Depreciation

Depreciation is the allocation of an assets cost over its useful life in accordance with its pattern of
usage.

Depreciable Amount: Cost – Residual

Carrying Amount: Cost – Accumulated Depreciation

Useful Life: Expressed in years or units (e.g. kms or hours)

Residual: Value at end of useful life

Straight Line Rate: 100% / Useful Life (in years)

Methods of Calculating Depreciation

Straight Line: Depreciable Amount / Useful Life (in years) * Pro Rata

Units of Production: Depreciable Amount / Useful Life (in units) * Usage (in units)

Reducing Balance: Carrying Amount * (Straight Line Rate *2) * Pro Rata

Pro Rata
Only relevant when asset is purchased during the year.

Need to pro rata by multiplying by the number of months the asset is owned and dividing by 12
months. For example, if an asset was purchased in February and the business has a June year end,
the pro rata will be 5/12.

Note that depreciation calculated using Units of Production method does not need to be pro rata’d
as it is calculated using actual usage.
Depreciation Question
On 1 January 2018, a business purchased a tractor for $250,000. It is planned to use the tractor for
10 years or 10,000 hours. The expected residual value is $50,000. During the six months to 30/6/18
the vehicle did 600 hours and 1,100 hours for the year to June 2019.

Calculate:

1. The depreciable amount on 1 January 2018.

2. The depreciation expense for the Y/E 30/6/18 using straight line method.

3. The depreciation expense for the Y/E 30/6/18 using units of production method.

4. The depreciation expense for the Y/E 30/6/19 using straight line method.

5. The depreciation expense for the Y/E 30/6/19 using units of production method.

6. Prepare a Balance Sheet excerpt for the tractor as at 30/6/19 under straight line method.

7. Prepare general journals for the purchase of the vehicle and the depreciation calculated in 2
and 4 (disregard GST).
Calculations

1. Cost 250,000
Residual Value 50,000
Depreciable Amt 200,000

2. Depreciable Amt 200,000

Useful Life 10
Period 6 months

SL Depreciation 200,000 6
-------- x -- = 10,000
10 12

3. Depreciable Amt 200,000

Useful Life 10,000 hours
Hours Used 600 hours

UOP Depreciation 200,000 600

-------- x = 12,000
10,000

4. Depreciable Amt 200,000

Useful Life 10

SL Depreciation 200,000
-------- = 20,000
10

5. Depreciable Amt 200,000

Useful Life 10,000 hours
Hours Used 1,100 hours

UOP Depreciation 200,000 1,100

-------- x = 22,000
10,000
6. Balance Sheet Excerpt as at 30 June 2019

Tractor (at cost) 250,000

Accumulated Depreciation – Tractor 30,000
Carrying amount 220,000

7. Purchase
Dr Cr
1/1/18 Tractor 250,000
Cash at Bank 250,000

30/6/18 Depreciation Expense 10,000

Accumulated Depn 10,000

30/6/19 Depreciation Expense 20,000

Accumulated Depn 20,000