Calculating Depreciation for First Year of an Asset - Requirements and Impact

Depreciation is a non-cash item in financial statements that impacts the financial results of an entity. To calculate the correct amount of depreciation for the first year of an asset, financial experts require information such as asset cost, estimated life of asset, and residual value of an asset. These factors have a direct impact on the rate of depreciation calculated. The article also discusses the percentage of completion method and completed contract method for outcome measurement.

PART 1
Depreciation being a non cash item in the financial statements of an entity is shown as an
expense in Statement of Profit or loss. Depreciation means decrease in the value of the asset over
a period of time with its usage, normal wear and tear loss, change in technology, and change in
taste, change in fashion and due to obsolescence. Depreciation is charged as expense over life of
an asset and creates material impact on the financial results of an entity.
For calculating the correct amount of depreciation to be charged as expense in the first year of an
asset life, below are the information required by financial expert:-
 Asset Cost/ Purchase Cost of Asset – The purchase cost of asset as per AASB 116 is the
amount paid or incurred for acquiring the asset, putting the asset at the place where it has
been use, and for making it ready for usage. It all includes all incidental costs incurred for
asset which includes taxes paid on purchase of asset, the freight for bringing the asset to
its location, insurance expense incurred for safeguarding the asset from loss, testing and
production run expense. And for self generated or constructed asset, the cost of asset
includes all the costs incurred for making the asset available for usage (Li, 2016).
 Estimated Life of Asset – According to Corporation Act, 2001 and AASB, estimated life
of a particular class of assets has already been defined. Ever entity governing from these
laws should have use the defined estimated life in calculation of depreciation. The
management of the company can not deviate from the life already defined. If the
management wants to use different life then this fact of deviation from statute should be
reported in the Notes to Accounts of the financial statements. The estimated life impact
the rate of depreciation calculated because if we take more years then rate of depreciation
are less or vice versa. Thus, estimated life of an asset have direct impact on the amount of
depreciation of asset when is has been calculated over its depreciable life.
 Residual Value of an Asset – Residual value of an asset is also called salvage value of
asset or scrap value which implies the estimated or expected value or amount which the
asset will fetch after its estimated useful life. The residual value as per financial
accounting has major impact on the calculation of depreciation and its rate as it will be

subtracted from cost of an asset to get the depreciable amount of asset which is
depreciated. The amount residual value is calculated by management of an entity on their
past experience, professional judgment and on their discretion and it depends upon the
open market condition in which the asset will be disposed off by the company. The
residual value is most important factor which has been consider by the management in
calculation of depreciation for first year as it directly relates to rate of depreciation to be
used (Rus, 2016).
Accordingly, the above three are the basic requirements which are taken into consideration by
financial accounting expert of an entity for calculating depreciation for first year and for future
years.
REFERENCES
Li, W.C., (2016), “Depreciation of business R&D capital “. National Bureau of Economic
Research (No. w22473).
Rus, L., (2016), “Accounting, analysis and auditing of information regarding tangible assets in
the romanian economic entities.” Annales Universitatis Apulensis: Series Oeconomica, 18(2),
p.86.
PART 2
GENERAL JOURNAL
Date Particular Debit Amount Credit Amount
30-Jun-
18 Construction in Process
$
16,551,500
To Accounts Payable
$
16,551,500
(To record the plant in the books which not yet ready
for usage)

30-Jun-
19 Power Plant
$
16,551,500
To Construction in Progress
$
16,551,500
(To record the plant after construction completion and production)
30-Jun-
24 No entry is Required to be passed.
PART 3
OUTCOME CAN BE MEASURED, PERCENTAGE OF COMPLETION
METHOD APPLY
ACCORDING TO PERCENTAGE OF COMPELETION METHOD
2015 2016 2017
Costs for the year
$
10,000,000
$
18,000,000
$
12,000,000
Costs incurred to date
$
10,000,000
$
28,000,000
$
40,000,000
Estimated costs to complete
$
28,000,000
$
12,000,000 $ -
Total Estimated Costs (A)
$
38,000,000
$
40,000,000
$
40,000,000
Contract Price (B)
$
50,000,000
$
50,000,000
$
50,000,000
Estimated total Gross Margin (B) -(A)
$
12,000,000
$
10,000,000
$
10,000,000
Percentage of Completion (POC) 26% 70% 100%
Gross Profit to be recognized till date 3,157,895 7,000,000 10,000,000
Gross Profit recognized in previous
years 0 3,157,895 7,000,000
Gross Profit recognized for the year 3,157,895 3,842,105 3,000,000
Contract Price 50,000,000 50,000,000 50,000,000
Percentage of Completion (POC) 26% 70% 100%
Contract revenue recognized till date

