Hassan is a sole trader. On 1 January 2022 he purchased a delivery vehicle for $36 000. He depreciates the vehicle at 25% per annum using the reducing balan...

(a) Depreciation table for the delivery vehicle (reducing balance method at 25%)

Under the reducing balance method, the depreciation charge each year is calculated as a fixed percentage of the net book value at the start of that year, not the original cost. This means the charge decreases each year.

The depreciation charge decreases each year (from $9,000 to $6,750 to $5,062.50) because the reducing balance method applies the percentage to a progressively smaller net book value. This reflects the fact that many assets, particularly vehicles, lose more value in their earlier years.

(b) Disposal calculations

(i) Depreciation charge for the six months to 30 June 2025:

Since the vehicle was sold halfway through the year, depreciation is charged for only 6 months:

\( 25\% \times \$15\,187.50 \times \frac{6}{12} \) [1] \( = \$1\,898.44 \) [1]

(ii) Net book value at the date of disposal:

\( \text{NBV} = \$15\,187.50 - \$1\,898.44 = \$13\,289.06 \) [1] [1]

(iii) Profit or loss on disposal:

Sale proceeds: $12,500

Net book value at disposal: $13,289.06

\( \text{Loss on disposal} = \$13\,289.06 - \$12\,500 = \$789.06 \) [1] [1]

A loss arises because the sale proceeds are less than the carrying value of the asset. This loss is recorded as an expense in the income statement for the year.

(c) Journal entry to record the disposal

Narration: Disposal of delivery vehicle originally costing $36,000, sold for $12,500. [1]

The accumulated depreciation ($9,000 + $6,750 + $5,062.50 + $1,898.44 = $22,710.94) is debited to remove it from the provision account. The vehicle at cost is credited to remove the asset from the books. The bank records the proceeds received. The difference (the loss) is debited as an expense.

(d) Two factors to consider when choosing a method of depreciation

Factor 1: The expected useful life of the asset and the pattern in which it loses value. [1] If the asset is expected to lose value more heavily in its early years (such as a motor vehicle), the reducing balance method is more appropriate. If the loss in value is spread evenly (such as office furniture), the straight-line method is better suited. [1]

Factor 2: The estimated residual (scrap) value at the end of the asset's useful life. [1] The straight-line method works well when there is a clear residual value, as the annual charge is simply (cost minus residual value) divided by the number of years. The reducing balance method naturally approaches but never reaches zero, which may better suit assets that always retain some value. [1]