2020 JYSS 3E POA EOY P2 Q3
3 Ming runs a delivery business which owns a number of non-current assets.
The following information relates to the motor vehicles of the business :
1.
$ | |
Cost of motor vehicles at 1 January 2017 | 128 000 |
Accumulated depreciation of motor vehicles at 1 January 2017 | 25 600 |
2. Ming‘s policy is to depreciate motor vehicles at 20% per annum using the reducing balance. A full year’s depreciation is charged in the year of purchase.
3. On 1 February 2018, Ming’s business purchased a new motor vehicle, costing $32 500, on credit from Marlin Garage.
4. On 1 March 2019, Ming’s business sold a motor vehicle. The motor vehicle had originally cost $28 000 in May 2016, when bought. No depreciation is provided in the year this motor vehicle is sold.
The accounting year end is 31 December.
REQUIRED
a. Write the journal entry to record the purchase of motor vehicle on 1 February 2018.
[2]
b. Calculate the depreciation of motor vehicles:
[4]
i. for the year ended 31 December 2017
ii. for the year ended 31 December 2018.
c. Calculate the net book value of motor vehicles as at 31 December 2018.
[1]
d. Write the journal entry for depreciation for the year ended 31 December 2018.
[2]
e. Calculate the net book value of the motor vehicle that was sold, as at 1 March 2019.
[2]
f. Define depreciation.
[1]
g. Comment on the suitability of the method adopted to depreciate the motor vehicle.
[2]
h. Using an appropriate accounting theory, explain why a business should depreciate its non-current assets.
[2]
[TOTAL 16]
( i ) 20% (128 000 – 25 600) = $20 480
( ii ) 20%($32 500) = $6 500
20%(128 000 – 46 080) = $16 384
Total = $22 884
Cost( $128 000 + $32 500) – Accumulated depreciation($46080+16384+6500)
Net book value = $91 536
First year depreciation(2016) + 2nd year(2017) + 3rd yr(2018)
$28000 x 20% = $5600
20% x(28000-5600) = $4480
20% x(28000-5600-4480)= $3584
Net book value at point of sale = 28000 -5600-4480-3584 = $14336
It is the allocation of cost over its useful life.
– A Motor vehicle will provide greater benefits in the earlier years of usage than
later years.
– It is suitable to use the reducing balance method as it charges more in the earlier
years than later years.
Matching concept
- A portion of the original cost has to be recorded as depreciation expense in the Statement of financial performance, so as, it is matched against the income earned to derive the profit for the period.