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For the following question, I have a doubt that how do we know which method of depreciation should be used?
– Liza bought a guillotine for her framing business for $20,000 on 1 July 20×7. She expected the guillotine to have a useful life of ten years and a residual value of $500. On July 20×8, Liza revised these estimates and now believes the guillotine to have a remaining useful life of 5 years and no residual value.
What was the depreciation charge for the year ended 30 June 20×9?
The answer is $3610.
I really confusing for which method of depreciation we should use? while the question didnt mention which method. If I use straight line method, it would be $4000. So, apparently that is reducing balance. Wondering is there any hint words in the question implies that is reducing balance method?
Please do not post the same question twice!
It cannot be reducing balance depreciation because you are not given a %.
The depreciation charge for the year ended 30 June 20X8 is (20,000 – 500)/5 = $1,950.
Therefore the net book value as at 30 June 20X8 is 20,000 – 1,950 = $18,050.
The remaining useful life is 5 years, so the depreciation charge for the year ended 30 June 20X9 is 18,050 / 5 = $3,610
Have you watched my free lectures on depreciation? The lectures are a complete free course for Paper FA and cover everything needed to be able to pass the exam well.
Sir,
I did not understand the calculations on depreciation ie, the first calculations
20000-500/5=1950How did you get this answer
It was a typing error – it is dividing by 10 and not 5, because the original useful life was 10 years.
The rest of what I typed is correct 🙂
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