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Hedges plc, a clothing retailer, depreciates all vehicles monthly over four years. On 31 December 20X4 Hedges plc bought a car at a cost of £21,000 plus VAT, trading in an old car that had cost £17,760 including VAT on 1 December 20X2. A cheque for £11,900 was also handed over.
In respect of this disposal in its statement of profit or loss for the reporting period ended 31 October 20X5 Hedges plc will show a profit of:£4,790
£4,415
£590
£2,008
hello, can u help me this exercise ? Thank u !Hi,
I can help if you show me your attempt at answering the question first.
Firstly you need to work out the total cost of the asset by adding on the VAT, i.e 17,760 plus VAT. You then depreciate this amount up to the date the car was traded in.
The gain on the disposal is the part exchange allowance less the carrying value of the old asset being sold/exchanged. To get the part exchange allowance then you are looking at the difference between the cash paid of 11,900 and the total cost of the new car.
Have a go and see how you get on.
Thanks.
hello, i think that the cost of new car is 21000 x 1.2 = 25200 and the part exchange allowance is 25200 – 11900 = 13300
The carrying value of the old car is 17760 – 17760/4 x 3 = 4440, so the gain on sale of old car is 13300 – 4440 = 8860
Is my answer corect ?
Thank u!I don’t think the answer is correct as it isn’t one of the options. I think you have the cost of the new car correct and the part exchange allowance correct too, so a great start.
I think you need to look at the depreciation on the old car. It was purchased on 1 December 20X2 and exchanged on 31 December 20X4.
Thanks.
I think the Depreciation figure needs to be calculated again.
as vehicle purchased on 01 Dec X2 a dn Disposed 31 Dec X4. this equals to 25 months.
In the question it states that the owner depreciates monthly so
17760/48 (4years x 12months) = 370 per month
Multiply that by 25 to get Depreciation until date of disposal = 9250The carrying value of the old car is 17760 – 9250 = 8510, so the gain on sale of old car is 13300 – 8510 = 4790
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