Accounting - Topics - Balance day adjustments - Case study 1 -
Case study 1 - Depreciation
Basil Braveheart and Sophie Solitaire each buy a new four-wheel drive on
the same day, 1 July 1998. They each pay $43 000 plus $2000 on road costs.
Basil intends to use his vehicle to deliver antique furniture in nearby
suburbs while Sophie will drive her vehicle to remote locations in her work
as a geologist.
At the end of the financial year they both visit an accountant for
assistance with their income tax. Given the nature of their work, being
self-employed, they are both able to claim the depreciation on their
vehicles as a work related expense for their respective small businesses.
The accountant suggests that Basil calculates depreciation using the
straight line method whilst suggesting that Sophie may wish to use the
diminishing balance method.
The suggested rate of depreciation is 20% prime cost for Basil. Basil asks
what 'prime cost' is, and is told it means 'straight line'.
The accountant then informs Sophie that the diminishing balance method has
a rate of one and a half times straight line, in this case 30%.
When the vehicles were bought the estimated trade in or disposal value was
Both Basil and Sophie ask for projected depreciation figures for the next
* calculate the depreciation and accumulated depreciation figures for the
next three years using both straight line and diminishing balance methods
* Sophie asks for her figures to be recalculated for six month accounting
periods. Complete this task and comment on changes in the depreciation and
accumulated depreciation amounts
* what accounting principle supports the use of alternative depreciation
methods? State the principle and describe its meaning
* which accounting principle is breached if, after the first year, Basil
chooses to change to the diminishing balance method?
* Sophie and Basil are using different methods of depreciation. Give two
reasons why each method may be used. explain two benefits to Sophie of
reporting more frequently than once a year
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