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European Module : Interactive European Professional Accountancy.

THEME 2: DEPRECIATION OF A MACHINE.

Statement of economic operation.

The firm A buys an industrial machine for 200.000 French francs out tax the 15th March 1996.
The machine is put in service the 1st April 1996.
1st case: the machine is depreciated on five years in straight line.
2nd case: the machine is depreciated in five years in accelerated method.
3rd case: the machine is depreciated economically in five years in straight line and for tax
accommodation in five years in accelerated method.

Work required :

1) Pass the acquisition of the machine in the book of the firm A.


2) Present the depreciation planning of the machine in each case.
3) Pass the constitution of endowment to depreciation in the book of the firm A, for the first
year and the last year.

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European Module : Interactive European Professional Accountancy.
French solution.

1)

Book of firm A

. 15 / 3 / 96
2154 Material manufacturer 200.000
44562 State, deductible VAT on fixed assets 41.200
404 Suppliers of fixed assets 241.200
Acquisition of the
machine
. date
404 Suppliers of fixed assets 241.200
512 Bank 241.200
Payment of the machine

2)

Case n 1

Year Bases Depreciation of the Depreciation Net Value


year accumulation
1996 200.000 30.000 (a) 30.000 170.000
1997 200.000 40.000 (b) 70.000 130.000
1998 200.000 40.000 (b) 110.000 90.000
1999 200.000 40.000 (b) 150.000 50.000
2000 200.000 40.000 (b) 190.000 10.000
2001 200.000 10.000 (c) 200.000 0

(a) 200.000 x 1 / 5 x 270 / 360 (prorata temporis) = 30.000. In straight line method, prorata
temporis is day by day.
(b) 200.000 x 1 / 5 = 40.000
(c) 200.000 x 1 / 5 x 90 / 360 = 10.000

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European Module : Interactive European Professional Accountancy.
Case n 2

Remark : valid solution for fixed assets acquired between 1 / 2 / 96 and 31 / 1 / 97.

Year Bases Depreciation of the Depreciation Net Value


year accumulation
1996 200.000 100.000 (a) 100.000 100.000
1997 100.000 60.000 (b) 160.000 40.000
1998 40.000 24.000(c) 184.000 16.000
1999 16.000 9.600 (d) 193.600 6.400
2000 6.400 6.400 (e) 200.000 0

(a) 200.000 x 1 / 5 x 3 x 10 / 12 = 100.000


(b) 100.000 x 1 / 5 x 3 = 60.000
(c) 40.000 x 1 / 5 x 3 = 24.000
(d) 16.000 x 1 / 5 x 3 = 9.600
(e) ending the plan of depreciation

Remark: valid solution if the fixed asset wasn’t acquired between 1 / 2 / 96 and 31 / 1 / 97.

Year Bases Depreciation of the Depreciation Net Value


year accumulation
1996 200.000 66.667 (a) 66.667 133.333
1997 133.333 53.333 (b) 120.000 80.000
1998 80.000 32.000 (c) 152.000 48.000
1999 48.000 24.000 (d) 176.000 24.000
2000 24.000 24.000 (e) 200.000 0

(a) 200.000 x 1 / 5 x 2 x 10 / 12 = 66.667. In accelerated method, prorata temporis is month


by month.
(b) 133.333 x 1 / 5 x 2 = 53.333
(c) 80.000 x 1 / 5 x 2 = 32.000
(d) 48.000 / 2 = 24.000 finally the depreciation plan, because 48.000 2 = 24.000 if greater than
48.000 x 0,4 = 19.200.

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European Module : Interactive European Professional Accountancy.
Case n 3.

The firm has decided to distinguish the economic depreciation (accountant) to the tax
advantage constituted by the decreasing method.

Year Economic Tax Economic Tax Derogatory


base base depreciation depreciation increase Decrease
1996 200.000 200.000 30.000 100.000 70.000 (a)
1997 200.000 100.000 40.000 60.000 20.000
1998 200.000 40.000 40.000 24.000 16.000 (b)
1999 200.000 16.000 40.000 9.600 30.400
2000 200.000 6.400 40.000 6.400 33.600
2001 200.000 0 10.000 0 10.000

(a) tax depreciation is superior than economic depreciation, the firm practices an endowment to
derogatory depreciation for the surplus : 100.000 - 30.000 = 70.000 F
(b) tax depreciation is inferior than economic depreciation, the firm practices a resumption on
derogatory depreciation for the deficit: 24.000 - 40.000 = - 16.000 F.

Remark: the total of endowments to derogatory depreciation is equal to the total of


resumption on derogatory depreciation : 70.000 + 20.000 = 16.000 + 30.400 + 33.600 +
10.000.

3)
Case n 1

. 31 / 12 / 96
6811 Endowments to incorporeal and corporal fixed assets 30.000
depreciation
28154 Industrial material depreciation 30.000
Endowment
1996
. 31 / 12 / 01
6811 Endowments to depreciation .. 10.000
28154 Industrial material depreciation 10.000
Endowment
2001

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European Module : Interactive European Professional Accountancy.
Case n 2

. 31 / 12 / 96
6811 Endowments to depreciation .. 100.000
28154 Industrial material depreciation 100.000
Endowment 1996
. 31 / 12 / 00
6811 Endowments to depreciation 6.400
28154 Industrial material depreciation 6.400
Endowment 2000

Case n 3

. 31 / 12 / 96
6811 Endowments to depreciation .. 30.000
28154 Industrial material depreciation 30.000
Accounting endowment 1996
. 31 / 12 / 96
68725 Endowments to derogatory 70.000
depreciation
145 Derogatory depreciation 70.000
Derogatory endowment allowing adjust
to the tax level
. 31 / 12 / 01
6811 Endowments to depreciation .. 10.000
28154 Industrial material depreciation 10.000
Accounting endowment 2001
. 31 / 12 / 01
145 Derogatory depreciation 10.000
78725 Resumption on derogatory 10.000
depreciation
Derogatory resumption allowing adjust
to the tax level.

