Add partial-year depreciation as a complication with reduced scaffolding
Complication: Partial-Year Depreciation
So far, you have assumed TechStart bought the van on January 1 — the first day of the fiscal year. But what if the van arrives on April 1? The company only owned it for 9 months of Year 1. Should the full year's depreciation still apply?
Depreciation is recorded only for the months the asset is actually in service. If the van was used for 9 out of 12 months in Year 1, then Year 1 depreciation should be 9/12 of the full annual amount.
Worked Example: Van Purchased April 1
Calculate the full annual expense
($30,000 − $5,000) ÷ 5 = $5,000 per year
Count months in service
April through December = 9 months
Prorate for the partial year
$5,000 × (9 ÷ 12) = $3,750
Multiple Assets Scenario
TechStart does not just own one van. By the end of Year 1, the company has purchased two assets at different times. Let us trace both.
| Asset | Cost | Salvage | Life | Purchase Date | Year 1 Expense |
|---|---|---|---|---|---|
| Delivery Van | $30,000 | $5,000 | 5 yrs | April 1 | $3,750 |
| Laptops | $12,000 | $2,000 | 4 yrs | July 1 | $1,250 |
Van: $5,000 × 9/12 = $3,750. Laptops: $2,500 × 6/12 = $1,500. Total Year 1 depreciation = $5,250.
Why does the purchase date matter for depreciation but not for the asset's cost?
The cost is recorded in full on the day of purchase — the company spent $30,000 regardless of the month. But depreciation measures how much of the asset's value was consumed during the accounting period. If the asset was only in service for part of the year, it only contributed part of a year's worth of value.
Key insight: In real business, assets are purchased throughout the year. Partial-year depreciation is the norm, not the exception. Always check the purchase date before recording depreciation.
Scenario: TechStart buys a $15,000 packaging machine on October 1. It has a 5-year life and $3,000 salvage value. What is the Year 1 depreciation expense?
Step 1: Depreciable base = $15,000 − $3,000 = $12,000
Step 2: Full annual expense = $12,000 ÷ 5 = $2,400
Step 3: Months in service = October, November, December = 3 months
Step 4: Year 1 expense = $2,400 × (3/12) = $600
Why does the book value at the end of Year 1 equal $14,400?
Book Value = Cost − Accumulated Depreciation = $15,000 − $600 = $14,400. Only one partial year of depreciation has been recorded so far.