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Depreciation Depreciation Straight Line Method

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					Depreciation

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
  usage
 Obsolescence – Out of date!
Calculation
   Initial Cost – Residual Value
   Expected Lifetime (in years)
        Example - Ford Mondeo:
      £15,000 (new) - £10,000 (now)
               3 years old
                    =
           £1666.66 per year
 Valuation Weblink
http://www.parkers.co.uk/pricing/used_car/?model=6
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!
Progress Questions
     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)
Progress Answers
   £8,000/4 Years = £2,100

   Level of usage, wear/tear, quality of
    maintenance/care taken, obsolescence,
    durability, 2nd hand market.

				
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