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Let say a company bought a car on July 1 2020 for $10000, later sold it on December 31 2021 for $5000, the last day of account period. The car is has a residual value of $2000 and has a estimated useful life of 4 years. The company calculate the depreciation on straight line monthly basis. Calculate the profit/loss of the car.
My working:
Car depreciation for year ended 2020 = ((10000-2000)/4)*(6/12) = 1000
Car depreciation for year ended 2021 = 2000*(11/12) = 1833.33
Car carrying value = 10000-1000-1833.33 = 7166.67
7166.67 – 5000 = 2166.67 LOSSExplanation: Annual deprecation is (10000-2000)/4 = 2000.
1) July 1 – December 31 2020 is 6 months. So multiply 2000 with 6/12 for the 2020 depreciation
2) Jan 1 – December 31 2021 is 12 months. BUT because the company sold the car on the last day of December, thus the usage of the car for December is 1st – 30th, 30days, not a full month(31days) so I didn’t count the depreciation for December. Thus 2000*(11/12) = 1833.33 for 2021 depreciationIm kinda skeptical for the second explanation. So am i correct or wrong?
You are wrong.
If it is on a monthly basis then we do it to the nearest month.
We never ever worry about a few days (and we do not in real life either). Businesses can choose to depreciate in any way they want.
Have you watched my free lectures on this? The lectures are a complete free course for Paper FA and cover everything needed to be able to pass the exam well.
@John Moffat ok i will watch it. So the correct answer would be
accum depreciation = 1000 + 2000 = 3000
Carrying value = 10000 – 3000 = 7000
7000 – 5000 = 2000 LOSSis that right? Also just in case you are wondering, this is not an exam question, i made this question myself so you are free to answer it.
Yes, it is now correct.
However you really should not be making up your own questions. It is vital that you buy a Revision Kit from one of the ACCA Approved Publishers, they are full of exam standard questions for practice. Once you have finished studying all the topics then practice at exam standard questions is essential to passing the exam.
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