- June 19, 2020 at 4:30 pm
Q)A car was purchased by a newsagent business in May 20X0 for:
Road tax 150
The business adopts a date of 31 December as its year end.
The car was traded in for a replacement vehicle in August 20X3 at an agreed value of $5,000.
It has been depreciated at 25% per annum on the reducing balance method, charging a full year’s
depreciation in the year of purchase and none in the year of sale.
What was the profit or loss on disposal of the vehicle during the year ended December 20X3?
$_______ profit. (2 marks)
20X0 Depreciation (25% reducing balance) 2,500
20X1 Depreciation 1,875
20X2 Depreciation 1,406
20X3 Part exchange 5,000
Note. The road tax is an expense. It does not form part of the cost of the car.
My doubt here is that,
1)in the year 20X0 the asset should be depreciated for 8/12 months only but its depreciated for the full year. Is it because its mentioned in the question to charge a full year’s
depreciation in the year of purchase and none in the year of sale?
2) If the depreciation should be charged only in the year of purchase and none in the year of sale, why is it depreciated for all the years until 20X3?
Thank You in advanceJune 20, 2020 at 9:43 am
1. Yes – the question says to charge a full years depreciation in the year of purchase. This is very common both in the exam and in real life as I explain in my free lectures on depreciation.
2. The question does not say to only charge depreciation in the year of purchase. We always charge depreciation in every year!!!!!
I do suggest that you watch my lectures. The lectures are a complete free course for Paper FA and cover everything needed to be able to pass the exam well.June 20, 2020 at 1:43 pm
Okay sir understood.
If the depreciation is to be charged every year then, then what is this statement ” charging a full year’s
depreciation in the year of purchase and none in the year of sale” trying to indicate? Cause this is a very common statement in most of the questions.
Yes sir I have watched all of your lectures. Its just that i watched it long ago and have forgotten these important concepts.
Thank You for your kind help Sir.June 20, 2020 at 5:53 pm
A full years charge in the year of purchases means calculate depreciation for a whole year even if the asset was only purchased part way through the year (as opposed to counting how many months it has been owned).
I do suggest that you watch the lectures again.June 28, 2020 at 10:22 am
Yes Sir you are right. I will watch them again.
Thank You sir 🙂June 28, 2020 at 10:30 am
You are welcome 🙂
The topic ‘Depreciation’ is closed to new replies.