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In the year to 30 November 2009, Lui accounted for $7,000 of expenditure on machinery repairs as the cost of a new machine. Lui depreciates machinery on a straight-line basis over 10 years and charges depreciation for a full year in the year an asset is acquired.
What is the effect of the error on Lui’s profit for the year to 30 November 2009?
A understated by $6,300
B understated by $7,700
C overstated by $6,300
D overstated by $7,700Answer is C : 6,300
Why do I need to minus the $700?
It’s the depreciation expense on the wrongly capitalised repairs.$7000/10 =$700. This therefore results in net overstatement of $6300. Hope this helps.
During 20X1 Fergus buys two vans and a car (70% business use 30% personal use) each costing $10,000 + sales tax. He depreciates vehicles on a straight line basis, vans over five years and cars over six years. What is his depreciation expense to the nearest $ for the year?
Answer: $5,958
Book’s explanation:
Sales tax on motor cars is not recoverable (unless 100% business use can be proved)
Vans (2 x 10,000) / 5 = $4000
Cars (10,000 x 117.5%) / 6 = $1958My question is why only sales tax for motor cars included in the cost of the asset? I know if sales tax is irrecoverable then we should capitalise it but I don’t understand how they decides that on this question. Plus, what to do with the 70% business use 30% personal use information. Lastly, my BPP Interactive Textbook states that the current standard rate is 20% but the explanation used 17.5%.
Generally, sales tax is not recoverable on cars so the sales tax is part of the cost of the asset.
Sales tax is recoverable on vans, so is not part of the cost of the asset?
The 70/30 business/private spilt is irrelevant.
The question should have specified the sales tax rate to be used.
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