1. D. Jones, a manufacturer, purchases a drilling machine for the sum of $4000.

It has an estimated life

of five years and scrap value of $500. Jones is not certain whether she should use the straight-line
or reducing balance basis for the purpose of calculating depreciation on the machine.

You are required to calculate the depreciation on the machine using both methods, showing clearly
the balance remaining in the machine account at the end of each of the five years for each method.
(Assume that 40% per annum is to be used for the reducing balance method)

Straight Line Method: Reducing Balance Method:

Dep = 4000-500 = 700 per year

5

Cost 4 000 4 000

Dep yr1 700 (40% x 4000) 1600

Value after yr1 3300 2400

Dep yr2 700 (40% x 2400) 960

Value after yr2 2600 1440

Dep yr3 700 (40% x 1440) 576

Value after yr3 1900 864

700
Dep yr4 (40% x 864) 346

Value after yr4 1200 518

700
Dep yr5 (40% x 518) 207

Disposal Value 500 311

25.4x
A machine costs $5120 It will be kept for five years, and then sold at an estimated figure of $1215.
Show the calculations of the figures for depreciation each year using (a) the straight-line method,
(b) the reducing balance method using depreciation rate of 25%.

Straight Line Method: Reducing Balance Method:

Dep = 5120-1215 = 781 per year

5

Cost 5120 5120

Dep yr1 781 (25% x5120 ) 1280

Value after yr1 4339 3840

Dep yr2 781 (25% x 3840) 960

Value after yr2 3558 2880

781
Dep yr3 (25% x 2880) 720

Value after yr3 2777 2160

781
Dep yr4 (25% x 2160) 540

Value after yr4 1996 1620

781
Dep yr5 (25% x 1620) 405

Disposal Value 1215 1215

DEPRECIATION

1. What is depreciation?

It is the part of the original purchase cost of a non-current asset consumed during its period of use

by the business.

Depreciation is an expense.

2. What are the four key factors that causes depreciation to be charged to a non-current asset?

 Physical deterioration – wear and tear

 Economic factors – Obsolete, inadequate

 Time factor – non current assets that have a legal life that expires, eg lease or patent

 Depletion – natural resources like oil wells

3. What are the methods used to calculate depreciation charge per year?

 Straight-line method

 Reducing balance method

Straight-line Method:

Depreciation per year = Cost price – Estimated disposal value

Number of years of use

A) If a car was bought for $22 000 and the business decided to keep it for four years then sell it

for $2 000, what will be the depreciation to charge?

Dep = $22000-2000 = $5000 depreciation per year

4

Cost $22000
DEP yr1 ($5000)
Value after yr1 $17000
DEP yr2 ($5000)
Value after yr2 $12000
DEP ($5000)
Value after yr3 $7000
DEP ($5000)
Disposal value $2000

B) If a photocopier was purchased for $12 000 and the business intended to sell it for $3 000

after 3 years, calculate the depreciation to be charged?

Dep = 12000-3000 = $ 3000 depreciation per year

3
Straight line
Cost $12000
DEP ($3000)
Value after yr1 $9000
DEP ($3000)
Value after yr2 $6000
DEP ($3000)
Disposal value $3000

C) If a building was leased for $20 000 for a period of five years what will be the depreciation

to charge?

Dep = 20000-0 = $4000 depreciation per year

Straight line
Cost $20 000
DEP ($4000)
Value after yr1 $16000
DEP ($4000)
Value after yr2 $12000
DEP ($4000)
Value after yr3 $8000
DEP ($4000)
Value after yr4 $4000
DEP ($4000)
Disposal value $0

2. Reducing Balance Method

Depreciation is charged at a decided percentage (%) each year. The first year the depreciation
percentage is deducted from the cost price and the following years, each year the depreciation is
then deducted from the newest reduced balance.

Example: A machine was bought for $10 000 and the depreciation is charged at 20%. What is the
depreciation for the first 3 years?
Cost $10 000
DEP yr1 (20% x 10 000) ($2000)
Value after yr1 $8000
DEP (20% x 8 000) ($1600)
Value after yr2 $6400
DEP (20% x 6400) ($1280)
Value after yr3 $5120

Example 2: An Air condition was bought for $8 000 and the depreciation is charged at 10%. What
is the depreciation for the first 3 years?
Cost $8 000
DEP (10% x 8000) ($)
Value after yr1 $
DEP (10% x ) ($)
Value after yr2 $
DEP (10% x) ($)
Value after yr3 $
Question:

A business bought a machine for $8 000 and it will be kept for 4 years then disposed at an estimated value of $500. The firm asks for a

comparison of the amounts charged as depreciation using both methods. A percentage of 50% will be used for the reducing balance

method.

