Question

ESTION 1 Sarah buys a new piano to the value of R 12 000. After 3 years it has a reduced value of R7 500. Determine the rate of depreciation on the reducing balance method.​

Answer 1

The rate of depreciation on the reducing balance method is $12,000.

The Piano value at the beginning of 2017 is $75,000 – $15,000 = $60,000. Depreciation for 2017 is $60,000 × 0.2 = $12,000.

This is because the rate of depreciation (20% in this case) is applied to the book value, which decreases year after year.

In 2016, the book value was $75,000, but by 2017 it had dropped to $60,000. It was reduced to $48,000 a year later. Keep in mind that the depreciation rate remains constant, but it is applied to a smaller amount (i.e., book value) each year.

As a result, the amount of depreciation per year is lower.

What is Reducing value ?

The reducing installment method is another name for the reducing balance method. It is especially useful for fixed assets whose value depreciates more rapidly in the first few years of use (e.g., cars, office equipment, and small machinery).The reducing balance method of depreciation is a method of accounting for assets over time. It is also known as declining balance depreciation or diminishing balance depreciation. It is charged at a set rate, similar to the straight line method (also known as the fixed instalment method or straight line.

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