Question

Explain fully the concepts of conventions as it pertains to depreciation. You must identify what useful lives are allocated to each of the conventions.

Answer 1

A} Conventions pertains to Depreciation :-

Depreciation conventions are used to determine first and last year's amount of depreciation taken. One depreciation convention is assigned to a book as default convention for all assets that use the book . We can change the convention as per requirements of individual assets. Nine depreciation conventions provided by The Asset Management Application.

B} Useful lives allocated to the each of the conventions :-

1) Full Year :-

If asset is placed in service, it receives a full year depreciation . It receives no depreciation in the year of it's disposal.

2) Actual Days :-

Used for assets that used calenders with period ending dates that are not month end dates.

3) Modified Half Month :-

If asset is placed in service during the first half of the month, it receives a one full month's depreciation, it receives no depreciation for the month in which it is disposed of.

4) Full Month :-

Full month depreciation during the month in which it is placed in service. No depreciation in the month in which it is disposed of.

5) Mid Month :-

One half of one month's depreciation for month in which it is placed in service , and One half of one month's depreciation for the month in which it is disposed of.

6) Half Year:-

One half of a year's depreciation for the  first and last year it is in service.

7) Next Month :-

Depreciation begins month after it is placed in service and receives one month full depreciation in month of it's disposal.

8) Modified Half Year :-

Asset in service before the midpoint of the year , receives a full year's depreciation during it's first year and no depreciation during the last year of service.