Question
An item of plant A has a cost of $60,000 and a life of three years. The annual income before depreciation and taxation is expected
An item of plant A has a cost of $60,000 and a life of three years. The annual income before depreciation and taxation is expected to be $36,000. Tax is 30% of profits and is paid at the end of the year of income.
For the purpose of this case study, the depreciation allowed using the straight-line method will be $20,000 per annum. The reducing-balance depreciation will be $30,000 in the first year, $20,000 in the second year and $10,000 for the final year. There will be no residual value. The company's cost of capital is 10%.
You are required to show the impact of changing the depreciation policy from the straight-line to a reducing-balance approach. Which is most appropriate? Use detailed workings in your answer.
Prepare depreciation schedule for the reducing balance and the straight-line depreciation method, showing asset cost, depreciation expense, accumulated depreciation, taxation and asset carrying amount.
Calculate the taxation payment lag for reducing balance method if tax is paid following the year of income.
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