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📉 Depreciation — Practice Space

O Level Accounting 7707  |  GPM Academy

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Section 1 — Straight Line Method (SLM)

Under SLM, the same fixed amount is charged every year. Calculate depreciation for each year and complete the schedule below.

⬤ Foundation — Equal charge each year

📌 SLM Formula

Annual Depreciation = (Cost − Residual Value) ÷ Useful Life (years) Net Book Value = Cost − Accumulated Depreciation
  • The charge is equal every year — a straight horizontal line on a graph
  • NBV reaches exactly the residual value at end of useful life
  • Asset Account stays at cost — never write it down directly

📋 Question 1 — Complete the SLM Depreciation Schedule

ItemValue
AssetMachinery purchased 1 January 2023
Cost$20,000
Residual Value$2,000
Useful Life4 years
MethodStraight Line
Annual Depreciation — find first!?

A Step 1 — Calculate Annual Depreciation

Annual Depreciation = (Cost − Residual) ÷ Life = (20,000 − 2,000) ÷ 4 = ?
Enter your answer:

A Step 2 — Complete the Depreciation Schedule

Year Cost ($) Annual Dep. ($) Accumulated Dep. ($) NBV ($)
Start (1 Jan 2023) 20,000 — — 20,000
Year 1 (2023) 20,000
Year 2 (2024) 20,000
Year 3 (2025) 20,000
Year 4 (2026) 20,000
💡 Year 4 NBV should equal the residual value ($2,000) exactly — this is your built-in check!
💡 Full solution:
Annual depreciation = (20,000 − 2,000) ÷ 4 = $4,500 every year

Year 1: Dep $4,500 | Accum $4,500 | NBV $15,500
Year 2: Dep $4,500 | Accum $9,000 | NBV $11,000
Year 3: Dep $4,500 | Accum $13,500 | NBV $6,500
Year 4: Dep $4,500 | Accum $18,000 | NBV $2,000 ✓ (equals residual value)

Notice: NBV = Cost ($20,000) − Accumulated Depreciation

Section 2 — Reducing Balance Method (RBM)

Under RBM, a fixed percentage is applied to the NBV at the start of each year — not to cost. The charge is higher in early years and lower later.

⬤ Intermediate — Apply % to NBV, not cost!

📌 RBM Formula — The Critical Rule

Year 1: Dep = Cost × Rate % Year 2+: Dep = NBV at START of year × Rate % (NOT cost!) NBV at end = NBV at start − Depreciation for the year
  • ⚠️ Most common mistake: applying the rate to cost every year instead of the NBV
  • NBV never reaches zero under RBM
  • Suitable for assets that lose value rapidly in early years (vehicles, technology)

📋 Question 2 — Complete the RBM Depreciation Schedule

ItemValue
AssetVehicle purchased 1 January 2023
Cost$25,000
Depreciation Rate20% per annum Reducing Balance
No residual value given—
⚠️ Remember: apply 20% to the NBV at the START of each year — NOT to the original cost of $25,000 every time!

A Complete the RBM Schedule

Year NBV at Start ($) Rate Depreciation ($) NBV at End ($)
Year 1 (2023) 25,000 (= cost) 20%
Year 2 (2024) 20%
Year 3 (2025) 20%
Year 4 (2026) 20%
💡 Check: Year 2 dep should be 20% × $20,000 (= $4,000) — NOT 20% × $25,000. Year 3 dep = 20% × $16,000 (= $3,200). The charge falls every year.
💡 Full solution:
Year 1: 25,000 × 20% = $5,000  →  NBV = 20,000
Year 2: 20,000 × 20% = $4,000  →  NBV = 16,000
Year 3: 16,000 × 20% = $3,200  →  NBV = 12,800
Year 4: 12,800 × 20% = $2,560  →  NBV = 10,240

Notice: the depreciation charge falls every year. NBV never reaches zero. This is why RBM suits vehicles — they lose most value early on.

Section 3 — Ledger Accounts for Depreciation

Two accounts record depreciation: the Asset Account (stays at cost — never changes) and the Provision for Depreciation Account (accumulates each year). Complete both accounts and the SFP extract.

