Moodle Exercise 3 correction long lived assets PDF

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Moodle Exercise 3 correction long lived assets...

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Exercice 3- Correction On January 2, 2001, Mac Tools Limited purchased a second-hand trailer at a cost of €63 000. Before placing the trailer in service, the company spent €2 200 painting it with the logo of the company, €800 replacing tyres, and €4 000 overhauling the chassis. Mac Tools Limited management estimates that the trailer will remain in service for six years and have a residual value of € 14 200. The trailer’s annual mileage is expected to be 18 000 miles in each of the first fourth years and 14 000 miles in each of the next two years. In deciding which depreciation to use, John Smith, the general manager requests a depreciation schedule of the following depreciation methods: a) 1) straight-line and 2) Units of production method .

calculation of the opening book value : € 63 000 + € 2 200 + € 800 + € 4 000 = € 70 000 (Gross value) depreciable amount = Gross value- Residual value 70 000 – 14 200 = € 55 800 Straight-line method : depreciation over 6 years 55 800/6 = € 9 300 per year Units of production method calculation of the mileage : (18 000x4)+(14 000x2) = 100 000 miles 55 800/ 100 000 = 0,558 €/mile a) 1) Year 1 2 3 4 5 6

Straight-line method Gross Value 70 000 70 000 70 000 70 000 70 000 70 000

Rate 16,666% Idem Idem Idem Idem Idem

Annual charge Closing book value Remaining life 9 300 60 700 5 9 300 51 400 4 9 300 42 100 3 9 300 32 800 2 9 300 23 500 1 9 300 14 200 0

2) Units of production method Year Gross Value Rate Annual charge 1 70 000 0,558/mile 18000X 0,558 = 10 044 2 70 000 idem idem 3 70 000 idem idem 4 70 000 idem idem 5 70 000 idem 14 000x0,558 =7 812 6 70 000 idem 7 812

Closing book value 59 956

Remaining life 5

49 39 29 22

912 868 824 012

4 3 2 1

14 200

0

b) The depreciation method that minimizes income tax payment is the diminishing balance method or declining balance method

c) For example the DDB with the switch to straight-line (very common in France and Germany) Year 1 2

Opening book value 70 000 46 667

3 4 5 6

31 111 20 741 13 827 6 913,5

Rate 2x16,666% same (DDB) same same 50% SL Idem

Annual charge 23 333 15 556

Closing book value 46 667 31 111

Remaining life 5 4

10 370 6 914 6 913,5 6 913,5

20 741 13 827 6 913,5 0

3 2 1 0

The switch to SL enables the asset to be depreciated to zero....