Provision for Depreciation and Disposal of Assets Title 6 · PDF fileProvision for...

Provision for

Depreciation

and Disposal of

Assets

Prepared by D. El-Hoss

All Questions Copyright of Cambridge International Examinations

www.igcseaccounts.com

ForExaminer’s

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2

0452/03/O/N/03

1 John Kamel is a sole trader whose financial year ends on 31 July.

(a) The following account appears in John’s ledger.

Disposal of Motor Vehicle account

$ $2003 2003 Mar 12 Motor Vehicles 5000 Mar 12 Provision for

Depreciation 3000XY Garages 1500

July 31 Profit and Loss 500–––– ––––5000 5000–––– ––––

For candidates who are not familiar with the layout of the account shown above, analternative presentation is provided.

Disposal of Motor Vehicle account

Explain each entry in the Disposal of Motor Vehicle account as it appears in JohnKamel’s ledger.

March 12 Motor Vehicles

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

March 12 Provision for Depreciation

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..........................................................................................................................................

..........................................................................................................................................

Dr Cr Balance$ $ $

2003Mar 12 Motor Vehicles 5000 5000

Provision forDepreciation 3000 2000

XY Garages 1500 500July 31 Profit and Loss 500 0




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March 12 XY Garages

..........................................................................................................................................

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July 31 Profit and Loss

..........................................................................................................................................

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(b) On 1 August 2001 John Kamel purchased a machine costing $8600 on credit fromSuperlooms. He decided to depreciate the machine using the reducing balance methodat the rate of 60% per annum.

(i) Write up the Provision for Depreciation of Machinery account in John’s ledger foreach of the two years ending 31 July 2002 and 31 July 2003.

Provision for Depreciation of Machinery account

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

......................................................................................................................................[9]




(ii) When preparing the Profit and Loss Account for the year ended 31 July 2003, JohnKamel included depreciation of machinery at 60% of the cost price instead of 60%of the book value of the machinery.

Calculate how this error would affect John’s Net Profit for the year ended 31 July 2003. Show your workings.

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...............................................................................................................................[4]

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© UCLES 2005 0452/02 O/N/05

4 (a) What is the reason for charging depreciation on capital expenditure in the Profit andLoss Account?

..........................................................................................................................................

......................................................................................................................................[2]

Koala bought a printing press on 1 October 2004 for $40 000. She is preparing her finalaccounts for the year ended 30 September 2005 and needs to decide which method ofdepreciation should be used.

She expects the printing press to have a useful life of ten years, and to be able to sell it at theend of that time for $4 000.

Using this information she could use the straight line method, or the reducing (diminishing)balance method at 20% per annum.

(b) Calculate how much depreciation will be charged in Koala’s Profit and Loss Account forthe next three years under each of the two methods.

You may use the space below for your workings

[5]

ForExaminer’s

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Year ended30 September

Straight linemethod

$

Reducing (diminishing)balance method

$

2005

2006

2007




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© UCLES 2005 0452/02 O/N/05 [Turn over

Koala decides to use the reducing balance method of depreciation.

(c) Show the entries in the provision for depreciation of machinery account below for eachof the three years ending 30 September 2005, 2006 and 2007

Provision for depreciation of machinery account

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

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......................................................................................................................................[7]

[Running balance format acceptable][Total: 14]

ForExaminer’s

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© UCLES 2006 0452/03 O/N/06

For

Examiner's

Use 4 David Parnell is a trader. His financial year ends on 30 September. He purchased the following motor vehicles on credit from Peter Drury on 1 October 2004.

Motor vehicle KUA 468 costing $20 000 Motor vehicle VWU 503 costing $16 000 David Parnell decided that depreciation should be calculated on motor vehicles owned at 30 September each year at the rate of 25 % per annum, using the straight line method. A full

year’s depreciation should be provided in the year of purchase, but no depreciation should be provided in the year of disposal.

On 1 April 2006 David Parnell decided that only one motor vehicle was required and he sold

motor vehicle VWU 503 on credit to Remuera Traders for $12 500. REQUIRED

(a) (i) Name one accounting principle which is applied when fixed assets are depreciated.

[1]

(ii) Explain why the accounting principle named in (i) is applied when providing for

depreciation of fixed assets.