⬤ Intermediate — Asset, Provision and SFP

📌 The Golden Rule

  • The Asset Account always stays at COST — never debit or credit it with depreciation
  • Annual depreciation: DR Depreciation Expense / CR Provision for Depreciation
  • The Provision Account has a credit balance that grows each year
  • SFP shows: Cost − Accumulated Depreciation = Net Book Value

📋 Question 3 — Equipment, SLM, 3 Years

ItemValue
Equipment purchased 1 January 2024Cost: $15,000
Residual Value$3,000
Useful Life3 years
MethodStraight Line
Annual Depreciation = (15,000 − 3,000) ÷ 3= $4,000

A Equipment Account (stays at cost)

💡 The Equipment Account never changes — all three balance c/d figures should be $15,000 (cost). The asset is never directly reduced.

B Provision for Depreciation — Equipment Account

💡 The Provision Account balance grows each year: 4,000 → 8,000 → 12,000. It has a credit balance. Balance c/d goes on the DR side; the running total goes on the CR side.

C SFP Extract — 31 December 2026

Extract: Statement of Financial Position — 31 Dec 2026
Non-Current Assets Cost ($) NBV ($)
Equipment — at cost
Less: Accumulated Depreciation
Net Book Value
💡 NBV = 15,000 − 12,000 = $3,000 — this equals the residual value exactly ✓ (end of Year 3 of 3)
💡 Key points:
Equipment Account: Always $15,000 — never changes.
Provision Account: Balance c/d 2024 = $4,000 | 2025 = $8,000 | 2026 = $12,000
The balance c/d goes on the DR side (to balance the account) but the provision is a credit balance in nature.
SFP: Cost $15,000 − Accumulated Dep $12,000 = NBV $3,000 (= residual value ✓)

Section 4 — Disposal of a Non-Current Asset

When an asset is sold, a Disposal Account is opened. The asset's cost goes to the debit side, accumulated depreciation and sale proceeds to the credit side. The balancing figure is the profit or loss on disposal.

⬤ Challenge — Profit AND Loss scenarios

📌 Disposal Account — Three Steps

  • Step 1: DR Disposal A/c with cost → CR Asset A/c
  • Step 2: DR Provision for Dep with accumulated dep → CR Disposal A/c
  • Step 3: DR Bank/Cash with sale proceeds → CR Disposal A/c
  • If CR total > DR total → Profit on disposal (transfer to I/S income)
  • If DR total > CR total → Loss on disposal (transfer to I/S expense)

📋 Question 4a — Disposal with PROFIT

ItemValue
Machine purchased 1 Jan 2022 — Cost$12,000
Depreciation: SLM 25% per annum on cost, no residual valueAnnual dep = $3,000
Date of disposal31 December 2024 (3 full years)
Accumulated depreciation at disposal3 × $3,000 = $9,000
NBV at disposal$12,000 − $9,000 = $3,000
Sale proceeds$4,500
Profit = Sale proceeds − NBV = 4,500 − 3,000= $1,500 PROFIT

A Complete the Disposal Account — Profit Scenario

CR total = Prov. Dep + Bank + Profit = ? + ? + ? = ?  (must equal DR total of $12,000)
💡 Working:
DR side: Machine Account (cost) = $12,000
CR side: Provision for Dep = $9,000 | Bank (proceeds) = $4,500 | Balancing = ?
CR items before profit = 9,000 + 4,500 = $13,500 — but that exceeds DR total of $12,000!
Wait — the profit is the balancing figure: 12,000 − (9,000 + 4,500) = −$1,500
Since CR side exceeds DR side, the balancing figure is a Profit of $1,500.
Profit → transferred to Income Statement as other income.

📋 Question 4b — Disposal with LOSS

ItemValue
Equipment purchased 1 Jan 2022 — Cost$30,000
Depreciation: SLM 10% per annum on costAnnual dep = $3,000
Date of disposal31 December 2024 (3 full years)
Accumulated depreciation at disposal3 × $3,000 = $9,000
NBV at disposal$30,000 − $9,000 = $21,000
Sale proceeds$18,000
Loss = NBV − Sale proceeds = 21,000 − 18,000= $3,000 LOSS

B Complete the Disposal Account — Loss Scenario

DR total = Cost + Loss = 30,000 + ? = ?  (must equal CR total of $27,000)
💡 Working:
CR side: Provision for Dep $9,000 + Bank $18,000 = $27,000
DR side: Cost $30,000 — but this exceeds CR total of $27,000!
Balancing figure = 30,000 − 27,000 = $3,000 LOSS
The loss appears on the DR side of the Disposal Account.
Loss → transferred to Income Statement as an expense (reduces profit).

🎓 All 4 Sections Complete!

⭐⭐⭐⭐

You have completed all four Depreciation practice sections.

Excellent — your depreciation skills are fully exam-ready!

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