Question 1. Trancor Ltd has been in operation for over 60 years. It has a standard straight-line depreciation policy for all its fixed assets. A new CFO was appointed in January 2020 and after review of the financial statements questioned the large write off of assets in December 2019. The Accountant stated these assets were computers and were not being used as the technology was obsolete. New computers were purchased on March 1, 2019 to replace the old ones and these were being depreciated over 5 years using the current policy. The CFO after discussion with management agreed that the reducing balance method at a rate of 30% per annum is more suitable for the computers and instructed the Accountant to make the changes to the depreciation policy. This change meets the requirements of a change in accounting policy. The scrap value of the computers is $5,000. The Balance Sheet extract for December 31, 2019 was as follows: Computers at cost 80,000 Accumulated depreciation 12,500 Net Book Value 67,500 Provide an explanation to substantiate the change in accounting policy. Calculate the depreciation expense on computers for the period ended December 31, 2019 and December 31, 2020 with the new policy. Prepare the Balance Sheet extract showing the Cost, accumulated depreciation and net book value for the computers as at December 31, 2019 and December 31, 2020. Calculate the depreciation expense for the period ended December 31, 2021 if the scrap value was changed to $8,000 in 2021 based on a change in the economic outlook. State the changes required for 2019 and 2020.
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.
Question 1.
Trancor Ltd has been in operation for over 60 years. It has a standard straight-line depreciation policy for all its fixed assets. A new CFO was appointed in January 2020 and after review of the financial statements questioned the large write off of assets in December 2019. The Accountant stated these assets were computers and were not being used as the technology was obsolete. New computers were purchased on March 1, 2019 to replace the old ones and these were being
Computers at cost 80,000
Net Book Value 67,500
- Provide an explanation to substantiate the change in accounting policy.
- Calculate the depreciation expense on computers for the period ended December 31, 2019 and December 31, 2020 with the new policy.
- Prepare the Balance Sheet extract showing the Cost, accumulated depreciation and net book value for the computers as at December 31, 2019 and December 31, 2020.
- Calculate the depreciation expense for the period ended December 31, 2021 if the scrap value was changed to $8,000 in 2021 based on a change in the economic outlook. State the changes required for 2019 and 2020.
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