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 kilometers. Ignore GST.

Required:

a) Assume the van was purchased on 1 July 2019 and that the accounting period ends on 30 June. Calculate the depreciation expense for the year 2019–20 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 78,000 kilometers during the financial year).

b) Record the adjusting entries for the depreciation on 30 June 2021 using a diminishing balance method.

c) Show how the van would appear in the balance sheet prepared at the end of year 2 using the Straightline method.

Answer 1

a.

Straight line method

This method gives a uniform depreciation figure over the lifetime of the asset. Formula is,

= ( Cost - Residual Value) / Useful life

= (52,000 - 12,000) / 4

= $10,000

Diminishing Balance Method

This method applies depreciation at a faster rate so that the assets depreciates faster in it's earlier years.

Formula is,

= Cost * Depreciation rate

= 52,000 * 31%

= $16,120

Units of Production

This method depreciates based on the usage of the asset vs the total capacity of the asset. Assuming the van was driven 78,000 kilometers during the financial year

Formula is,

= (( Cost - Residual value) * units for the year) / Estimated production capacity

= ((52,000 - 12,000)*78,000)/200,000

= 3,120,000 / 200,000

= $15,600

b.

Date

June 30 2021

DR Depreciation $11,123

CR Accumulated Depreciation $11,123

Working

June 30 2021 Depreciation

= ( Cost - 2020 Depreciation ) * 31%

= (52,000 - 16,120 ) * 31%

= 35,880 * 31%

= $11,123

c. Straight line depreciation is constant so Value at the second year using Straight line will be,

= Cost - 2020 Depreciation - 2021 Depreciation

= 52,000 - 10,000 - 10,000

= $32,000

Balance sheet excerpt,

Particulars Amount

Assets

Fixed assets

Vechicles $32,000