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: 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 by straight-line, diminishing balance (depreciation rate has been calculated as 31%) units of production (assume the van was driven 78,000 kilometres during the financial year) b) Record the adjusting entries for the depreciation at 30 June 2021 using diminishing balance methd and Show how the van would appear in the balance sheet prepared at the end of year 2 using Straightline 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: a) Assume the van was purchased on 1 July 2019 and that the accounting period ends on 30 June.
Calculate the
b) Record the
Depreciation per year (Straight line) = ( cost of Asset - Residual value ) / useful life of the assets
a. Depreciation expense for 2019-20 (Straight line) = ($52,000 - $12,000 ) / 4 = $10,000
Depreciation per year (Diminishing balance method) = Cost of Asset x Depreciation rate
= $52,000 x 31 %
= $16,120
Depreciation (Units of production method) =[ ( cost of Asset - salvage value ) x Actual driven kilometres ] / Estimated kilometres
= [($52,000 - $12,000 ) x 78000 ] / 200000
= $15,600
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