“A” LEVEL ACCOUNTING

DEPRECIATION

REVISION QUESTIONS

BOOKLET

Tinofamba nevanofamba

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 QUESTION 1

Rapid Deliveries Ltd is a small parcels delivery company. In order to ensure a high level of
efficiency the vans used are usually replaced by the latest models. It is company policy not to
retain any van for more than four years. Depreciation is provided for at 25% per annum on
cost, calculated on a monthly basis on all vans used during the year. On 31 December 2010
the company had three vans.

Details of the vans appearing in the statement of financial position at 31 December

2010 were:
$
Vans at cost (3 vans) 75 000
Less depreciation to date 41 875
33 125

During 2011 two vans of the fleet were sold and van 4 was purchased on credit for
$32 000 on 1 October 2011. The following details relate to these transactions:

Sales
Date sold Van Year Cost Sale
Reference bought proceeds
1 April 2011 1 1 January 2008 24 000 5 000
1 July 2011 2 1 April 2009 26 000 10 000

Van 3 was bought in 2010 at a cost of $25 000.

REQUIRED
a)The ledger accounts for the year ended 31 December 2011:
(i) vans at cost account; [3]
(ii) vans provision for depreciation account; [11]
(iii) vans disposal account. [7]
b) Explain why it is important to provide for depreciation. [2]
c) State two advantages and two disadvantages of using the straight line method of
depreciation and reducing balance method of depreciation. [2]

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 QUESTION 2

a. State five potential users of company financial statements. [5]

b. Explain briefly how each of these users makes use of the financial statements. [5]

c. The following information was extracted from the trial balance of Yasha Ltd as at 31
December 2016.
$
Premises at cost 2 400 000
Office equipment at cost 310 000
Delivery vehicles at cost 159 000
Provision for depreciation:
Premises 480 000
Office equipment 170 000
Delivery vehicles 60 000
Loss on sale of delivery vehicle 3 500

i. Depreciation is provided on cost at the following annual rates:

Premises 2,5%
Office equipment 10%
Delivery vehicles 20%

ii. Office equipment costing $30 0000 was bought during the year.

iii. A delivery vehicle bought during the year ended 31 December 2014 for $35
000 was sold on 1 August 2016 for $17 500.

iv. Items (ii) and (iii) have already been dealt with in the accounts.

Required

A schedule of fixed assets as it will appear as a note in the published accounts. [15]

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 QUESTION 3

SMC Limited is a wholesale business. An extract from their statement of financial position at
31 December 2012 showed:

Non-current Assets
$ $ $
Fittings and fixtures 240 000 96 000 144 000
Equipment 60 000 18 000 42 000

SMC Ltd has a policy to depreciate fittings and fixtures at 20% per annum on cost (straight line
method) and equipment at 10% per annum on cost. Depreciation is charged for each month of
ownership.

No allowance is made for any residual value.

All fittings and fixtures held by the company at the end of the financial year had been purchased
within the previous four years. All equipment had been purchased within the previous seven
years.

During the year ended 31 December 2013 the following transactions took place:

Purchases
1 January 2013 fittings and fixtures $16 000, purchased on credit from Walker.
1 July 2013 equipment $14 000, purchased on credit from Arcadia Limited.

Disposals
31 March 2013 equipment (original cost $8 000, bought on 1 January 2010) was sold for $6 000.
Disposal proceeds were received in full by cheque.

REQUIRED

(a) Prepare journal entries to record the following (narratives are not required).
(i) The purchase of the equipment. [2]
(ii) The depreciation charge for fittings and fixtures for the year ended 31 December 2013.[4]
(iii) The depreciation charge for equipment for the year ended 31 December 2013. [4]
(iv) The disposal of equipment. [8]

(b) (i) Explain the purposes of the journal. [2]

(ii) State two examples of transactions which would be recorded in the journal, other than
the purchase of non-current assets on credit. [2]

Additional information
SMC is considering changing the depreciation method for equipment to reducing balance
method.

REQUIRED

(c) (i) State an accounting concept which is applied when depreciation is provided. [1]
(ii) Explain the possible reasons why the business is considering this change. [7]
[Total 30]

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 QUESTION 4

Richard commenced business on 1 May 2011. At the end of the first year of trading an extract
from his statement of financial position showed:

Non-current assets
Cost $ Accumulated Depreciation$ Net book value $
Freehold land and Buildings 100 000 2 000 98 000
Machinery 64 000 16 000 48 000
Motor vehicle 12 000 3 600 8 400

Richard has a policy to depreciate non-current assets as follows:

• Buildings at 2% per annum on cost.