[2]

(b) Write up the following accounts in David Parnell’s ledger for each of the years ended 30 September 2005 and 30 September 2006: (i) Motor vehicles account (ii) Provision for depreciation of motor vehicles account (iii) Disposal of motor vehicles account Where traditional “T” accounts are used they should be balanced at the end of each

year and, where appropriate, the balance brought down on the first day of the following financial year. Where three column running balance accounts are used the balance column should be up-dated after each entry.




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© UCLES 2006 0452/03 O/N/06 [Turn over

For

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Use (i) Motor vehicles account

(ii) Provision for depreciation of motor vehicles account




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© UCLES 2006 0452/03 O/N/06

For

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Use (iii) Disposal of motor vehicles account

[16]

(c) Using your answer to (b), state the entries in relation to motor vehicles which will

appear in David Parnell’s Profit and Loss Account for the year ended 30 September 2006. State whether the Profit and Loss Account would be debited or

credited for each entry.

[2]

[Total: 21]




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© UCLES 2008 0452/01/SP/10 [Turn over

For

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4 (a) State two causes of depreciation in the value of a fixed asset.

(i)

(ii)

[2]

Paul has a business for which he bought a new machine on 1 April 2008 for $1200. He decides to charge depreciation on the machine at 15% per annum using the reducing balance method.

REQUIRED

(b) Calculate the depreciation to be charged on the machine for (i) the year ended 31 March 2009;

[3]

(ii) the year ended 31 March 2010.

[3]

(c) Show the entries in the provision for depreciation account for the machine in Paul’s

ledger for the two years ended 31 March 2010.

Provision for depreciation account - machine

[4]




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© UCLES 2008 0452/01/SP/10

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On 1 April 2010 Paul sells the machine for $750. REQUIRED (d) Show the entries required in the disposal of fixed assets account to record the sale of

the machine and show the transfer to profit and loss account of any profit or loss on the sale.

Disposal of fixed assets account

[8]

(e) Using the profit or loss found in your answer to (d) above, advise Paul on the selection

of the rate of depreciation he chose for the machine.

[2]

[Total: 22]




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© UCLES 2008 0452/03/M/J/08

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5 Tahir Ali supplies building materials. His financial year ends on 31 December. On 1 January 2006 he decided to provide a delivery service for his customers. On that date

he purchased three motor vehicles, costing $20 000 each, on credit from Ansari Road Motors.

Tahir Ali decided that depreciation should be calculated on motor vehicles owned at

31 December each year at the rate of 20 % per annum, using the reducing (diminishing) balance method. A full year’s depreciation should be provided in the year of purchase, but no depreciation should be provided in the year of disposal.

On 30 June 2007 Tahir Ali decided that only two motor vehicles were required and he sold

the other motor vehicle on credit to Apollo Traders for $17 000. REQUIRED (a) Explain how Tahir Ali is applying the matching principle when he depreciates his motor

vehicles.

[2]

(b) Write up the following accounts in Tahir Ali’s ledger for each of the years ended

31 December 2006 and 31 December 2007. (i) Motor vehicles account. (ii) Provision for depreciation of motor vehicles account. (iii) Disposal of motor vehicles account. Where traditional “T” accounts are used they should be balanced at the end of each year

and, where appropriate, the balance brought down on the first day of the following financial year. Where three column running balance accounts are used the balance column should be updated after each entry.




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© UCLES 2008 0452/03/M/J/08 [Turn over

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(i) Motor vehicles account





20

Permission to reproduce items where third-party owned material protected by copyright is included has been sought and cleared where possible. Every reasonable effort has been made by the publisher (UCLES) to trace copyright holders, but if any items requiring clearance have unwittingly been included, the publisher will be pleased to make amends at the earliest possible opportunity. University of Cambridge International Examinations is part of the Cambridge Assessment Group. Cambridge Assessment is the brand name of University of Cambridge Local Examinations Syndicate (UCLES), which is itself a department of the University of Cambridge.

© UCLES 2008 0452/03/M/J/08

For

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(iii) Disposal of motor vehicles account

[18]

[Total: 20]




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© UCLES 2008 0452/02/O/N/08

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5 (a) State the purpose of providing for depreciation of a fixed asset.

[2]

(b) State which accounting principle is being followed when depreciation is provided on a

fixed asset.

[1]

Mandy decides to set up a laundry business and on 1 July 2007 buys a large washing

machine at a cost of $9000. She decides to depreciate the washing machine using the straight line method over a period of four years. The expected scrap value of the washing machine at the end of that period is $600.

