Chp 11 : Depreciation Flashcards
State 2 causes of depreciation
Usage - Coal mines are depleted as coals are being extracted
Wear and tear - The exterior structure of a building may deteriorate due to exposure to sun and rain
Obsolescence - Electronic gadgets may become obsolete when new versions are launched
Legal limits - Leasehold land can only be occupied for a limited time period
Can you remember the journal entry to record depreciation expense?
State and explain the need for depreciation.
According to matching theory,
the expense of using the non-current asset has to be recorded (depreciation expense) and
matched against the income earned in the same financial period
Explain using accounting theory, why a business cannot change the depreciation method.
Consistency theory states that once an accounting method is chosen, this method should be applied to all future accounting periods to enable meaningful comparison.
So business should use the same deprecation method unless there is a change of usage pattern.
Explain why straight line method of depreciation is suitable for Fixtures and Fittings .
SLM is suitable when business use the non-current asset UNIFORMLY throughout its estimated useful life
Explain why Reducing balance method of depreciation is suitable for Motor vehicles.
RBM is suitable when business use the non-current asset MORE in its earlier years and less as the non-current asset gets older and become less efficient.
What is the formula for calculating depreciation under
STRAIGHT LINE METHOD?
Cost - Scrap value x (?/12) (if bought sometime during the year)
Estimated useful years
OR
? % x (original cost – scrap value) x ?/12 (IF % IS GIVEN)
What is the formula for calculating depreciation under
REDUCING LINE METHOD?
? % x (Cost - Acc dep) x ? /12
State the effects of using
REDUCING BALANCE METHOD of depreciation on
Profit and Net Book value
Higher depreciation expense in the earlier years
→Profit decreases by a higher amount in earlier years
→Net book value decreases by a higher amount in earlier years
(clarify if in doubt)
State the effects of using
STRAGITH LINE METHOD of deprecation on
Profit and Net Book value
EQUAL depreciation expense in EVERY year
→Profit decreases by a EQUAL amount every year
→Net book value decreases by EQUAL amount every year.
(clarify if in doubt)
Describe the transaction $40
(If asked on Dep exp acc): Dep expense for the year is $40 and is closed off to income summary.
(if asked on Acc Dep acc) Depreciation exp for the year is $40 →
So the accumulated depreciation of motor vehicle is increased by $40
