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The plant and machinery account (at cost) of a business for the year ended 31 December 20X5 was as follows:
Plant and machinery – cost
20X5 $ 20X5 $
1 Jan Balance b/f 240,000 31 Mar Transfer to disposal account 60,000
30 Jun Cash purchase of plant 160,000 31 Dec Balance c/f 340,000 –––––––– ––––––––The company’s policy is to charge depreciation at 20% per year on the straight line basis, with proportionate
depreciation in the years of purchase and disposal.? please can you explain the stagesYou can get the same answer in two ways (and which way does not matter for the exam). One way is the way the answer in our lecture notes does it.
An alternative way is as follows:The cost is 240,000 from 1 Jan to 31 Mar – 3 months.
So the depreciation for this period is 3/12 x 20% x 240,000 = 12,000We then sell assets that cost 60,000, so the balance is 180,000 from 1 Apr to 30 Jun – 3 months.
So the depreciation for this period is 3/12 x 20% x 180,000 = 9,000We then buy assets for 160,000, so the balance goes to 340,000 from 1 Jul to 31 Dec – 6 months.
So the depreciation for this period is 6/12 x 20% x 340,000 = 34,000So the total depreciation is 12,000 + 9,000 + 34,000 = 55,000
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