22208 Chap.7 Non-Current Assets: Depreciation and Disposal
Non-Current Assets: Depreciation and Disposal
Week 7 follows property, plant and equipment through acquisition, depreciation and disposal. Acquisition cost includes everything needed to make the asset ready for use. Depreciation allocates cost over useful life by the straight-line, reducing-balance or units-of-activity method, recorded through accumulated depreciation.
Changes in estimates are applied prospectively, capital spending is added to the asset, and a disposal removes cost and accumulated depreciation and recognises a gain or loss.
The lecture follows one delivery truck through all three depreciation methods, showing that each charges the same total over the asset’s life while spreading it differently between years.
Later sections revise estimates part-way through a machine’s life, add an upgrade that extends its life, and sell an asset for more than its carrying amount. The module practice set adds equipment cost build-ups, mid-year disposals and full-year journal sets.
What this chapter covers
- 01
Acquisition cost: what is capitalised and what is not
- 02
Depreciation as allocation, not valuation
- 03
Straight-line, units-of-activity and reducing-balance methods
- 04
Prospective changes in useful life and residual value
- 05
Capital versus revenue expenditure and impairment
- 06
Recording a disposal and its gain or loss
Worked example · free
Selling a delivery van at a gain
- 1Carrying amount: 52,000 − 31,000 = $21,000.
- 1Proceeds exceed the carrying amount: 24,500 − 21,000 = $3,500 gain.
- 1Remove the asset at cost and its accumulated depreciation: Cr Van 52,000, Dr Accumulated depreciation 31,000.
- 1Record the cash and the gain: Dr Cash 24,500, Cr Gain on disposal 3,500.
Key terms
- Acquisition cost
- All necessary costs of buying a non-current asset and making it ready for use.
- Accumulated depreciation
- A contra-asset account holding all depreciation recorded on an asset to date.
- Carrying amount
- An asset’s cost less its accumulated depreciation, also called book or written-down value.
- Residual value
- The amount an asset is expected to be worth at the end of its useful life.
- Capital expenditure
- Spending that extends an asset’s life or productivity and is added to its cost.
- Impairment
- A write-down required when an asset’s recoverable amount falls below its carrying amount.
Non-Current Assets: Depreciation and Disposal FAQ
Is depreciation meant to show what an asset is worth?
No. The lecture is explicit that depreciation allocates cost over the periods that benefit from the asset, applying the matching principle. The carrying amount it produces is not a market value.
Why is residual value ignored in the reducing-balance calculation?
The rate is applied to the carrying amount each year, so residual value is not subtracted first. It still acts as a floor: depreciation stops once the carrying amount reaches it, which is why a final-year charge may be smaller.
What happens to past depreciation when the useful life is revised?
Nothing. Changes in estimate are prospective. The remaining carrying amount, less the new residual value, is spread over the remaining life, so only current and future years change.
Is routine maintenance added to the asset?
No. Maintenance keeps the asset working at its expected level, so it is a revenue expenditure and expensed. Only spending that extends life or productivity is capitalised.
How do I depreciate an asset bought or sold part-way through a year?
Charge only the months the asset was held. For straight line, take the annual charge and multiply by the fraction of the year, for example nine months out of twelve, and always record that partial charge before calculating any gain or loss on disposal.
What is the difference between capital and revenue expenditure?
A capital expenditure improves an asset, extending its useful life or productivity, so it is added to the asset’s cost and depreciated. A revenue expenditure only maintains the asset at its expected level, such as ordinary servicing, so it is expensed in the period it occurs.
Exam move
Build a depreciation schedule for one asset under all three methods and check that each totals cost minus residual value. Then practise disposals part-way through a year, always recording the extra months of depreciation before comparing proceeds with the carrying amount.
A one-page sheet with the three formulas, the disposal sequence and the prospective-change steps covers most of the topic, and it is exactly the kind of note the restricted open book exam allows.
Add one revision question in which the useful life or residual value changes after a few years, and set it out in the lecture’s three steps: carrying amount at the revision date, remaining depreciable amount, then the new annual charge over the remaining life.
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