Question

Fixed Assets & Depreciation At 31 July 20X6, Helios International had non-current assets which had cost $310,000. At the same date, the accumulated depreciation on the assets was $120,000. The company had not disposed of any non-current assets during the year to 31 July 20X7, but acquired an asset at a cost of $79,200 on 1 January 20X7. Helios International depreciates non-current assets at a rate of 25% per annum. What is the company’s depreciation charge for the year to 31 July 20X7 using:

a. The straight line method
b. The reducing balance method Assume that depreciation is charged from the first year of acquisition.

Answer 1

Using straight line depreciation, the charge for the year would be $87,400, while using the reducing balance method, it would be $67,300.

Step-by-step explanation:

The depreciation charge for Helios International for the year to 31 July 20X7 can be calculated using both the straight line and reducing balance methods.

Straight Line Depreciation

Using the straight line depreciation method, the charge is the same each year. The cost at the beginning was $310,000 plus the new asset of $79,200, totaling $389,200. A full year's depreciation at 25% for the new asset would be $19,800, but because it was purchased during the year (on 1 January 20X7), only half a year's depreciation applies, which would be $9,900. The old assets would depreciate by $77,500 ($310,000 initial cost x 25%). Thus, the total depreciation charge would be $77,500 + $9,900 = $87,400.

Reducing Balance Depreciation

Using the reducing balance method, depreciation is calculated on the book value of the assets at the start of the year, which is $190,000 ($310,000 - $120,000 in accumulated depreciation). This results in a depreciation charge of $47,500 (25% of $190,000). The new asset would add $19,800 of depreciation as it would be calculated for the full year being new. The total depreciation then is $47,500 + $19,800 = $67,300 for the year.