Question

Q2: Al Bayan Steel Company has bought a machinery for RO 75,000 with an estimated useful life of 6 years. Mr. Yousuf, an Accounting Manager, is responsible to calculate the depreciation and record in the books of accounts. He is confused in selecting the method of depreciation like WDV or Straight line method. He came to know that the expected scrap value at the end of its useful life is RO 15,000. a) Find out book value of the machine after 6 years using WDV method and straight line method. b) Discuss major two differences that differentiate WDV method and straight line method. (3+2=5 Marks)

Answer 1

a)

WDV -

The formula used to calculate WDV rates is –

Rate of Depreciation (R) = 1 – [s/c]1/n

Where,

s = scrap value at the end of period ‘n’;

c = Written down value at present; and

n = useful life of the assets

Therefore,

R = 1 - [15000/75000]1/6

R = 24% Approx

Year	WDV at beginning	Depreciation	WDV at end
0	75000	–	75000
1	75000	18000	57000
2	8.705	13680	43320
3	7.578	10396.8	32923.2
4	6.597	7901.57	25021.63
5	5.743	6005.19	19016.44
6	4.999	4563.95	14452.49

SLM

1. Purchase cost of 75,000 – estimated salvage value of 15,000 = Depreciable asset cost of 60,000

2. Depreciation = 60000/6 = 10000 per year

b)

Meaning	A method of depreciation in which the cost of the asset is spread uniformly over the life years by writing off a fixed amount every year.	A method of depreciation in which a fixed rate of depreciation is charged on the book value of the asset, over its useful life.
Calculation of depreciation	On the original cost	On the written down value of the asset.
Annual depreciation charge	Remains fixed during the useful life.	Reduces every year
Value of asset	Completely written off	Not completely written off
Amount of depreciation	Initially lower	Initially higher
Impact of repairs and depreciation on P&L A/c	Increasing trend	Remains constant