| LO3 – Explain, calculate, and record depreciation for partial years. |
Assets may be purchased or sold at any time during a fiscal year. Should depreciation be calculated for a whole year in such a case? The answer depends on corporate accounting policy. There are many alternatives. One is to calculate depreciation to the nearest whole month. Another, often called the half-year rule, records half a year’s depreciation regardless of when a capital asset is purchased or sold during the year. The half-year rule is used in this textbook.
To demonstrate the half-year approach to calculating depreciation for partial periods, assume again that on January 1, 2015 Big Dog Carworks Corp. purchases equipment for $20,000 with a useful life of five years and a residual value of $2,000. Recall that depreciation expense for 2015 was $3,600 using the straight-line method. Because of the halfyear rule, depreciation expense for 2015 would be $1,800 ($3,600 x ½) even though the asset was purchased on the first day of the fiscal year. Using the double-declining balance method, depreciation expense for 2015 under the half-year rule would be $4,000 ($8,000 x ½). The half-year rule does not apply to the units-of-production depreciation method because the method is usage-based and not time-based. Presumably, usage would be less if the asset is purchased or sold partway through a year, so this depreciation method already takes this into account.
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