Page 140 - DCOM101_FINANCIAL_ACCOUNTING_I

Financial Accounting-I

Notes
Depreciation

Depreciation for initial year Depreciation for subsequent years

Depreciation on original value Depreciation on book value
at the beginning during later period

Example: Calculate the depreciation using straight line method and WDV method of
depreciation from the information given below:
Cost of equipment = ` 8,000
Estimated useful life = 4 years

Scrap value at the end of useful life = ` 500
Depreciation rate for reducing balance method = 50%
Solution:
(i) Computation of Depreciation under SLM:

Dep. = ` 8000 – ` 500/4 years
= ` 1875
(ii) Rate of depreciation for reducing balance method is 50%.
Dep. = Net Book Value * 50%
The following table shows a comparison between the two methods of depreciation:

Straight-line Reducing Balance
` `
Cost 8,000 8,000
Depreciation - year 1 1,875 4,000

Net book value 6,125 4,000
Depreciation - year 2 1,875 2,000
Net book value 4,250 2,000
Depreciation - year 3 1,875 1,000

Net book value 2,375 1,000
Depreciation - year 4 1,875 500
Net book value (diposal value) 500 500

Illustration 5: On 1st April, 2000, a firm purchases machinery worth `3,00,000. On 1st October,
2002 it buys additional machinery worth `60,000 and spends `6,000 on its erection. The accounts
are closed normally on 31 March. Assuming the annual depreciation to be 10%, show the
machinery account for 3 years under the written down value method.

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