
Account Debit Credit
$4,400
Accumulated depreciation - truck
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Example 2
A machine had a cost of $30,000, salvage of $5,000 and useful life of
6 years. Compute depreciation under the straight line method?
What is depreciation expense in year 3?
Units of Production
Example 3
Example 3
Example 4
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DECLINING BALANCE METHOD
Provides for a declining periodic expense over the estimated useful life
of the asset.
Book value
= Cost – Accumulated depreciation
Steps
Compute the DB rate = 100/Life of asset
For double declining balance
Multiply rate time 2
Depreciation expense =
Beg. book value X Rate
Rule: the book value may never by less than the salvage value of
the asset
Example 5:
Year Cost Accumulated Book value at the Rate Depreciation Book value end of
Depreciation beginning of year year
1 $24,000 $24,000 40% $9,600 $14,400
2 $24,000 9,600 14,400 40% 5,760 8,640
3 $24,000 15,360 8,640 40% 3,456 5,184
4 $24,000 18,816 5,184 40% 2,073.60 3,110.40
5 $24,000 20,889.60 3110.40 1,110.40 2,000
Example 5:
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Revision of Depreciation
Revising the estimates of the residual value and the useful life is normal
Used to determine depreciation expense in future periods
Example 7
At the end of ten years, the asset’s book value of $90,000. During 11th
year, it is estimated that the remaining useful life is 25 years and that
the residual value is $5,000.
Compute depreciation expense for the 11th year using the new
information provided.
Example 7
Depreciation expense=
= $130,000-$10,000
30
= $ 4,000.00 per year before changes
Book value
= $130,000.00 – $40,000 = $90,000
Example 7
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= $ 3,400.00 per year for remaining years
Example 8
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Example 9:
Asset with cost of $25,000 and Accumulated Depreciation of $10,000 is sold
for $15,000 cash.
Account Debit Credit
Cash $15,000
Accumulated depreciation $10,000
Fixed Asset $25,000
Gain is recognized
Example 10:
Asset with cost $25,000, Accumulated Depreciation of $10,000
is sold for $20,000 cash.
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EXCHANGING SIMILAR ASSETS
Old equipment is often traded in for new equipment having a
similar use.
The seller allows the buyer an amount for the old equipment
traded in called TRADE IN ALLOWANCE.
The remaining balance – the amount owed is either paid in cash
or recorded as a liability – called BOOT
GAIN ON EXCHANGES
Not recognized for financial reporting purposes.
When trade-in allowance exceeds the book value of an asset traded in
and no gain is recognized, the cost recorded for the new asset can be
determined in either of two ways:
Cost of new asset = List price + Unrecognized gain
Cost of new asset = Cash given + book value of old Not recognized
for financial reporting purposes.
Example 12
Example 12
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For financial reporting purposes, losses are recognized on exchanges of
similar fixed assets.
If trade in is less than the book value of the old equipment, there is a loss
Example 14
New equipment is purchased with a list price of $5,000, trade in allowance
of old is $700, cost of old equipment is $4,000, accumulated depreciation
$3,200. Record the entry.
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