(c) Calculate the depreciation to be charged in Mandy’s accounts for: (i) the year ended 30 June 2008

(ii) the year ending 30 June 2009.

[4]




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© UCLES 2008 0452/02/O/N/08

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(d) Show the entries to be made in Mandy’s provision for depreciation account for the year ended 30 June 2008 and the year ending 30 June 2009.

Show the transfer to the profit and loss account for each year.

Provision for depreciation account

[8]

(e) State the net book value of the washing machine at 30 June 2009.

[1]

[Total: 16]




2

© UCLES 2009 0452/03/M/J/09

For

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1 Tony and Alice Mundondo started a business on 1 March 2007 supplying and repairing computers. On that date they purchased a motor vehicle, $9500, on credit from Valley Motors. They purchased a further motor vehicle, $10 800, on 1 July 2008 and paid by cheque.

They decided to depreciate the motor vehicles at 20 % per annum using the straight line

(equal instalment) method. The depreciation was to be calculated from the date of purchase. No depreciation was to be charged in the year of disposal of a motor vehicle.

REQUIRED (a) Write up the following accounts in the ledger of Tony and Alice Mundondo for each of

the years ended 29 February 2008 and 28 February 2009: (i) Motor vehicles account (ii) Provision for depreciation of motor vehicles account Where traditional “T” accounts are used they should be balanced at the end of each year,

and the balance brought down on the first day of the following financial year. Where three column running balance accounts are used the balance column should be up-dated after each entry.

(i) Motor vehicles account




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[9]

(b) Prepare the relevant extract from the fixed assets section of Tony and Alice

Mundondo’s balance sheet at 28 February 2009.

Tony and Alice Mundondo Extract from Balance Sheet at 28 February 2009

[3]




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© UCLES 2009 0452/03/M/J/09

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On 31 March 2009 Tony and Alice Mundondo decided that the motor vehicle purchased in 2007 was too small. On that date they purchased a larger motor vehicle from Valley Motors who agreed to accept the original motor vehicle in part exchange.

Tony and Alice Mundondo opened an account in the ledger to record the disposal of the

motor vehicle. REQUIRED

(c) Complete the following table to indicate the ledger accounts to be debited and credited to record the disposal of the motor vehicle on 31 March 2009.

account to be debited account to be credited

(i) eliminating original cost of motor vehicle from ledger

(ii) eliminating accumulated depreciation from ledger

(iii)

recording part exchange allowance made by Valley Motors

[6] Tony and Alice Mundondo have heard of the revaluation method of depreciation but do not

understand how it is applied. REQUIRED (d) (i) Explain the revaluation method of depreciation.

[2]

(ii) State one type of fixed asset which is suitable for depreciation using the

revaluation method.

[1]

[Total: 21]




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© UCLES 2009 0452/02/O/N/09

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4 Rashida has a business selling office machines, office supplies and stationery from her warehouse.

REQUIRED (a) In the following table, place a tick (�) under the correct heading to show the correct

category of each asset shown on her balance sheet.

Tangible fixed

assets

Intangible fixed

assets

Current assets

Goodwill

Motor van

Warehouse

Stock

[4] Cleo is in business and prepares her accounts to 30 September each year. On

1 October 2008 she bought a new photocopier from Rashida for $2100. Cleo decides to depreciate the photocopier over three years using the straight line method.

She expects the scrap value of the photocopier at the end of this period to be $300. REQUIRED (b) Calculate the amount of depreciation to be charged in Cleo’s profit and loss account for

each of the two years ended 30 September 2009 and 30 September 2010.

[4]




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© UCLES 2009 0452/02/O/N/09 [Turn over

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(c) Prepare the provision for depreciation account in Cleo’s ledger for the two years ended 30 September 2009 and 30 September 2010. Balance the account at the end of each year and show the amount transferred to the profit and loss account for each year.

Cleo

Provision for depreciation account

[4]

(d) Complete the following extract from Cleo’s balance sheet on 30 September 2010.

Cleo Balance Sheet at 30 September 2010 (extract)

Cost

Provision for depreciation

Net book value

$ $ $

[3]




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© UCLES 2009 0452/02/O/N/09

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(e) Explain what the balance at 30 September 2010 on Cleo’s provision for depreciation account represents.