• Machinery at 25% per annum on cost.
• Motor vehicles at 30% per annum using the reducing balance method.
• Depreciation is charged for each month of ownership.

On 1 August 2012 additional machinery, costing $18 000, was purchased.

On 1 January 2013 a new motor vehicle costing $24 000 was purchased. On the same date the
old motor vehicle was traded in. Richard received an allowance of $2 600 against the cost of the
new vehicle. The vehicle disposed had originally cost $12 000 and was purchased on
1 May 2011. All payments and receipts for purchases and disposals were in cash.

REQUIRED

(a) Prepare the following ledger accounts for the year ended 30 April 2013. Dates are not
required.

(i) Motor vehicles (at cost) [5]

(ii) Provision for depreciation of motor vehicles [5]
(iii) Disposal of motor vehicles [5]

(b) Calculate the depreciation charge for the year ended 30 April 2013 to be shown in the
income statement, clearly identifying the amount charged for each category of asset. [6]

Additional information
Richard is considering the admission of a partner and feels that he should be rewarded for his
efforts in starting and developing the business. His accountant has advised him that there is an
asset called goodwill.

REQUIRED
(c) Explain the meaning of the term goodwill and suggest two reasons how it may arise. [5]
(d) Explain how goodwill should be treated in the books of partnership. [4]
[Total: 30]

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 QUESTION 5

On 1 January 2017, the non current assets register of Chings Limited held the following
information on its taxis.

Date of purchase Taxi Cost Date of Cash received

Reg number disposal $

01/01/13 Vitz 28 000 31/03/2017 7 000

01/01/13 Honda 32 000 24/04/2017 10 000

01/01/14 Funcago 20 000 31/08/ 2017 10 500

01/01/14 Ipsum 20 000 30/11/2017 10 000

08/01/15 Chariot 25 000 - -

06/01/15 Mazda 28 000 23/11/2017 See below

25/01/16 Wish 30 000 - -

31/01/16 Corrolla 35 000 - -

On 23 November 2017, taxi Mazda was involved in an accident and was written off. The
insurance company has offered to pay 80% of the net book value of the taxi as at 31
December 2016. The company has agreed to accept the offer. The money is yet to be
received.

Depreciation is provided on taxis at 20% per annum using the reducing balance method. A
full year’s charge is made in the year of purchase but no depreciation applied in the year in
which a taxi is sold or otherwise disposed of.

a) Draw up for the year 2017,

i. The Taxis account, {4}

ii. The Provision for Depreciation Account on Taxis, {15}
iii. The Asset Disposal Account for taxi Mazda. {5}

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 QUESTION 6

Rapid Deliveries Ltd is a small parcels delivery company. In order to ensure a high level of
efficiency the vans used are usually replaced by the latest models. It is company policy not to
retain any van for more than four years. The depreciation applied relates to this policy. The
company uses the straight line method and calculates the annual depreciation charge on the
cost of the vans held at the year end. It assumes no residual value.

Details of the vans appearing in the balance sheet as at 31 December 1990 were:
$
Vans at cost (5 vans) 81 000
Less depreciation to date 38 750
42 250
During 1991 two vans of the fleet were sold and three were purchased. The following
details relate to these transactions:

Sales
Date sold Van Year Cost Sale
Reference bought proceeds
1 April 199 1 1988 14 000 4 000
1 July1991 2 1988 15 000 3 350

Purchases
Date purchased
Van Cost
Reference
1 April 1991 6 19 000
1 August 1991 7 20 000
1 November 1991 8 21 000

Van 3 was bought in 1989 at a cost of $16 000 and vans 4 and 5 were purchased in
1990 at the same price each.

REQUIRED
a)The ledger accounts for the year ended 31 December 1991:
(i) vans at cost account;
(ii) vans provision for depreciation account;
(iii) vans disposal account. {14}
b) Explain why it is important to provide for depreciation. {2}
c) State two advantages and two disadvantages of using the straight line
method of depreciation and reducing balance method of depreciation. {8}

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