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 $200
Which method should we use in this situation "percentage of depreciation" or "by dividing useful life by depreciable amount and charge depreciation"?
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Depreciation
5y ago#1The 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.
5y ago#4The 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.
5y ago#6No problem :-)
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