Reducing balance method and straight line method, Business Management

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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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