Depreciation

Question 1

Depreciation

Answer 1

Depreciation is defined as the allocation of the cost of a non-current asset over its useful life.
Depreciation attempts to match the loss in value of a non current asset against the revenue earned by the asset. It is an estimate of the loss in value as the calculation is based on a number of estimates. The key components to the calculation of depreciation are estimates of useful life and residual value.

Question 2

Useful life

Answer 2

the length of time the business will own the asset and the extent to which it will contribute to the earning of revenue

Question 3

Residual value

Answer 3

the amount the business is expected to sell or trade in the asset for when it is disposed of at the end of its useful life

Question 4

Historical cost

Answer 4

the invoice price of and asset plus any additional “one-off” costs involved in getting the asset into a position are condition for use by the business.

Question 5

Depreciable value

Answer 5

the Historical cost less the residual value. This represents the total amount to be depreciated over the assets life.

Question 6

Depreciation expense

Answer 6

the amount of depreciation charged against revenue in a reporting period.

Question 7

Accumulated depreciation

Answer 7

the total amount of depreciation that has been charged against an asset at a particular point of time.

Question 8

Carrying value

Answer 8

the amount found by subtracting the accumulated depreciation for an asset from the historical cost of an asset. It represents the unallocated cost of the asset plus residual value.

Question 9

3 accounting principles that apply to depreciation

Answer 9

Reporting period
Historical cost
Going concern

Question 10

Characteristic that applies to depreciation

Answer 10

Relevance

Question 11

Is depreciation reliable

Answer 11

When calculating depreciation, the residual value and the useful life of the non-current asset are estimates, and are therefore not based on verifiable evidence. This makes the accounting reports not free from bias. However depreciation ensures relevance in the income statement and the balance sheet.

Question 12

Relevance in the income statement

Answer 12

depreciation ensures that the Income Statement includes all information that is useful for decision-making about profit, by showing the consumption of non-current assets in the current Reporting Period.

Question 13

Relevance in the balance sheet

Answer 13

By showing accumulated depreciation in the Balance Sheet, it ensures that assets are shown at their carrying value, which is vital for decision-making about their replacement.

Question 14

Straight line method

Answer 14

The straight lime method charges the same amount of depreciation each year as it assumes that asset contributes equally to revenue earning over its useful life.
The formula for calculating depreciation using the straight-line method is

Depreciation expense ($ per annum) = (Historical cost — Residual value)/Estimated useful life (years)

Question 15

Depreciation rate formula

Answer 15

Depreciation rate % per annum = depreciation expense/historical cost *100

Question 16

How are reports kept free from bias

Answer 16

The asset must always be reported initially at its historical cost as this is the amount verifiable by source document evidence.

Question 17

Cost of a non current asset

Answer 17

The cost of a non current asset is defined as all costs incurred in order to bring the asset into a location and condition ready for use, which will provide a benefit for the life of the asset. Costs that might be included in the cost of a non current asset include purchase price/suppliers price, delivery costs, modification costs and installation costs.