Reducing balance method and straight line method, Business Management

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

Easier to calculate

Simple to understand

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

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