Question

Martha Ltd has a year ended 30th June. On 1st July 2015 the company, owned equipment that originally cost £650,000 and for which accumulated depreciation of £200,000 had been provided. On 4th October 2015 a piece of equipment, which was originally purchased for £95,000 on 1st October 2013, was sold for £18,000. It is the accounting policy of the company to depreciate equipment by 25% using the reducing balance method, charging a full year’s depreciation in the year of acquisition and none in the year of disposal. (In all calculations use figures to the nearest £) Required a. Write up the Equipment Cost Account, the Accumulated Depreciation of Equipment Account and the Disposals Account for the year ended 30th June 2016. b. State the effect the above matters will have on the profit of the company for the year ended 30th June 2016 and show how the entries for equipment would appear on the Balance Sheet as at 30th June 2016. c. Briefly discuss whether you would expect the net book value of the equipment to be the same as its market value.

Answer 1

a.
Equipment Cost Account
Date	Particulars	Debit	Date	Particulars	Credit
1-Jul-15	To Balance b/d	£650,000	30-Jun-16	By Accumulated Depreciation on Equipment Account	£200,000
			30-Jun-16	By Disposal of Equipment Account	£95,000
			30-Jun-16	By Balance C/d	£355,000
		£650,000			£650,000.0
Accumulated Depreciation Account of Equipment Account
Date	Particulars	Debit	Date	Particulars	Credit
30-Jun-16	To Equipement Cost Account	£200,000	30-Jun-16	By Profit & Loss Account	£241,563
30-Jun-16	To Disposal of Equipment Account	£41,563	30-Jun-16
		£241,563			£241,563
Disposal of Equipment Account
Date	Particulars	Debit	Date	Particulars	Credit
30-Jun-16	To Equipement Cost Account	£95,000	30-Jun-16	By Bank Account	£18,000			Depreciation	25%
			30-Jun-16	By Accumulated Depreciation Account	£41,563			Cost	£95,000
			30-Jun-16	By Profit & Loss Account	£35,438			2013	£23,750
								2014	£17,813
		£95,000			£95,000			Total Depreciation	£41,563

b	Effects on Profit and Loss account for the year ended 30th June,2016
	We have to charge the Accumulated Depreication of	£200,000
	Profit on Sale on sale of Equipment	-£35,438
	Net Effect on Profit and Loss Account	£164,563
	Carrying Value in the Balance Sheet	£355,000

c	Market Value
	Cost	£650,000
	Accumulated Deprecation	-£200,000
	Net Book Value of the Equipment	£450,000
	Net Book Value of the Equipment	£355,000
	Market Value and the net book value of the Equipment is not the same