Depreciation _ Flat Rate Depreciation by xiaoyounan

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									Depreciation & Flat Rate (Straight Line) Depreciation

 Depreciation is the estimated loss in value of assets.
 Book value is the estimated value of an item at any time.
   Book value = cost price – total depreciation to that time
 When book value = 0, the item is ‘written off’.
 Scrap value is the book value of an item at the end of its useful life.

Flat Rate (Straight Line) Depreciation
Flat rate depreciation is when an item depreciates by a fixed amount each year.
It is also known as prime cost depreciation.
BVT = P – dT , where
P = cost price ($)
BVT = book value ($) after time (T)
T = time since purchase (years)
d = rate of depreciation ($ per year) (this is a fixed amount per year or a percentage of P per year)

Total depreciation = cost price – current value
Rate of depreciation =
Examples
1. A printing press is bought for $15000 and depreciates by the flat rate method. Depreciation was 20%
   of the prime cost price each year. Its useful life was 4 years.
   a) Find the annual depreciation.
       P = 15000 d = 20% of P
       d = 0.20 × 15000
       d = $3000 per year
       Annual depreciation is $3000.
   b) Draw a depreciation schedule for the useful life of the press. Draw a graph of the book value
       against time.




   c) Find the relationship between the book value and time and use it to find the scrap value.
      d = $3000, P = $15,000
      BVT = P – dT
      BV4 = 15000 – 3000T
      BV4 = 15000 – 3000×4 (as the press is scrapped after 4 years)
      BV4 = $3000
2. Jarrod bought his car 5 years ago for $15,000. Its current market value is $7,500. Assuming straight
   line depreciation, find:
   a) The car’s annual depreciation rate.
       Total depreciation = cost price – current value
                          = 15,000 – 7,500
                          = $7,500
       Rate of depreciation =

                            =
                            = $1,500 per year.
       The annual depreciation rate is $1,500.

   b) The relationship between the book value and time. Use it to find when the car will have a value
      of $3000.
      BV = P – dT
      BVT = 15000 - 1500×T
      When BVT = 3000
      3000 = 15000 - 1500×T
      12000 = 1500×T
      T = 12000÷1500
      T=8
      The car will have a book value of $3000 when it is 8 years old.

								
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