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Hi John, Can you help me with this question, please? It’s from Chapter 6 Q4.
On 1 January 2000 Krin Co. bought a machine for $70,000. It was estimated that the machine’s useful life would be 7 years and its residual value $7,000. Two years later the useful life was revised to three remaining years and at 31 December 2003 the machine was sold for $30,000. What is the profit on disposal? Answer: $8,000.
My Disposal Acc end up with a DR of 70,000 from machine and CR of 30,000 Cash & 33,000 Accumulated Depreciation. And Im stuck because here the difference should be $8,000, no?
The depreciation initially is (70000 – 7000)/7 = 9000 per year.
Therefore the carrying value after 2 years would be 70000 – (2 x 9000) = 52,000.
The remaining life was revised to 3 years. So the depreciation from then on will be (52000 – 7000)/3 = 15000 per year.So the carrying on 31 December 2003 will be 52,000 – (2 x 15000) = 22000.
So the profit on disposal is 30000 – 22000 = 8000.
Thank you for your answer John.
I am a bit slow here. I don’t follow the last two lines.
“So the carrying on 31 December 2003 will be 52,000 – (2 x 15000) = 22000.
So the profit on disposal is 30000 – 22000 = 8000.”
Why do you multiply the 15000 by 2? Should the 15000 not be charged only for the year 2003?
I meant the carrying value 🙂
You are counting your years wrong.
The 2 years depreciation at the old amount of 9,000 are for 2000 and 2001.
The machine was sold at the end of 2003, so there are 2 more years depreciation (2002 and 2003) up to the date of the sale which is at the end of 2003.
Oops, got it! Thank you so much for your patience.. as I said.. Im a bit slow here 😉
Walter Kiragu started a transport business on 1 January 2004. The business’s purchases and disposal of motor vehicles over the subsequent period of three years were as follows:
Motor vehicle date of purchase Cost Date of disposal Proceeds on
Registration disposal
Number
Sh. Sh.
KAP 8610L 1 January 2004 2’500’000
KAP 9000R 1 January 2004 1’250’000 1 January 2006 450’000
KAQ 1000Q 1 January 2006 3’500’000The business charges depreciation at the rate of 20% per annum calculated on the straight line basis. Walter Kiragu’s financial year ended 31 December.
Required:
(i) Motor vehicles account for each of the three years ended 31 December 2004, 2005 and 2006
(ii) Motor vehicle disposal account
(iii) Provision for depreciation on motor vehicles account for each of the three years ended 31 December 2004 2005 and 2006
iv)Extracts of profit and loss account and the balance sheet for 2004,2005,2006There is no point in setting a test question here and expecting me to provide a full answer.
You must have a printed answer in the same book in which you found the question and so you should ask about whatever part of the answer you are not clear about.
Have you watched the free lectures on depreciation, because if you have then you should have no problem with this question.
Also, although you should be able to answer the question, it will never be asked in this form in the exam – the exam cannot ask you to write up t-accounts and will never ask you to do it for three years.
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