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Formula for Depreciation

Depreciation plays a vital role in preparation of financials. The formula for calculation the depreciation is:

Depreciation = (Cost – Residual Value)/ Useful Life of the assets

So, for calculating depreciation for the first year, the following information is required:

Cost of assets – The major part for calculation of depreciation is to find out the cost for that asset. The cost of assets includes its purchase price and other costs incurred for use of the assets. These costs include the asset installation charges, taxed paid at the time of purchase or freight paid, etc.

Useful life of assets – Another important factor is to determine the useful life of the assets. This means the period up to which the benefits can be derived from that asset. As per the matching concept, the costs and revenue should be recognized in the same accounting period. So, the depreciation should be charged up to the period in which future economic benefits can be derived from that assets, i.e. its the useful life. 

Residual Value – This is the amount which will be received at the end of the assets life either in the form of scrap sale or reselling of that product. This amount is deducted from the cost of the asset to determine depreciation as it will be received at the end of the assets life. So, it will be wrong to depreciate this amount as well. 

Depreciation Method – After identifying the above factors, last factor is to decide as to which depreciation method should be used to depreciate the assets. The depreciation methods available are as follows: 

Straight Line Method – Under this method, the cost (net of residual value) is divided with the useful life of the asset. As per this method, the depreciation amount remains same over the life of the assets and the underlying assumption of this method is that the assets will give uniform benefits over its life. 

Written Down Value Method – Under this method the depreciation is charged on the carrying amount of the assets. Hence, the depreciation charge remains higher in the initial yeas and low in the remaining years. This method assumes that the benefits derived from the assets which keep on reducing with the age of the asset. And this method is most commonly used and popular method as it is more scientific than others. 

Units of Production Method – Another method is units of production method, under this method the depreciation is calculated in the following manner: 

Depreciation = (cost – residual value)/ Total unites estimated to be produced over the life * units produced during the period. 

This method should be used for the assets involved in the manufacturing as production units can be determined for them only. 

References:

Accounting-simplified.com. (2017). Units of Production Depreciation Method - Explanation and Examples. [online] Available at: https://accounting-simplified.com/financial/fixed-assets/depreciation-methods/units-of-production.html [Accessed 21 Sep. 2017].

Accounting, Financial, Tax. (2017). How To Calculate And Record Depreciation [of Fixed Asset]. [online] Available at: https://accounting-financial-tax.com/2009/04/how-to-calculate-and-record-depreciation-of-fixed-asset/ [Accessed 23 Sep. 2017].

Accounting-simplified.com. (2017). Methods of Depreciation | Accounting-Simplified.com. [online] Available at: https://accounting-simplified.com/financial/fixed-assets/depreciation-methods/types.html [Accessed 23 Sep. 2017]. 

Date  Account Titles Debit  Credit
30 June, 2018 Capital Work in Progress  $12,550,000.00 
To Cash  $12,550,000.00 
(Being expenses incurred on construction recorded)
30 June, 2018 Capital Work in Progress  $4,001,500.00 
To Cash  $4,001,500.00 
(Being other expenses incurred on construction recorded)
Date  Account Titles Debit  Credit
1 July, 2018 Asset - Nuclear Power Generator  $16,551,500.00 
To Capital Work in Progress  $16,551,500.00 
(Being asset recorded by crediting CWIP)
1 July, 2018 Asset - Nuclear Power Generator Annexure-I  $809,640.91 
To Provision for Dismantling Cost  $809,640.91 
(Being provision for dismantling costs created)
30 June, 2019 Interest expense   $80,964.09 
To Provision for Dismantling Cost  $80,964.09 
(Being interest expense on dismantling costs recorded)
Date  Account Titles Debit Credit
30 June, 2024 Interest expense  Annexure-II  $130,393.48 
To Provision for Dismantling Cost  $130,393.48 
(Being interest expense on dismantling costs recorded)
Annexure-I
Calculation of Dismantling Costs:
Cost of Plant  16,551,500 
Dismantling Costs  2,100,000 
Years to Plant Life  10 
Discount rate 10%
Present Value of dismantling cost as on 1 July, 2018  809,641 
Annexure-II
Schedule of Interest expense and Provision for Dismantling cost over the period
Year ended on 30 June Reference calculation Interest exp @ 10% Provision for Dismantling cost 
2018  $-     $809,640.91 
2019 Last year provision * 10%  $80,964.09   $890,605.00 
2020 Last year provision * 10%  $89,060.50   $979,665.50 
2021 Last year provision * 10%  $97,966.55   $1,077,632.05 
2022 Last year provision * 10%  $107,763.20   $1,185,395.25 
2023 Last year provision * 10%  $118,539.53   $1,303,934.78 
2024 Last year provision * 10%  $130,393.48   $1,434,328.26 
2025 Last year provision * 10%  $143,432.83   $1,577,761.08 
2026 Last year provision * 10%  $157,776.11   $1,735,537.19 
2027 Last year provision * 10%  $173,553.72   $1,909,090.91 
2028 Last year provision * 10%  $190,909.09   $2,100,000.00 
Particulars

