Fixed Assets Depreciation

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1 Fixed Assets A depreciable asset is a man-made asset such as building, machine, vehicle, or piece of equipment that expected to provide service to the company for a number of years. expense is the amount of asset cost assigned as an expense to a particular time period. Three factors affect the computation of depreciation:. Asset cost: all expenditures necessary to acquire the asset and make it ready for intended use. 2. Useful life: estimate of the expected life 3. Salvage value: estimate of the asset s value at the end of its useful life Three methods of recognizing depreciation are:. Straight-line, 2. Declining-balance 3. Sum of the years Each method is acceptable under generally accepted accounting principles. Management selects the method that is appropriate in the circumstances. Once a method is chosen, it should be applied consistently. Straight-line method is the same for each year of the asset s useful life. The equation for determining the amount of depreciation expense is as follow: Asset Cost Salvage Value Useful Life Example : Assume a company purchased a truck for KD 0000 on January, 207 with an estimated salvage value of KD 000 and a useful life of 4 years. By using the Straight-line depreciation method, the annual depreciation on the truck is calculated as follow: years = KD 2250 Lecture 7 Page

2 The amount of depreciation expense for the period is debited to depreciation expense account and credited to an accumulated depreciation account. Expense - Truck 2250 Accumulated - Truck 2250 Double Declining-Balance Method The following steps should be followed to calculate the depreciation expense based on this method:. Calculating the depreciation rate: Rate = 2. Calculate the depreciation expense: Useful life rate X Remaining book value Note: an asset s cost less accumulated depreciation account is called book value Unlike the other depreciation methods, the declining balance method ignores salvage value. Example 2 Assume a company purchased a truck for KD 0000 on January, 207 with an estimated salvage value of KD 000 and a useful life of 4 years. By using the Double Declining Balance Method, the annual depreciation on the truck is calculated as follow: 3/2/207: Rate = 4 Years = 50% 50% X 0000 = 5000 Expense - Truck 5000 Accumulated - Truck 5000 Lecture 7 Page 2

3 3/2/208: Rate = 4 Years = 50% 50% X ( ) = 2500 Expense - Truck 2500 Accumulated - Truck 2500 Sum-of-the-Year s Digits Method The useful life remaining Sum of the years X (Cost Salvage value) Example 3: Assume a company purchased a truck for KD 0000 on January, 207 with an estimated salvage value of KD 000 and a useful life of 4 years. By using Sum-of-the- Year s Digits Method, the annual depreciation on the truck is calculated as follow: Sum of the year = = 0 3/2/207: 4 0 X ( ) = 3600 Expense - Truck 3600 Accumulated - Truck /2/208: 3 0 X ( ) = 2700 Expense - Truck 2700 Lecture 7 Page 3

4 Accumulated - Truck 2700 Key Terms English Fixed Assets Salvage Value Useful Life Expense Straight Line Method Double Declining Method Sum-of-the Year s Digits Method Arabic األصىل الثابتة استهالك القيمة التخريدية العمر االنتاجي مصروف االستهالك طريقة القسظ الثابث طريقة مضاعف القسظ المتناقص طريقة مجمىع ارقام السنىات Exercises. The following account balances have been taken from ABC factory: Asset Name Cost Accumulated Method of Machines Straight-line Truck Building Double- Declining Sum-of-the Years Notes The company bought a new machine on October st for KD3000 The old machines have an expected useful life of 5 years The new machine has an expected useful life of 6 years The expected scrap value for the old machine is KD2000 and no scrap value is expected for the new one The useful life of those trucks is 5 years and it has an expected scrap value of KD 7500 The useful life of the building is 20 years, and the expected scrap value is KD Required:. Calculated the depreciation expense for each asset mentioned above Lecture 7 Page 4

5 2. Prepare the needed entries 3. prepare the closing entries 4. Mention the effects on the income statement and the balance sheet Lecture 7 Page 5

Unit three: Property, Plant and Equipment Depreciation

Unit three: Property, Plant and Equipment اسم الطالب:... رقم الطالب:... الصف:... المدرسة:... الرقم التسلسلي * Years Line and Going Concept: 2002 2003 2004 2005 2006 Jan. Feb. Mar. Apr. May. Jun. Jul. Aug.