Depreciation for Partial Years: Videos & Practice Problems

When purchasing fixed assets mid-year, partial depreciation must be calculated. For straight-line and double-declining balance methods, first determine the full year's depreciation, then prorate it based on the ownership duration. For example, if an asset costing $42,000 with a $2,000 residual value has a 5-year life, the annual depreciation is $(42000-2000)/5)$ = $8,000. If owned for 3 months, the depreciation expense is $2,000, leading to a net book value of $40,000.

Depreciation for Partial Years

When purchasing fixed assets, the timing of the acquisition significantly impacts depreciation calculations. If an asset is acquired in the middle of an accounting period rather than on the first day of the year, partial depreciation must be calculated for that period. This means that instead of taking a full year's depreciation, the expense must be prorated based on the duration of ownership within the year.

For methods like straight-line and double declining balance, the first step is to determine the full year depreciation. This is done using the formula:

Depreciation Expense = (Cost - Residual Value) / Useful Life

For example, if a company purchases a delivery truck for $42,000 with an estimated useful life of 5 years and a residual value of $2,000, the annual depreciation expense would be:

Depreciation Expense = (42,000 - 2,000) / 5 = 8,000

However, if the truck is purchased on October 1, the company only owns it for 3 months of the year (October, November, December). To find the prorated depreciation for this period, the annual depreciation is multiplied by the fraction of the year the asset was owned:

Partial Depreciation = Annual Depreciation × (Months Owned / Total Months) = 8,000 × (3/12) = 2,000

This amount, $2,000, would be recorded as a journal entry, debiting depreciation expense and crediting accumulated depreciation for the same amount. Consequently, the net book value at the end of the year would be calculated as follows:

Net Book Value = Cost - Accumulated Depreciation = 42,000 - 2,000 = 40,000

In contrast, the units of production method does not require adjustment for the timing of the purchase, as it is based on the number of units produced rather than time. Therefore, if an asset is acquired mid-year, the calculation naturally reflects the reduced number of units produced without needing further adjustment.

Understanding how to accurately calculate partial depreciation is crucial, as overlooking the purchase date can lead to significant errors in financial reporting. Practicing these calculations will enhance your proficiency in managing asset depreciation effectively.

DBQ Company purchased a machine on July 1, Year 1 for $60,000. The company estimated a five year useful life and $8,000 residual value. If the company uses the double-declining-balance method for depreciation, what will be the amount of accumulated depreciation on December 31, Year 2?

• A. $27,040
• B. $31,200
• C. $38,400
• D. $41,600

Answer: (B)

DAB Company purchased a machine on November 1, Year 1 for $12,000. DAB estimated that the machine could produce 60,000 units over its useful life and would be worth $2,000 as scrap. During Year 1, DAB produced 3,000 units. During Year 2, DAB produced 12,000 units. During Year 3, DAB produced 9,000 units. If DAB uses the units-ofproduction method for depreciation, what would be the net book value of the machine at the end of Year 2?

• A. $2,500
• B. $4,000
• C. $7,500
• D. $8,000
• E. $9,500

Answer: (E)

Here’s what students ask on this topic:

How do you calculate partial year depreciation using the straight-line method?

To calculate partial year depreciation using the straight-line method, first determine the full year's depreciation. Use the formula:

$\frac{\mathrm{Cost}-\mathrm{Residual\; Value}}{\mathrm{Useful\; Life}}$

Next, prorate this amount based on the number of months the asset was owned. For example, if an asset costing $42,000 with a $2,000 residual value has a 5-year life, the annual depreciation is:

$\frac{42000-2000}{5}=8000$

If the asset was owned for 3 months, the partial depreciation is:

$8000\times \frac{3}{12}=2000$

What is partial year depreciation and why is it important?

Partial year depreciation refers to the depreciation expense calculated for an asset that was not owned for the entire year. It is important because it ensures that the depreciation expense accurately reflects the period during which the asset was in use. This provides a more precise matching of expenses with revenues, adhering to the matching principle in accounting. For example, if an asset is purchased mid-year, only a portion of the annual depreciation should be recorded, reflecting the actual time the asset was in service.

How does the double-declining balance method handle partial year depreciation?

For the double-declining balance method, calculate the full year's depreciation first. The formula is:

$2\times \frac{\mathrm{Book\; Value}}{\mathrm{Useful\; Life}}$

Then, prorate this amount based on the number of months the asset was owned. For example, if an asset with a book value of $42,000 and a 5-year life is purchased mid-year, calculate the annual depreciation and then adjust it for the partial year. If owned for 3 months, multiply the annual depreciation by 3/12 to get the partial depreciation amount.

What are the steps to record partial year depreciation in journal entries?

To record partial year depreciation in journal entries, follow these steps:

1. Calculate the full year's depreciation using the appropriate method (e.g., straight-line).
2. Prorate the annual depreciation based on the number of months the asset was owned.
3. Make the journal entry by debiting Depreciation Expense and crediting Accumulated Depreciation for the prorated amount. For example, if the partial depreciation is $2,000, the entry would be:

Debit: Depreciation Expense $2,000

Credit: Accumulated Depreciation $2,000

How does the units of production method handle partial year depreciation?

The units of production method does not require adjustments for partial years because it bases depreciation on the number of units produced rather than time. If an asset is purchased mid-year, the depreciation expense will naturally be lower due to fewer units being produced. The formula remains:

$\frac{\mathrm{Cost}-\mathrm{Residual\; Value}}{\mathrm{Total\; Units\; Expected}}\times \mathrm{Units\; Produced}$