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European Module : Interactive European Professional Accountancy.

TECHNICAL FORM OF THEME 2: DEPRECIATION OF A MACHINE.

Depreciation.

Accountancy.

The account 68 is destined for show in load the annual endowment to fixed assets. In
principle, the indirect depreciation is practised; subsections of the account 68 are debited by
credit of the depreciation account (account 28); subsections of this account are carried to the
assets of the balance sheet statement in deduction of positions concerned.

Linear depreciation (or constant).

It distributes equal manner depreciation on the duration of life of the fixed asset. The rate of
linear depreciation mode intend of the figure, expressed as compared to 100, obtained by
dividing 100 by the number of years of useful life duration of the fixed asset.
For taxation, it constitutes the legal mode of depreciation.

The first and the last year calculates the next manner:
a) the date of departure of depreciation is the date of placement in service of the fixed asset ;
correspondingly, the first endowment has to be reduced by the prorata temporis to take into
account the past period between the beginning of the exercise and the date of placement in
service ;
b) symmetrically, the last endowment of depreciation is reduced as compared to the
endowment completes the first year endowment.

Decreasing depreciation.

This system is characterised by the use of a constant rate to a decreasing value, at the
beginning the initial cost price, then, from second exercise, the residual value of the fixed asset.

Tax law coefficients that multiplies the linear rate to provide the rate of decreasing
depreciation:

Duration of life of the fixed asset Multiplier for decreasing rates


3 and 4 years 1,5
5 and 6 years 2
more of 6 years 2,5

Nevertheless, for fixed assets acquired between February 1st 1996 and January 31st 1997, the
coefficient applied on the linear rate is increased by 1, then the table is :

Duration of life of the fixed asset Multiplier for decreasing rates


3 and 4 years 2,5
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European Module : Interactive European Professional Accountancy.
5 and 6 years 3
more of 6 years 3,5

In practice:
• the year of acquisition of the fixed asset, the first decreasing instalment is calculated as if the
fixed asset had been acquired to the first day of the month of its acquisition ;
• the following exercises, decreasing instalments calculate by keeping the same rate of
decreasing depreciation but by taking as bases the residual value of the fixed asset to the
enclosure of the year preceding. But, when the decreasing depreciation endowment
becomes inferior to endowment correspondent to the quotient of the residual value by the
number of remainder year to run to count from the beginning of the year, the firm applies an
equal depreciation endowment to this last linear instalment (not applied for fixed assets
acquired between February 1st 1996 and January 31st 1997).

Derogatory depreciation.

According to the tax law, only are deductible the taxable benefit depreciation duly observed in
accountancy. But, if tax law accommodations being used sometimes for purposes of economic
policy notably for incitement to investment (exceptional depreciation, possibility for using
decreasing mode, etc. ..), the undertaken have the possibility to observe depreciation that are
necessary according to the accounting plan.
The accounting plan has solved this difficulty of the following manner: when the given of tax
advantage is subordinate to its accounting that is different from a normal depreciation :
derogatory depreciation that results some is carried to the passive in the account 145 :
derogatory depreciation (when the tax law endowment is superior to the accountant
endowment) and in less of the passive of the account 145: derogatory depreciation (when the
tax law endowment is inferior to accountant endowment).

Usual depreciation rate are :

houses : 1 to 2% ;
buildings for usage of offices: 4% ;
buildings for commercial usage: 2 to 5%;
industrial buildings: 5%;
equipment: 10 to 15%;
tools : 10 to 20%;
buses: 15%;
cars: 20%;
trucks: 20 to 25%;
office equipment : 10 to 20%;
furniture: 10%;
arrangements and light construction furniture: 15 to 20%.

Equipment that can be amortized according to the decreasing mode have to be included
in one of following categories:

equipment used in industrial manufacture operations, transformation and transport ;


equipment of handling;
installations against pollution;
productive vapour installations, heat or energy;
installations of security;

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European Module : Interactive European Professional Accountancy.
machines of office, to the exclusion of typewriters;
equipment allocated to research;
storage and stocking installations;
industrial buildings whose normal utilisation duration does not exceed 15 years;
road vehicles serving to the transportation in common of persons;
trucks that carried more than two tons;
vans and vehicles of tourism are exclude from the decreasing system.

We observe that except for light industrial buildings and real estate for innkeeper usage, it
concerns only movable equipment goods.

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European Module : Interactive European Professional Accountancy.
Extract from the general accounting plan 1982 French, obligatory to all commercial
firms.

Class 1: Accounts of capital


145 Derogatory depreciation

Class 2: Fixed assets accounts


2154 Industrial machines
28154 Industrial machines depreciation

Class 4: Accounts of debtors and creditors


404 Suppliers of fixed assets
44562 State deductible VAT on fixed assets

Class 5: Financial accounts


512 Bank

Class 6: Accounts of charges


6811 Endowments to incorporeal and corporal fixed assets depreciation.
68725 Endowments to derogatory depreciation.

Class 7: Accounts of products


78725 Resumption on derogatory depreciation.

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