9.2 Accounting treatment of depreciation: - a mechanism to reflect the cost of using a non-current asset
　　(i)Depreciation is charged as an expense in the profit and loss account
　　(ii)The corresponding credit is accumulated in the provision for depreciation account in the balance sheet to offset against the original cost of the fixed assets.
　　●Method of depreciation:
　　Straight-line method
　　The depreciable amount is spread evenly across the useful life of the fixed asset, resulting in same amount of depreciation charged every year.
　　Depreciation charge = Cost of asset minus residual value
　　Expected useful life of the asset
　　Residual value: the estimated disposal value of the asset at the end of its useful life.
　　Example:
　　A non-current asset costing $60,000 has an estimated life of five years and a residual life of $7,000.The annual depreciation charge using the straight line method would be calculated as follows:
　　$( 60,000 – 7,000)= $10,600 per annum
　　5 years
　　The net book value of the fixed assets would reduce each year as follows:
　　After 1 year　after 2 years　after 3 years　after 4 years　after 5 years
　　$　　　　　　 $ 　　　　　　$　　　　　　　 $ 　　　　　　$
　　Cost　　　　 60,000　　　 60,000　　　　60,000　　　　 60,000　　　　 60,000
　　Accumulated　10,600　　　 21,200　　　　31,800　　　　 42,400　　　 　53,000
　　Depreciation
　　Net book value 49,400 　 38,800　　　　28,200　　　　 17,600　　　 7,000 (estimated residual value)
　　Reducing balance method
　　A fixed depreciation rate ( percentage)is applied to the fixed asset’s net book value( cost less accumulated depreciation)every year.Since net book value diminishes yearly, the depreciation charge falls every year.
　　Depreciation charge = X% x net book value
　　Net book value = Cost of an asset – accumulated depreciation
　　Asset bought/sold in the period:
　　- full year’s depreciation in the year of acquisition and none in the year of disposal
　　- monthly or pro rata，based on the exact number of months that the assets has been owned.
　　Exercise 1 :
　　Hopkins who makes up accounts to 31 December, buys a car on 1 January 20x1 for $5,000. The depreciation policy is 20% pa(每年), using the reducing balance method. What is the depreciation charge for each of the first five years?
　　Year 　20%on　　　　　 Depreciation　 Accumulated　　 Net book
　　net book value　　 charge　　　　 Dep.　　　　　 value
　　20x1 　　20% of $5,000　　 $1,000　　　 $1,000　　　　 $4,000
　　20x2　　 20% of $4,000　　　 800　　　　 1,800　　　　 3,200
　　20x3　　 20% of $3,200　　　 640　　　　 2,440　　　　 2,560
　　20x4　　 20% of $2,560　　　 512　　　　 2,952　　　　 2,048
　　20x5　　 20% of $2,048　　　 410　　　　 3,362　　　　 1,638
　　20x6　　 20% of $1,638　　　 328　　　　 3,690　　　　 1,310
　　Exercise 2:
　　The following information relates to B & S, a car repair business:
　　Machine 1　　　　　　 Machine 2
　　Cost　　　　　 $12,000　　　　　　　$8,000
　　Purchase date　1 August 20x5　　　　1 October 20x6
　　Depreciation　 20% straight line　 10% reducing balance
　　Method　　　　 pro-rata　　　　　　 pro- rata
　　What is the depreciation charge for years ended 31 December 20x5 and 31 December 20x6?
　　20x5 　　　　　　20x6
　　$　　　　　　　 $
　　A.　　 2,400　　　　　 2,600
　　B.　　 1,000 　　　　　2,600
　　C.　　 2,400　　　　　 3,200
　　D.　　 1,000　　　　　 3,200
　　Solution:
　　- for machine 1:
　　20x5: 20% x 12,000 x 5/12 = 1,000
　　20x6: 20% x 12,000= 2,400
　　- for machine 2:
　　20x6: 10% x 8,000 x 3/12=200
　　Total depreciation: 20x5: 1,000
　　20x6: 2,400 + 200 = 2,600
　　Answer: B
　　●Accounting for depreciation: - whichever method is used to calculate depreciation, the accounting remains the same:
　　Journal entry is:
　　Dr. Depreciation
　　Cr. Accumulated Depreciation ( provision for depreciation)
　　Accumulated depreciation account is cumulative, i.e. reflects all depreciations to date.
　　Cost　　　　　　　　　　　　X
　　Accumulative Depreciation (X)
　　NBV　　　　　　　　　　　　 X
　　●Consistency and subjectivity when accounting for depreciation:
　　- The following are all based on estimates made by the management of a business:
　　Depreciation method
　　Residual value
　　Useful life
　　- Different estimates would result in varying levels of depreciation, and
　　consequently, profits.
　　- It can be argued that these subjective areas could therefore result in manipulation of the accounts by management.
　　- In order to reduce the scope for such manipulation and increase consistency of treatment, IAS 16 Property, Plant and Equipment requires the following:
　　depreciation method should be reviewed at each year end and changed if the method used no longer reflects the pattern of the use of the asset.
　　residual value and useful life should be reviewed at each year end and changed if expectations differ from previous estimates.
　　Ex 3. A purchased a non-current asset for $100,000 on 1 January 20x2 and started depreciating it over 5 years. Residual value was taken as $10,000.
　　At 1 January 20x3, a review of asset lives was undertaken and the remaining useful life was estimated at 8 years. Residual value was estimated nil.
　　Calculate the depreciation charge for the year ended 31 December 20x3 and subsequent years.
　　Solution:
　　Initial depreciation charge (100,000-10,000)/5 = 18,000
　　NBV at date of charge: 100,000-18,000 = 82,000
　　New depreciation charge: 82,000/8 = 10,250