[2]

[Total: 17]




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© UCLES 2010 0452/11/M/J/10

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5 Griffin has a car hire business. He hires cars to customers for a fixed period of time. He buys cars new and keeps them for three years. At the end of the three years a motor dealer buys the used car in part exchange for a new car.

REQUIRED (a) In the table below, place a tick (�) under the correct heading to show whether Griffin’s

receipts are capital or revenue.

Capital Revenue

Hire charges

Cash discount received from motor dealer for prompt payment for new car

Part exchange value of used car

[6]

(b) (i) On 1 April 2009 Griffin bought a new car at a cost of $12 000. He charges

depreciation on cars using the reducing balance basis at 30% per annum. Calculate the depreciation charged in Griffin’s income statement (profit and loss

account) for the year ended 31 March 2010.

[3]

(ii) State the net book value of the car to be shown in Griffin’s balance sheet at

31 March 2010.

[1]

(c) On 1 April 2010 the car was involved in an accident and was damaged so badly that it

could not be repaired and had to be scrapped. The insurance company paid Griffin $5000 for the scrapped car.

Prepare the disposal of motor vehicles account in Griffin’s nominal (general) ledger for

April 2010, showing any profit or loss on the disposal. (The disposal of motor vehicles account is on the next page.)




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Disposal of motor vehicles account

[5]

(d) Griffin is finding that the part exchange value being paid by the motor dealer is less

than the net book value after three years. (i) Comment on the annual rate of depreciation charged by Griffin.

[2]

(ii) Suggest a different method for charging depreciation on Griffin’s hire cars. Give

one reason for your answer.

Method

Reason

[2]

[Total: 19]




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6 Accounting statements can be used for decision-making purposes.

REQUIRED (a) Give two examples of interested parties, other than the owner or shareholders, who

may use accounting statements for decision-making purposes.

(i)

(ii) [4]

(b) Selkirk Ltd decides to extend and improve their factory building. Show by placing a tick

(�) in the table below which items of expenditure should be treated as capital and which as revenue.

Capital Revenue

New factory extension

Repainting old factory

Architect’s fees for designing extension

New plant and equipment for extension

[4]

The cost of the new factory extension is $30 000 and the architect’s fees are 10% of this amount.

The cost of the new plant and equipment is $6000. Selkirk Ltd decides to depreciate all the costs of the new factory extension on the straight

line basis over its useful life of 20 years. The factory extension is not expected to have any residual value after this time.

The company decides to depreciate the new plant and equipment on the straight line basis

over its useful life of four years. The plant is expected to have a residual value of $800 after that time.

REQUIRED

(c) (i) Calculate the depreciation charge for a full year for the new factory extension. Show all your workings.

[4]




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© UCLES 2010 0452/12/M/J/10

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(ii) Calculate the depreciation change for a full year for the new plant and equipment.

[3]

(d) It is not usual to charge depreciation on land. Suggest two reasons why depreciation

should not be charged on land.

(i)

(ii)

[4]

[Total: 19]




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4 Ameena Saber started a business on 1 September 2008. On that date she purchased equipment, $12 200, on credit from Bashir Supplies. She purchased additional equipment, $9300, on 1 May 2010 and paid by cheque.

Ameena Saber decided to depreciate equipment at 15% per annum using the straight line

(equal instalment) basis. The depreciation was to be calculated from the date of purchase. No depreciation was to be charged in the year of disposal.

REQUIRED (a) Define depreciation.

[1]

(b) State two causes of depreciation.

(i)

(ii) [2]

(c) (i) Name one accounting principle which is applied when providing for depreciation of

non-current (fixed) assets.

[1]

(ii) Explain why the accounting principle named in (i) above is applied when providing

for depreciation of non-current (fixed) assets.

[2]

(d) Write up the equipment account and the provision for depreciation of equipment

account in Ameena Saber’s ledger for each of the years ended 31 August 2009 and 31 August 2010.

Where traditional “T” accounts are used they should be balanced at the end of each

year, and the balance brought down on the first day of the following financial year. Where three column running balance accounts are used the balance column should be

up-dated after each entry.




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© UCLES 2010 0452/23/O/N/10

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Ameena Saber Equipment account

[3]

Provision for depreciation of equipment account

[5]




15


For

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On 30 September 2010 Ameena Saber sold one quarter of the equipment she had purchased on 1 September 2008 as it was no longer suitable. She received $900 in cash.

