06-29-2007, 05:33 PM
Thanx for the detailed reply,
As u have said "yes, residual values have to be dedcuted even if entity is using diminishing balance method."
But the problem is that i have not come across any book or any article even on the internet where, in the diminishing balance method , residual value is deducted from cost and then depreciation is taken on that even if the residual value is MATERIAL. Wiley series book of Abbas Ali Mirza has also said that in diminishing balance method depreciation is taken on cost and at the end of the useful life residual value will be left. the example given by Wiley Series is that,
Example
Double-declining balance depreciation (if salvage value is to be recognized, stop when book value = estimated salvage value)
Depreciation = 2 x Straight-line rate x Book value at beginning of year
Another method to accomplish a diminishing charge for depreciation is the sum-of-the-years' digits method, that is commonly employed in the USA.
Assume the following
Taj Mahal Milling Co., a calendar-year entity, acquired a machine on June 1, 2002, that cost $40,000 with an estimated useful life of four years and a $2,500 salvage value. The depreciation expense for each full year of the asset's life is calculated as follows
Straight-line
Year 1 37,500 [a] ÷4 = 9,375
Year 2 9,375
Year 3 9,375
Year 4 9,375
[a]$40,000 - $2,500.
Double-declining balance
50%x40,000 =20,000
50%x20,000 =10,000
50%x10,000 =5,000
50%x5,000 =2,500
You can see in the example , in straight line method depreciation is taken on cost less residual while in diminishing balance method, depreciation is taken on cost.
Also what we read in Module C are updated books, version 2007. We read TRM by PBP written by Maqbool Sahib FCA. Even i have searched on internet and have not come across any example where in both straight line and diminishing balance method depreciation is taken on cost less residual value. In every book and every website i have come across that in straight line method take depreciation on cost less residual but in diminishing method take depreciation on cost. Now it is very difficult for me to absorb that everyone is wrong here, and certainly in the papers if the question comes which way we have to adopt while taking depreciation.
As u have said "yes, residual values have to be dedcuted even if entity is using diminishing balance method."
But the problem is that i have not come across any book or any article even on the internet where, in the diminishing balance method , residual value is deducted from cost and then depreciation is taken on that even if the residual value is MATERIAL. Wiley series book of Abbas Ali Mirza has also said that in diminishing balance method depreciation is taken on cost and at the end of the useful life residual value will be left. the example given by Wiley Series is that,
Example
Double-declining balance depreciation (if salvage value is to be recognized, stop when book value = estimated salvage value)
Depreciation = 2 x Straight-line rate x Book value at beginning of year
Another method to accomplish a diminishing charge for depreciation is the sum-of-the-years' digits method, that is commonly employed in the USA.
Assume the following
Taj Mahal Milling Co., a calendar-year entity, acquired a machine on June 1, 2002, that cost $40,000 with an estimated useful life of four years and a $2,500 salvage value. The depreciation expense for each full year of the asset's life is calculated as follows
Straight-line
Year 1 37,500 [a] ÷4 = 9,375
Year 2 9,375
Year 3 9,375
Year 4 9,375
[a]$40,000 - $2,500.
Double-declining balance
50%x40,000 =20,000
50%x20,000 =10,000
50%x10,000 =5,000
50%x5,000 =2,500
You can see in the example , in straight line method depreciation is taken on cost less residual while in diminishing balance method, depreciation is taken on cost.
Also what we read in Module C are updated books, version 2007. We read TRM by PBP written by Maqbool Sahib FCA. Even i have searched on internet and have not come across any example where in both straight line and diminishing balance method depreciation is taken on cost less residual value. In every book and every website i have come across that in straight line method take depreciation on cost less residual but in diminishing method take depreciation on cost. Now it is very difficult for me to absorb that everyone is wrong here, and certainly in the papers if the question comes which way we have to adopt while taking depreciation.
