Depreciation Problem

username

Hi I am just working through a practice assessment for AP1, and I am stumped as to how arrive at the depreciation charge figure.

The question was:

"You are working on the accounts for a sole trader that is registered for VAT.
The business year end is 31 December 20XX

On September 20XX the business bought a new machine for the business on which VAT can be reclaimed.
The machine cost £12200 excluding VAT. AN invoice has been received from the seller which has been recorded into the purchases day book.
The machines residual value is expected to be £2300 excluding VAT.
The Business's depreciation policy for machines is 30% per annum on a straight line basis.

Make entries to account for:
The purchase of the new machine
The depreciation on the new machine
For the account, show clearly the balance carried down or transferred to the profit and loss account."

Would really appreciate any help.

Rinske

Hi,

On the straight line basis, you calculate a yearly charge of depreciation (the same for each year) based on the cost less residual value.

The cost less residual value is 12,200 less 2,300 as both figures are excluding VAT. Just remember to remove any VAT if they are included in the costs.

The difference is the bit that you will need to depreciate for, as you have paid the cost and you only get the little bit back of those costs (residual value).

To spread it out between the years, rather than deducting it all from the profit in one period, you divide it through the numbers of years you will be using the asset, or reduce the net book value of the asset by a set percentage each year.
(Both methods will run out in about the same result, as the percentage will be based on the number of years.)

In this case the percentage given is 30%. So you would calculate the difference between the machine costs less residual value and take 30% of this for each year you want to depreciate for.

So 12,200 less 2,300 and the result times 0.30 (or times 30 divided by 100, depending on what you are used to for calculating percentages)

(I do wonder though, is the 30% correct? As in this case you would end up with a 10% depreciation in the fourth year, if you still have the asset at this point.)

wannabebean

Hi

THis is very easy.

First forget the VAT at Level 3. Just get the two VAT free amounts. In this case:


The Business's depreciation policy for machines is 30% per annum on a straight line basis.


£12200 - £2300 = £9900 - now we are going to work out the Depreciation

ahmmm 30% of £9900 = your magic figure. This is the amount the machine will Depreciate every year (ignore the answer above from the other user)

1st year Depreciation = £2970
2nd year = 30% of £6930 (that is £9900 - £2970) --- answer is £2079
3rd (6930 - 2079) 30% of £4851 = £1455.30
4th year --- (4851 - 1455.30) £3395.57 - 30% of = 1018.71

and so on.

Basically

Opening Value (excluding VAT) - Closing value (excluding VAT) = Figure to work with
1. Find 30% of this figure = Deprecation for the year

Subsequent years? Don't forget to minus the Depreciation from the figure before going on to do the next year.

wannabebean

Actually ignore my answer completely - it is for teh Reducing Balance Method and not the straight-line method.

This is straight-line:

First forget the VAT at Level 3. Just get the two VAT free amounts. In this case:

The Business's depreciation policy for machines is 30% per annum on a straight line basis.

£12200 - £2300 = £9900 - now we are going to work out the Depreciation

ahmmm 30% of £9900 = your magic figure. This is the amount the machine will Depreciate every year until the amount reasches zero. This has complications on the Y/E Accounts as if it become a negative value and you sell the machine for a 'gain'....