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Trans Haulage Ltd prepares its final accounts to 31st December each year - Leaving Cert Accounting - Question 3 - 2010
Question 3
Trans Haulage Ltd prepares its final accounts to 31st December each year. The company’s policy is to depreciate its vehicles at the rate of 20% of Book Value (reduci... show full transcript
Worked Solution & Example Answer:Trans Haulage Ltd prepares its final accounts to 31st December each year - Leaving Cert Accounting - Question 3 - 2010
Step 1
The Vehicles Account.
Answer
To prepare the Vehicles Account for 2008 and 2009, we will calculate the balance brought forward, disposals, and balance carried forward for each year:
Vehicles Account
| Date | Details | € |
|---|---|---|
| 01/01/2008 | Balance b/d (W1) | 166,000 |
| 01/08/2008 | Disposal (No. 1) | 56,000 |
| 01/08/2008 | Bank & Trade-in No. 4 | 12,000 |
| 01/12/2008 | Balance c/d | 232,000 |
| 01/01/2009 | Balance b/d | 232,000 |
| 01/05/2009 | Disposal (No. 3) | 60,000 |
| 31/12/2009 | Balance c/d | 248,000 |
This shows the recording of the vehicles and their disposals across the two years.
Step 2
The Provision for Depreciation Account.
Answer
To create a Provision for Depreciation Account for the years 2008 and 2009, we will apply the relevant depreciation rates:
Provision for Depreciation Account
| Date | Details | € |
|---|---|---|
| 01/01/2008 | Balance b/d | ? |
| 01/08/2008 | Disposal (W3) | 33,047 |
| 31/12/2008 | Depreciation (20%) | 36,646 |
| 31/12/2009 | Depreciation (W4) | |
| 31/12/2009 | Balance c/d | 92,144 |
Note: The yearly depreciation expense calculations would need specific vehicle valuations and prior year adjustments.
Step 3
The Vehicles Disposal Account.
Answer
For the Vehicles Disposal Account, we reflect disposals appropriately:
Disposal of Vehicles Account
| Date | Details | € |
|---|---|---|
| 01/08/2008 | Vehicle No. 1 (Disposal) | 56,000 |
| 01/08/2008 | Trade In | 12,000 |
| 01/05/2009 | Vehicle No. 3 (Disposal) | 60,000 |
| 31/12/2009 | Profit & Loss | 62,328 |
Each disposal must reflect the respective vehicle and any associated profit or loss on disposal.
Step 4
Explain its treatment by depreciation.
Answer
Depreciation is used to allocate the cost of a tangible asset over its useful life. It reflects the wearing down of the asset due to usage, age, or obsolescence. For vehicles, depreciation ensures that the expense is matched with revenue generated during their operational period. The accounting treatment involves adjusting the asset's book value accordingly, which directly influences profit calculation.
In our case, using reducing balance method allows for a larger depreciation expense in earlier years, which systematically decreases over time. Thus, this method reflects the actual reduction in value effectively.
Step 5
Why does a company charge depreciation in calculating profit?
Answer
A company charges depreciation in calculating profit to reflect the expense associated with the use of fixed assets in generating revenue. Without accounting for this expense, profits would be overstated, misrepresenting the financial position of the company. Depreciation ensures a fair representation of the company’s profits by acknowledging the gradual consumption of asset value.