- 20 Marks
Question
A company buys an item having a useful life of 10 years for N1,000,000. If the company depreciates the item by the reducing balance method:
a. Determine the depreciation for the first year.
b. Estimate the depreciation for the second and third years.
c. What is the salvage value of the asset?
Answer
a) Depreciation for the first year:
Depreciation = 1,000,000 x 10% = N100,000
(b) Depreciation for the second year:
Carrying Value after Year 1 = 1,000,000 – 100,000 = N900,000
Depreciation for Year 2 = 900,000 x 10% = N90,000
Depreciation for the third year:
Carrying Value after Year 2 = 900,000 – 90,000 = N810,000
Depreciation for Year 3 = 810,000 x 10% = N81,000
(c) Salvage Value of the Asset:
The salvage value is calculated after 10 years of depreciation using the reducing balance method. Using the geometric progression formula for total depreciation, the salvage value after 10 years is:
N348,678.44
- Tags: Asset Valuation, Depreciation, Reducing Balance Method, Salvage Value
- Level: Level 1
- Topic: Mathematics of Business Finance
- Series: NOV 2015
- Uploader: Dotse