Simple SA has just purchased a roasting/salting machin
Simple SA has just purchased a roasting/salting machine to produce roasted walnuts. The finance director asks for your advice on how the company should calculate the depreciation on this machine.
Details are as follows:
Cost of machine $800,000
Residual value $104,000
Estimated life 4 years
Annual profits $2,000,000
Annual turnover from machine $850,000
Required:
(a) Calculate the annual depreciation charge using the straight-line method and the reducing balance method. Assume that an annual rate of 40% is applicable for the reducing balance method.
(b) Comment upon the validity of each method, taking into account the type of business and the effect each method has on annual profits. Are there any other methods which would be more applicable?