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

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