Exercise 2: Depreciation:

The following data for machinery is available

Purchase price (incl. 20% VAT) 360 000 EUR

Salvage Value (excl. VAT) 10 000 EUR

Useful life 7 years

(=estimated service life)

Production capacity 580 000 hours

1st year: production (2006) 120 000 hours

2nd year: production (2007) 160 000 hours

3rd year: production (2008) 130 000 hours

4th year: production (2009) 80 000 hours

5th year: production (2010) 50 000 hours

6th year: production (2011) 40 000 hours

7th year: production (2012) 30 000 hours

a) Calculate the straight-line depreciation. (straight-line method)

Answer.

Depreciation for 2006 – 360 000 – 10000/7 = 50 000 and depreciation is the same for all the years.

b) Calculate the depreciation based on the activity method.

Formula for calculating activity method =(cost less salvage value) x hours this year/total estimated hours
equals depreciated charge.

Answer.

1st year 2006: (360 000 – 10 000) x 120 000 /540 000 =77 777.77
Year 2007: (360 000 – 10 000) x 160 000 / 540 000 = 103 703.70

Year 2008: (360 000 – 10 000) x 130 000 / 540 000 = 84 259.25

Year 2009: (360 000 – 10 000) x 80 000 / 540 000 = 51 851.85

Year 2010: (360 000 – 10 000) x 50 000 / 540 000 = 32 407.40

Year 2011: (360 000 – 10 000) x 40 000 / 540 000 = 25 925.92

Year 2012: (360 000 -10 000) x 30 000 / 540 000 = 19 444.44

c) What other depreciation method do you know?

Answer.

1) Straight-line method. 2) Reducing balance method. 3) Re valuation method

4) Unit of output method. 5) Sum of digit method (Rule of 78) 6) Machine hour method and

7) Depletion hour method.

D) Calculate the depreciation for 2006 and the book value (31.12.2006) in accordance with the
Austrian (taxation) regulations (straight-line) if the machinery has been purchased at 30 May 2006.

Answer.

(360 000 – 10 000 /7) x 7/12 = 29 166.67

Book value = cost minus acc depreciation = NBK

Cost Acc Dep. NBK

360 000 29 166.67 330 833.33

E) Calculate the depreciation for 2006 and the book value (31.12.2006) in accordance with the
Austrian (taxation) regulations (straight Line) if the machinery has been purchased at 5 August
2006.

Answer.

(360 000 – 10 000/7) x 5/12 = 20 833.33

Cost Acc Dep. NBK

360 000 20 833.33 339 166.67