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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
View the word document for solution to the Case study 1 - Depreciation
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Links:
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[1] http://alison.com/#
[2] http://alison.com/#