Question

As a policy Dabsbenzy Company Ltd. uses the straight – line method of depreciation to
depreciate its fixed assets. It is also a policy of the company to apportion depreciation in relation
to the number of months the asset is put to use. The company commenced operations on 1st
January 2014.On 1st January, 2014, the company bought a motor vehicle with a registration
number AD 11 for GH¢55,000. This was the only motor vehicle which was used in the business
until 1st July, 2015 when a new one with registration number ARB 22 was purchased for
GH¢65,000. All payments for the motor vehicle were by cheque.
The accountant of the company wrongly used the reducing balance method of depreciation at a
rate of 20% per annum to depreciate the two vehicles in the company’s books. This came to light
when the company’s auditors, commenced the first audit of the firm on 4th January 2016,
Each motor vehicles is estimated to have useful life of five years and a salvage value of
GH¢5,000.On 30th
September, 2016 after the close of business, the motor vehicle with registered
number AD 11 was sold leaving ARB 22.
A cash amount of GH¢32,500 was realized from the sale of AD 11. Dabsbenzy Company Ltd.
Operates its business from rented premises which have all requisite equipment and fittings. The
only fixed assets of the company were the two motor vehicles. The profits earned by Dabsbenzy
Company Ltd, for the years ended 31st December, 2014, 2015, and 2016 using the reducing
balance method of depreciation were GH¢41,000, GH¢37,500 and GH¢42,000 respectively.
Depreciation was apportioned in relationship to the number of months in a year to which the
asset was used by the business.
You are required to:
a) Re-calculate the profits for the year ended 31st December, 2014, 2015and 2016 respectively
using the straight-line method of depreciation.
b) Show the following accounts as would appear in the books of Dabsbenzy Company Ltd. after
the depreciation adjustments have been made by the auditors.
(i) Motor Vehicle Disposal Account
(ii) Motor Vehicle Account
(iii) Accumulated Depreciation Account.
c) State the motor vehicle balance as would appear in the statement of financial position as at

Answer 1

Motor vehicle Balance as would appear in the statement of financial position as at 31 December 2016 is GHc65,000 - 18,000 = GHc 47,000