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Lecture Note: Depreciation of Fixed Assets

What is depreciation?

 Allocation of the original cost of the purchased fixed assets over its expected
useful life.
 Part of the original cost of a fixed asset that is consumed during its period of use
by the business.
 Depreciation is an expense and needs to be charged to profit and loss account
(income statement) every year.
 The amount charged in a year to profit and loss for depreciation is based upon an
estimate of how much of the overall economic usefulness of a fixed asset has been
used up in that accounting period.

Causes of depreciation
Depreciation arises because of several factors such as:-

 Physical deterioration
o Wear and tear
When a motor vehicle or machine or fixtures and fittings are used thay
eventually wear out. Some last many years, others last only a few
years.
o Erosion, rust, rot and decay
Land may be eroded or wasted away by the action of wind, rain, sun
and other elements of nature. Similarly, the metals in the motor
vehicles or machinery will rust away. Wood will rot eventually. Decay
is a process which will also be present due to the elements of nature
and the lack of proper attention.

 Economic factors
o Obsolescence
This is the process of becoming out-of-date. (because of the new
invention)
o Inadequacy
This arises when an asset is no longer used because of the growth and
changes in the size of the business.

 Time
o There are assets which have a legal life fixed in terms of years. For
example when you buy a patent to ensure that only you can produce
something. When patent’s time has finished it then has no value.

 Depletion

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Depletion of natural resources because of the extraction of the raw materials
from them. For examples mines, quarries and oil well.

Methods of calculating depreciation charges

Straight line method Reducing balance method

Eg 1:
Using the same example 1, the method of
Assumes that Hashim Enterprise acquired
calculating the depreciation is based on the
the machine on 1 April 2006. The cost of
reducing balance at the rate of 20%.
the machine is RM4,000. The useful life of
Therefore,
the machine is 4 years. Calculate the
depreciation expenses need to be charged
Dep expenses = Net book value x rate
against the Income Statement for year
2006, 2007 and 2008 (assuming the
business closed their accounts on 31 Dec
each year).

a)Depreciation expenses = Cost/ useful life


Or For 2006 : Depreciation expenses would be
b) Dep expenses = Cost – scrap value
Useful life Dep exp = (cost – accum dep) x 25%
Or = 4,000 x 25%
c) Dep expenses = Rate x cost = 1,000

(which one to be used ????) 2007 = (4,000 – 1,000) x 25%


= 750
Solution :-
Dep expenses = Cost / useful life 2008 = (4,000 – 1750) x 25%
4,000/ 4 = 563
1,000 per year (2006- 2009)
2009 = (4,000 – 2313) x 25% = 422

Double entry records for depreciation

2
Dr. Depreciation - machine xxxx
Cr. Provision for depreciation – machine xxxx

Example 1

Income statement for the year ended 31 Dec 2006

Rev

Expenses
Depreciation for machine 1,000

Balance Sheet as at 31 Dec 2006

Fixed Assets

Cost Provision for depreciation Net Book Value


Machine 4,000 1,000 3,000

Income Statement for the year ended 31 Dec 2007

Expenses
Depreciation for machine 1,000

Balance Sheet as at 31 Dec 2007

Cost Provision for depreciation Net Book Value


Machine 4,000 2,000 2,000

Tutorial questions:

Question 1

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a. A manufacturing firm purchased a van for RM 150,000 by cheque on 2 January
2001. The van is to be depreciated at a rate of 10% using reducing balance
method.

You are required to prepare:

i. Van Account at 31 December 2003.


ii. Provision for Depreciation Account at 31 December 2003
iii. Depreciation Account at 31 December 2003
Balance Sheet as at that date

QUESTION 2

The following is the Balance Sheet (extract) of SEGAR SDN BHD as at 30 June 1999

Fixed asset Cost (RM) Net book value


Equipment 180,000 125,000
Motor vehicles 250,000 175,000

Additional information:
1. It is a policy of the company to provide depreciation as
follows:
Equipment 20% on reducing balance; yearly basis
Motor vehicle 15% on cost; yearly basis

2. During the year ended 30 June 2000, the following


fixed assets were purchased:

Fixed asset Cost (RM) Date of purchase


Motor vehicle 35,000 2 October 1999
Equipment 25,000 2 October 1999
Motor vehicle 45,000 1 February 2000
Equipment 20,000 1 March 2000

(all payments are made by cheque)

Required to prepare:
i. All fixed assets accounts
ii. Provision for depreciation accounts
iii. Balance sheet (extract) as at 30 June 2000.

