European Module : Interactive European Professional Accountancy.
CASE 2: DEPRECIATION OF A MACHINE
Business transaction
Company A buys an investment machine for FIM 200,000 (VAT not included) on 15 March 1997.
Payment is made on 30 March 1997. Machine is introduced on 1 April 1997.
a) The machine will be depreciated during five years applying straight-line depreciation.
b) The machine will be depreciated with a 25 per cent reducing balance method of depreciation. Writeof will be made in five years.
c) The economic lifetime of the machine requires the straight-line depreciation of five years. In taxation
the machine will be depreciated as soon as the taxman accepts, which means reducing balance
method of depreciation at 25 per cent.
1) Recording of the machine to the general journal of company A.
Bank account
15 March 1997
Purchase of machine
VAT 22 %
30 March 1997
Payment made
Trade
payables
Machinery
200,000
VAT receivables
200,000
44,000
244,000
244,000
2) Alternatives for the depreciation plan.
a) Straight-line depreciation
Year
Acquisition cost
to be depreciated
Annual
depreciation
1997
1998
1999
2000
2001
2002
200,000
200,000
200,000
200,000
200,000
200,000
30,000*
40,000**
40,000
40,000
40,000
10,000***
* (200,000 x 1/5) x 9/12
** 200,000 x 1/5
*** (200.000 x 1/5) x 3/12
Cumulative
depreciation
30,000
70,000
110,000
150,000
190,000
200,000
= 30,000
= 40,000
= 10,000
1 - 07/03/16
Net
expenditures
170,000
130,000
90,000
50,000
10,000
0
44,000
European Module : Interactive European Professional Accountancy.
Managers of the company has to consider carefully the economic lifetime of the subject to be
depreciated and convenient depreciation method. This guarantees the best possible accrual.
b) Reducing balance method at 25 per cent.
Year
Acquisition costs
to be depreciated
1997 200,000
1998 150,000
1999 112,500
2000
2001
2002
Annual
depreciation
50,000
37,500
28,125
21,094
15,820
11,865
Cumulative
depreciation
50,000
87,500
115,625
136,719
152,539
164,404
Net
expenditures
150,000
112,500
84,375
63,281
47,461
35,596
Commentary:
In this method the depreciation period is infinite. In six years the depreciation will be approximately
82,2 %. The. remaining net expenditures will be depreciated in more and more decreasing amounts
during an infinite period of time.
Although the introduction takes place on 1 April 1996 companies are allowed to book the
depreciation for the entire accounting period, unless it essentially misrepresents the total amount of the
depreciation. Many small companies do so.
A company is considered as a small company, when at least two of the following conditions are
fulfilled:
- the turnover of the previous accounting period has not been more than FIM 20 million
(3,36 million Euros).
- the total of the balance sheet of the previous accounting period has not been more than
FIM 10 million (1,68 million Euros).
- the average number of employees working for the company during the previous accounting
period has not been more than 50.
Companies that do not fulfil at least two of the conditions above have to take into consideration the date
of the purchase of the fixed assets while making deprecations.
2 - 07/03/16
European Module : Interactive European Professional Accountancy.
C) Profit is being deceased by the amounts of the deprecations in taxation.
Year
1997
1998
1999
2000
2001
2002
Acquisition cost
to be depreciated
in accounting
200,000
200,000
200,000
200,000
200,000
200,000
Depreciation
in accounting
Net
Depreciation
Depreciation
expenditures in taxation
difference
in taxation
Increase Decrease
30,000
40,000
40,000
40,000
40,000
10,000
200,000
150,000
112,500
84,375
63,281
47,461
50,000
37,500
28,125
21,094
15,820
11,865
20,000
2,500
11,875
5,625
In the year 2000 the decrease of depreciation difference will be recorded only for 5,625 although it by
calculation would be 18,906 (40,000 – 21,094).
Reason: the decrease of depreciation difference cannot be recorded in excess of the recorded increase of
depreciation difference (20,000 - 2,500 – 11,875 – 5,625). Depreciation of taxation continue by reducing
balance method and from now on they will only be made in tax return sheet.
3) Deprecations in the books of company A for the first and for the last year.
Recording of the depreciation
a) Straight-line depreciation
Machinery
Depreciations
Closing account
Balance sheet
account
31 Dec 1997 (200,000)
30,000
170,000
30,000
170,000
30,000
30,000
10,000
10,000
31 Dec 2002 (10,000)
10,000
10,000
3 - 07/03/16
European Module : Interactive European Professional Accountancy.
b) Reducing balance method at 25 per cent.
Machinery
Deprecations
Closing account
Balance sheet
account
31 Dec 1996 (200,000)
50,000
150,000
50,000
150,000
50,000
50,000
31 Dec 2002 (47,461)
11,865
35,596
11,865
35,596
11,865
11,865
c) Profit is being deceased by the amounts of the deprecations in taxation.
Machinery
Depreciations
Change in
depreciation
difference
Accumulated
depreciation
difference
31 Dec 1997 (200,000)
30,000
30,000
20,000
20,000
31 Dec 2000 (50,000)
40,000
40,000
5,625
4 - 07/03/16
5,625
European Module : Interactive European Professional Accountancy.
Defining the depreciation periods
The depreciation periods shown below represent the view of the Finish Accounting Board for the
general depreciation periods:
Establishing and organisation expenses
Research and development costs
Intangible rights
Goodwill
Buildings and structures:
Industrial and office buildings
Lightly built warehouses
and constructions
Machines and equipment:
Heavy-duty machinery
Light machinery
Transportation equipment
Computing-equipment
Land and water
Bonds and shares
3 - 5 years
3 - 5 years
5 - 17 years
3 - 5 years
20 - 40 years
10 - 20 years
10 - 15 years
5 - 10 years
4 - 7 years
3 - 5 years
not depreciable
not depreciable
Land and water, bonds and shares are fixed assets which are not charged by depreciation.
What must be emphasised is that the company itself is responsible for defining the depreciation periods.
The taxman has his own routine percentage of depreciation. The taxman also specifies the depreciation
method to be used in taxation. The main method is reducing balance method.
Example (reducing balance method):
machinery and equipment
shop, store and factory building
residential and office building
25% max
7 % max
4 % max
In Finland there has been a lot of conversation lately claiming that the taxman should approve the
planned depreciation also in taxation. So far there isn’t such a change in legislation.
5 - 07/03/16