Question

Sunrise Development Industries purchased a depreciable asset for $50 000 on 1 July 2016. The asset has a five-year useful life and a $10 000 estimated residual value. The company will use the straight-line method of depreciation for book purposes. However, Sunrise will use the reducing-balance method for tax purposes. Assume a tax rate of 30 per cent.

Prepare depreciation schedules using the straight-line and reducing-balance methods (at 1.5 times the straight-line rate) of depreciation for the useful life of the asset.
b   Calculate the tax savings for the financial year ended 30 June 2017 from the use of the accelerated depreciation method for tax purposes.
c   Under the straight-line method of depreciation, what is the gain or loss if the equipment is sold (i) at the end of June 2019 for $30 000 or (ii) at the end June 2020 for $16 000?
d   How is the gain or loss on the disposal of the equipment presented in the financial statements assuming no revaluations?

Answer 1

Solution a:

Cost of asset = $50,000

Residual value = $10,000

Depreciable cost = $50,000 - $10,000 = $40,000

estimated useful life = 5 years

Annual depreciation - SLM = $40,000 / 4 = $8,000

Depreciation rate SLM = $8,000 / $40,000 = 20%

Depreciation rate - Reducing balance method = SLM Rate * 1.5 = 20%*1.5 = 30%

Depreciation Schedule - SLM
Date	Asset Cost	Depreciable Cost	Depreciation Rate	Depreciation Expense for the year	Accumulated Depreciation	Book Value
1-Jul-16	$50,000.00
30-Jun-17		$40,000.00	20%	$8,000.00	$8,000.00	$42,000.00
30-Jun-18		$40,000.00	20%	$8,000.00	$16,000.00	$34,000.00
30-Jun-19		$40,000.00	20%	$8,000.00	$24,000.00	$26,000.00
30-Jun-20		$40,000.00	20%	$8,000.00	$32,000.00	$18,000.00
30-Jun-21		$40,000.00	20%	$8,000.00	$40,000.00	$10,000.00

Depreciation Schedule - Reducing Balance Method
Date	Asset Cost	Book Value	Depreciation Rate	Depreciation Expense for the year	Accumulated Depreciation	Book Value
1-Jul-16	$50,000
30-Jun-17		$50,000	30%	$15,000	$15,000	$35,000
30-Jun-18		$35,000	30%	$10,500	$25,500	$24,500
30-Jun-19		$24,500	30%	$7,350	$32,850	$17,150
30-Jun-20		$17,150	30%	$5,145	$37,995	$12,005
30-Jun-21		$12,005		$2,005	$40,000	$10,000

Solution b:

Tax savings for Financial year ended 30 june 2017 from use of accelerated depreciation method for tax purposes = Depreciation expense for the year * 30% = $15,000* 30% = $4,500

Solution c-i:

Sale value of equipment at the end of June 2019 = $30,000

Book value = $26,000

Gain (Loss) on disposal = $30,000 - $26,000 = $4,000

Solution c-ii:

Sale value of equipment at the end of June 2020 = $16,000

Book value = $18,000

Gain (Loss) on disposal = $16,000 - $18,000 = ($2,000)

Solution d:

Gain or loss on the disposal of the equipment should be shown in income statement under "Other income" and "Other expenses" head.