2015 ($m)

2016 ($m) 2017 ($m)
Contract Price  $50,000,000   $50,000,000   $50,000,000 
 Less: Cost for the year   $10,000,000   $28,000,000   $40,000,000 
 Less: Estimated costs to complete   $28,000,000   $12,000,000   $-   
Estimated total cost  $38,000,000   $40,000,000   $40,000,000 
Estimated Profit  $12,000,000   $10,000,000   $10,000,000 
% completion 26.32% 70.00% 100.00%
Profit Recognised for the year  $3,157,895   $3,842,105   $3,000,000 

Journal entries for the financial year 2015

Account Titles    Debit Credit
Construction in progress  $10,000,000 
To Expenses  $10,000,000 
(Being contract cost recognised)
Construction in progress  $3,158,400 
Construction expenses  $10,000,000 
To Income from Contract  $13,158,400 
(Being Income and Profit from contract recognised)
Accounts receivable  $12,000,000 
To Construction in progress  $12,000,000 
(Being amount receivable from customer recorded)
Cash  $11,000,000 
To Accounts receivable  $11,000,000 
(Being cash received from customer recorded)

Journal entries for the financial year 2015

Account Titles Debit Credit
Construction in progress  $10,000,000 
To Expenses  $10,000,000 
(Being contract cost recognised)
Construction expenses  $10,000,000 
To Income from Contract  $10,000,000 
(Being income from contract recognised)
Accounts receivable  $12,000,000 
To Construction in progress  $12,000,000 
(Being amount receivable from customer recorded)
Cash  $11,000,000 
To Accounts receivable  $11,000,000 
(Being cash received from customer recorded)
Construction in progress  $2,000,000 
To Contract Liability  $2,000,000 
(Being liability recognised with difference of amount billed over cost)
Date Account Titles   Debit Credit
30 June, 2019 Impairment Loss Annexure-I   800,000 
To Accumulated Impairment Loss - Goodwill  800,000 
(Being impairment of goodwill recorded)
Date Account Titles Debit Credit 
30 June, 2019 Impairment Loss  Annexure -II   2,200,000 
To Machinery  243,697 
To Buildings  252,101 
To Land  504,202 
To Accumulated Impairment Loss - Goodwill  1,200,000 
(Being impairment of assets recorded)
Annexure -I
Calculation of amount of Goodwill Impairment
Amount of Impairment = Consideration Paid  - Recoverable amount
Amount of Impairment = 7,000,000 - 6,200,000
Amount of Impairment =  800,000 
Annexure -II
Calculation & Allocation of Impairment Loss
Impairment Loss = Recoverable amount of CGU  - Fair value of the net identifiable assets of Bo Ltd
Impairment Loss = 4,800,000 - 7,000,000
Impairment Loss =  (2,200,000)

The impairment loss is set off in the following manner:

(a) with goodwill to the extent available i.e. $1,200,000
(b) Remaining loss of $1,000,000 in the ratio of carrying amount of assets

Machinery  1,450,000  24.37%  243,697 
Buildings  1,500,000  25.21%  252,101 
Land  3,000,000  50.42%  504,202 
Total  5,950,000  100.00%  1,000,000 

Loss is not apportioned to customer list as it is assumed that it is recorded on NRV.

Cite This Work

To export a reference to this article please select a referencing stye below:

My Assignment Help. (2022). Depreciation Calculation & Methods Essay: A Comprehensive Analysis Of Financial Strategies.. Retrieved from https://myassignmenthelp.com/free-samples/acc204-advanced-financial-accounting/written-down-value-method-file-A9AAD4.html.

"Depreciation Calculation & Methods Essay: A Comprehensive Analysis Of Financial Strategies.." My Assignment Help, 2022, https://myassignmenthelp.com/free-samples/acc204-advanced-financial-accounting/written-down-value-method-file-A9AAD4.html.

My Assignment Help (2022) Depreciation Calculation & Methods Essay: A Comprehensive Analysis Of Financial Strategies. [Online]. Available from: https://myassignmenthelp.com/free-samples/acc204-advanced-financial-accounting/written-down-value-method-file-A9AAD4.html
[Accessed 25 February 2024].

My Assignment Help. 'Depreciation Calculation & Methods Essay: A Comprehensive Analysis Of Financial Strategies.' (My Assignment Help, 2022) <https://myassignmenthelp.com/free-samples/acc204-advanced-financial-accounting/written-down-value-method-file-A9AAD4.html> accessed 25 February 2024.

My Assignment Help. Depreciation Calculation & Methods Essay: A Comprehensive Analysis Of Financial Strategies. [Internet]. My Assignment Help. 2022 [cited 25 February 2024]. Available from: https://myassignmenthelp.com/free-samples/acc204-advanced-financial-accounting/written-down-value-method-file-A9AAD4.html.

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