- 6 Marks
FA – L1 – Q18 – Non-current assets and depreciation
Question
Avery purchased a van for GH₵800 cash. He estimates that in four years it will have a scrap value of GH₵104.
Required
(a) Calculate the annual depreciation charge on the straight-line method.
(b) Calculate the annual depreciation charge on the reducing instalment method (you will need to calculate the rate).
Answer
(a) Straight-line method
Depreciable amount = Cost – Scrap value = GH₵800 – GH₵104 = GH₵696
Annual depreciation = GH₵696 ÷ 4 years = GH₵174
(b) Reducing balance method
Depreciation rate (r) is calculated using the formula:
1−( Cost Scrap value ) 1/n =1−( 800 104 ) 1/4
=1−(0.13)0.25= 1 – (0.13)^{0.25} =1−(0.13) 0.25
=1−0.602=0.398 or 39.8%= 1 – 0.602 = 0.398 \text{ or } 39.8\% =1−0.602=0.398 or 39.8%
Annual depreciation charges:
Year 1: GH₵800 × 39.8% = GH₵318.40
Year 2: (GH₵800 – GH₵318.40) × 39.8% = GH₵481.60 × 39.8% = GH₵191.66
Year 3: (GH₵481.60 – GH₵191.66) × 39.8% = GH₵289.94 × 39.8% = GH₵115.40
Year 4: (GH₵289.94 – GH₵115.40) × 39.8% = GH₵174.54 × 39.8% = GH₵69.45
- Tags: Depreciation, Non-current Assets, Reducing Balance Method, Straight-line Method, Van
- Level: Level 1
- Uploader: Samuel Duah