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Accounting - Topics - Balance day adjustments - Case study 1 -
Depreciation

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 [1] whilst suggesting that Sophie may wish to use the
diminishing balance method. [2]

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
\$15 000.

Both Basil and Sophie ask for projected depreciation figures for the next
three years.

* 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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