Question

A company owns the same asset in a U.S. plant and in a EU plant. It has B=$2,000,000 and a salvage value of 20% of B. For tax depreciation purposes, the United States allows a straight line write-off over five years, while the EU allows a straight line write-off after 8 years. The general manghers of both oplants want to know the difference in depreciation amounts for year five and the book value after five years.

Answer 1

Salvage value = $2,000,000 x 20% = $400,000

With Straight-line method (SLM),

Annual depreciation = (Cost - Salvage value) / Useful life = $2,000,000 x 80% / Useful life = $1,600,000 / Useful life

Annual depreciation, US = $1,600,000 / 5 = $320,000

Annual depreciation, EU = $1,600,000 / 8 = $200,000

Difference in annual depreciation, year 5 = $(320,000 - 200,000) = $120,000

Book value in US, year 5 = Salvage value = $400,000

Book value in EU, year 5 ($) = Cost - Accumulated depreciation in 5 years

= 2,000,000 - (5 x 200,000) = 2,000,000 - 1,000,000

= 1,000,000

Difference in book value = $(1,000,000 - 400,000) = $600,000