Depreciation & Flat Rate (Straight Line) Depreciation
 Depreciation is the estimated loss in value of assets.
 Book value is the estimated value of an item at any time.
Book value = cost price – total depreciation to that time
 When book value = 0, the item is ‘written off’.
 Scrap value is the book value of an item at the end of its useful life.
Flat Rate (Straight Line) Depreciation
Flat rate depreciation is when an item depreciates by a fixed amount each year.
It is also known as prime cost depreciation.
BVT = P – dT , where
P = cost price ($)
BVT = book value ($) after time (T)
T = time since purchase (years)
d = rate of depreciation ($ per year) (this is a fixed amount per year or a percentage of P per year)
Total depreciation = cost price – current value
Rate of depreciation =
𝑡𝑜𝑡𝑎𝑙 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛
𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑦𝑒𝑎𝑟𝑠
Examples
1. A printing press is bought for $15000 and depreciates by the flat rate method. Depreciation was 20%
of the prime cost price each year. Its useful life was 4 years.
a) Find the annual depreciation.
P = 15000 d = 20% of P
d = 0.20 × 15000
d = $3000 per year
Annual depreciation is $3000.
b) Draw a depreciation schedule for the useful life of the press. Draw a graph of the book value
against time.
c) Find the relationship between the book value and time and use it to find the scrap value.
d = $3000, P = $15,000
BVT = P – dT
BV4 = 15000 – 3000T
BV4 = 15000 – 3000×4 (as the press is scrapped after 4 years)
BV4 = $3000
2. Jarrod bought his car 5 years ago for $15,000. Its current market value is $7,500. Assuming straight
line depreciation, find:
a) The car’s annual depreciation rate.
Total depreciation = cost price – current value
= 15,000 – 7,500
= $7,500
Rate of depreciation =
=
𝑡𝑜𝑡𝑎𝑙 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛
𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑦𝑒𝑎𝑟𝑠
7500
5
= $1,500 per year.
The annual depreciation rate is $1,500.
b) The relationship between the book value and time. Use it to find when the car will have a value
of $3000.
BV = P – dT
BVT = 15000 - 1500×T
When BVT = 3000
3000 = 15000 - 1500×T
12000 = 1500×T
T = 12000÷1500
T=8
The car will have a book value of $3000 when it is 8 years old.