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.

Example

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.

Solution

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
= \$6,700
* 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
= \$2,250

* 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
= \$8,950

If an asset is purchased in the middle of the year, would you prorate the depreciation charge for that year?

We do not prorate Depreciation on assets purchased during the year. This is because neither of these assets was available to us before they were purchased, so we cannot consider them as having been used in generating revenue during their respective periods of ownership.

When a fixed asset is sold, would you reverse the depreciation already recorded on that asset? Or in other words, in case a fixed asset is sold after a few years of its purchase, should we charge the entire depreciation amount from the year of the purchase or only from the year in which it was sold?

We do not reverse the Depreciation recorded on an asset sold. Depreciation is meant to reflect the wear and tear of the asset. So, if we were to reverse Depreciation on items sold before they are fully depreciated, it would be tantamount to recognizing revenue earlier than expected, which is not allowed under gaap.

If I did not dispose of an asset, do I remove the value from its respective asset section?

If you intend to use an asset for a long time and you clearly show it as such in your books, then you can leave its book value there.

How to record depreciation on assets sold during the year?

Depreciation expense would be calculated based on the book value of the asset at the end of the previous year (i.E., At the time it was sold).

If an asset is purchased on 1 January 2016, would its depreciation be calculated based on its cost or 31 December 2015's book value?

Depreciation for any asset purchased will be calculated only up to the date it is available for use by company. So, if your asset was purchased on 1 january 2016 and you started using it from that date, then its Depreciation would be calculated based on the cost of that asset up to 31 december 2016 only.

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