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Depreciation of Fixed Assets Euro Ltd, a sportwear manufacturer, prepares its final accounts to 31 December each year - Leaving Cert Accounting - Question 2 - 2015
Question 2
Depreciation of Fixed Assets Euro Ltd, a sportwear manufacturer, prepares its final accounts to 31 December each year. The company’s policy is to depreciate its mac... show full transcript
Worked Solution & Example Answer:Depreciation of Fixed Assets Euro Ltd, a sportwear manufacturer, prepares its final accounts to 31 December each year - Leaving Cert Accounting - Question 2 - 2015
Step 1
The Machinery Account
Answer
The Machinery Account will include the purchases and disposals as follows:
Date | Details | €
------------------------------------------------
01/01/13 | Opening Balance | 190,000
01/03/13 | Machine No 1 | 50,000
01/01/14 | Machine No 2 | 250,000
01/04/14 | Machine No 5 | 55,000
------------------------------------------------
Total | 261,400
Step 2
The Provision for Depreciation Account
Answer
The Provision for Depreciation Account will show the depreciation expense:
Date | Details | €
---------------------------------------------------------
31/12/13 | Depreciation accumulated | 33,408
31/12/13 | Disposal of Machine No 1 | 12,667
01/04/14 | Depreciation from machine 2 & 5 | 34,528
---------------------------------------------------------
Total | 52,342
Step 3
The Machinery Disposal Account
Answer
The Machinery Disposal Account records the income from the sale and the accumulated depreciation:
Date | Details | €
---------------------------------------------------------
01/03/13 | Machine No 1 | 50,000
31/12/13 | Depreciation on Machine No 1 | 12,667
---------------------------------------------------------
Total | 37,333
Step 4
Explain why a company charges depreciation in calculating profit
Answer
Depreciation is crucial in calculating profit because it allocates the cost of an asset over its useful life. By doing so, a company ensures that it does not overload its expense with large one-time charges. This results in more accurate profit measurement over time and reflects the usage of the asset in generating revenue.
Step 5
List three factors which should be considered when determining the depreciation policy on a particular asset
Answer
- Type of Asset: Different assets have varying economic lives and should be depreciated accordingly.
- Estimated Life of Asset: This affects how quickly the asset's value will decrease over time.
- Scrap Value: The estimated salvage value of an asset at the end of its useful life influences the amount that can be depreciated.