Depreciation of non-current assets: nature & calculations

1. Depreciation of non-current assets: nature & calculations Non current assets = Fixed assets

2. Causes of depreciation Wear & Tear Erosion/ rust/ decay Obsolescence Inadequacy

3. Land & Buildings Because land value tends to rise rather than fall, it is inappropriate to charge depreciation on the land. However, buildings do fall into disrepair and therefore must be subject to a charge in depreciation.

4. Calculating depreciation Straight line method Reducing balance method Depreciation whereby depreciation is calculated on the value of the asset from the previous year. Depreciation whereby depreciation remains at an equal amount each year Cost price – disposal value Depreciation/year = No years of use Example: depreciation of 20% of a cost priced asset of £10,000 First year 20% of 10,000 = 8,000 Second year 20% of 8,000 = 6,400 Third year 20% of 6,400 = 5,120

5. Assessment • J Chen runs a joinery business and purchases a new machine for £6,000. it has an estimated life of four years and a scrap value of £1,000. Chen is not sure whether to use the straight line method or the reducing method of depreciation. • Calculate the depreciation for the machine using both methods, showing clearly the balance remaining in the machine account at the end of the four years for each method. Assume that a 40% per annum is to be used for the reducing balance method. • [4] • A machine costs £75,000 and will be kept for four years when it will be sold for an estimated value of £30,720. show the calculations of the figures for depreciation for each of the four years using the straight line method and the reducing method (20%) • [4] • A machine is bought for £18,000 and will last for four years when it will be sold for an estimated £3,000. Calculate the deprecation using the straight line method and the reducing method (40%) • [4]