- 20 Marks
Question
a. Briefly explain the following concepts used in Accounting:
i. Depreciation
ii. Depreciable amount
iii. Net book value
iv. Straight line depreciation
v. Reducing balance depreciation
(10 marks)
b. The Managing Director of Agana Limited located at the Manya Krobo Municipality is uncomfortable with the impasse between the Municipality and the Electricity Company of Ghana. As such she decided to install solar equipment for her company. She purchased the equipment on 4th July 2021 at a cost of GH¢ 520,000. The estimated useful life of the asset is 10 years with a residual value of GH¢ 35,000. The company’s policy is to provide for a full year’s depreciation regardless of the date of purchase. You are required to:
i. Compute the rate of depreciation for the solar equipment using the straight-line method (2 marks)
ii. Compute the depreciation for the year 2021 using the straight-line method (4 marks)
iii. Compute the Net present value of the asset as at 31st December 2021 (4 marks)
(Total: 20 marks)
Answer
- a.
i. Depreciation: The systematic allocation of the depreciable amount of a tangible asset over its useful life, reflecting wear and tear or obsolescence. In Ghanaian banking, it’s applied to fixed assets like IT equipment under IAS 16 for accurate asset valuation.
ii. Depreciable Amount: The cost of an asset minus its residual value, representing the portion allocated as expense over its useful life. For example, a vehicle costing GH¢100,000 with residual GH¢10,000 has depreciable amount GH¢90,000.
iii. Net Book Value: The cost of an asset less accumulated depreciation, showing its carrying amount on the balance sheet. It’s crucial for impairment tests in banks per BoG’s directives.
iv. Straight Line Depreciation: Allocates the depreciable amount evenly over the useful life, resulting in constant annual expense. Suitable for assets with uniform usage, like buildings.
v. Reducing Balance Depreciation: Applies a fixed rate to the net book value each year, leading to higher early expenses. Ideal for assets like vehicles that lose value faster initially, aligning with prudence.
b.
i. Rate of depreciation (straight-line method):
Depreciable amount = Cost – Residual value = 520,000 – 35,000 = 485,000.
Annual depreciation = Depreciable amount / Useful life = 485,000 / 10 = 48,500.
Rate = (Annual depreciation / Cost) × 100 = (48,500 / 520,000) × 100 = 9.33%.
ii. Depreciation for 2021 (straight-line method):
As per company policy, full year’s depreciation regardless of purchase date: GH¢48,500.
iii. Net book value (likely meant as net book value, not net present value) as at 31st December 2021:
Cost – Depreciation = 520,000 – 48,500 = 471,500.
- Topic: reducing balance methods (IAS 16)
- Series: OCT 2022
- Uploader: Samuel Duah