Expert: Arthur Naman - 7/17/2009

Question
QUESTION: E.g. Our company purchased a Notebook value at 4,818.00 for sales executive. On a/c part, i'll capture as : --
Dr. Computer (Fixed Asset)
Cr. Bank account
According to our company a/c policy, it should depreciate on Reducing Balance Method for 3 years @ 36.90%. The depreciation shown below as for our kind perusal : --

COST(10/17/2008)          4,818.00
Year 2008 Depreciation     -444.45
Year 2009 Depreciation     - 1,613.88
Year 2010 Depreciation     - 1,018.32
Year 2011 Depreciation     - 642.55
Balance of Note Book        1,098.80  

Due to depreciation only applicable for 3 years, i'm concerning about the balance of 1,098.80 after Year 2011 depreciation.
My question is that how should i do Accounting Entry for these 1,098.80 ?


ANSWER: If your depreciation method does not fully depreciate the asset over its useful life, then the depreciation method is in error.

Typically in a declining balance depreciation, the annual depreciation changes; thus 36.9% might only be for the first year.

Do you know the details of the method you are using?

---------- FOLLOW-UP ----------

QUESTION: Sorry, i'm not so good on Reducing Balance Method, because normally i use Straight Line Method.
I thought 36.9% fixed for 3 years.How do i find out the 2nd year rate of depreciation? And for 3 years ?
Please teach me. Thank you very much.


ANSWER: A straight line depreciation over 3 years is 33% per year (actually 33.333% per year) = $1,606.00 per year.

It is not obvious to me where the 36.9% comes from.

Normally, using a declining balance method, once the calculated depreciation is less than the straight line over the remaining years, the declining method is dropped in favor of the straight line method over the reaming life.

Using a 36.9% over 3 years, the depreciation would be, I think, as follows:

4,818 x 36.9% = 1,778  yr 1
4,818 - 1,778 = 3,040
3,040 x 36.9% = 1,122  yr 2 but 3,040 / 2 = 1,520.

So the depreciation over 3 years would be:
1,778
1,520
1,520





---------- FOLLOW-UP ----------

QUESTION: Highly appreciated your teaching & i understood clearly.

The 36.9% was instructed & given by our Finance Director who told me that expected life is 3 years for this Notebook.

My another question is that we bought the Notebook on 10/17/2008 & Financial Year Ended on 12/31/2008.so this Notebook only depreciated for 3 months(OCT/NOV/DEC)on year 2008, depreciation shown below : --

COST : 4,818.00
Depreciation : 4,818.00 x 36.9% = 1777.85 / 12 months
         = 148.15 per month
so, my bookkeeping entry is :
OCT 148.15
NOV 148.15
DEC 148.15
TOTAL:444.45   

Dr.Depreciation(Expense-P/L)   444.45
Cr. Accumulated Depreciation (Liability-B/S) 444.45

May i know that on Jan 2009,Can i start with 4,373.55 ?
(Calculation:4,818.00 - 444.45 = 4,373.55)

OR still maintain the depreciation of 148.15 monthly til SEPT 2009 ?

Thank you very much.

Answer
Under declining balance depreciation calculations, at some point the straight-line method will be greater than the calculated declining balance depreciation. At that time, convert to the straight-line method and quit using the declining balance method.

The result should be that the asset is fully depreciated over its useful life.

I did not verify your calculations.