DEPRECIATION

BY: MR. ISAAC

Question #1:Victoria bought a car for $50,000 on January 01st 2010. The depreciation rate for the year was

5%.

What is the net book value of the car at the

end of year 2?

Question:Victoria bought a car for $50,000 on January 01st 2010. The depreciation rate for the year was

5%.

What is the net book value of the car at the

end of year 2?

CALCULATING THE DEPRECIATION

Depreciation = Rate x The Value of

the Asset

Year 1 = 5% x $50,000 = $2,500

NET BOOK VALUE (NBV)

NBV = Cost (NBV) – Depreciation

Year 1: NBC = $50,000 - $2,500

= $ 47,500

CALCULATING THE DEPRECIATION

Year 2 = 5% x $47,500 = $2,375

NET BOOK VALUE (NBV)

Year 2: NBV = $47,500 - $2,375

= $ 45,125

NBV at the end of Year 2

Year 1: Depreciation = 5% x $50,000

=$2,500

NBV = $50,000 - $2,500

= $47,500

Year 2: Depreciation = 5% x $47,500

= $2,375

NBV = $47,500 - $2,375

= $45,125

STEPS IN CALCULATING THE NET BOOK VALUE (NBV) OF AN ASSET PER YEAR – REDUCING BALANCE METHOD

Step 1: Identify the cost of the asset, the depreciable rate and the number of years

Step 2: Calculate the depreciation for year 1

Step 3: Calculate the NBV for the end of year 1(Beginning of year 2)

Step 4: Calculate the depreciation for year 2 using the NBV from the end of year 1

Step 5: Calculate the NBV for the end of year 2 (Beginning of year 3)

Principles of Accounts

Jan 01,10 Opening bal. $50,000 Dec 31,10 Depreciation $2,500

Bal. c/d $47,500

$50,000 $50,000

Jan 01,11 Bal. b/d $47,500 Dec 31,11 Depreciation$2,375

Bal. c/d $41,125

$47,500 $47,500

Jan 01,12 Bal. b/d $41,125

Dr. Cr.MOTOR VEHICLE: CAR

Principles of Accounts

Jan 01,10 Opening bal. $0

Dec 31,10 Car $2,500 Dec 31,10 P & L A/C $2,500

$2,500 $2,500

Jan 01,11 Bal. b/d $0

Dec 31,11 Car $2,375 Dec 31,10 P & L A/C $2,375

$2,375 $2,375

Dr. Cr. DEPRECIATION EXPENSE A/C

Method of Depreciation Reducing Balance

This method of depreciation involves multiplying the asset carrying amount by the depreciation rate to calculate the depreciation that can be claimed in that year.

NB: The carrying amount is the current value of the asset.

QUESTION: Calculation of Depreciation

Thomson bought an Audi for $500,000. The car depreciates 10% per annum (reducing balance).

1. Determine the Net Book Value at the end of year 2?

NBV at the end of Year 2

Year 1: Depreciation = 10% x $500,000

=$50,000

NBV = $500,000 - $50,000

= $450,000

Year 2: Depreciation = 10% x $450,000

= $45,000

NBV = $450,000 - $45,000

= $405,000

QUESTIONS