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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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