Depreciation, Determining Costs

Depreciation
Depreciation is the allocation of cost of tangible plant assets
to expense in the periods in which services are received from
that asset.
Capital Expenditure and Revenue Expenditure:
Expenditure for the purchase or expansion of plant assets
are called capital expenditures and are recorded in asset
accounts.

Any expenditure that will benefit only the current period or

that is not material is treated as revenue expenditure.
 Determining Costs;

Q.
A factory in Karachi orders a machine at a list price of
Rs.10000. Payment will be made in 48 monthly
installments of Rs.250, which include Rs.2000 in
interest charges. Sales taxes of Rs.600 must be paid,
as well as freight charges of Rs. 1250. Installation and
other “start-up” costs amounts to Rs.400. What is the
cost of this machine to be debited to the machinery
account?
 Determining Costs;

List Price 10000

Sales Taxes 600
Transportation Charges 1250
Set up cost 400
Total 12250
 Straight Line Method;

Cost of Asset =Rs.1000000

Life= 5 years
Salvage Value= Rs.100000

Depreciation Expense = (Total Acquisition Cost – Salvage Value)

Useful Life
 An Accelerated Depreciation Method;

Cost of Asset =Rs.1000000

Life= 5 years
Depreciation Rate= 40%
Salvage Value= Rs.100000
Q.

Cost of Asset =Rs.1000000

Life= 5 years
Depreciation Rate= 40%
 DEPRECIATION

• Q.
• ABC Co. purchase office equipment for Rs. 125,000 on credit from
Hamid & Co. Co paid transportation charges Rs.5000. Estimated life of
the asset is 10 years and scrap value Rs.10,000.
Company decided to use straight line method for depreciation assets.
 
Required:
• 1: Compute total cost of office equipment
• 2: Compute depreciation for first three years
• 3: Present Schedule of depreciation showing book value
• 4: Prepare Allowance for depreciation account
• 5: Balance sheet for each of the three years separately.
 Exercise

Q.
On January 2, 1993, Atlantic Iron Works acquired new
machinery at a cost of Rs.270000. The useful life of
the machinery was estimated at 5 years, with the
residual value of Rs.24000.
Compute deprecation expense of machine for 5 years.
• Straight Line Method
• Double Declining Method/ Reducing balance
Method.
 MACRS
Q.
Micro Circuit Co purchases new equipment on September
4, 1993, at a cost of Rs.80000. Useful life of this
equipment was estimated at 4 years, with an estimated
residual value of Rs.5000. For income tax purposes, this
equipment is classified as “3-year property”.
Show supporting computations,
• Straight Line Method.
• 200% declining balance, with half year convention.
• MACRS.
 DEPRECIATION

 
Q.
Company bought machine at $ 40,000 on Jan.1 1998. Estimated
life of the machine is expected to be four years and residual
value is 4000.
Prepare Schedule showing cost, depreciation and book value
under given method separately showing four years
depreciation and residual value.
 
• STRAIGHT LINE METHOD
• DIMINISHING BALANCE METHOD ( rate 25% )