Question 3

Royal Gold Enterprise showed the following details of fixed assets as at 30 June 2006.

Type Cost Accumulated Method of


Basis Depreciation

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Depreciation depreciation Rate
Motor vehicle RM80,000 RM18,000 Straight Line Yearly 15% p.a.
Machinery RM45,000 RM4,500 Reducing Yearly 10% p.a.
balance

On 2 January 2007, Royal Gold Enterprise purchased an additional motor vehicle costing
RM60,000. Payment was made by cheque.

Royal Gold Enterprise also decided not to rent the current premise but instead purchased a
new building on 1 June 2007 worth RM240,000. The deposit of RM24,000 was paid by
cheque and the balance was financed by loan from Bank Utama. No depreciation is to be
provided for new building.

Required:

Prepare the following for the year ended 30 June 2007.

a. Motor vehicle account, machinery account and building account.


b. Separate accumulated depreciation account for each of the above assets.
c. A balance sheet extract as at 30 June 2007.

Question 4

On 31 December 2005 Daniel Enterprise owned the following fixed assets and had at that
date already made provision for depreciation as indicated below:

Cost Provision for depreciation


Motor vehicles 65,400 17,560
Equipment 12,300 6,200

During the year ended 31 December 2006, the following fixed assets were purchased:

Motor Vehicles RM7,800 (including transportation costs RM200)


Equipment RM2,800

The motor vehicles are depreciated at 20% per annum on cost (monthly basis) and the
equipment at 25% on book value (yearly basis).

You are required to prepare:

a. Motor Vehicles and Equipment accounts for the year ended 31 December
2006.
b. The Provision for Depreciation accounts for each of the fixed assets, for the
year ended 31 December 2006.
c. Balance Sheet extract as at 31 December 2006. (10 marks)

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Question 5

Aripin is a sole trader who maintains his fixed assets at cost. On the 31/12/2006 he
owned the following fixed assets:

Provision for Depreciation


Cost
RM RM
Motor vehicles 130,000 35,000
Fixtures 36,900 18,600

On 3rd July 2007, Aripin acquired motor vehicle costing RM 52,000 and fixtures costing
RM 7,400.

The motor vehicles are depreciated at 10% per annum using the straight-line method
(yearly basis) and the fixtures at 20% per annum using the reducing balance method
(monthly basis).

You are required to show:

a. The machinery account


b. The fixtures account
c. The provision for depreciation accounts for each of the fixed assets, for the
year ended 31/12/2007
d. The Balance Sheet as at 31/12/2007

Question 6

Yuzai Enterprise owned three motor vehicles. The information on the asset for the year
ended 31 March 2007 are as follows.

Motor vehicle A (WGD 3434) was purchased on 31 May 2004 for RM31,200
Motor vehicle B (WKK 2323) was purchased on 4 June 2006 for RM19,600.
Motor vehicle C (WQR 5457) was purchased on 1 February 2007 for 48,800 excluding
road tax and insurance of RM1,200). All payments are made by cheque.

Depreciation is charged at 20% per annum on cost (monthly basis).


You are required to prepare the following accounts for year ending 31 March 2007:

a. Motor vehicle account


b. Accumulated Depreciation account
c. Balance Sheet extract as at 31 March 2007 (10 marks)

Question 7

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Syarikat Naditech has two types of fixed assets, being motor vehicles and furniture and
fittings. Depreciation on motor vehicles is provided at 20% on cost based on assets in
existence at the end of the year and the depreciation on furniture and fittings is
provided at 10% on book value on a month to month basis commencing from the date
of purchase.

The following is an extract of balance sheet of Syarikat Naditech Sdn Bhd as at 31


December 2006.

Accumulated Net Book


Fixed Asset Cost Depreciation Value
RM RM RM

Motor Vehicles 99,000 40,000 59,000


Furniture and Fittings 50,000 20,000 30,000

During the year ending 31 December 2007, Syarikat Naditech purchased the following
assets and paid by cheques.

Date Assets Amount


1 July 2007 Motor Vehicle RM40,700 (including road tax
RM700)
31 October 2007 Furniture & Fittings RM4,000 (excluding delivery cost to
business office RM2,000)
12 January 2008 Motor Vehicle RM60,000 (including installation
cost of air-conditioning RM1,500)
Required:

a. Prepare the following for the year ended 31 December 2007


i. Fixed Assets Accounts
ii. Provision for Depreciation Accounts
iii. Balance Sheet Extract
Note: Show separate accounts for each type of assets.