Question

The question is related to the Australian tax 2018.

Outline the methods used to calculate the decline in value of a depreciating asset, and
explain the terms used in the formulas.

Answer 1

In most cases, you can choose to use either of two alternative methods for calculating depreciation:

1.PRIME COST METHOD :

The prime cost method assumes that the value of a depreciating asset decreases uniformly over its effective life.

Under the prime cost method (also known as the straight line method), you claim a fixed amount each year based on the following formula:

Asset’s cost × (days held/365) × (100%/asset’s effective life)

2. DIMINISHING VALUE METHOD :

The diminishing value method assumes that the value of a depreciating asset decreases more in the early years of its effective life. The following formula is used for the diminishing value method:

Book value × (days held/365) × (200%/asset’s effective life)