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Depreciation of Fixed Assets O'Brien Transport Ltd prepares its final accounts to 31 December each year - Leaving Cert Accounting - Question 2 - 2018
Question 2
Depreciation of Fixed Assets O'Brien Transport Ltd prepares its final accounts to 31 December each year. The company's policy is to depreciate its vehicles at the r... show full transcript
Worked Solution & Example Answer:Depreciation of Fixed Assets O'Brien Transport Ltd prepares its final accounts to 31 December each year - Leaving Cert Accounting - Question 2 - 2018
Step 1
The vehicles account.
Answer
To show the vehicles account for the years 2016 and 2017, we need to record the purchases, disposals, and the balance brought forward.
Vehicles Account
| Date | Details | Amount (€) | Balance (€) |
|---|---|---|---|
| 01/01/2016 | Balance b/d | 212,000 | |
| 01/01/2016 | Bank & trade-in no. 2 | 86,000 | |
| 31/12/2016 | Disposal (No. 3) | (74,000) | 224,000 |
| 31/12/2016 | Balance c/d | 224,000 | |
| 31/07/2017 | Disposal (Vehicle 1) | (72,000) | 142,000 |
| 01/08/2017 | Balance c/d | 142,000 |
Step 2
The provision for depreciation account.
Answer
To calculate the provision for depreciation, we apply the rates on the vehicles:
Provision for Depreciation Account
| Date | Details | Amount (€) | Balance (€) |
|---|---|---|---|
| 01/01/2016 | Balance b/d | 88,425 | |
| 31/12/2016 | P & L (2016) | 33,150 | 121,575 |
| 01/01/2017 | Balance c/d | 121,575 | |
| 31/07/2017 | P & L (2017) | 34,725 | 156,300 |
| 31/07/2017 | Balance c/d | 156,300 |
Step 3
The vehicles disposal account.
Answer
The vehicles disposal account will track the transactions related to the disposal of vehicles:
Vehicles Disposal Account
| Date | Details | Amount (€) |
|---|---|---|
| 01/04/2016 | Disposal (Vehicle 3) | 74,000 |
| 31/12/2016 | P & L | 6,650 |
| 31/07/2017 | Trade in (Vehicle 1) | 72,000 |
| 31/07/2017 | Trade in (Vehicle 1) | 76,600 |
Step 4
Explain what is meant by ‘depreciation’.
Answer
Depreciation refers to the allocation of the cost of a tangible asset over its useful life. This decrease in value occurs due to wear and tear, obsolescence, or extraction. Each accounting period, a portion of the asset's cost is allocated as an expense, reducing net income. The value of the asset retained is also reflected in the financial statements.
Step 5
Distinguish between the straight line method and reducing balance method of depreciation.
Answer
The straight-line method spreads the same amount of depreciation evenly over the useful life of the asset. This method suggests that the asset should depreciate by the same value each year.
The reducing balance method, on the other hand, applies a fixed percentage to the diminishing balance of the asset, leading to higher depreciation costs in the earlier years. This method is often favored for assets that lose their value significantly faster at the beginning.