Archives for October 2012

Methods & Suitability of Depreciation Calculations

Several depreciation methods have been coming out for the O Level examinations such as the Revaluation and Units of Production method. We will discuss the two main methods commonly used – the Straight Line Method (SLM) and the Reducing Balance Method (RBM). 

 

1. Straight Line Method

Calculation of Depreciation:

Depreciation can be calculated if the following items of information are available:

  • Cost of the asset includes all expenses incurred for freight, carriage, and installation costs.
  • Scrap or residual value of the asset. I call it the garang-guni value – that amount we estimate the trash collection uncle will take when he collects from your place.
  • Useful life (not the physical life) of asset.

2. Reducing (Diminishing) Balance Method

Calculation of Depreciation:

Depreciation = Rate x Net Book Value (NBV)

where

NBV = Cost* – Provision for (Accumulated) Depreciation

In Year 2,

Depreciation expense using RBM = 10% x (10,000 – 1,000)

 

EXAMPLE

Using two different methods, a $10,000 asset with no scrap value at a depreciation rate of 10% will result in a different depreciation expense and net book value of the asset from Year 2 onwards.

· Straight Line = 10% X $10,000 = $1,000 per year

· Reducing Balance = 10% x Net Book Value Asset at the end of the previous period

Often, the depreciation rate used in RBM is usually between two and three times greater than under the SLM. Besides the depreciation charges, there are also the maintenance and repairs costs element and these running costs usually increases with age.

In Reducing Balance Method,

Suitability of Methods

How suitable the depreciation method is on an asset depends on how well it reflects the benefits the business derives from the used of assets.

Straight line method is more suitable for fixed assets that generates a more constant benefits such as Furniture and Fittings. it is fairer and more realistic.

Reducing balance method is used for fixed assets which depreciate more in the early years and in later years due to the efficiency of the fixed asset is higher in the early year. Therefore, reducing balance method used for assets such as motor vehicle and computers.

Revaluation Method (for loose tools and cutlery) – see notes below on Materiality Concept

Other Methods of Providing Depreciation:

Machine Hour Rate Method, Sum of Year’s Digit Method, Production unit method or Depletion method etc.

Why Different Methods?

To adhere to the Matching principle, because the revenue earned must be matched with the expenses incurred (depreciation) from the fixed asset that was used to generate that income within the same accounting period.

Prudence/Conservatism principle is adhered because the fixed asset is valued based on their net book value after accumulated depreciation so that assets and profits will not be overstated.

Materiality Concept is applied when the amount is insignificant. Loose tools which are immaterial in dollar amount may be written off as expense in one period, even though it may have a useful life of more than an accounting period.

 

SUMMARY OF DIFFERENCES

2011 N Level Results Out!

The results of 2011 Singapore-Cambridge General Certificate of Education (GCE) Normal (Academic) and Normal (Technical) Level Examinations are out!

 

Received great news from all my students. U-graders passed and the best went from F9 to B3 (taught him over 5 months). Did some screen shots of the smses. Rewards from tutoring comes in many ways – this being the greatest! Can’t wait to see what comes from the O’ – Levelers!

“Thanks Caleb, Bryan got 1 for POA. Because of your effort, he managed to top the school. Thanks 🙂 “ – Annie, Bryan’s mom. St Patrick’s School

“F9 to B3 is a big jump. I’m happy!” – Rigzin

“Hello teacher, grade1 for POA :)”Sheri

 

IMG_3371

“… and I didn’t expect to pass my POA! Hahah thank you caleb for the time you spent on me, helping me on my POA 🙂 see you next time! “Joseph Kim, my Korean student from Assumption English School.

A little note on Joseph – Joseph struggled to understand accounting concepts in school and even during my lessons as his command of English was not strong. It was over 4.5 months we worked together on his understanding of the subject. Unlike my student from Hangzhou  in 2010 who scored a C5 from Ungraded in 2.5 months, I was not able to teach in his native language (Korean). I’m so proud of Joseph Kim.

 

Congratulations to all my N-Levelers and all you guys who worked hard for this N levels.

2012 GCE N Levels Principles of Accounts (POA) Suggested Solutions!

Suggested Solution

It’s 8 days since your last paper.

Hope you guys are having a great time with your holidays!

This year’s suggested solutions came in a little late as the O’ levelers are ramping up their revision. 😉

Anyhow, it’s here now!

Tell me what you think.

Right click and choose “Save As” to download:

Paper 1 7092/02 GCE N’ Level Principles of Accounts 2012 Paper 1 Suggested Solutions

Paper 2: 7092/02 GCE N’ Level Principles of Accounts 2012 Paper 2 Suggested Solutions

Thanks guys!

Caleb

Why is there no depreciation for land?

sheep by A. Roger Davies

Short Answer:

Land generally does not depreciate in value because it is a limited resource with an
infinite life and can be used for a range of purposes.

Explanation:

All assets wear out and eventually cease to exist, except land. Land is not considered to ever be able to be destroyed, so it can’t lose value and go down to zero value like other assets.

The land generally retains or increases in value  Over the long term, land will go up in value over because the demand is always increasing, while they are not “making” any new land.

If there is something built on the land which the business owns,  the accountant has to subtract the cost of the land from the overall cost of the property in order to determine the depreciation expense for the buildings,