Satine Enterprise Ltd.
a) Reducing balance method:
|
Year
|
Depreciation
|
Net Book Value
|
|
0
|
0
|
$25,000
|
|
1
|
$8,750 ($25,000 x 35%)
|
$16,250
|
|
2
|
$5688 ($16,250 x 35%)
|
$10,563
|
b) Straight line method: Annualised depreciation = ($25,000 - $2,900) / 5 years = $4,420
|
Year
|
Depreciation
|
Net Book Value
|
|
0
|
0
|
$25,000
|
|
1
|
4420
|
$20,580
|
|
2
|
4420
|
$16,160
|
Therefore, total depreciation = $8,840
c) Students should show their working out (which could include answers taken from Questions 3.5.6a and 3.5.6b.
|
Method
|
Net Book Value
|
|
Reducing balance
|
$6,865
|
|
Straight line
|
$11,740
|
|
d) Reducing Balance
|
Straight line
|
- More realistic method for depreciating motor vehicles (these tend to lose most of their value at the beginning of their useful life)
- More complicated to calculate
- Subjective nature of the (arbitrary) chosen rate of depreciation
|
- Residual value of the asset is often a guess (at best) and may not be realized in the future.
|
Hence, the reducing balance method depreciates the NBV of the car by a greater amount in this time period