Depreciation of Fixed Asset II

METHODS OF DEPRECIATION

THE DIMINISHING OR REDUCING BALANCE METHOD OF DEPRECIATION

In this method, a fixed percentage is written off the diminishing balance of the asset yearly. The total depreciation is spread over the anticipated useful life of the asset by annual installments of diminishing amount. This method of depreciation is advantageous because depreciation is more scientifically provided for.

Depreciation rate is computed using this formula: \(\sqrt[1 -N]{\frac{\text{residual value}}{cost}}\)

Where N = the number of years (useful life of the asset)

Example: A motor van cost N10,000 in 2005. It has an expected life span of four years and the estimated residual value of N256. What is the depreciation rate?

SOLUTION

Rate of Depreciation, \(R = \sqrt[1 -N]{\frac{\text{residual value}}{cost}}\)

\(R = \sqrt[1 -4]{\frac{₦250}{₦10,000}}\)

The depreciation calculation applied to each of four years of use would be:

DEPRECIATION SCHEDULE

Accounting entries (with modern method)

The following accounts will be prepared:

1. Motor van account
2. Provision for depreciation account
3. Profit and loss account
4. Balance sheet extract

MOTOR VAN ACCOUNT

PROVISION FOR DEPRECIATION – MOTOR VAN

PROFIT AND LOSS ACCOUNT

BALANCE SHEET

EVALUATION:

1. Define diminishing method of depreciation
2. Mention four accounts to be prepared in the above method

DISPOSAL OF ASSETS

Fixed assets can be sold in the course of the business.