Sunrise Development Industries purchased a depreciable asset for $50 000 on 1 Ju
ID: 2431039 • Letter: S
Question
Sunrise Development Industries purchased a depreciable asset for $50 000 on 1 July 2016. The asset has a five-year useful life and a $10 000 estimated residual value. The company will use the straight-line method of depreciation for book purposes. However, Sunrise will use the reducing-balance method for tax purposes. Assume a tax rate of 30 per cent.
Prepare depreciation schedules using the straight-line and reducing-balance methods (at 1.5 times the straight-line rate) of depreciation for the useful life of the asset.
b Calculate the tax savings for the financial year ended 30 June 2017 from the use of the accelerated depreciation method for tax purposes.
c Under the straight-line method of depreciation, what is the gain or loss if the equipment is sold (i) at the end of June 2019 for $30 000 or (ii) at the end June 2020 for $16 000?
d How is the gain or loss on the disposal of the equipment presented in the financial statements assuming no revaluations?
Explanation / Answer
Solution a:
Cost of asset = $50,000
Residual value = $10,000
Depreciable cost = $50,000 - $10,000 = $40,000
estimated useful life = 5 years
Annual depreciation - SLM = $40,000 / 4 = $8,000
Depreciation rate SLM = $8,000 / $40,000 = 20%
Depreciation rate - Reducing balance method = SLM Rate * 1.5 = 20%*1.5 = 30%
Solution b:
Tax savings for Financial year ended 30 june 2017 from use of accelerated depreciation method for tax purposes = Depreciation expense for the year * 30% = $15,000* 30% = $4,500
Solution c-i:
Sale value of equipment at the end of June 2019 = $30,000
Book value = $26,000
Gain (Loss) on disposal = $30,000 - $26,000 = $4,000
Solution c-ii:
Sale value of equipment at the end of June 2020 = $16,000
Book value = $18,000
Gain (Loss) on disposal = $16,000 - $18,000 = ($2,000)
Solution d:
Gain or loss on the disposal of the equipment should be shown in income statement under "Other income" and "Other expenses" head.
Depreciation Schedule - SLM Date Asset Cost Depreciable Cost Depreciation Rate Depreciation Expense for the year Accumulated Depreciation Book Value 1-Jul-16 $50,000.00 30-Jun-17 $40,000.00 20% $8,000.00 $8,000.00 $42,000.00 30-Jun-18 $40,000.00 20% $8,000.00 $16,000.00 $34,000.00 30-Jun-19 $40,000.00 20% $8,000.00 $24,000.00 $26,000.00 30-Jun-20 $40,000.00 20% $8,000.00 $32,000.00 $18,000.00 30-Jun-21 $40,000.00 20% $8,000.00 $40,000.00 $10,000.00Related Questions
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