Theory question 105
DepreciationSection B – Financial Accounting Practice (answer three questions only from this section)
5. The records of assets of Moklo Limited show the following:
Motor Vehicles – Purchases: 1. Land Rover 1st March, 1998 N240,000; 2. Peugeot 505 1st June, 1999 N240,000; 3. Peugeot 504 1st January, 2000 N120,000; 4. Nissan Rover 1st September, 2000 N240,000
Disposal: Land Rover 30th June, 2001 N50,000
The company has a policy of depreciating its vehicles on a straight line basis over an estimated useful life of five years with no scrap value.
You are required to prepare: (a) Motor Vehicle Accounts for the years 1998, 1999, 2000 and 2001; (b) Provision for Depreciation Account; (c) Motor Vehicle Disposal Account.
Show the model answer
Depreciation is 20% of cost a year, charged by months owned.
(a) Motor vehicles account: 1998 bank (Land Rover) 240,000, balance c/d 240,000. 1999 + Peugeot 505 240,000 → 480,000. 2000 + Peugeot 504 120,000 + Nissan 240,000 → 840,000. 2001: disposal 240,000; balance c/d 600,000.
(b) Provision for depreciation: 1998 40,000 (10 months of 48,000). 1999 76,000 (48,000 + 7 months of 48,000 = 28,000); balance 116,000. 2000 136,000 (48,000 + 48,000 + 24,000 + 4 months of 48,000 = 16,000); balance 252,000. 2001 charge 144,000 (Land Rover 6 months 24,000 + 48,000 + 24,000 + 48,000); transfer to disposal 160,000; balance c/d 236,000.
(c) Disposal account: Dr motor vehicles 240,000. Cr provision for depreciation 160,000; bank 50,000; loss on disposal to profit and loss 30,000.
Charge depreciation only for the months each vehicle was owned.