Question

QUESTION 2 Pusher commenced business on 1 January 2010 with two (2) lorries - A (costs £1,000) and B (costs £1,600). On March 3, 2011 - A was written off in an accident and Pusher received £750 from insurance company. This vehicle was replaced on 10 March 2011 by C which costs £2,000. A full year's depreciation is charged in the year of acquisition and no depreciation is charged in the year of disposal. Instructions: a. You are required to show the appropriate extracts from Pusher's statement of financial position and income statement for the 3 years to 31/12/00, 31/12/11 and 21/12/02 assuming that: i. The vehicles are depreciated at 20% on the straight line method. ii. The vehicles are depreciated at 25% on the reducing balance method. b. Comment briefly on the pros and cons of using the straight line and reducing balance methods of depreciation.

Answer 1

1) Straight line method Lorry A/C Amount Amount Date Particulars 1/1/2010 To Bank A) 1000 B) 1600 2600 Date Particulars 12/31/2010 By Depreciation A) 200 B) 320 12/31/2010 By Balance C/d A) 800 B) 1280 520 2600 2080 2600 750 50 1/1/2011 To Balance B/d A) 800 B) 1280 3/10/2011 To Bank C) 2080 2000 3/3/2011 By Bank By Loss on Lorry (A) 12/31/2011 By Depreciation B) 320 C) 400 12/31/2011 By Balance C/d B) 960 C) 1600 720 2560 4080 4080

1/1/2012 To Balance B/d B) 960 C) 1600 2560 720 12/31/2011 By Depreciation B) 320 C) 400 12/31/2011 By Balance C/d B) 640 C) 1200 1840 2560 2560 2) Reducing Balance method Lorry A/C Amount Amount Date Particulars 1/1/2010 To Bank A) 1000 B) 1600 2600 Date Particulars 12/31/2010 By Depreciation A) 250 B) 400 12/31/2010 By Balance C/d A) 750 B) 1200 650 1950 2600 2600

3/3/2011 By Bank 750 1/1/2011 To Balance B/d A) 750 B) 1200 3/10/2011 To Bank C) 1950 2000 800 12/31/2011 By Depreciation B) 300 C) 500 12/31/2011 By Balance C/d B) 900 C) 1500 2400 3950 3950 1/1/2012 To Balance B/d B) 900 C) 1500 2400 600 12/31/2011 By Depreciation B) 225 C) 375 12/31/2011 By Balance C/d B) 675 C) 1125 1800 2400 2400 82 83 84 86 Under Straight line method equal amount of depreciation is charged in each year whereas in Reducing balance method in early years higher amount of depreciation is charged and in later years lower amount of depreciation is charged. Reducing balance method is used to take advantage of higher tax because in earlier years higher depreciation is charged resulting in a lower net income whereas in straight line method same amount of depreciation is charged and same amount of tax is charged. 89 91