Depreciation on Assets Purchased During the Year
If a fixed asset is purchased after the beginning of the year, depreciation charged for the first year should be proportionate to the time the asset is used in the business during the year.
For example, if an office machine is purchased on 1 March 2016, the depreciation to be provided at the end of 2016 should only be for 10 months.
On 1 January 2016, XYZ company had the following balances in its ledger:
- Motor vehicle at cost: $38,000
- Provision for depreciation on motor vehicle: $11,200
On April 1, 2016, the company purchased a new motor vehicle for $12,000. Motor vehicles are written down by 25% p.a. using the reducing installment method.
Required: Calculate total depreciation on motor vehicles for the year 2016.
Step 1: Calculate depreciation on old motor vehicle
Depreciation on the old motor vehicle is calculated for the full year because it has been used in the business for the full year.
Depreciation on old motor vehicle = Book value × 0.25
= $26,800* × 0.25
* We know that depreciation under the reducing installment method is calculated on the book value of the asset, which is the cost of the motor vehicle less accumulated depreciation (i.e., $38,000 – $11,200 = $26,800).
The accumulated depreciation on an asset is the balance of the provision for depreciation account of that asset.
Step 2: Calculate depreciation on new motor vehicle
Depreciation on the motor vehicle purchased on 1 April 2016 would be calculated for 9 months because it has been used in the business for 9 months (not for the full year).
Depreciation on new motor vehicle = (Book value × 0.25) × 9/12
= (12,000* × 0.25) × 9/12
* The book value of the newly purchased motor vehicle is equal to its cost. This is because no accumulated depreciation applies in this case.
Step 3: Calculate total depreciation on motor vehicle for the year
Total depreciation on motor vehicle = Depreciation on old motor vehicle + Depreciation on new motor vehicle
= $6700 + $2,250
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True contributes to his own finance dictionary, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.