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How is the cost of a non-current asset allocated over its useful life and what happens on disposal?

Calculate and record depreciation using the straight-line and reducing-balance methods, determine carrying amount, and record the disposal of a non-current asset including any profit or loss

WACE Year 12 Accounting and Finance Unit 3 on depreciation: the straight-line and reducing-balance methods, calculating carrying amount, recording depreciation entries, and accounting for the disposal of a non-current asset with profit or loss on sale.

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  1. What this dot point is asking
  2. Why we depreciate
  3. Straight-line method
  4. Reducing-balance method
  5. Disposal of a non-current asset

What this dot point is asking

SCSA wants you to calculate depreciation by both methods, record the annual entry, find carrying amount, and account for disposal including any profit or loss.

Why we depreciate

Straight-line method

An equal charge each period:

Annual depreciation=Cost−Residual valueUseful life in years\text{Annual depreciation} = \frac{\text{Cost} - \text{Residual value}}{\text{Useful life in years}}

A machine costing 50000witha50 000 with a 5 000 residual and a 5-year life depreciates by:

50 000−5 0005=9 000 per year\frac{50\,000 - 5\,000}{5} = 9\,000 \text{ per year}

Reducing-balance method

A fixed percentage applied to the carrying amount (cost less accumulated depreciation to date). The same machine at 30 per cent:

  • Year 1: 30% of 50000=50 000 = 15 000; carrying amount $35 000
  • Year 2: 30% of 35000=35 000 = 10 500; carrying amount $24 500
  • Year 3: 30% of 24500=24 500 = 7 350; carrying amount $17 150

The annual entry under either method is: debit Depreciation Expense, credit Accumulated Depreciation.

Disposal of a non-current asset

To dispose, transfer the asset's cost and its accumulated depreciation to a Disposal account, record the proceeds, and the balancing figure is the profit or loss.

Profit or loss=Proceeds−Carrying amount\text{Profit or loss} = \text{Proceeds} - \text{Carrying amount}

A loss arises when proceeds are below carrying amount; a profit when they exceed it.