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Reducing balance method with Residual Value

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FR Exams › Reducing balance method with Residual Value

  • This topic has 3 replies, 3 voices, and was last updated 2 years ago by P2-D2.
Viewing 4 posts - 1 through 4 (of 4 total)
  • Author
    Posts
  • October 29, 2021 at 9:13 am #639371
    ty0311
    Participant
    • Topics: 27
    • Replies: 8
    • ☆

    Hi Chris,

    Enjoyed watching your lectures on the Income Tax / Deferred Tax topic.

    When we use the reducing balance method of depreciation, do we not need to take into consideration the Residual value of the asset? Following the example question, when we apply a 25% reducing balance to a $150,000 Asset with useful life of 6 years and an estimated RV of $ 30,000, should we not calculate the first year depreciation charge by:

    ($150,000 – $30,000 (RV) ) * 25% = $30,000?

    This seems to be the approach I see from online research.

    Thanks and Regards,
    Tim

    October 30, 2021 at 9:58 am #639462
    P2-D2
    Keymaster
    • Topics: 4
    • Replies: 7163
    • ☆☆☆☆☆

    Hi Tim,

    Glad you enjoyed the lectures on what is a challenging topic to cover but one that is usually OK in the exam itself.

    No, you do not need to allow for the residual value in the calculation of depreciation using the reducing balance method. Technically, the percentage being used should depreciate the balance down to somewhere near its residual value. It might work with the numbers you suggest above but I’ve not tried. In year one it would by $150,000 x 25% for the depreciation and then in year two you would need the carrying value to then be able to apply the 25%.

    Thanks

    July 9, 2022 at 11:46 am #660209
    lshawa
    Member
    • Topics: 0
    • Replies: 1
    • ☆

    Oh wow! All this time I did not know that we do not take into account Residual Value when computing depreciation based on Reducing Balance Method.

    July 10, 2022 at 8:16 pm #660258
    P2-D2
    Keymaster
    • Topics: 4
    • Replies: 7163
    • ☆☆☆☆☆

    Yes, don’t ever use the residual value in a depreciation calculation using the reducing balance method, even if the examiner gives you a residual value figure. They are just trying to trick you!

    Thanks

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