, the Chairman of a small local company, recently bought a motor van for GH₵15,000 on 1st January, 2016. The expected useful life of the motor van is three (3) years and at the end of the useful life it could be sold for GH₵3,500. He has asked you to clarify some points concerning depreciation. He later disposed of the motor van on 1st February, 2018 for GH₵6,300. Required: (a) Explain the aim of charging depreciation in the financial statements. 7 (b) Explain two methods of depreciation and a reason behind a choice. (c) Calculate the rate of depreciation using the reducing balance method. (d) Calculate the value of depreciation to be charged for 31st December, 2017. (d) Calculate the gains on the disposal of the moto
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.
Your client, Felix Hammond, the Chairman of a small local company, recently bought a motor van for GH₵15,000 on 1st January, 2016. The expected useful life of the motor van is three (3) years and at the end of the useful life it could be sold for GH₵3,500. He has asked you to clarify some points concerning
Required:
(a) Explain the aim of charging depreciation in the financial statements.
7
(b) Explain two methods of depreciation and a reason behind a choice.
(c) Calculate the rate of depreciation using the
(d) Calculate the value of depreciation to be charged for 31st December, 2017.
(d) Calculate the gains on the disposal of the motor van on 1st February, 2018.
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