Week 3 - Depreciation Flashcards
What do we already know about property, plant and equipment?
- Held for use in the production or supply of goods and services, for rental to others or for administrative purposes
- expected to be used for more than one period
- recognised at cost (purchase + delivery price)
When does the entity receive the benefit from property, plant and equipment?
Over the period that it is used in the business - thus we recognise a portion of the expense each year it is used aka depreciation
What is the depreciation expense formula?
Depreciation expense = depreciable amount / useful economic life
How do you calculate the depreciable amount?
Cost - residual value
(where residual value is the expected value of the asset at the end of its life e.g scrap value - usually £nil)
Define useful economic life
The length of time the asset is expected to be used by the entity
How do we determine the useful economic life?
It is a matter of judgement
- often the same UEL is applied to a whole class of PPE
How is land an exception?
Land is not depreciated - it is considered to have an indefinite life
How is depreciation recognised in the statement of profit or loss?
Part of administrative expenses
How is depreciation recognised in the statement of financial position?
Measure property plant and equipment at net book value
What is net book value?
Original cost of PPE - accumulated depreciation
When do we use a reducing line depreciation?
When assets are considered to be far more useful in their first few years of life, compared to later on
When do we use a straight line depreciation?
When assets consistently depreciate by the same amount, making net book value decrease the same amount each year, creating a diagonal \
How do we calculate depreciation using the reducing balance method?
Depreciation expense = % x net book value
