I n t e r a c t I v e t e X t foundations in Accountancy/ acca financial accounting (ffa/FA) bpp learning Media is an acca approved Content Provider

 

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(b) 

A non-current asset costing $60,000 has an estimated life of five years and a residual value of 

$7,000. The annual depreciation charge using the straight line method would be: 

$(60,000 – 7,000)

5 years

 = $10,600 per annum 

The carrying amount of the non-current asset would be: 

 

After 1 

After 2 

After 3 

After 4 

After 5 

 

year 

years 

years 

years 

years 

 

 $      

 $      

 $      

 $      

 $      

Cost of the asset 

 60,000 

 60,000 

 60,000 

 60,000 

 60,000 

Accumulated depreciation 

 10,600 

 21,200 

 31,800 

 42,400 

 53,000 

Carrying amount 

 49,400 

 38,800 

 28,200 

 17,600 

   7,000* 

* ie its estimated residual value 

Since the depreciation charge per annum is the same amount every year with the straight line method, it 

is often convenient to state that depreciation is charged at the rate of x% per annum on the cost of the 

asset. So for example, a non-current asset costing $20,000 with an expected residual value of nil and 

an expected useful life of 10 years would be depreciated on a straight line basis at $20,000/10 = 

$2,000 per year. This is the same as saying 'the depreciation charge per annum is 10% of cost' (ie 10% 

of $20,000 = $2,000). 

 

The straight line method of depreciation is a fair allocation of the total depreciable amount between the 

different accounting periods, provided that it is reasonable to assume that the business enjoys equal 

benefits from the use of the asset in every period throughout its life. An example of this could be 

shelving (fixtures and fittings) in the accounts department. 

4.8 Assets acquired part-way through an accounting period 

A business can purchase new non-current assets at any time during the course of an accounting period. 

It is reasonable to charge an amount for depreciation only from the date that the business has owned 

the asset, which might be part-way through an accounting period.  

4.9 Example: assets acquired part-way through an accounting period 

A business which has an accounting year that runs from 1 January to 31 December purchases a new 

non-current asset on 1 April 20X1, at a cost of $24,000. The expected life of the asset is four years, 

and its residual value is nil. What should the depreciation charge for 20X1 be? 

Solution

 

The annual depreciation charge will be 

$24,000

4 years

 = $6,000 per annum 

However, since the asset was acquired on 1 April 20X1, the business has only benefited from the use of 

the asset for 9 months instead of a full 12 months. It would therefore seem fair to charge depreciation in 

20X1 of only: 

9

12

 × $6,000 = $4,500