FAR 3 - M5 PP&E: DEPRECIATION AND DISPOSAL

Question 1

Which method of depn is salvage value excluded

Answer 1

Salvage value is deducted on all depn methods except double declining method

Question 2

What is the effect in net income if salvage value is excluded from the depn computation?

Answer 2

Depn exp is higher

Net income is lower or understated

Question 3

If equipment is depreciated using say DD method in the first 2 yrs, then switched to SL on the following year - how may years do you need to depreciate using SL?

Answer 3

EX: DD 5 yrs - first 2 yrs

SL - use 3 yrs (not 5)

Question 4

How do you calculate composite life?

Answer 4

Depreciable cost / depn exp for the year for each asset
then, add up all assets then div by total depn

ex:
mach A 450000 salvage 30000 6 yrs = 70000 depn
mach B 170000 salvage 10000 8 yrs = 20000 depn
mach C 40000 no salvage 4 yrs = 10000 depn

total 6600000 ( 40000) 1000000
net 620000 / 100000
= 6.2 years

Question 5

Sum of yrs digit calc

Answer 5

Purchase price 20,000
salvage 2,000
net 18,000

syd 4 YRS

Y1     4/10  X 18000 = 7200 depn exp
Y2    3/10  X 18000 = 5400 depn exp
Y3    2/10  X 18000 = 3600 depn
Y4   1/10  X 18000 = 1800 depn
       --------
       10/10

CARRYING VALUE @ YR3:
Purchase price 20000
less: accum depn ( 16200) 7200+5400+3600
net 3800

Question 6

Impairment loss =

Answer 6

BV > FV

Book value is reduced to the FV and impairment loss is credited to Accum Depn