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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,
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%.
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.
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!