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What is depreciation?
Allocation of the original cost of the purchased fixed assets over its expected
useful life.
Part of the original cost of a fixed asset that is consumed during its period of use
by the business.
Depreciation is an expense and needs to be charged to profit and loss account
(income statement) every year.
The amount charged in a year to profit and loss for depreciation is based upon an
estimate of how much of the overall economic usefulness of a fixed asset has been
used up in that accounting period.
Causes of depreciation
Depreciation arises because of several factors such as:-
Physical deterioration
o Wear and tear
When a motor vehicle or machine or fixtures and fittings are used thay
eventually wear out. Some last many years, others last only a few
years.
o Erosion, rust, rot and decay
Land may be eroded or wasted away by the action of wind, rain, sun
and other elements of nature. Similarly, the metals in the motor
vehicles or machinery will rust away. Wood will rot eventually. Decay
is a process which will also be present due to the elements of nature
and the lack of proper attention.
Economic factors
o Obsolescence
This is the process of becoming out-of-date. (because of the new
invention)
o Inadequacy
This arises when an asset is no longer used because of the growth and
changes in the size of the business.
Time
o There are assets which have a legal life fixed in terms of years. For
example when you buy a patent to ensure that only you can produce
something. When patent’s time has finished it then has no value.
Depletion
1
Depletion of natural resources because of the extraction of the raw materials
from them. For examples mines, quarries and oil well.
Eg 1:
Using the same example 1, the method of
Assumes that Hashim Enterprise acquired
calculating the depreciation is based on the
the machine on 1 April 2006. The cost of
reducing balance at the rate of 20%.
the machine is RM4,000. The useful life of
Therefore,
the machine is 4 years. Calculate the
depreciation expenses need to be charged
Dep expenses = Net book value x rate
against the Income Statement for year
2006, 2007 and 2008 (assuming the
business closed their accounts on 31 Dec
each year).
2
Dr. Depreciation - machine xxxx
Cr. Provision for depreciation – machine xxxx
Example 1
Rev
Expenses
Depreciation for machine 1,000
Fixed Assets
Expenses
Depreciation for machine 1,000
Tutorial questions:
Question 1
3
a. A manufacturing firm purchased a van for RM 150,000 by cheque on 2 January
2001. The van is to be depreciated at a rate of 10% using reducing balance
method.
QUESTION 2
The following is the Balance Sheet (extract) of SEGAR SDN BHD as at 30 June 1999
Additional information:
1. It is a policy of the company to provide depreciation as
follows:
Equipment 20% on reducing balance; yearly basis
Motor vehicle 15% on cost; yearly basis
Required to prepare:
i. All fixed assets accounts
ii. Provision for depreciation accounts
iii. Balance sheet (extract) as at 30 June 2000.
Question 3
Royal Gold Enterprise showed the following details of fixed assets as at 30 June 2006.
4
Depreciation depreciation Rate
Motor vehicle RM80,000 RM18,000 Straight Line Yearly 15% p.a.
Machinery RM45,000 RM4,500 Reducing Yearly 10% p.a.
balance
On 2 January 2007, Royal Gold Enterprise purchased an additional motor vehicle costing
RM60,000. Payment was made by cheque.
Royal Gold Enterprise also decided not to rent the current premise but instead purchased a
new building on 1 June 2007 worth RM240,000. The deposit of RM24,000 was paid by
cheque and the balance was financed by loan from Bank Utama. No depreciation is to be
provided for new building.
Required:
Question 4
On 31 December 2005 Daniel Enterprise owned the following fixed assets and had at that
date already made provision for depreciation as indicated below:
During the year ended 31 December 2006, the following fixed assets were purchased:
The motor vehicles are depreciated at 20% per annum on cost (monthly basis) and the
equipment at 25% on book value (yearly basis).
a. Motor Vehicles and Equipment accounts for the year ended 31 December
2006.
b. The Provision for Depreciation accounts for each of the fixed assets, for the
year ended 31 December 2006.
c. Balance Sheet extract as at 31 December 2006. (10 marks)
5
Question 5
Aripin is a sole trader who maintains his fixed assets at cost. On the 31/12/2006 he
owned the following fixed assets:
On 3rd July 2007, Aripin acquired motor vehicle costing RM 52,000 and fixtures costing
RM 7,400.
The motor vehicles are depreciated at 10% per annum using the straight-line method
(yearly basis) and the fixtures at 20% per annum using the reducing balance method
(monthly basis).
Question 6
Yuzai Enterprise owned three motor vehicles. The information on the asset for the year
ended 31 March 2007 are as follows.
Motor vehicle A (WGD 3434) was purchased on 31 May 2004 for RM31,200
Motor vehicle B (WKK 2323) was purchased on 4 June 2006 for RM19,600.
Motor vehicle C (WQR 5457) was purchased on 1 February 2007 for 48,800 excluding
road tax and insurance of RM1,200). All payments are made by cheque.
Question 7
6
Syarikat Naditech has two types of fixed assets, being motor vehicles and furniture and
fittings. Depreciation on motor vehicles is provided at 20% on cost based on assets in
existence at the end of the year and the depreciation on furniture and fittings is
provided at 10% on book value on a month to month basis commencing from the date
of purchase.
During the year ending 31 December 2007, Syarikat Naditech purchased the following
assets and paid by cheques.