- 15 Marks
Question
b. Buma Limited recently acquired a piece of equipment for ₦1,600,000. The equipment has an estimated useful life of 5 years with no residual value. The company estimates the rates of depreciation under the straight-line method to be 20% and the reducing balance method to be 30%. It is still considering which of the two depreciation methods to adopt and requires ledger records to make a final decision.
Required:
i. Present the ledger accounts to record the transaction for the first three years using the straight-line method. (6 Marks)
ii. Present the ledger accounts to record the transaction for the first three years using the reducing balance method. (6 Marks)
c. Show the extracts from the statement of financial position at the end of the third year for the two methods. (3 Marks)
Answer
i. Ledger Accounts Using the Straight-Line Method:
Equipment Account (Cost)
| Date | Particulars | Debit (₦) | Credit (₦) |
|---|---|---|---|
| Year 1 | Bank | 1,600,000 | |
| Year 3 | Balance c/d | 1,600,000 |
Depreciation Account (20% Straight-Line)
| Date | Particulars | Debit (₦) | Credit (₦) |
|---|---|---|---|
| Year 1 | Profit or Loss Account | 320,000 | |
| Year 2 | Profit or Loss Account | 320,000 | |
| Year 3 | Profit or Loss Account | 320,000 |
Accumulated Depreciation Account
| Date | Particulars | Debit (₦) | Credit (₦) |
|---|---|---|---|
| Year 1 | Balance c/d | 320,000 | |
| Year 2 | Balance c/d | 640,000 | |
| Year 3 | Balance c/d | 960,000 |
ii. Ledger Accounts Using the Reducing Balance Method:
Equipment Account (Cost)
| Date | Particulars | Debit (₦) | Credit (₦) |
|---|---|---|---|
| Year 1 | Bank | 1,600,000 | |
| Year 3 | Balance c/d | 1,600,000 |
Depreciation Account (30% Reducing Balance)
| Date | Particulars | Debit (₦) | Credit (₦) |
|---|---|---|---|
| Year 1 | Profit or Loss Account | 480,000 | |
| Year 2 | Profit or Loss Account | 336,000 | |
| Year 3 | Profit or Loss Account | 235,200 |
Accumulated Depreciation Account
| Date | Particulars | Debit (₦) | Credit (₦) |
|---|---|---|---|
| Year 1 | Balance c/d | 480,000 | |
| Year 2 | Balance c/d | 816,000 | |
| Year 3 | Balance c/d | 1,051,200 |
c
i. Extracts from the Statement of Financial Position Using Straight-Line Method:
| Item | ₦ |
|---|---|
| Equipment (Cost) | 1,600,000 |
| Less: Accumulated Depreciation | (960,000) |
| Carrying Amount | 640,000 |
ii. Extracts from the Statement of Financial Position Using Reducing Balance Method:
| Item | ₦ |
|---|---|
| Equipment (Cost) | 1,600,000 |
| Less: Accumulated Depreciation | (1,051,200) |
| Carrying Amount | 548,800 |
- Tags: Depreciation, Reducing Balance Method, Straight-Line Method
- Level: Level 1
- Topic: Depreciation Methods and Accounting for Disposals
- Series: MAY 2024
- Uploader: Dotse