Fixed assets accounting

HELLO, STUDENTS. Take a look at this worked example.

WORKED EXAMPLE

Aloe commenced business on October 1, 2014, delivering parcels to customers’ homes. He bought a motor van on the same date. The details are:

Aloe is undecided as to whether he should use the straight-line method or diminishing-balance method to depreciate the motor van.

If Aloe uses the diminishing-balance method, the annual rate of depreciation charged would be 50%.

You are required to: a. Explain the term ‘depreciation’. b. Complete the table below to show the depreciation to be charged for the years ended September 30, 2015, 2016, and 2017, using the straight-line method and the diminishing-balance method.

c. State ONE advantage of Aloe using the straightline method when depreciating the motor van.

d. State ONE advantage of Aloe using the diminishing-balance method when depreciating the motor van.

Aloe is considering:

PROPOSAL 1

Charging the total purchase price of the motor van to the 2015 income statement.

PROPOSAL 2

Using the diminishing-balance method on the motor van in 2015, and then charging to the straight-line method for 2016 and 2017.

You are required to: e. Name and explain which accounting concept would NOT be complied with if Aloe implemented his proposals. Aloe also incurred the following expenditure:

1. Delivery of motor van from manufacturer.

2. Fuel for motor van.

3. Signwriting his business name on the motor van.

4. Insurance for motor van.

You are required to: f) State whether each of the items ABOVE is capital expenditure or revenue expenditure.

WORKINGS SOLUTION

a) Depreciation, known as the cost of fixed assets consumed during the accounting period, is transferred to the income statement as an expense.

b)

c) An equal amount is deducted from the profit each year.

d) Fixed assets depreciation is high in the early years and low in later years.

PROPOSAL 1

Accounting concept: Accrual and matching principle.

Explanation: The purchase price of the motor vehicle will be recorded under fixed assets. Depreciation or cost of the asset used each year will be charged as an expense in the income statement.

PROPOSAL 2

Accounting concept consistency.

Explanation: A firm must follow one method of depreciation so the profit is either overstated or understated.

f)

1. Capital expenditure

2. Revenue expenditure

3. Capital expenditure

4. Revenue expenditure

This is all we have time for this week. Visit again next week, when the presentation will continue. Remember, IF IT IS TO BE, IT IS UP TO ME (10 simple two-letter words).