A new Van purchased on 31 March 20×5, at a cost of $22,000. The van is to be depreciated at 15% reducing balance.
Depreciation is charged on a monthly basis.
What is the depreciation charge for the year ended 31 August 20×5?
Can someone please help me with this?
I assume you’re ok with calculating reducing balance depreciation but you need help with calculating the monthly reducing balance depreciation rate from the annual rate.
If the monthly rate is x% then
after 1 month the NBV is 22,000 x (1-x%),
after 2 months the NBV is 22,000 x (1-x%) x (1-x%) = 22,000 x (1-x%)^2
after 12 months the NBV is 22,000 x (1-x%)^12
This must be equal to the NBV after 1 year which is 22,000 x (1-15%)
So, 22,000 x (1-x%)^12 = 22,000 x (1-15%)
Which you can rearrange to get
x% = 1 – (1-15%)^(1/12) = 1.3452%
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