Assume that a business entity (Amiable Enterprises) purchased equipment for ₦50,000 on 3 August 2018. The equipment's estimated scrap or disposal value is ₦2,000, and the equipment is expected to be used for seven years.
The table below shows the profits of the years ending 31 July 2019, 2020, 2021, and 2022 (before depreciation is computed):
Required: Using the straight line method, calculate the depreciation for each of the years ended 31 July 2019, 2020, 2021, and 2022.
Suggested answers to practice activity 3.3
Hint: Computation of depreciation using the straight line method is given as follows:
Cost - Estimated scrap value |
Expected useful life |
Depreciation using the straight line method is computed as follows:
₦50,000 - ₦2,000 |
7 |
= ₦6,857.14286
Approximated to a whole number, the depreciation each year for 7 years is ₦6,857.
Using the straight-line method, the depreciation charged on tangible non-current assets does not change from one year to another. From the answer, the only amount that changes is the profit after the depreciation expense is subtracted.
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