Straight Line Method
Cars and Depreciation – Link?
Measurement of the loss of value of a fixed asset through wearing out
consumption, reduction in economic use or obsolescence of the asset
Causes of Depreciation
Time – over time will wear out
Use – deterioration with more intensive
Obsolescence – Out of date!
Initial Cost – Residual Value
Expected Lifetime (in years)
Example - Ford Mondeo:
£15,000 (new) - £10,000 (now)
3 years old
£1666.66 per year
Reasons for Depreciation
Cash flow – spread out the cost of an
asset over time.
Balance Sheet – show true representation
of assets value/fair accounts situation.
Depreciation – Objectivity and Subjectivity
Often subject to opinion – and a hell a lot
of guess work!
Objectivity – it will be worth so much after
doing so many miles!
A firm purchases a fixed asset for £10,000.
Its useful lifetime is expected to be 4 years,
after which it will have a residual value of £1,600
a. Calculate the annual depreciation and book values for next 4 years. (4 Marks)
b. Identify and explain four factors that might influence the useful lifetime and the
residual value of an asset. (8 marks)
c. Depreciation is a waste of time, as it does not change the total amount that
the fixed asset costs the company in its accounts. To what extent is this opinion
valid? (10 marks)
£8,000/4 Years = £2,100
Level of usage, wear/tear, quality of
maintenance/care taken, obsolescence,
durability, 2nd hand market.