Chapter 10, Problem 6BTN

To determine

Concept Introduction:

Depreciation is a method of allocating the cost of assets over the estimated life of assets. The value of asset reduces as the passage of time because of obsolescence and wear & tear.

There are several methods of depreciation such as straight-line, units of production method, double-declining method and written down value etc.

Under straight-line method the depreciation method total cost less salvage value is divided by total number of useful life and depreciation is charged equally every year over the life of the asset.

Under units of production method, the total cost is divided by estimated number of units and then it is multiplied by no. of units consumed/ produced during the period.

Under double declining method following steps are used to calculate the depreciation:

i. Compute the asset’s straight-line depreciation rate

ii. Double the rate calculated above

iii. Multiply the rate with the beginning year book value.

Requirement-1:

To calculate:

We have to calculate the depreciation for each year under three methods of depreciation i.e. straight-line method, units of production method, double-declining method.

Answer to Problem 6BTN

Solution:

Under straight line method the depreciation for 2015, 2016, 2017 and 2018 is same and as below:

Depreciation for 2015, 2016, 2017 & 2018 = 10,500

Depreciation under Unit of production method:

Year 2015 = 8,400

Year 2016 = 12,600

Year 2017 = 14,700

Year 2018 = 6,300

Depreciation under double declining method:

Year 2015 = 22,000

Year 2016 = 11,000

Year 2017 = 5,500

Year 2018 = 2,750

Explanation of Solution

Explanation:

Under straight line method the depreciation for 2015, 2016, 2017 and 2018 is same and as below:

$\text{(Cost of vehicle - residual value)/ life of vehicle}$

=$\text{(44,000-2,000)/4 }$

$\text{= 10,500}$

Unit of production method

$\text{= (Cost of vehicle - residual value)/ total no}\text{. of miles to be driven \&*\#x00A0;miles driven during the year}$

Depreciation for 2015 $\text{= (44,000-2,000)/60,000 \&*\#x00A0;12,000}$

Depreciation for 2015 $\text{= 8,400}$

Depreciation for 2016 = $\text{(44,000-2,000)/60,000 \&*\#x00A0;18,000}$

Depreciation for 2016 = 12,600

Depreciation for 2017 = $\text{(44,000-2,000)/60,000 \&*\#x00A0;21,000}$

Depreciation for 2017 =14,700

Depreciation for 2018 = $\text{(44,000-2,000)/60,000 \&*\#x00A0;9,000}$

Depreciation for 2018 =6,300

In 2018, depreciation will be calculated for 9,000 miles even if the miles running are 10,000 because total life of vehicle is 42,000 miles.

Depreciation under double declining method:

The rate for calculating depreciation will be as below:

$\begin{array}{l}\text{2\&*\#x00A0;100/useful life of }\\ \text{=2 *100/4 }\\ \text{=50\%}\end{array}$

Depreciation = book value of vehicle * rate of depreciation

$\begin{array}{l}\text{Depreciation for 2015 = 44,000 *50\%}\\ \text{Depreciation for 2015 = 22,000}\end{array}$

Closing book value at end of Dec $\text{2015 = 44,000- 22,000 = 22,000}$

$\begin{array}{l}\text{Depreciation for 2016 = 22000 *50\%}\\ \text{Depreciation for 2016}\text{ = 11,000}\\ \text{Closing book value at end of Dec 2016 = 22,000- 11,000 = 11,000}\\ \\ \text{Depreciation for 2017 = 11000 *50\%}\\ \text{Depreciation for 2017}\text{ = 5,500}\\ \\ \text{Closing book value at end of Dec 2017 = 11,000- 5,500 = 5,500}\end{array}$

Depreciation for 2018 = $\text{5,500 *50\%}$

Depreciation for 2018 = 2,750

Closing book value at end of Dec 2018 $\text{= 5,500 -2,750 = 2,750}$

To determine

Requirement-2:

To determine:

We have to explain that how and when the depreciation is recorded in books of accounts.

Answer to Problem 6BTN

Solution:

The depreciation is recorded at year end in books of accounts. The depreciation expenses recorded in statement of profit and loss account as expenses and accumulated depreciation is credited and shown in balance sheet by deducting it from gross block of assets.

Explanation of Solution

Explanation:

The journal entry for recording of depreciation expense will be as below:

Date	Particular	Debit	Credit
	Depreciation expenses Debit	XXX
	Accumulated depreciation credit		XXX
	(Annual depreciation expense recorded)

To determine

Requiremnt-3:

To determine:

We have to explain the impact of depreciation method under three methods over the van’s life.

Answer to Problem 6BTN

Solution:

If we follow other methods of depreciation then the impact of net income will be as below:

Year	(decrease)/ increase in net income under double declining method	(decrease)/ increase in net income under Unit of production method
2015	(11,500)	2,100
2016	(500)	(2,100)
2017	5,000	(4,200)
2018	7,750	4,200
	750	0

Explanation of Solution

Explanation:

The impact on net income is as below if we follow other methods of depreciation other than straight-line method:

i. If we follow unit of production method:

Year	Straight line method	Unit of production	(decrease)/ increase in net income
2015	10,500	8,400	2,100
2016	10,500	12,600	(2,100)
2017	10,500	14,700	(4,200)
2018	10,500	6,300	4,200
	42,000	42,000	0

ii. If we follow double declining method:

Year	Straight line method	Double declining method	(decrease)/ increase in net income
2015	10,500	22,000	(11,500)
2016	10,500	11,000	(500)
2017	10,500	5,500	5,000
2018	10,500	2,750	7,750
	42,000	41,250	750

To determine

Requirement -4:

To calculate:

We have to calculate the closing book value for each year under straight line method and have to explain the reporting requirement for that year.

Answer to Problem 6BTN

Solution:

	2015	2016	2017	2018
Opening book value	44,000	44,000	44,000	44,000
Less: Accumulated Depreciation	10,500	21,000 (10,500+ 10,500)	31,500 (21,000+10,500)	42,000
Closing book value	33,500	23,000	12,500	2,000

In balance sheet the closing book value will be shown as below:

Balance sheet as on 31.12.2015

Assets	Amount
Gross Block: Van	44,000
Less: Accumulated depreciation	10,500
Net block	33,500

Explanation of Solution

Explanation:

In balance sheet, the asset is shown at gross book value and accumulated depreciation is shown under assets side by deducting it from gross block. After deducting net book value is shown under balance sheet as Fixed assets.