Depreciation: practice questions

How to approach these questions

Pin down three things from the wording: the method, the cost of the asset and the period asked about. The two methods examined are straight-line, which gives an equal charge each year, and reducing balance, which applies a fixed percentage to the falling carrying amount. If the question names the method, follow it exactly.

A residual value and a useful life point to straight-line. A single percentage applied year after year points to reducing balance. Using the wrong method for the whole answer is the most expensive mistake in this topic.

For straight-line, the annual charge is (cost − residual value) ÷ useful life. For example, a machine costs RM50,000, with a residual value of RM5,000 and a life of five years. The annual charge is 45,000 ÷ 5 = RM9,000.

Write the formula, substitute the figures, then state the answer. For reducing balance, apply the percentage to the carrying amount at the start of each year. Take the same machine at 20%.

Year one is RM10,000, leaving RM40,000. Year two is 20% of RM40,000, which is RM8,000, leaving RM32,000.

The charge falls each year. Never apply the percentage to the original cost a second time.

In a multi-year question, set out a small schedule with columns for cost, annual charge, accumulated depreciation and carrying amount. Complete it one year at a time. Under reducing balance, one year's closing carrying amount becomes the next year's opening figure, so a tidy schedule stops errors from spreading.

Under straight-line the charge is constant, but accumulated depreciation still grows each year. The carrying amount is cost minus accumulated depreciation, not cost minus one year's charge.

For the ledger, debit the annual charge to the depreciation expense account and credit it to the provision for depreciation account. In the statement of financial position, show the asset at cost, deduct the provision for depreciation, and arrive at the carrying amount.

Do not reduce the asset account itself. Cost stays unchanged and the provision account accumulates.

Watch these three traps. The first is timing: if an asset is bought part-way through the year, follow the convention the question gives.

A full year's charge in the year of purchase is one option. Monthly charging is another, where nine months is nine twelfths of the annual charge. The second trap is residual value, which belongs only in the straight-line formula.

Do not deduct it before applying a reducing-balance percentage. The third trap is disposal: remove the accumulated depreciation up to the sale date with the cost.

The difference between the carrying amount and the proceeds is the profit or loss on disposal. A profit arises when proceeds are higher and a loss when they are lower.

Check your figures. Under straight-line, the carrying amount should never fall below the residual value. If it does, you have run the calculation one year too far.

Under reducing balance, it gets close to zero but never reaches it. In every year, accumulated depreciation plus carrying amount must equal cost.

Depreciation spreads the cost of a non-current asset over the years that benefit from it. That is why the charge is an expense each year and not a single cost on purchase.

If reducing-balance schedules keep going wrong, one of our teachers can work through them with you year by year and check each step. Book a trial class