Wednesday, 26 December 2012
Based on The Course Given by Andre Altmeyer
Best track of wear and tear The units-of production method tracks the wear and tear on the van most closely. Preferred method for income tax purposes For income tax purposes, the double-declining-balance method is best because it provides the most depreciation and, thus, the largest tax deductions in the early life of the asset. The company can invest the tax savings to earn a return on the investment.
Problem
Atlantic Services bought a used Peugeot delivery van on January 2nd 2010, for 19.200 €.
The van was expected to remain in service 4 years (30.000 kilometres). At the end of its useful life, Atlantic Services’ management estimated that the van’s residual value would be 2.400€.
The van travelled 8.000 kilometres the 1st year, 8.500 kilometres the 2nd year, 5.500 kilometres the 3rd year and 8.000 kilometres the 4th year.
Prepare
· A depreciation expense schedule under 3 depreciation method.
· Draw a balance sheet extract (for the van) of the company under the 3 methods.
· Which method best tracks the wear and tear on the van?
· Which method would Atlantic Services prefer for income tax purposes?
Plan
Determine depreciation basis (for straight-line and units-of-production methods) = cost – residual value.
Depreciation basis for Double-Declining method is the cost but depreciation stops when net book value equals residual value
Execute
Depreciation schedule
Straight-line method
Depreciable amount is (Cost - residual value); 19.200 - 2.400 = 16.800 Yearly depreciation = 16.800 / 4 = 4.200 € per year, i.e. 25%
Units-of-production method
Depreciable amount is (Cost - residual value); 19.200 - 2.400 = 16.800 Yearly depreciation depends on usage of the van
Year
|
Kilometres
|
Depreciation for 1 km
|
Annual depreciation
| |
2010
|
8 000
|
0,560
|
4 480
| |
2011
|
8 500
|
0,560
|
4 760
| |
2012
|
5 500
|
0,560
|
3 080
| |
2013
|
8 000
|
0,560
|
4 480
| |
30 000
|
16 800
| |||
Double-Declining-Balance method
Depreciable amount is cost = 19.200.
Depreciation is double of straight-line method = 25% x 2 = 50%
Year
|
Depreciation basis
|
Rate
|
Annual depreciation
|
Net Book Value
|
2010
|
19 200
|
50%
|
9 600
|
9 600
|
2011
|
9 600
|
50%
|
4 800
|
4 800
|
2012
|
4 800
|
50%
|
2 400
|
2 400
|
2013
|
0
|
0
|
2 400
| |
16 800
| ||||
Extract of Balance sheet 31st December 2011
| |||||||||||||||||||
Non- current assets
| |||||||||||||||||||
Straight-
|
Units of
|
Double
| |||||||||||||||||
line
|
production
|
Declining
| |||||||||||||||||
Peugeot van cost
|
19 200
|
19 200
|
19 200
| ||||||||||||||||
Less accumulated depreciation
|
-8 400
|
-9 240
|
-14 400
| ||||||||||||||||
10 800
|
9 960
|
4 800
| |||||||||||||||||
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