Financial Accounting

FFA-F3
Depreciation methods and Disposals of non-current
assets
Sample question – depreciation

• X Ltd makes up its accounts to 31 December each year.

On 01.01.x1 it purchases a motor vehicle for $60,000.
This vehicle has an expected life of five years, and X Ltd
estimates a residual value of $10,000.
• Required: to calculate the depreciation charge for each
of the five years of the vehicle’s useful life, using
• 1. the reducing balance method (at a rate of 30%)
• 2. the straight line method
Answer – reducing balance method
• Year 1:
• Depreciation = 60,000 x 30% = 18,000
• Carrying amount – 31.12.x1 = 60,000 – 18,000 = 42,000
• Year 2:
• Depreciation = 42,000 x 30% = 12,600
• Carrying amount – 31.12.x2 = 42,000 – 12,600 = 29,400
• Year 3:
• Depreciation = 29,400 x 30% = 8,820
• Carrying amount – 31.12.x3 = 29,400 – 8,820 = 20,580
• Year 4:
• Depreciation = 20,580 x 30% = 6,174
• Carrying amount – 31.12.x4 = 20,580 – 6,174 = 14,406
• Year 5:
• Depreciation = 14,406 x 30% = 4,322
• Carrying amount – 31.12x5 = 14,406 – 4,322 = 10,084
Answer – Straight Line Method

• Depreciation per year

• = (cost – residual value)/asset life
• = (60,000 – 10,000)/5 = 10,000 per year
• Carrying amount
• Year 1: 60,000 – 10,000 = 50,000
• Year 2: 50,000 – 10,000 = 40,000
• Year 3: 40,000 – 10,000 = 30,000
• Year 4: 30,000 – 10,000 = 20,000
• Year 5: 20,000 – 10,000 = 10,000
Comparison of the 2 methods
Straight Line method Reducing Balance Method
Cost 60,000 60,000
Depreciation – year 1 (10,000) (18,000)
Carrying amount – end of year 1 50,000 42,000
Depreciation – year 2 (10,000) (12,600)
Carrying amount – end of year 2 40,000 29,400
Depreciation – year 3 (10,000) (8,820)
Carrying amount – end of year 3 30,000 20,580
Depreciation – year 4 (10,000) (6,174)
Carrying amount – end of year 4 20,000 14,406
Depreciation – year 5 (10,000) (4,322)
Carrying amount – end of year 5 10,000 10,084
Disposals of Non-Current Assets

Profit or Loss on Difference between Carrying amount and proceeds

What does a profit or loss actually mean?

Example – Motor vehicle cost $60,000, estimated life of 5 years and a

residual value of $10,000. Depreciation charged on the straight line
basis.
Disposal example
• Motor vehicle – Cost $60,000, depreciation of $10,000 per
annum.
• This is sold after 3 years – Carrying amount = $30,000
• Proceeds:
• 1. $35,000 – so “profit” on disposal $5,000
• 2. $25,000 – so “loss” on sale $5,000

• Not a “real” profit or loss but to adjust to charge total cost to

P&L account.
• 1. total cost = $(60 – 35)k = $25k (10k x 3 – 5k)
• 2. total cost = $(60 – 25)k = $35k (10k x3 + 5k)