A workshop uses loose tools in its operations. The tools are depreciated using the revaluation method. Item $ Tools valued at 1 January 2025 3 500 Tools pur...

(a) Depreciation charge using the revaluation method

The revaluation method calculates depreciation by comparing the value of the assets at the start of the period (plus any additions) with the value at the end of the period.

The $2 100 difference represents the cost of tools that were used up, lost, broken, or otherwise consumed during the year.

(b) Tools Account for the year ended 31 December 2025

The opening balance plus purchases on the debit side equals the closing balance plus depreciation on the credit side.

(c) When the revaluation method is appropriate

1. The revaluation method is most suitable for small, low-value, numerous items such as loose tools, containers, or livestock, where it would be impractical to maintain individual depreciation records for each item. [1] [1]
2. The assets may be frequently replaced, lost, or broken, and their value is best determined by physical inspection and valuation at the year end rather than by a formula applied to each item. [1] [1]

(d) Depreciation calculations for the machine

Cost = $40 000, Useful life = 8 years, Residual value = $4 000

(i) Straight-line method

Annual depreciation = (Cost - Residual value) / Useful life [1]
= ($40 000 - $4 000) / 8 [1]
= $36 000 / 8
= $4 500 per year [1]

The straight-line method charges an equal amount each year. The residual value is excluded because it represents the portion of cost the business expects to recover at the end of the asset's life.

(ii) Reducing balance method at 20% (first year only)

Depreciation = Net book value at start of year x Rate [1]
= $40 000 x 20% [1]
= $8 000 [1]

The reducing balance method applies the percentage to the remaining book value, so the charge is highest in year one and decreases each subsequent year. In the first year, the net book value equals the original cost.