Accounting for depreciation & disposal of non current assets

Question 1

What are the three T accounts that must be completed

Answer 1

1. The Asset at Cost T account
2. The Provision for Depreciation (or Accumulated Depreciation T account)
3. The Disposal of Asset T account

Question 2

Formula for Profit or Loss on Disposal of Assets

Answer 2

Disposal Proceeds - NBV

Question 3

What is the formula for Straight Line method Depreciation

Answer 3

Cost/Residual Value x 100

Question 4

What is the formula for Reducing balance method Depreciation

Answer 4

Percentage x NBV

Question 5

EXAMPLE QUESTION

Cindy Fireplace wises to improve her business profits. SHe has purchased a new computer system for her business at a cost of £6000. She will use the system for two years and then replace it. At the end of the 2 years the system will have no scrap value

Cindy will either depreciate her computer system using
1. The straight Line Method
2. The reducing balance method at 60% per annum

Calculate the expense charged to the income statement.

(HINT: DRAW A TABLE DIVIDE IT BY STRAIGHT AND RECIDUAL DEP AND YEAR 1/2)

Answer 5

ANSWERS

YEAR 1 STRAIGHT LINE METHOD
= £3000
(6000-0/2)

YEAR 1 REDUCING BALANCE METHOD = £3600
(6000 X 0.6 = 3600)

YEAR 2 STRAIGHT LINE METHOD
= 3000

YEAR 2 REDUCING BALANCE METHOD
2400 X 0.6 = 1440

Question 6

What is the formula for depreciation of the year

Answer 6

NBV at start + Cost of Additions - NBV of disposals
(Then divide by the percentage of depreciation)

Question 7

What is on the Debit Side of the Machinery at Cost T Account

Answer 7

Balance b/d
Additions at cost

Question 8

What is on the Credit Side of the Machinery at Cost T Account

Answer 8

Disposal at cost
Balance c/d

Question 9

What is on the debit side of the Prov for Dep/Accumulated Dep T account

Answer 9

Disposals
Balance c/d

Question 10

What is on the credit side of the Prov for Dep/Accumulated Dep T account

Answer 10

Balance b/d
Depreciation

Question 11

What is on the debit side of the disposal of machinery T account

Answer 11

Cost of asset disposed
Profit on disposal

(IF NOT A PROFIT IT WILL BE A LOSS ON DISPOSAL WHICH WILL BE ON THE CREDIT SIDE)

Question 12

What is on the credit side of the disposal of machinery T account

Answer 12

Accumulated Depreciation
Bank - disposal proceeds
Loss on disposal (IF NOT A LOSS IT WILL BE A PROFIT ON DISPOSAL WHICH WILL BE ON THE DEBIT SIDE)