Question

Nevertire Ltd purchased a delivery van costing $52,000. It is expected to have a residual value of $12,000 at the end of its useful life of 4 years or 200,000 kilometres. Ignore GST.

Required:

1. Assume the van was purchased on 1 July 2019 and that the accounting period ends on 30 June. Calculate the depreciation expense for the second year using each of the following depreciation methods

• straight-line
• diminishing balance (depreciation rate has been calculated as 31%)
• units of production (assume the van was driven 50,000 kilometers in the first year and 78,000 kilometres during the second financial year).

2. Record the adjusting entries for the depreciation at the end of the second financial year using straight-line method. (1 mark)
3. Show how the van would appear in the balance sheet prepared at the end of year 2 using Straight-line method.

Answer 1

a.

Straight line depreciation expense = (Cost - Residual Value) / Years

= ($52,000 - $12,000) / 4

= $10,000

Second year depreciation expense = $10,000

Diminishing balance

First year depreciation expense = Cost * rate

= $52,000 * 31%

= $16,120

Second year depreciation expense = ($52,000 - $16,120) * 31%

= $11,123

Units of production

Second year depreciation expense = (Cost - Residual Value) * (78,000 / 200,000)

= ($52,000 - $12,000) * 0.39

= $15,600

b.

Date	General Journal	Debit	Credit
June 30, 2021	Depreciation expense	$10,000
	...Accumulated depreciation		$10,000
	(To record the depreciation expense)

c.

Assets:
Fixed assets	$52,000
Less: Accumulated depreciation ($10,000 + $10,000)	$20,000	$32,000