Preptio Blog | FOA | Depreciation | preptio.com
Depreciation is one of the most consistently tested topics in ICAP CA Foundation FOA papers. It appears in MCQs, numerical adjustments in Financial Statements questions, and occasionally as a standalone calculation question. Understanding not just the formula but the logic behind each method is essential for exam success.
This article covers all three depreciation methods tested in FOA, explains the exam patterns based on ICAP past papers, and shows you how to calculate and present depreciation correctly every time.
Practice These Topics on Preptio - Free
What Is Depreciation and Why Does It Matter?
Depreciation is the systematic allocation of the cost of a non-current (fixed) asset over its useful economic life. In simpler terms — it is how a business spreads out the cost of a long-term asset across the years it benefits from it.
The key principle is the matching concept: the cost of the asset should be matched against the revenue it helps generate, period by period. A machine that lasts 5 years should not be fully expensed in Year 1.
Depreciation does not represent a cash outflow. It is a non-cash charge in the SOCI that reduces the carrying value of the asset in the SOFP over time.
Method 1: Straight-Line Method (SLM)
How It Works
The straight-line method allocates an equal amount of depreciation each year over the asset's useful life.
Formula: (Cost − Residual Value) ÷ Useful Life
Worked Example
A machine costs Rs. 500,000. Residual value Rs. 50,000. Useful life 5 years.
- Annual depreciation = (500,000 − 50,000) ÷ 5 = Rs. 90,000 per year
- Carrying value after Year 1: 500,000 − 90,000 = Rs. 410,000
- Carrying value after Year 5: Rs. 50,000 (residual value)
When ICAP Uses It
Straight-line is the most common method in FOA exam papers. It appears in over 70% of depreciation questions across recent ICAP past papers. Any time you see 'useful life in years' or 'equal annual charge', use SLM.
Method 2: Reducing Balance Method (RBM)
How It Works
The reducing balance method applies a fixed percentage rate to the carrying value (book value) of the asset each year. Because the carrying value reduces each year, so does the depreciation charge — higher in early years, lower in later years.
Formula: Carrying Value at Start of Year × Depreciation Rate %
Worked Example
A vehicle costs Rs. 800,000. Depreciation rate 20% per annum on reducing balance.
- Year 1: 800,000 × 20% = Rs. 160,000 | Carrying value: Rs. 640,000
- Year 2: 640,000 × 20% = Rs. 128,000 | Carrying value: Rs. 512,000
- Year 3: 512,000 × 20% = Rs. 102,400 | Carrying value: Rs. 409,600
When ICAP Uses It
Reducing balance appears frequently in financial statements questions where you are given a depreciation rate percentage rather than a useful life. Watch for the phrase 'per annum on cost' vs 'per annum on reducing balance' — they mean different methods.
Method 3: Units of Production Method
How It Works
This method calculates depreciation based on actual usage — how many units the asset produces in a given period relative to its total expected production over its life.
Formula: (Cost − Residual Value) ÷ Total Expected Units × Actual Units Produced
Worked Example
A factory machine costs Rs. 600,000. Residual value Rs. 60,000. Expected total production: 900,000 units. Year 1 production: 120,000 units.
- Year 1 depreciation = (600,000 − 60,000) ÷ 900,000 × 120,000 = Rs. 72,000
When ICAP Uses It
The units of production method appears less frequently in FOA MCQs but does appear in scenario-based questions. It is more commonly tested as a conceptual MCQ — 'which method is most appropriate for a machine whose usage varies year to year?'
Disposal of Non-Current Assets
A closely related topic in ICAP FOA papers is the disposal of fixed assets — calculating profit or loss on disposal. This appears regularly alongside depreciation questions.
Profit on disposal: Proceeds > Carrying Value at disposal date
Loss on disposal: Proceeds < Carrying Value at disposal date
Always calculate the carrying value at the date of disposal first (using whichever depreciation method applies), then compare it to the sale proceeds.
Depreciation in Financial Statements
In ICAP Financial Statements questions, depreciation appears as an adjustment in the trial balance notes. Typical scenarios:
- Depreciation at X% on cost — straight line
- Depreciation at X% on reducing balance — use opening carrying value
- Asset purchased mid-year — charge depreciation for partial period
- Asset disposed mid-year — depreciate up to disposal date then remove from accounts
A common exam trap: if an asset is purchased part-way through the year, only charge depreciation for the months owned. If purchased on 1 October and year-end is 31 December, charge only 3/12 of the annual amount.
Exam Strategy for Depreciation Questions
- Read the depreciation note in the trial balance question carefully — identify method and rate first.
- Check if any assets were purchased or disposed during the year (partial-year depreciation).
- Calculate accumulated depreciation, not just current year charge, for SOFP carrying value.
- For reducing balance, always apply the rate to the net book value — not cost.
- Write your workings clearly — ICAP awards method marks even if your final number is off.
Practice Depreciation on Preptio
Preptio's FOA practice module includes hundreds of depreciation questions across all three methods, at every difficulty level aligned with ICAP past papers. The Financial Statements practice module includes 11 full trial balance cases where depreciation adjustments are embedded — exactly as they appear in the real exam.
- 4,000+ FOA MCQs including dedicated depreciation questions
- Full trial balance cases with partial-year and disposal scenarios
- Instant feedback showing the correct calculation and where your working went wrong
- Chapter-wise practice to isolate depreciation as a standalone skill
Practice Depreciation Questions Free on Preptio → preptio.com
Disclaimer: Preptio is a practice supplement — not a replacement for textbook study. Always cover your ICAP-recommended material alongside platform practice.
