Depreciation charge

sscors

Hi

does anyone understand why the depreciation charge is 1500


Question

A new vehicle has been acquired VAT can be reclaimed on this vehicle
The cost of excluding VAT was 7500 this was paid from the bank
The residual value is expected to be 1500 excl VAT
The depreciation policy for vehicle is 25% per annum on a straight line basis
Deprec has already been entered for existing vehicles

Make entries for
a)purchase of new vehicle
b) deprecia on new vehicle


According to my calcs deprec is 1875 but the answer says depreciation is 1500? Not sure what to do with residual value

janwal

The cost of Vehicle minus the residual value x 25%

7500 - 1500 x 25% = 1500

On straight line method you always take any residual value away from the cost before calculating the depreciation.

Hope this helps

Jan

sscors

Sorry I still don't understand. I looked up staight line method and the formula for calc deprec was (cost-residual value)/useful economic life. I'm not quite sure about your working out?

nicd1981

Hia

its 7500-1500=6000 (price - residual value)

6000 x25%=1500(times by the depreciation)

therefore depreciation is £1500

does this help explain?

janwal

That is correct if you are given the life, so if it says you keep the item for 4 yrs you would divide the cost - residual value by 4 to find yearly depreciation, but in this case it gave you a %

7500-1500 = 6000

6000/4 = 1500

or

7500 - 1500 x 25% = 1500

It is just they word the questions differently

Jan

sscors

Yeah thanks I get it now