Depreciation Calculation for Mid-Year Purchases and Conventions
📌 When an asset is purchased mid-year, depreciation is calculated only for the portion of the year the asset was in use (e.g., 4 months if purchased September 1st, assuming a December year-end).
📅 Standard full-year depreciation is applied from the subsequent financial year onwards.
🗓️ Assets purchased before the 15th of a month are generally treated as acquired at the start of that month; those purchased after the 15th are treated as acquired in the next month.

Half-Year Convention Method
✅ Under the half-year convention, assets are treated as acquired or disposed of halfway through the year, meaning only half a year's depreciation is recorded in the first and last years of use, regardless of the exact date.
🔧 This convention simplifies calculations and provides consistency, often used in the U.S.
🔄 The asset's total useful life depreciation period spans the initial half-year, four full years, and the final half-year, summing up to the estimated 5-year life in the example provided.

Depreciation Methods: Straight-Line (SL) vs. Declining Balance (DB)
📉 Straight-Line (SL) Method: Depreciation is constant: \text{(\text{Cost} - \text{Salvage Value}) / Useful Life}. For the example asset (\text{Cost} = \108,000$, $\text{Salvage} = \$8,000$, $\text{Life} = 5$ years), the annual depreciation (after Year 1 adjustment) is (\108,000 - \8,000) / 5 = \20,000$.
🚀 200% Declining Balance (DB) Rate: Calculated as $(\text{1 / Life}) \times 200\%$. For 5 years, the rate is $(1/5) \times 2 = 40\%$, applied to the asset's book value each period.
📊 150% Declining Balance (DB) Rate: Calculated as $(\text{1 / Life}) \times 150\%$. For 5 years, the rate is $(1/5) \times 1.5 = 30\%$, applied to the book value.

Switching Depreciation Methods and Disposal
🔄 Companies may switch from an accelerated method (like DB) to the Straight-Line method in the year that maximizes the depreciation expense, ensuring the asset's book value equals its salvage value by the end of its useful life.
💰 To calculate Gain or Loss on Disposal, use: $\text{Cash Proceeds} - \text{Book Value at Disposal Date}$.
💸 A positive result indicates a Gain (selling price > book value); a negative result indicates a Loss (selling price < book value).
💵 The reported gain or loss on disposal in the income statement has no direct cash effect on the income statement itself, as the cash transaction is recorded separately via the disposal entry.

Key Points & Insights
➡️ The Straight-Line method is often preferred for financial reporting because it results in lower initial depreciation expense, leading to higher reported net income in early years.
➡️ Under the 200% DB method, the final year's depreciation must be adjusted to ensure the final Book Value equals the Salvage Value (\8,000$ in the example).
➡️ Following the sale on Dec 31, 2011 (End of Year 4): The loss was \10,000 under SL, but a Gain of \9,338** resulted under the 200% DB method.

📸 Video summarized with SummaryTube.com on Nov 02, 2025, 13:10 UTC