A company maintains its fixed assets at cost. Depreciation provision accounts for each asset

27.5 A company maintains its fixed assets at cost. Depreciation provision accounts for each asset

are kept. At 31 December 20X8 the position was as follows:

Total cost to date

Total depreciation to date

Office furniture

The following additions were made during the financial year ended 31 December 20X9: Machinery £16,000, office furniture £460. A machine bought in 20X5 for £1,600 was sold for £360 during the year. The rates of depreciation are: Machinery 20 per cent, office furniture 10 per cent, using the straight line basis, calculated on the assets in existence at the end of each financial year irrespective of the date of purchase.

You are required to show the asset and depreciation accounts for the year ended 31 December 20X9 and the balance sheet entries at that date.

27.6 A vehicle bought on 1 January 20X0 cost £16,000. Its useful economic life is estimated at 4 years and its trade-in value at that point is estimated as being £4,000. During 20X2 a review of the vehicle’s probable useful economic life suggested that it should be retained until 1 January 20X5 and its residual value should be £2,500.

Required:

What is the amount of straight line depreciation charged in the profit and loss account in the year to 31 December 20X2 and the amount included in the balance sheet for accumulated depreciation at that date?

27.7A

(a) What is the meaning of depreciation? (b) Give three reasons why depreciation may occur. (c) Name two methods of depreciation. (d) In what way do you think the concept of consistency applies to depreciation? (e) ‘Since the calculation of depreciation is based on estimates, not facts, why bother to make the

calculation?’ Explain briefly why you think that the calculation of depreciation is based on estimates.

(f ) If depreciation was omitted, what effects would this have on the final accounts? (g) ‘Some assets increase (appreciate) in value, but normal accounting procedure would be to

ignore any such appreciation.’ Explain why bringing appreciation into account would go against the prudence concept.

(h)

A business whose financial year ends at 31 December purchased on 1 January 20X7 a machine for £5,000. The machine was to be depreciated by ten equal instalments. On 4 January 20X9 the machine was sold for £3,760.

Part 4 l Adjustments for financial statements

Ignoring any depreciation in the year of sale, show the relevant entries for each of the follow- ing accounts for the years ended 31 December 20X7, 20X8 and 20X9: (i) Machinery (ii) Provision for depreciation of machinery (iii) Machinery disposals (iv) Profit and loss

(Northern Examinations and Assessment Board: GCSE )

(a) Identify the four factors which cause fixed assets to depreciate. (b) Which one of these factors is the most important for each of the following assets?

(i) a gold mine, (ii)

a lorry, (iii) a 50 year lease on a building, (iv) land, (v)

a ship used to ferry passengers and vehicles across a river following the building of a bridge across the river, (vi ) a franchise to market a new computer software package in a certain country. (c) The financial year of Ochre Ltd will end on 31 December 20X6. At 1 January 20X6 the company had in use equipment with a total accumulated cost of £135,620 which had been depreciated by a total of £81,374. During the year ended 31 December 20X6 Ochre Ltd purchased new equipment costing £47,800 and sold off equipment which had originally cost £36,000, and which had been depreciated by £28,224, for £5,700. No further purchases or sales of equip- ment are planned for December. The policy of the company is to depreciate equipment at 40% using the diminishing balance method. A full year’s depreciation is provided for on all equipment in use by the company at the end of each year.

Required:

Show the following ledger accounts for the year ended 31 December 20X6: (i ) the Equipment Account; (ii ) the Provision for Depreciation on Equipment Account; (iii ) the Assets Disposals Account.

(Association of Accounting Technicians)

27.9A Mavron plc owned the following motor vehicles as at 1 April 20X6: Motor

Estimated Estimated Vehicle

Residual Value Life (years)

AAT 101

5 DJH 202

1 October 20X3

8 Mavron plc’s policy is to provide at the end of each financial year depreciation using the straight

1 April 20X4

line method applied on a month-by-month basis on all motor vehicles used during the year. During the financial year ended 31 March 20X7 the following occurred: (a) On 30 June 20X6 AAT 101 was traded in and replaced by KGC 303. The trade-in allowance was

£5,000. KGC 303 cost £15,000 and the balance due (after deducting the trade-in allowance) was paid partly in cash and partly by a loan of £6,000 from Pinot Finance. KGC 303 is expected to have a residual value of £4,000 after an estimated economic life of 5 years.

(b) The estimated remaining economic life of DJH 202 was reduced from 6 years to 4 years with no change in the estimated residual value.

Chapter 27 l Double entry records for depreciation

Required:

(a) Show any Journal entries necessary to give effect to the above. (b) Show the Journal entry necessary to record depreciation on Motor Vehicles for the year ended

31 March 20X7. (c) Reconstruct the Motor Vehicles Account and the Provision for Depreciation Account for the year ended 31 March 20X7.

Show the necessary calculations clearly. (Association of Accounting Technicians)