Straight Line Method: Reducing Balance Method:

Dep =

Cost 8 000 8 000

Dep yr1 (50% x 8000)

Value after yr1

Dep yr2 (50% x )

Value after yr2

Dep yr3 (50% x )

Value after yr3

Dep yr4 (50% x )

Disposal Value
 EVALUATION
2. D. Jones, a manufacturer, purchases a drilling machine for the sum of $4000. It has an estimated life
of five years and scrap value of $500.
Calculate the depreciation on the machine using the straight-line method, showing clearly the
balance remaining in the machine account at the end of each of the five years.
Expected Answer:

3. A machine cost $12 500, it will be kept for four years and then sold for $5120. Show the
calculations of the figures for depreciation for each of the four years using the straight-line method.
(15mks)

Expected Answer:
4. A car costs $ 6400. It will be kept for five years and sold for $200. Calculate the depreciation for
each of the five years using the straight-line method. (15mks)
Expected Answer:
 LESSON NOTES:
Set Induction / Introduction: Scenario
 I bought a 4*2 Frontier today valued at $295 000.00, however one year from now, I
want to sell it to buy a 4*4 Frontier. Can I sell it for the same $295 000.00?
 The answer is ‘No’. since the value of the item has changed, it has dropped because I
have been using it.
 Today’s topic is ‘Depreciation’.

Presentation 1:
 So, what is depreciation?
 Depreciation is an expense for services consumed, in the same way as expenses for
items such as wages or rent.
 It is the part of the original purchase cost of a non-current asset consumed during its
period of use by the business.
 Depreciation is charged on non-current assets such as machinery, motor vehicles,
fixtures and buildings.

Presentation 2:
 What do you think are some reasons why depreciation is charged on non-current
assets?
 The main causes of depreciation are:
Physical deterioration.
Economic factors.
Time factor.
Depletion.
 Let’s see how each affects depreciation:
Physical deterioration – comes in two forms:
1. Wear and tear – assets usually wear out as a result of usage. E.g. Vehicles, fixtures
and even buildings.
2. Erosion, rust, rot and decay – land maybe eroded, metals in vehicles can become
rusted and wood will rot eventually.
Economic factors – are the reasons why an asset is put out of use despite being in
good condition. This is due to obsolescence and inadequacy.
1. Obsolescence is when the asset becomes out of date due to advanced technology
or a change in processes. E.g. in the car industry most processes are carried out by
robots.
2. Inadequacy – when an asset is no longer used because of growth and changes in
the size of the business it becomes inadequate.
Time factor – there are assets that have a legal life in terms of years. E.g. if a
business leases a building for 10 years, at the end of the 10 years, whatever you paid
for the lease is now of no value and it is depreciated.
 Depletion – There are assets that have wasting character since raw materials are
extracted from them. The asset is then either sold or used for another purpose by the
business. E.g. Mines, quarries and oil wells. Providing for the consumption of the
asset is called depletion.

Presentation 3:
 How do we calculate depreciation?
There are two ways:
1. Straight line method
2. Reducing balance method
 Today we are focusing on the straight-line method:
This method involves the cost price of an asset, the estimated years of its use and the
expected disposal value. Every year the depreciation value will be the same figure.
The depreciation can be calculated each year using the following formula:
Depreciation per year = cost price – estimated disposal value

Number of years of use

Demonstration:
If a car was bought for $22 000 and the business decided to keep it for 4 years and then sell it
for an estimated price of $2 000 the depreciation to be charged would be:
Dep. per year = 22 000 – 2 000

4
= $5 000 (each year for 4 years)
If after 4 years, the car had no disposal value, the charge for depreciation would be:
Dep. per year = 22 000
4
= $5 500 (each year for 4 years)

Let us practice another:

A business has just bought a machine for $8 000. It will be kept in use for 4 years and then it
will be sold for $500. Calculate the charge for depreciation using the straight-line method.
Answer:
Dep. per year = 8 000 – 500
4
 = $1875 (each year for 4 years)
Straight line
Cost $8000
DEP yr1 ($1875)
Value after yr1 6125
DEP yr2 ($1875)
Value after yr2 $4250
DEP yr3 ($1875)
Value after yr3 $2375
DEP yr4 ($1875)
Disposal value $500

Depreciation can be charged using a percentage instead of using the formula:

E.g. Office furniture is purchased for $5500 and depreciation per year is to be charged at
25%. Using the straight-line method, what would be the amount to be charged as depreciation
per year?
Percentage of the cost price - 25% * $5500 = $1375
Straight line
Cost $5500
DEP yr1 ($1375)
Value after yr1 4125
DEP yr2 ($1375)
Value after yr2 $2750
DEP yr3 ($1375)
Value after yr3 $1375
DEP yr4 ($1375)
Disposal value $0

Working with your partner solve the following:

1. A business has just bought a vehicle for $12 000. It will be kept in use for 5 years and
then it will be sold for $2 000. Calculate the charge for depreciation using the straight-line
method.

Answer:
Dep. per year = 12 000 – 2 000
5
= $2000 (each year for 4 years)
Straight line
Cost $12 000
DEP yr1 ($2 000)
Value after yr1 10 000
DEP yr2 ($2 000)
Value after yr2 $8 000
DEP yr3 ($2 000)
Value after yr3 $6 000
DEP yr4 ($2 000)
Value after yr4 $4 000
DEP yr5 ($2 000)
Disposal value $2 000

2. Fixtures are purchased for $2 500 and depreciation per year is to be charged at 25%. Using
the straight-line method, what would be the amount to be charged as depreciation per
year?

Percentage of the cost price - 25% * $2500 = $625

Straight line
Cost $2500
DEP yr1 ($625)
Value after yr1 $1875
DEP yr2 ($625)
Value after yr2 $1250
DEP yr3 ($625)
Value after yr3 $625
DEP yr4 ($625)
Disposal value $0