Ch 4.2: Depreciation and Disposal of Non-Current Assets

For which non-current assets is the revaluation method of depreciation most appropriate?

• loose tools

• motor vehicles

• office equipment

• plant and machinery

Amit depreciates his buildings at the rate of 2% per annum using the straight line method. He bought land for $200 000. It cost $120 000 to build a warehouse on it. After five years he sold the warehouse for $299 000.

What was the profit or loss on disposal?

• $9000 loss

• $9000 profit

• $11 000 loss

• $11 000 profit

A non-current asset was depreciated at the end of the first year of ownership using the straight-line method based on the following information.

Cost: $20 000

Working life: 4 years

Residual value: $4000

It was found that the reducing balance method at 30% per annum should have been used.

What was the effect on the profit for the year of correcting this error?

• decrease by $2000

• increase by $2000

• decrease by $6000

• increase by $6000

A machine which cost $32 000 was sold for $14 000. The total depreciation at the date of disposal was $15 000.

What was the profit or loss on disposal?

• $3000 profit

• $3000 loss

• $18 000 profit

• $18 000 loss

A trader uses the reducing balance method of depreciation.

What effect will this have over the life of the non-current asset?

• depreciation charged evenly over the years

• more depreciation charged in the early years

• more depreciation charged in the later years

• the non-current asset being revalued each year

Why should a trader provide for the depreciation of a non-current asset?

1. 1. to match the cost against the revenue of the years which benefit from the use of the asset

2. 2. to provide a cash fund to enable the asset to be replaced at the end of its useful life

3. 3. to recognise that most non-current assets lose value with the passage of time

4. 4. to spread the cost of the asset over its expected working life to avoid overstating profit

• 1 and 2 only

• 1, 3 and 4

• 2 and 3 only

• 2,3 and 4

• A

• B

• C

• D

Why is depreciation charged on a non-current asset?

• to accumulate a fund of money to replace the asset

• to charge the cost of using the asset against income

• to determine the market value of the asset

• to ensure that profits are not understated

A café owner decided to use the revaluation method to calculate depreciation on the kitchen equipment.

Kitchen equipment costing $3200 was purchased on 1 January 2016. This was expected to have a useful life of 4 years.

Additional kitchen equipment was purchased during the year for $400. The total kitchen equipment was valued at $2900 on 31 December 2016.

What was the depreciation charge for the year ended 31 December 2016?

• $300

• $700

• $800

• $900

Imran's financial year ends on 31 December. A machine purchased on 1 January 2015 for $20 000 was sold on 30 June 2017 for $8500. The machine had been depreciated using the straight-line method at 25% per annum on a month by month basis.

What was the profit or loss on the disposal of the machine?

• loss $1000

• loss $1500

• profit $1000

• profit $1500