The general performance of the candidates was very poor. The expected answers were:
3(a) (i) Definition of depreciation: Depreciation is the permanent and continuous
decrease in the economic value of fixed assets. OR
It may also be defined as the systematic and periodic allocation of the
historical cost or revalued amount less estimated residual value of a
depreciable asset over its estimated useful life.
(ii) Characteristics of a depreciable asset
- It should have useful life of over one year
- It must have been acquired primarily for use in the production of goods or services
- It should have an estimated useful life
- It should not be intended for sale in the ordinary course of the business
- It may have a scrap value.
- It must have an original cost
- It must have net book value.
(b) Methods of calculating depreciation
- Straight line method: Under this method, the cost less scrap value of a fixed tangible asset is allocated equally over the years of useful life.
- Reducing Balance method: Under this method, depreciation is calculated per annum at a fixed percentage rate on the net book value of the fixed asset.
- Sum of the year's digit method: This is the method where the digits of the numbers making up the economic life span of the fixed asset are added and used as a proportion for determining the annual charge for depreciation.