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Hello sir
I have a confusion in a question from Kaplan test your understanding .
Bindi bobbin runs a business altering and repairing clothes. When she started business on 1 January 20X2, she bought a soopastitch sweng machine for $2500. She depreciates sewing machines using the straight-line method at a rate of 20% pa, and she charges a full year of depreciation in the year of acquisition and none in the year of disposal.Now she needs a faster machine, and she will upgrade to the soopastitch V during December 20X5 the sales man ha offered her a part of exchange deal as follows
Part exchange allowance for soopastitch $750
Balance to be paid in cash for soopastitch V $4850
Could you please help me in showing ledger entries for the year ended 31december 20X5
Thanks
Normally when you buy a machine you would Cr Cash and Dr Machine account with the full cost (which here is 4850 + 750 = 5600)
Normally when you sell a machine you Dr Cash and Cr Disposal account with the sale proceeds (which here are 750)
(the full entries for this are covered in the free lectures)Here, they are effectively buying a machine and selling a machine, but instead of paying out the full cash for the purchase and receiving the full cash for the sale, they are just paying out the net amount.
We must end up with the same result as if they had paid the full amount and received the full amount. To achieve this:
Cr Cash Dr Machine with the net amount paid of 4850
Then, Dr Machine Cr Disposal account with 750As a result, the full cost of the new machine appears on the machine account, and the full sale proceeds from the old machine appear on the Disposal account. All other entries are exactly as normal.
But I have a problem in depreciation, thay charge depreciation on for year of acquisition but none in the year of disposal but in the answers for the last year $1120 so when in the question it’s clear that no depreciation in the year of disposal then why they charge it
They have not charged depreciation on the machine that has been sold!
They have charged it on the new machine which cost $5,600 in total.
20% x 5,600 = $1,120.Hi Mr John,
I need your help to solve this question:
accounting year end 30th June, it purchased an item of plant on 1 April 2005 at cost of $15000,at the date of purchase, the item of plant and equipment had an estimated useful life to the business of five years and an estimated residual value of $2000’This item of plant was traded in for a replacement item on 30 September 2008 at an agreed valuation of $5000.it has been depreciated at 20 percent per annum on a straight line basis, with a pro rated charge in the year of acquisition and disposal. Calculate profit or loss on disposal of the item of plant.You must have an answer in the same book in which you found the question, and so you should ask about whichever bit of the answer you are not clear about.
The profit or loss on disposal is, as always, the difference between the sale proceeds and the carrying value (net book value) of the asset sold.
Here, the sale proceeds were the agreed valuation of $5,000.
The carrying value is the original cost of 15,000 less the accumulated depreciation at the date of the disposal which you calculate in the normal way.If you are not sure about calculating the accumulated depreciation, then watching my free lectures on it will explain. The lectures are a complete course for Paper F3 and cover everything needed to be able to pass the exam well.
Thanks for your reply, I don’t understand in this question, they do not consider life of an asset
so the answer in my book says 15000-2000×20%x3.5 years which give me value of depreciation.but in straight line method it should be 15000-2000/5 years
would you please make me understand why we are not dividing by 5 years
thanks
Multiplying by 20% gives the same figure as dividing my 5 years.
This gives you the depreciation per year.
The total/accumulated depreciation is 3.5 years (because they owned it for that long) multiplied by the depreciation per year.
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