Theory question 110
Farm Management and Records(a) Explain the meaning of each of the following terms in relation to agricultural practices: (i) appreciation (ii) depreciation (iii) salvage value.
(b) A Fiat tractor was purchased by a farmer in 1978 for N12,000.00. In 1987, the tractor was sold off for N3,000.00 when it was no longer economical to maintain it. Calculate the: (i) salvage value of the tractor (ii) total depreciation (iii) annual depreciation (iv) appreciation.
Show the model answer
(a)(i) Appreciation: increase in the value of an asset over time (e.g. land, buildings)
(ii) Depreciation: loss in value of an asset through use, wear and tear, age or obsolescence
(iii) Salvage value: the value (price) of an asset at the end of its useful life, when it is sold off
(b)(i) Salvage value = N3,000.00
(ii) Total depreciation = 12,000 − 3,000 = N9,000.00
(iii) Useful life = 1987 − 1978 = 9 years; annual depreciation = 9,000 ÷ 9 = N1,000.00 per year (straight-line)
(iv) Appreciation = nil (N0), since the tractor lost value
Show the working: cost − salvage value, then divide by the years used.