Question

6. Assume a machine with initial cost of 22 m. €, residual value of 7 m. €, useful life of 5 years, expected output of 5,000 units and actual output of 800 units in year 1, 600 units in year 2, 2,000 units in year 3 and 800 units in year 4 and 5. The declining balance rate is 40%.

a) Calculate the depreciation per year for the straight-line (linear) method, declining/reducing balance method and the production unit (usage) method. (9 points) Note: When you apply the declining/reducing balance method, you do not need to switch to the linear method (but you can if you want). Just depreciate the remaining depreciable amount in the last year.

b) What would happen in the different cases if the impairment value after year 2 is calculated to be 14 m. €? (

Answer 1

	Straight line method	Reducing balance method		Production method
Year 1	22	22.00		22
Depre year 1	3	8.80	=22*0.4	2.4	=800*0.003
Year 2	19	13.20		19.6
Depre year 2	3	5.28	=13.20*0.4	1.8	=600*0.003
Year 3	16	7.92		17.8
Depre year 3	3	3.17	=7.92*0.4	6	=2000*0.003
Year 4	13	4.75		11.8
Depre year 4	3	1.90	=4.75*0.4	2.4	=800*0.003
Year 5	10	2.85		9.4
Depre year 5	3	1.14	=2.85*0.4	2.4	=800*0.003
End balance year 5	7	1.71		7

Depreciation calculation
Straight line method	=(cost-residual value)/useful life
	=(22-7)/5
	3
Production method
Rate per unit of production	(cost-residual)/total estimated production
	=(22-7)/5000
	0.003
Straight line method	=(14-7)/3
	2.333333333
Production method	=(14-7)/3600
	0.00194

If the impairment value after year 2 is 14
Impairment value	14	14		14
Carrying amount	16	7.92		17.8
Impairment loss recognised	2			3.8
Effect on depreciation
Year 3	14	No change		14
Depre year 3	2.33			3.88	=2000*0.00194
Year 4	11.67			10.12
Depre year 4	2.33			1.55	=800*0.00194
Year 5	9.34			8.57
Depre year 5	2.33			1.55	=800*0.00194
End balance year 5	7.01			7.02