1. Peter bought a non-current asset for $5000 and depreciated it at 10% per annum on the straight line basis. At the end of year 2 he sold it for $4100.
What was the profit or loss on disposal?
A) $50 loss
B) $50 profit
C) $100 loss
D) $100 profit
2. Safir bought a machine for $10,000 and depreciated it at the rate of 30% per annum on the reducing (diminishing) balance basis.
What was the net book value at the end of year 2?
A) $4000
B) $4900
C) $5100
D) $6000
3. Why is depreciation provided?
A) to estimate the cost to the business of wear and tear
B) to set aside funds for future repairs to the asset
C) to spread the cost of an asset over its useful life
4. On 1 January 2014 Alex had a motor vehicle with an original cost of $17,000 on which depreciation of $6,800 had been provided.
On 1 April 2014 he bought a new vehicle, costing $24,000. He sold the old one and received a cheque for $9,400.
Alex provides depreciation on motor vehicles at the rate of 40% per annum on the reducing (diminishing) balance basis. He allows a full year's depreciation in the year of purchase and none in the year of disposal.
Answer (2)
Let's address each question step-by-step:
Profit or Loss on Disposal of the Asset :
Peter bought a non-current asset for $5,000 and depreciated it at 10% per annum using the straight-line method. Here's how you calculate the depreciation:
Annual Depreciation = Initial Cost × Depreciation Rate = 5000 × 0.10 = 500
After Year 1: Value of Asset = Initial Cost - Depreciation
5000 − 500 = 4500
After Year 2: Value of Asset = Previous Year's Value - Depreciation
4500 − 500 = 4000
Peter sold the asset for $4,100, so the profit or loss is calculated by comparing the sale price to the book value at the time of sale:
Profit/Loss = Sale Price - Book Value at Disposal
4100 − 4000 = 100
Since the sale price is higher than the book value, there is a profit. Therefore, the answer is D) $100 profit .
Net Book Value Using Reducing Balance Basis :
Safir bought a machine for $10,000 and applied a 30% depreciation rate annually using the reducing balance method:
End of Year 1: Depreciation = Initial Cost × Depreciation Rate
10000 × 0.30 = 3000
New Book Value After Year 1 = 10000 − 3000 = 7000
End of Year 2: Depreciation = Book Value After Year 1 × Depreciation Rate
7000 × 0.30 = 2100
New Book Value After Year 2 = 7000 − 2100 = 4900
Hence, the net book value after year 2 is B) $4900 .
Purpose of Depreciation :
Depreciation is accounted for several important reasons:
Option A) "to estimate the cost to the business of wear and tear" is part of it, but it's not the whole picture.
Option B) "to set aside funds for future repairs to the asset" is incorrect, as depreciation doesn't imply setting aside cash.
Option C) "To spread the cost of an asset over its useful life" . This is the correct and comprehensive purpose of depreciation, matching the cost of the asset to the periods benefiting from its use.
Depreciation on Motor Vehicles :
Alex initially had a vehicle with a cost of $17,000 and accumulated depreciation of $6,800, giving a book value of $10,200 ( 17000 − 6800 ).
He bought a new vehicle for $24,000 and sold the old one for $9,400. Implementing a 40% depreciation (on the reducing balance basis) allows a full year's charge on purchases but none on disposals. This part involves detailed calculations for the new vehicle where you need to calculate depreciation based on the reduced balance method, which is not included here due to specific conditions in the problem.
Peter made a $100 profit on the sale of his asset, while Safir's machine's net book value after 2 years is $4,900. Depreciation helps to spread the cost of an asset over its useful life. In Alex's situation, more calculations for the new vehicle's depreciation would follow standard methods.
;
