Question

Week 10

Nevertire Ltd purchased a delivery van costing $52,000. It is expected to have a residual value of $12,000 at the end of its useful life of 4 years or 200,000 kilometres. Ignore GST.

Required:

a) Assume the van was purchased on 1 July 2019 and that the accounting period ends on 30 June.

Calculate the depreciation expense for the year 2019–20 using each of the following depreciation methods

 straight-line

 diminishing balance (depreciation rate has been calculated as 31%)

 units of production (assume the van was driven 78,000 kilometres during the financial year)

b) Record the adjusting entries for the depreciation at 30 June 2021 using diminishing balance

method.

c) Show how the van would appear in the balance sheet prepared at the end of year 2 using Straight-

line method.

Answer 1

(a) Computation of the depreciation expense for the year 2019–20 using:

Straight Line Method:

Particulars		Delivery Van
		$
Purchase Cost	A	52,000
Estimated Salvage value	B	12,000
Value to be depreciated in its useful life	C=A-B	40,000
Useful Life of Asset (in Years)	D	4
Depreciation value per year as per SLM	E=C/D	10,000

Hence, depreciation for the Year 2019-20 will be $10,000

Diminishing balance:

Depreciation = Book Value at the beginning of the Year * Depreciation rate

Depreciation for the year = $52,000*31% = $16,120

Units of production method:

Depreciation for the year = Cost * No of Kilometers driven for the year / Expected kilometers to be driven during lifetime

Depreciation for the year 2019-20 = $52,000 * 78,000/200,000 = $20,280

2. Adjusting entries for the depreciation at 30 June 2021 using diminishing balance method will be as follows:

Depreciation = Book Value at the beginning of the Year * Depreciation rate

Depreciation for the year 2020-2021 = ($52,000-$16,120)*31% = $11,123

Hence, Journal entry will be as follows:

3. Item - Van would appear in the balance sheet prepared at the end of year 2 using Straight-line method:

Depreciation for the Year 1 = $10,000

Depreciation for the Year 2 = $10,000

Accumulated Depreciation at the end of year 2 = $10,000 + $10,000 = $20,000