13,157,895 35,000,000 50,000,000
Contract revenue for the year 13,157,895 21,842,105 15,000,000
JOURNAL ENTRIES
DATE PARTICULARS
DEBIT
AMOUNT
CREDIT
AMOUNT
30-Jun-
15 Construction in Progress
$
10,000,000
Accounts Payable 10,000,000
(To records cost incurred)
30-Jun-
15 Accounts Receivable
$
12,000,000
Billings on construction contract
$
12,000,000
(To record billings to customer)
30-Jun-
15 Cash
$
11,000,000
Accounts Receivable 11,000,000
(To record cash collections)
30-Jun-
15 Construction in Progress 3,157,895
Contract Expenses 10,000,000
Contract Revenue 13,157,895
(To record periodic income
recognized)
OUTCOME CAN NOT BE MEASURED, COMPLETED CONTRACT
METHOD APPLY
ACOORDING TO COMPLETED CONTRACT METHOD
JOURNAL ENTRIES

DATE PARTICULARS
DEBIT
AMOUNT
CREDIT
AMOUNT
30-Jun-
15 Construction in Progress
$
10,000,000
Accounts Payable
$
10,000,000
(To records cost incurred)
30-Jun-
15 Accounts Receivable
$
12,000,000
Billings on construction contract
$
12,000,000
(To record billings to customer)
30-Jun-
15 Cash
$
11,000,000
Accounts Receivable
$
11,000,000
(To record cash collections)
30-Jun-
15 Billings
$
50,000,000
Contract Revenue
$
50,000,000
(To record revenue )
30-Jun-
15 Cost of Construction
$
40,000,000
Construction in Progress
$
40,000,000
(To record expense and Work in
Progress)

PART 4
GENERAL JOURNAL
DEBIT CREDIT
30-Jun-
19 Impairment Loss
$
800,000
Goodwill
$
800,000
30-Jun-
19 Profit and Loss
$
800,000
Impairment Loss
$
800,000
On 30-June-2019
Carrying Amount of CGU =
$
7,000,00
0
Recoverable Amount CGU =
$
6,200,00
0
Loss on Impairment =
$
800,000
The Impairment Loss is first allocated to
Goodwill
The Impairment loss allocated to Goodwill
is $ 800000
Value of Goodwill
Purchase Consideration =
$
7,000,00
0
Net Assets Acquired =
$
5,800,00
0
Goodwill = $

1,200,00
0
GENERAL JOURNAL
DEBIT CREDIT
30-Jun-
19 Impairment Loss
$2,200,00
0
Goodwill
$
1,200,00
0
Accumulated Depreciation and
Impairment-Machinery
$
243,697
Accumulated Depreciation and
Impairment-Building
$
252,101
Accumulated Depreciation and
Impairment-Land
$
504,202
30-Jun-
19 Profit and Loss
$2,200,00
0
Impairment Loss
$
2,200,00
0
As on 30th June 2019
Carrying Amount of Division =
$
7,000,00
0
Recoverable Amount of
Division =
$
4,800,00
0
Impairment Loss =
$
2,200,00
0
Assumed that Consumer List already valued on Fair market Value less cost of
disposal that is on Net Realizable Value so Impairment loss will not be allocated
First Step, Allocation of Impairment Loss on

Goodwill
The Impairment loss allocated to Goodwill
is $ 1200000
The Balance Impairment loss of $ 1000000 is allocated to Other
Assets as follows:
Asset
Carrying
Amount
as on 30-
06-2019 Fraction
Allocation
of Loss
Net
Carrying
Amount
30-06-2019
Machinery
$1,450,00
0 145 / 595
$
243,697
$
1,206,303
Building
$1,500,00
0 150 / 595
$
252,101
$
1,247,899
Land
$3,000,00
0 300 / 595
$
504,202
$
2,495,798
$5,950,00
0
$
1,000,000