Q Why is it necessary to deduct the cost of a
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set of tyres when allowing for depreciation on a vehicle? Could you explain why and what difference it would make if ignored?
Also would not 25 per cent per annum of the yearly remaining figure give a more accurate residual value than 10 per cent of the vehicle price as the potential price one would hope to get?
A The price of a set of tyres is deducted from the price of the vehicle before calculating depreciation because the cost of tyres is considered as a separate running cost. Not to deduct this cost from the depreciation factor would involve charging twice for the same item.
There are many ways of depreciating vehicles and most operators adopt the easy way and divide the net cost of the vehicle by the mileage life or the number of years they intend to operate it thus getting a cost per mile or cost per year according to their method of costing.
It will be obvious that this —straightline" method leaves no apparent residual value and, therefore, an estimated 10 per cent of the original cost of the vehicles has been adopted in Commercial Motor Tables of Operating Costs to represent the residual value.
To deduct 25 per cent of the annual residual value would probably be more accurate and. indeed, might be more representative of the actual annual depreciation of a vehicle.