Topic: Depreciation

Activity No. 1:
Rockford & Sons purchases a machine that costs £50,000. The business estimates it will use the machine
for 10 years, and at the end of this time, the machine will be sold for £5,000.

Required:

a) Calculate the annual depreciation expense?

b) What is the accumulated depreciation at the end of year 3?

c) What is the net book value at the end of year 3?

Activity No. 2:

Pento Printing Press has bought a new printing machine for £100,000 and expects it to be used in the
business for five years. At the end of five years, the business expects to sell the machine for £15,000.

Required:

a) Calculate the annual depreciation expense?

b) What is the accumulated depreciation at the end of year 3?

c) What is the net book value at the end of year 3?

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Topic: Depreciation

Activity No. 3:

Rockford & Sons also purchases a motor vehicle for £20,000. Depreciation is to be charged at the rate of
25% on the reducing balance basis.

Required:

a) Calculate the annual depreciation expense?

b) What is the accumulated depreciation at the end of year 3?

c) What is the net book value at the end of year 3?

Activity No. 4:

Pento Printing Press has bought a new printing machine for £100,000 and expects it to have a residual
value of £10,000 at the end of five years. The business decided to depreciate the machine on a reducing
balance basis at a rate of 36.9%.

Required:

a) Calculate the annual depreciation expense?

b) What is the accumulated depreciation at the end of year 3?

c) What is the net book value at the end of year 3?

Activity No. 5:

Rockford & Sons also bought a piece of machinery for £50,000 on 1 st November 2011. Rockford’s
accounting date is 31st October. The directors decided that the machinery would have a nil residual value.,
and to depreciate it on the straight-line basis over 5 years. On 31 st October 2014 Rockford sold the
machinery for £25,000.

Required:

What is the profit or loss on disposal of the machinery?

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Topic: Depreciation

Multiple Choice Questions – Depreciation:

1- What is the purpose of charging depreciation in accounts?

(a) To allocate the cost less residual value of a non-current asset over the accounting
periods expected to benefit from its use.
(b) To ensure that funds are available for the eventual replacement of the asset.
(c) To reduce the cost of the asset in the statement of financial position to its estimated
market value.
(d) To comply with the prudence concept.

2- Your firm bought a machine for £5,000 on 1-1-2011, which had an expected useful life
of four years and an expected residual value of £1,000; the asset was to be depreciated
on the straight-line basis. On 31 December 2013, the machine was sold for £1,600.
The amount to be entered in the 2013 income statement for the profit or loss on the
disposal, is

(a) Profit of £600

(b) Loss of £600
(c) Profit of £350
(d) Loss of £400

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Topic: Depreciation

3 – A non-current asset was purchased at the beginning of Year 1 for £2,400 and
depreciated by 20% per annum by the reducing balance method. At the beginning of
Year 4 it was sold for £1,200. The result of this was

Calculate Net Book Value of NCA at the start of 4th year

(a) A loss on disposal of £240.00

(b) A loss on disposal of £28.80
(c) A profit on disposal of £28.80
(d) A profit on disposal of £240.00

4 – A machine cost £9,000. It has an expected useful life of six years, and an expected
residual value of £1,000. It is to be depreciated at 30% per annum on the reducing balance
basis. A full year’s depreciation is charged in the year of purchase, with none in the year
of sale. During year 4, it is sold for £3,000.

The profit or loss on disposal is:

(a) Loss £87
(b) Loss £2,000
(c) Profit £256
(d) Profit £1,200

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Topic: Depreciation

5– The most appropriate definition of depreciation is:

(a) A means of determining the decrease in market value of an asset over time.
(b) A means of allocating the cost of an asset over a number of accounting periods
(c) A means of setting funds aside for the replacement of the asset.
(d) A means of estimating the current value of the asset.

6 – A non-current asset was disposed of for £2,200 during the last accounting year. It had
been purchased exactly three years earlier for £5,000, with an expected residual value of
£500, and had been depreciated on the reducing balance basis, at 20% per annum.
The profit or loss on disposal was:
(a) £360 loss
(b) £150 loss
(c) £104 loss
(d) £200 profit

7- A machine was purchased in 2006 for £64,000. It was expected to last for 5 years and to
have a residual value of £2,000. Depreciation was charged at 50% per annum on the
reducing balance method, with a full year’s charge in the year of the purchase. No
depreciation is charged in the year of disposal. The company’s year end is 31 December.
The machine was sold on 3 April 2010 for £2,500. The profit or loss on sale is:
(a) Profit £500
(b) Profit £562.50
(c) Loss £1,375
(d) Loss £1,500

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