Question 28.

a. Straight-line method
($400,000 - $52,000) ÷ 4 years = $87,000 annual depreciation
Depreciation Net Book Value
2003 $ 87,000 $400,000 - $ 87,000 = $313,000
2004 87,000 $400,000 - $174,000 = $226,000
2005 87,000 $400,000 - $261,000 = $139,000
2006 87,000 $400,000 - $348,000 = $ 52,000
$348,000

160% Declining Balance method

Straight-line annual depreciation: 100 ÷ 4 years = 25%
25% × 1.6 = 40% declining balance percentage.
Purchase price $400,000
2003 $400,000 × 40% (160,000)
Net book value $240,000
2004 $240,000 × 40% 96,000
Net book value $144,000
2005 $144,000 × 40% 57,600
Net book value $ 86,400
2006 $86,400 × 40% 34,400 (plug!)
Net book value $ 52,000

b. The declining balance method with 40% rate produces marginally higher total
depreciation charge and marginally lower net book value at the end of 2006,
but the differences are not material.
The allocation of the total depreciation charge between four years differs
significantly. In 2003 the declining balance method’s charge is $73,000 higher
than under straight-line method. The situation is substantially reversed in 2006
when the declining balance charge is $52,600 lower.
If the straight-line method is used, reported income is expected to be stable at
$113,000 ($200,000 income before depreciation - $87,000 depreciation),
while the declining balance method resulted in a reported income of $40,000
in 2003 ($200,000 - $160,000) and it increased to $165,600 in 2006 ($200,000
- $34,400).
In the balance sheet the book value of non-current assets will decline much
more quickly under the declining balance method. The level of activity is
expected to remain unchanged over four years – that is an annual income of
$200,000 before depreciation – and so the straight-line basis with an annual
equal charge could be more appropriate.