Question

a. On 1st July, 2015 COVID- 19 Ltd (COVID- 19) purchased a plant for GH₵195,000 and spent GH₵5,000 on its installation. COVID- 19 decided to provide depreciation at 7.5% per annum, using written down value method. On 30th November, 2018 the plant was dismantled at a cost of GH₵2,500 and then sold for GH₵50,000.

On 1st December, 2018 COVID- 19 acquired and put into operation a new plant at a total cost of GH₵380,000. Depreciation was provided on the new plant on the same basis as had been used in the case of the earlier plant. COVID- 19 closes its books of account every year on 31st March. Prepare Plant Account and Depreciation Account for four accounting years ended 31st March. 2019.

b. If a company continues to use equipment past the useful life that was assumed in determining the depreciation, there will be no depreciation expense in the additional years. Is this statement true? Explain.

c. The value of a plant is depreciating at 2.5% per annum and is GH₵631,750 after two years. What was its original price?

Answer 1

Plant Account

Date	Particular	Amount	Date	Particular	Amount
December 18	To Cash Account	₵380,000.00	November 18	By Cash Account	₵50,000.00
			November 18	By Loss on Sale account	100,924.00
			November 18	By Dismantle Expense	2,500
			March 19	By Depreciation	9,500
			March 19	By Balance C/d	217,076
		₵380,000.00			₵380,000

Depreciation Account

Date	Particular	Amount	Date	Particular	Amount
November 18	To Old plant Account	₵8075.00		By Balance c/d	₵17,575.00
March 19	To New Plant Account	9,500.00
		₵17,575.00			₵17,575.00

Working Note-:

Opening Value of the asset on July 15, = Amount paid for Purchase of Plant + Installation Cost

  = ₵ 195,000 + ₵ 5,000

= ₵200,000

Closing Value of the Asset on March-16,= Opening Value of Asset - Depreciation

   = 200,000 - {200,000 X 7.5% (9/12)}

= 200,000 - 11,250.00

= 188,750.00

Closing Value of the Asset on March- 17 = 188750 - (188,750 x 7.5%)

= 188,750 - 14,156.25

= 174,593.75

Closing Value of the Asset on March -18, = 174,593.75 - (174,593.75 x 7.5%)

= 174,593.75 - 13,094.53

= 161,499.22

Closing Value of the Asset on November 18, = 161,499.22 - (161,499.22 x 7.5%)

= 161,499.22 - {161,499.22 - 7.5% (8/12)}

= 153,424.26

Cost of the Asset = Closing Value of the Asset on November 18 - Dismantle Cost

= 153,424.26 - 2,500

= 150,924.26

Computation of Profit or Loss on Sale of Asset

Sales Price - Cost of the Asset

= 50,000 - 150,924.26

= (100,924.26)

Answer b.   If a company continues to use equipment past the useful life that assumed in determining the depreciation. There will be a depreciation expense in the next year as the method of Depreciation followed is WDV, in that the diminishing value will not be zero at any point of time. But, if the Straight-line method followed, then the diminishing value will be zero after the useful life of the Asset. Hence, the statement is not true at all.

Answer c. If the plant gets depreciated by 2.5% p. a. by WDV method & the value of the asset after 2 years is $631,750 then the original cost would be 631,750/ (100%- 2.5%) = 647,948.00.

In the First Year, the Value of the asset will be= 647,948.00 / (100%-2.5%) = 664,562.05