Chp5: Depreciation

Question 1

What is First Cost?

Answer 1

• Investment required to acquire asset

The sum of the initial expenditures involved in capitalising a property; includes items such as transportation, installation, preparation for service, as well as other related costs.

Question 2

What is Salvage Value?

Answer 2

• Expected or estimated value when scrapped.
• Forecast at the beginning.
• Subtracted from the cost of a fixed asset to determine the amount of the asset cost that will be depreciated.
• Thus, used as a component of the depreciation calculation.

Question 3

What is Book Value?

Answer 3

• From depreciation method
• Value of asset in accounting book.
• BV always greater than or equal to SV.
BV > = SV

Question 4

What is Net Realisable Value (market value)?

Answer 4

◦ Net amount of money realised at disposal of asset.

Question 5

What are the 4 depreciation methods?

Answer 5

1) Uniform Write-off
• Straight Line Depreciation.

2) Greater Write-off in earlier years (accelerated method)
• Sum of Years Digits (SOYD) method.
• Declining Balance (DB) method.
• Double-rate Declining Balance (DDB) method.

Question 6

Formula for Straight Line depreciation?

Answer 6

𝑫𝒓 =( 𝑷 − 𝑺 )/n

𝑩𝑽𝒓= 𝑷 − 𝒓( 𝑷 − 𝑺 )/n

Question 7

Formula for Sum of Years Digits (SOYD) Method?

Answer 7

𝐒𝐎𝐘𝐃 = 𝐧( 𝐧 + 𝟏 )/𝟐
𝐃𝐫= [(𝐧 −𝐫+𝟏)/𝐒𝐎𝐘𝐃]∗ (𝐏 − 𝐒)

Question 8

Formula for Declining Balance?

Answer 8

where f= specified depreciation rate

D = f ( BVr-1)

Question 9

Formula for Double-rate Declining Balance (DDB) Method?

Answer 9

𝒇 =𝟐/n
𝑫 = 𝒇(𝑩𝑽𝒓_-𝟏)

• Salvage value is not used
• Book value must be > = Salvage Value

Question 10

Elaborate more on the role of accelerated method of depreciation, and discuss whether depreciation charges are adjusted for inflation in after-tax eng economic analysis.

Answer 10

• This method increases the depreciation amount in earlier years.
• As a result, projects are valued higher due to less tax paid to authority
• Although some may argue that the total deprecaition amount paid are the same regardless of time value of money involved, it is due to equipment having a limited lifespan. Hence more beneficial than normal depreciation methods.
• Depreciation charges are not adjusted due to complexity in accounting procedures.
• Not allowed by income tax authority