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

QUESTION 

Depreciation methods

 

A lorry bought for a business cost $17,000. It is expected to last for five years and then be sold for 

scrap for $2,000.  

Required 

Work out the depreciation to be charged each year under: 

A 

The straight line method 

B 

The reducing balance method (using a rate of 35%) 

ANSWER 

A 

Under the straight line method, depreciation for each of the five years is: 

Annual depreciation = 

$(17,000 – 2,000)

5

 = $3,000 

B 

Under the reducing balance method, depreciation for each of the five years is: 

Year Depreciation 

  

1 

35% × $17,000 

=  $5,950

2 

35% × ($17,000  $5,950) = 35% × $11,050 

= $3,868

3 

35% × ($11,050  $3,868) = 35% × $7,182 

= $2,514

4 

35% × ($7,182  $2,514) = 35% × $4,668 

= $1,634

5 

Balance to bring book value down to $2,000 = $4,668  $1,634 

 $2,000 

= $1,034

 

4.11 Change in method of depreciation 

It is up to the business concerned to decide which method of depreciation to apply to its non-current 

assets. Once that decision has been made, the chosen method of depreciation should be applied