# Discuss and calculate what amount is allowed as a deduction for the decline in value of the machinery

Home, - Calculate what amount is allowed as deduction

Question - With reference to relevant legislation and case law, discuss and calculate what amount is allowed as a deduction for the decline in value of the machinery and the car discussed above, using both prime cost and diminishing value methods.

A. RK Co purchased a machine on 1st November 2020 at the cost of \$110,000 (inclusive of GST) and exclusively used it to manufacture for the Co's production. The machine's effective life is ten years.

B. Andy purchased a Toyota car and use it 100% for business purpose on 1st October 2020 at the cost of \$74,000 (inclusive GST), estimated to have a useful life of twelve years.

A. In the prime cost method the same depreciation can be charged in each year for the purpose of taxation, as per the guidelines of ATO. This depreciation is calculated by using this formula: (Cost - residual value)/ number of years of life.

In the declining balance method depreciation rate for the purpose of taxation, as per the guidelines of ATO is 200%. Depreciation under this method is calculated on the written down value of the asset.

 Prime cost method Cost of the machine including GST 110000 Cost of the machine excluding GST (110000/1.1) 100000 Effective life of machine in years 10 Annual depreciation to be charged = Cost of machine / effective life Annual depreciation 10000 Purchase date of the machine 1st November 2020 So in the first year depreciation is allowed for 8 months only Depreciation in the first year 6666.667 Diminishing value method Cost of the machine exclusive of GST 100000 Depreciation in the first year = Base value  * (number of days held in the year/ 365)*200%/10 In the first year 13150.68 base value at the beginning of second year (Base value at the beginning of first year - depreciation in the year) 86849.32 Depreciation in the second year 17369.86 base value at the end of 3rd year 69479.45 Depreciation 13895.89 Base value at the beginning of 5th year 55583.56 Depreciation in 5th year 11116.71 Base value at the beginning of sixth year 44466.85 Depreciation in 6th year 8893.37 Base value at the beginning of 7th year 35573.48 Depreciation in the 7th year 7114.696 Base value at the beginning of 8th year 28458.78 Depreciation in the 8th year 5691.757 Base value at the beginning of 9th year 22767.03 Depreciation in the 9th year 4553.405 Base value at the beginning of the 10th year 18213.62 Depreciation in the 10th year 3642.724 Base value at the beginning of 11th year 14570.9 Depreciation in first four months of the 11th year 971.3931

 B. Prime cost method Cost of the car inclusive of GST 74000 Cost of the car exclusive of GST (Cost/ 1.10) 67272.73 Effective life of machine in years 12 Annual depreciation to be charged = Cost of car / effective life Annual depreciation 5606.061 Purchase date of the machine 1st October 2020 So in the first year depreciation is allowed for 9 months only Depreciation in the first year 4204.545 Diminishing value method Cost of the car exclusive of GST 67272.73 Depreciation in the first year = Base value  * (number of days held in the year/ 365)*200%/12 In the first year 8293.898 base value at the beginning of second year (Base value at the beginning of first year - depreciation in the year) 58978.83 Depreciation in the second year 9829.805 base value at the end of 3rd year 49149.02 Depreciation 8191.504 Base value at the beginning of 5th year 40957.52 Depreciation in 5th year 6826.253 Base value at the beginning of sixth year 34131.27 Depreciation in 6th year 5688.545 Base value at the beginning of 7th year 28442.72 Depreciation in the 7th year 4740.454 Base value at the beginning of 8th year 23702.27 Depreciation in the 8th year 3950.378 Base value at the beginning of 9th year 19751.89 Depreciation in the 9th year 3291.982 Base value at the beginning of the 10th year 16459.91 Depreciation in the 10th year 2743.318 Base value at the beginning of 11th year 13716.59 Depreciation in first four months of the 11th year 2286.098 Base value at the beginning of 12th year 11430.49 Depreciation in 12th year 1905.082 Base value at the beginning of 13th year 9525.41 Depreciation for the three months of 13th year 396.8921