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: 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). Record the adjusting entries for the depreciation at the end of the second financial year using straight-line method. Show how the van would appear in the balance sheet prepared at the end of year 2 using Straight-line method.
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
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:
- 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).
- Record the
adjusting entries for the depreciation at the end of the second financial year using straight-line method. - Show how the van would appear in the
balance sheet prepared at the end of year 2 using Straight-line method.
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