Phillips Ltd. purchased a machine on 26 March 20X3 for $98,000 and began to use it immediately. The estimated useful life of the machine is 5 years, and it has an expected residual value of $10,300 at that time. Phillips uses straight-line depreciation. Required: 1 & 2. Calculate annual depreciation for 20X3 through 20X8 assuming that depreciation is calculated to the nearest month using three accounting conventions: a. Half-year convention b. Full-first-year convention c. Final-year convention Year Month Half year Full first year Final year 20X3 20X4 20X5 20X6 20X7 20X8 3. Calculate the gain or loss on disposal assuming that the asset is unexpectedly sold for $6,300 at the end of 20X6, using net book value from requirement 1, and then from the three alternatives in requirement 2. Year Proceeds, 20X6 Net book value, 20X6 Month Half Year Full First Year Final Year 0 0 0 0

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Depreciation Methods

The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.

Depreciation Accounting

In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.