Question

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:

1. Assume the van was purchased on 1 July 2019 and that the accounting period ends on 30 June. Calculate the depreciation expense for the second year 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 50,000 kilometers in the first year and 78,000 kilometres during the second financial year).

2. Record the adjusting entries for the depreciation at the end of the second financial year using straight-line method. (1 mark)
3. Show how the van would appear in the balance sheet prepared at the end of year 2 using Straight-line method.

Answer 1

Given information of Nevertire Ltd:

Delivery van purchase                                                   = $52,000

Residual value                                                               = $12,000

Useful life in years                                                         = 4 years

Useful life in Kilometres                                                 = 200,000 Kilometres

Depreciation rate (WDV) = 31%

The van was purchased on 1 July 2019 and the accounting period ends on 30 June.

a. Straight line method:

Depreciation expense = (52,000 – 12,000)/4 = $10,000.

Since in straight line method, depreciation is same for all the years. Hence depreciation for the second year will be $10,000.

Diminishing balance method:

Depreciation rate                             = 31%

Depreciation expense in the first year = $52,000*31% = $16,120.

Written down value at the end of first year = $52,000 - $16,120 = $35,880.

Depreciation expense for the second year = $35,880 * 31% = $11,123 (rounded of)

Units of production method:

Depreciation expense for a given year is calculated by dividing the original cost of the equipment less its salvage value, by the expected number of units the asset should produce given its useful life. Then, multiply that quotient by the number of units (U) used during the current year.

Depreciation expense for the first year = [(52,000-12,000)/200,000]*50,000 = $10,000.

Depreciation expense for the second year = [(52,000-12,000)/200,000]*78,000 = $15,600.

b. Adjusting entries for the depreciation at the end of second financial year using straight line method:

Depreciation expense                   A/c                         Dr                           $10,000

              To accumulated depreciation                       A/c                                             $10,000            

Profit and loss                                   A/c                         Dr                           $10,000

              To depreciation expense                              A/c $10,000                             

c. Balance of the van at the end of the second year:

Van                                                                                        = $52,000

Accumulated depreciation = ($20,000)

Balance at the end of second year = $32,000.