DEPRECIATION

Question 1

Depreciation

Answer 1

The decrease in the value of a non current asset over time. It is a non-cash expense that is recorder in the profit and loss account in order to determine the profit before intrest and tax.

Question 2

Straight Line Method Advantages + Disadvantages

Answer 2

A:
- Simple to calculate as its a predictable expense spread over a number of years.
- Most suitable for less expensive items.
D:
- Not suitable for expensive assets as it does not take into account the loss in efficiency or increase in repair expenses. - Can inflate the value of some assets which may have lost the greatest amount of value in their first or second years. - Doesnt take into account the fast changing technological environment that may render certain fixed assets obsolete very quickly.

Question 3

Straight Line Method Formula

Answer 3

Formula: Annual Depreciation Expense = (Cost of Asset - Residual Value) / Useful Life
Example: If a computer with a cost of $1,000 and a residual value of $100 has a useful life of 5 years, the annual depreciation would be ($1,000 - $100) / 5 = $180.

Question 4

Straight Line Method

Answer 4

The straight-line method is an accounting technique that evenly spreads the cost of a tangible asset over its estimated useful life, resulting in a consistent annual depreciation expense.

Question 5

Reasons why assets depreciate

Answer 5

• Wear and Tear: refers to the physical deterioration of assets due to regular usage.
  Assets subjected to wear and tear experience a decrease in their operational efficiency and value.
• Obsolence: Occurs when assets become outdated or less useful due to advancements in technology, design, or market demand.
  Technological advancements can quickly render certain assets obsolete, decreasing their value.

Question 6

Units of production method

Answer 6

The units of production method is an accounting technique used to calculate depreciation based on an asset’s usage or output rather than the passage of time.

It’s especially useful for assets whose wear and tear is directly related to their usage, such as machinery or vehicles.

Question 7

Units of production Rate Formula

Answer 7

(Cost basis of asset - salvage value/Estimated total units to be produced over estimated useful life)

Question 8

Advantages + Disadvantages of Units of Production

Answer 8

A:
- More accurate reflection of the declining physical value of the asset.
- It accurately matches revenues and expenses.
D:
- Only useful to manufacturers or producers
- Cannot be used when a business computes its tax returns at the end of the year
- Can be complicated to compute units of production. Measuring output can be tricky and depreciation expense must be recalculated each period.

Question 9

Information needed to calculate Units of production

Answer 9

• Cost Basis: Amount paid to get the asset.
• Salvage value: estimated value of the asset if it were to be sold at the end of its useful life.
• Estimated total numbers of units to be produced
• Estimated useful life
• Actual units produced

Question 10

Information needed to calculate Straight line method

Answer 10

• Expected useful time of the asset
• Original cost of the asset
• The residual value of the asset, which is an estimation of its value over its useful time.

Question 11

Depreciation expense Formula

Answer 11

Units of production rate x actual units produced

Question 12

Things to take into account when choosing

Answer 12

• Price
• Whether it depreciates by time or usage
• Tax considerations