- September 12, 2021 at 6:03 pm #635601ChristelleBaderMember
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I would really appreciate some help. I have watched all the lectures pertaining to depreciation and have practiced the examples alongside your lectures. I have a question as I have seen questions that includes Scrap value with the reducing balance method. However online I am seeing a lot of confusing information. Let’s say I bought a vehicle for $5000 with a scrap value of $500, over a life of 5 years and 37% of depreciation per year. I am being asked the book value at the end of year 4.
My solution for this was to approach the question by calculating the depreciation for each year and the net book value at the end of each period as below
Year 1 cost of vehicle $5000
Less Depreciation @ 37% ($1850)
Book value end of year 1. $3,150
Year 2 Less Depreciation @37%. ($1,165)
Book value end of year 2. $1985
Year 3 less depreciation @37%. ($734)
Book value end of year 3. $1,251
Year 4 less depreciation @37%. ($463)
Book value end of year 4. $788
Is this accurate? I am confused as I have seen several other methods for accounting for the reducing balance method when having a scrap value. Some explained to remove the scrap as from year 1 onwards and calculate the depreciation value (minus the scrap)) )- meaning year 1 depreciation would be calculated 37% x (5000-500) …
Your help would be highly appreciated. As in your example for the reducing balance method we did not have any scrap accounted for it. Thanks aheadSeptember 13, 2021 at 9:31 am #635638John MoffatKeymaster
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The scrap value is not taken into account when calculating reducing balance depreciation. It is calculated based on the initial cost. (In real life there are no rules to stop you taking it into account, but it would be strange to do it, and certainly in exams we do not take the sale proceeds into account when using reducing balance depreciation)
Have you watched my free lectures on this? The lectures are a complete free course for Paper FA and cover everything needed to be able to pass the exam well.
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