Osborne Books (Workbook - AQ16) Task 6.2 - Depreciation of non-current assets

adilosmanadil

Hi,

I am currently self studying for AVBK and am slightly stuck on what seems to be a simple question which I can't seem to work out without going down the 'trail and error' route.

Q) A car is being depreciated using the diminishing balance method. the original cost of the car was £15,000. At the end of year three is has a carrying amount of £5,145. What percentage diminishing balance is being used ?

Thank you in advance.

PeterC

I'm afraid it's a bit laborious

If "r" is the depreciation rate

Value at the end of Year 1 is 15,000(1 - r)
Value at the end of Year 2 is 15,000(1 - r)(1 - r)
Value at the end of Year 3 is 15,000(1 - r)(1 - r)(1 - r)

So
15,000(1 - r)^3 = 5,145
(1 - r)^3 = 5,145/15,000 = 0.657
1 - r = 0.657^0.3333 = 0.869338 (cube root of 0.657)
r = 1 - 0.869338 = 0.130662 ie. 13.0662%


If you have access to a spreadsheet, trial and error is probably the better option for most people

adilosmanadil

Thank you PeterC. I did realise later on that the formula was required in order to solve this question but did not pay much attention to it as the book stated that this formula will not be needed for the assessment.

Much appreciated.

PeterC

You're welcome

I think the formula the book was referring to was this one:



You are, however, expected to know that

Depreciation = carrying amount x depreciation rate

which is the basis of my thinking above

adilosmanadil

Thanks again

PeterC

You're welcome

annefoth

Is it not 30%
Or is that too simplistic

annefoth

I am currently studying level 3 advanced bookkeeping and thought there is no residual value when using the diminishing method

annefoth

> @PeterC said:
> I'm afraid it's a bit laborious
>
> If "r" is the depreciation rate
>
> Value at the end of Year 1 is 15,000(1 - r)
> Value at the end of Year 2 is 15,000(1 - r)(1 - r)
> Value at the end of Year 3 is 15,000(1 - r)(1 - r)(1 - r)
>
> So
> 15,000(1 - r)^3 = 5,145
> (1 - r)^3 = 5,145/15,000 = 0.657
> 1 - r = 0.657^0.3333 = 0.869338 (cube root of 0.657)
> r = 1 - 0.869338 = 0.130662 ie. 13.0662%
>
>
> If you have access to a spreadsheet, trial and error is probably the better option for most people

Due to sit the advanced bookkeeping assessment soon and haven’t been taught this formula
I worked it out to be 30% but that seemed too easy compared to this calculation