Vietnam Pty Ltd purchased a truck for cash for $52,000 on January 1, 2015. At the time of purchase, it was estimated that the useful life of the vehicle would be 100,000 kilometres and it was expected that it would travel that distance over 5 years. At the end of five years of useful life it was calculated that the truck could be sold for $8,000. The accounting period for Vietnam Pty Ltd is the financial year ending 30 June. The actual distance covered by the truck was as follows: Year ending 30 June: 2015 10,000 kilometres 2016 25,000 kilometres 2017 31,000 kilometres 2018 23,000 kilometres 2019 8,000 kilometres Required: 1.Calculate depreciation for the years ending 30th June 2015 to 30 June 2019 using the units of production method. 2.Prepare general journal entries to record the depreciation, using the straight-line method, for the period 1 January 2015 to 30 June 2017. 3.Discuss the nature the depreciation and how depreciation adjustments affect the financial statements.
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.
Vietnam Pty Ltd purchased a truck for cash for $52,000 on January 1, 2015. At the time of purchase, it was estimated that the useful life of the vehicle would be 100,000 kilometres and it was expected that it would travel that distance over 5 years. At the end of five years of useful life it was calculated that the truck could be sold for $8,000. The accounting period for Vietnam Pty Ltd is the financial year ending 30 June.
The actual distance covered by the truck was as follows:
Year ending 30 June:
- 2015 10,000 kilometres
- 2016 25,000 kilometres
- 2017 31,000 kilometres
- 2018 23,000 kilometres
- 2019 8,000 kilometres
Required:
1.Calculate
2.Prepare general
3.Discuss the nature the depreciation and how depreciation adjustments affect the financial statements.
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