Page 220 - Accountancy_F5

Solution 7.6
The calculation of the depreciation and carrying amount for each year is as follows:

Calculation Depreciation Carrying value
Year Particulars TZS TZS TZS
“000” “000” “000”
FOR ONLINE READING ONLY
1 year Depreciation 100,000#40% 40,000 60,000
st
2 year Depreciation 60,000#40% 24,000 36,000
nd
3 year Depreciation 36,000#40% 14,400 21,600
rd
LANGUAGE EDITING 12,960
4 year Depreciation 21,600#40% 8,640
th
LANGUAGE EDITING
Note: As seen in the solution, the depreciation charge is decreasing from 1 year to 4
th
st
year of the asset. In the 1 year, it was TZS 40,000,000, however, it gradually decreased
st
to TZS 8,640,000 in the 4 year. Under the reducing balance method of depreciation,
th
the carrying value of an asset at the end of its useful life is equal to the asset’s residual
value. Suppose you are given the residual value (s), number of useful life (n), original
cost of asset (A), the rate of depreciation (r) to apply then can be calculated using the
following formula:

n s
r = 1 -
A
Note that, the residual value s must be a significant amount or else the answer will be
meaningless as the rate of depreciation will amount to nearly one.
Using the Sunflower example, we can compute the rate of depreciation as follows:

,
r = 1 - 4 12 ,960 000 = 1 - . 0 6 = . 0 4 = 40 %
100 ,000 000
,
The following table provides the comparison between the straight-line method and the
reducing balance method:

Table 7. 1: Comparison between straight line and reducing balance methods

Straight line method Reducing balance method

It calculates a fixed amount of depreciation It calculates a higher amount during the
on the asset each year and charges the initial years when the machine is new and
amount to the statement of profit or loss. efficient and a lower amount in later years.
The calculated amounts are accordingly
charged to the statement of profit or loss
each year.

Student’s Book Form Five
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