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This is a question from the case questions set 2:
The question i’m referring to is the one about the depreciation charge being changed from $50000 to $40000,
The question is:
Which of the following is correct with respect to the current charge of 500000 and the proposed charge of 40000?
The answer is that 50000 is too high and 40000 is too low.Why is this?
Cost = 200,000. Old depreciation rate = 25%, but assets last 5 years. Therefore some will have been fully depreciated and can’t be depreciated further. Simply taking 25% of 200,000 will not reflect that.
When a depreciation rate is changed, assets are depreciated over their remaining useful life. Depreciating them at 20% (ie over 5 years) presumes that they are all new with 5 years’ life left.
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