- This topic has 6 replies, 2 voices, and was last updated 4 years ago by
.
- Posts
F Co purchased a car for $12,000 on 1 April 20X1 which has been depreciated at 20% each year straight line, assuming no residual value. F Co’s policy is to charge a full year’s depreciation in the year of purchase and no depreciation in the year of sale. The car was traded in for a replacement vehicle on 1 August 20X4 for an agreed figure of $5,000. What was the profit or loss on the disposal of the vehicle for the year ended 31 December 20X4?
A Loss $2,200
B Loss $1,400
C Loss $200
D Profit $200Which method should we use in this situation “percentage of depreciation” or “by dividing useful life by depreciable amount and charge depreciation”?
The question specifically says that the depreciation is 20% straight line assuming no residual value.
Therefore the depreciation each year is 20% x 12,000.
There is no such method as “dividing useful life by depreciable amount” – it is the other way round!! 20% straight line is the same as straight line depreciation with a useful life of 5 years, as I explain in my free lectures on this.
I mistakenly said that I mean to say that allocating depreciable amount to its useful life which is 4 years not five. And according to full year policy, we will not depreciate in year of sale and due to this useful life becomes 3 years?
My question is that are we doing 20% depreciation per year or are we allocating depreciable amount to its estimated useful life and charge depreciation according to that?
I hope I am clear now.The depreciation is 20% x 12,000 as I wrote before, as per the instructions in the question.
20% straight line is the same as depreciating over an expected useful life of 5 years (100/20).
The calculation of the amount to depreciate each year has nothing to do with how many years we actually end up using it – we don’t know when we purchase it how long will actually use it for. Obviously we might end up keeping if for more than 5 years or we might end up keeping it for less than 5 years.
You really should watch my free lectures on depreciation!
Now I got your point sir. Thank you so much. Sorry I was actually confused.
- The topic ‘Depreciation’ is closed to new replies.