Question

Warwreck Car Wrecking Company has been in operation for three years using two wrecking trucks. On 31 August 2016, the end of the third accounting period, the new accountant noticed that the company had recorded depreciation on its wrecking trucks in the following ways: First year Straight-line method Second year Reducing balance method on the net book value at the end of Year 1 Based on the above information:

(a) (i) Name the TWO financial statements which were affected by the error described above. ................................................................................................................................. ................................................................................................................................. (ii) Name the accounting principle that was NOT being followed by the company. ................................................................................................................................. (1 mark)

(b)To correct the error, the new accountant presents the following information.

ASSET       - Vehicles

COST   - $160,000

YEARS OF USEFUL LIFE   - 8

DEPRECIATION    METHOD -Reducing balance 30%

Rate 30%

Using all the information provided, calculate the balance which had been brought

down in error in the Provision for Depreciation Account as at 1 September 2015.

years	name of method	depreciation expense (formula and answers)
1
2
	balance b/d

Warwreck’s owner has agreed that the reducing balance method should be used for the calculation of depreciation on the wrecking trucks.

(ii) Using the information above and the form below, calculate the amount that should appear in the Provision for Depreciation Account as at 31 August 2016. Depreciation Expense on Wrecking Trucks using Reducing Balance Method

working column	working column	working column
depreciation expense -year 1	depreciation expense -year 2	depreciation expense year 3

Answer 1

a(i) Two Financial years Statements that were affected by error:

Financial statement as on 31/08/2014

Financial Statement as on 31/08/2015

a(ii) Accounting Principle that were not followed: Principle of consistency

b (i) Depreciation balance brought down in error

Year	Name of Method	Depreciation Expenses (Formula and answer)
2013-2014	Straight-line method	Depreciation per year = cost of the asset/Useful life =$160000/8=20000 Depreciation for the year ended 31/08/2014 is 20000
2014-2015	Reducing balance method	Depreciation=WDV of the first year*Rate of Depreciation =($160000-20000)*30% =140000*30% =42000 Depreciation for the year ended 31/08/2015 is $42000
	Balance b/d	=$20000+$42000 =$62000

b(ii) The amount that should appear in the provision for Depreciation Account as on 31/08/2016

Depreciation Exp Year-1	Depreciation Exp Year-2	Depreciation Exp Year-3
=Cost of Asset*Rate of Depreciation =$160000*30% =$48000	=WDV of 1st year*Rate of Depreciation =($160000-$48000)*30% =$112000*30% =$33600	=WDV of 2nd year*Rate of Depreciation =($112000-$33600)*30% =78400*30% =$23520
Depreciation for year ending 31/08/2014 is $48,000	Depreciation for year ending 31/08/2015 is $33,600	Depreciation for year ending 31/08/2016 is $23,520

The total amount that should appear in the Provision for Depreciation Account as at 31 August 2016

=$48000+$33600+23520

=$105,120