Kira purchased a motor vehicle which was later sold. The following information is available. Item Details Date of purchase 1 July 2022 Cost $24 000 Deprecia...
Question 1 Report
Kira purchased a motor vehicle which was later sold. The following information is available.
| Item | Details |
|---|---|
| Date of purchase | 1 July 2022 |
| Cost | $24 000 |
| Depreciation method | Reducing balance |
| Rate | 25% per annum |
| Depreciation policy in year of purchase | Full year charged |
| Depreciation policy in year of disposal | No charge |
| Date of disposal | 31 October 2024 |
| Sale proceeds | $10 000 |
| Financial year end | 30 June |
(a) Calculate the net book value of the motor vehicle at the date of disposal. Show your workings for each year. [4]
(b) Prepare the disposal account, showing clearly the profit or loss on disposal. [8]
(c) State where the profit or loss on disposal would appear in the financial statements. [2]
(d) State two causes of depreciation. [4]
(e) Explain the difference between capital expenditure and revenue expenditure relating to a motor vehicle. Give one example of each. [2]
Answer Details
(a) Net book value at the date of disposal
The reducing balance method applies the depreciation rate to the remaining net book value at the start of each year, producing a decreasing charge over time.
| Period | Calculation | Depreciation ($) | NBV at end ($) |
|---|---|---|---|
| Year ended 30 Jun 2023 | $24 000 x 25% (full year in year of purchase) | 6 000 [1] | 18 000 [1] |
| Year ended 30 Jun 2024 | $18 000 x 25% | 4 500 [1] | 13 500 [1] |
| Year of disposal (to 31 Oct 2024) | No charge (policy: no depreciation in year of disposal) | 0 | 13 500 |
Total accumulated depreciation = $6 000 + $4 500 = $10 500
Net book value at disposal date (31 October 2024) = $13 500
(b) Disposal Account
The disposal account collects the cost, accumulated depreciation, and sale proceeds of the asset to determine the profit or loss on disposal.
| Motor Vehicle Disposal Account | |||
|---|---|---|---|
| Debit | Credit | ||
| Motor vehicle (cost) | 24 000 [1] | Provision for depreciation | 10 500 [1] |
| Bank (sale proceeds) | 10 000 [1] | ||
| Income statement (loss on disposal) | 3 500 [1] | ||
| Total | 24 000 [1] | Total | 24 000 [1] |
Loss on disposal = Net book value - Sale proceeds = $13 500 - $10 000 = $3 500 loss [1]
The loss arises because the vehicle was sold for less than its net book value. The cost is transferred from the asset account (debit of disposal), the accumulated depreciation is removed (credit of disposal), and the proceeds are credited. The balancing figure is the loss, which is transferred to the income statement. [1]
(c) Where the loss on disposal appears
The loss on disposal of $3 500 would be shown as an expense in the income statement. [1] It is deducted from profits, increasing total expenses for the period. [1]
(d) Two causes of depreciation
- Wear and tear through regular use - physical deterioration reduces the asset's ability to perform its function over time. [1] [1]
- Obsolescence - technological advances or changes in business needs mean the asset becomes outdated or is no longer adequate, even if it is still physically functional. [1] [1]
(e) Capital expenditure vs revenue expenditure for a motor vehicle
Capital expenditure is spending on acquiring or improving a non-current asset that will benefit the business for more than one accounting period. Example: the purchase price of the motor vehicle ($24 000). [1]
Revenue expenditure is spending on the day-to-day running and maintenance of the asset that benefits only the current period. Example: fuel costs, insurance premiums, or routine repairs and servicing. [1]
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