Question

MTM Ltd acquired a machine with an original cost of R900 000 on 1 January 2017. The machine has a five-year life and an estimated salvage value of 100 000.

a) Compute depreciation for 2017 and 2018 under each of the following methods:

i. Sum-of-years’ digits
ii. Double declining balance
iii. Straight line

b) Compare the impact of the straight line and double-declining balance method on each of the following:

i. Trend of depreciation over a five year life
ii. Trend of net-income over a five year life
iii. Cash from operations over a five year life
iv. Debt-to- equity ratio in 2017
v. Total asset turnover ratio in 2017

Answer 1

		2017	2018
1	Sum-of-years’ digits	$                                  266,667	$ 213,333
2	Double declining balance	$                                  360,000	$ 216,000
3	Straight line	$                                  160,000	$ 160,000

Year	Years remaining	Depreciable Cost	Depreciation
2017	5	$                800,000	$        266,667
2018	4	$                800,000	$        213,333
2019	3	$                800,000	$        160,000
2020	2	$                800,000	$        106,667
2021	1	$                800,000	$          53,333
	15		$        800,000

Straight line = (9,00,000 - 1,00,000) / 5 = 1,60,000

DDB

Year	Period	Depreciation
2017	1	$                360,000
2018	2	$                216,000
2019	3	$                129,600
2020	4	$                  77,760
2021	5	$                  16,640
		$                800,000

		Straight line	DDB
1	Trend of depreciation over a five year life	Consistent	Decreasing
2	Trend of net-income over a five year life	Consistent	Increasing
3	Cash from operations over a five year life	No impact	No impact
4	Debt-to- equity ratio in 2017	Consistent	Decreasing
5	Total asset turnover ratio in 2017	Consistent	Increasing