Depreciation: Practice Question on Reducing Balance Method

 

Question

Gragra Man Ltd. acquired a factory plant with the following data:

Cost of acquisition is ₦2,700,000

Estimated salvaged value is ₦634,500

Estimated number of useful life is 5 years

Required: Determine the annual depreciation rate and Calculate the amount of depreciation to be charged for each of the five years with respect to the factory plant, if reducing balance method of depreciation is used.

 

Solution

Using the mathematical formula below to determine the depreciation rate, we have

 

Where r       =       the depreciation rate (?)

          s        =       ₦634,500

          c        =       ₦2,700,000

          n       =       5 years, then

r = (1 – 0.74853752) * 100

r = 0.2514625 * 100

r = 25.15%

 Thus, the depreciation rate to be used is 25.15%

Details	Cost / NBV
	₦
Cost of asset at beginning of year	2,700,000.00
Depreciation in year 1 @ 25.15%	(679,050.00)
NBV at end of year 1	2,020,950.00
Depreciation in year 2 @ 25.15%	(508,268.93)
NBV at end of year 2	1,512,681.08
Depreciation in year 3 @ 25.15%	(380,439.29)
NBV at end of year 3	1,132,241.78
Depreciation in year 4 @ 25.15%	(284,758.81)
NBV at end of year 4	847,482.98
Depreciation in year 5 @ 25.15%	(213,141.97)
NBV at end of year 5	634,341.01

From the above, we can see that the net book value at the end of year 5 of ₦634,341.01 is approximately equal to the estimated salvaged value of ₦634,500 as given in the question. The difference between the value stated in the question (₦634,500) and the computed net book value of ₦634,341.01 is ₦158.99 only. This is due to approximation, otherwise they would be equal.