Ameena Saber opened an account in her ledger to record the disposal of equipment. REQUIRED (e) Prepare entries in Ameena Saber’s journal to record the disposal of the equipment on

30 September 2010. Narratives are required.

Ameena Saber

Journal [Total: 23]

Debit

$ Credit

$

[9]




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© UCLES 2011 0452/12/M/J/11

For

Examiner's

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5 Piranha Limited is planning to buy a computer system costing $4500 for use in its business.

It estimates the computer system will have a useful life of three years and will have a scrap value of $750 after that time. The company decides it will depreciate the computer system on the reducing balance

method at the rate of 40% per annum. REQUIRED (a) State two other methods of calculating depreciation.

(i)

(ii) [2]

(b) Calculate the depreciation to be charged on the computer system for each of the three

years of its useful life. Show your workings for each year.

(i) Year 1

(ii) Year 2

(iii) Year 3

[9]

(c) Complete the following extract from the company’s balance sheet at the end of the

third year.

Piranha Limited Balance Sheet at end of third year (extract)

Cost

$

Provision for depreciation

$

Net book value

$

Non-current assets

Computer system [3]




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(d) Piranha Limited compared the calculated net book value of the computer system after three years with its expected scrap value after three years, $750.

State whether you consider the percentage rate the company should be using to

calculate the depreciation should be higher or lower. Give a reason for your answer.

[2]

(e) Piranha Limited is proposing to take a three year bank loan. In the table below, place a tick (�) under the correct heading to show the effect of

taking the bank loan on the item.

Increase Decrease No effect

Net profit

Working capital

Return on capital employed

[6] [Total: 22]




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4 Youssef El Rahman is a business consultant. His financial year ends on 31 March. Youssef El Rahman depreciates his office equipment by 20% per annum on cost.

Depreciation on new office equipment is calculated from the date of purchase. No depreciation is charged in the year of disposal.

REQUIRED (a) Name the accounting principle Youssef El Rahman applies when he writes off the

same percentage of depreciation each year.

[1]

(b) Explain how depreciation of non-current assets is an application of the accounting

principle of prudence.

[2]

(c) Name one other accounting principle which is applied when non-current assets are depreciated.

[1]

On 1 April 2010 the balances on Youssef El Rahman’s books included the following:

$ Office equipment at cost 7500 Provision for depreciation of office equipment 4500

On 1 October 2010 Youssef El Rahman purchased new office equipment, $3500, by cheque. On 31 December 2010 Youssef El Rahman sold equipment on credit to AH Company for

$2000. The equipment had been purchased on 1 April 2008 for $4000. REQUIRED (d) Write up the office equipment account, provision for depreciation of office equipment

account and office equipment disposal account on the following pages for the year ended 31 March 2011.

Where traditional “T” accounts are used they should be balanced and, where

appropriate, the balances brought down on 1 April 2011.

Where three column running balance accounts are used the balance column should be updated after each entry.




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© UCLES 2011 0452/22/M/J/11

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Youssef El Rahman Office equipment account

[5]

Provision for depreciation of office equipment account

[7]




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Office equipment disposal account

[4]

[Total: 20]




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© UCLES 2012 0452/11/O/N/12

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5 Agricola bought a tractor, $6400, on 1 January 2010 for use on his farm. The tractor will have a useful life of four years and is expected to have a scrap value of $800 after that time.

REQUIRED (a) State two methods used to calculate depreciation of a non-current asset.

1

2 [2] Agricola decided to use the most suitable method to depreciate his tractor. REQUIRED (b) Calculate the following. Show your workings. (i) Depreciation for each of the two years ended 31 December 2010 and

31 December 2011.

[3] (ii) Net book value at 31 December 2011.

[2] (c) Agricola sold the tractor on 1 January 2012 for $2600. Prepare the disposal account.

Agricola

Disposal of tractor account

[5]




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(d) (i) State one reason why there was a profit or loss on the sale of Agricola’s tractor.

[2]

(ii) Suggest one way in which a loss on a sale of a non-current asset may be reduced

or avoided.

[2]

On checking his accounting records, Agricola discovered the following errors: 1 A cheque, $320, paid to Cattle Feeds Ltd had been debited to the account of Cattle & Co. 2 Repairs to farm machinery, $30, had been recorded in the farm machinery account. REQUIRED (e) Prepare journal entries to correct the above errors. Narratives are required.

Agricola Journal Debit

$ Credit

$

[6] [Total: 22]




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