IGCSE Accounting Paper-1: Specimen Questions with Answers 140 - 142 of 214

Passage

Peacock Limited is planning to buy a machinery costing $4500 for use in its business. It estimates the machinery will have a useful life of four years and will have a scrap value of $750 after that time. The company decides it will depreciate the machinery on the reducing balance method at the rate of 20 % per annum.

Question number: 140 (1 of 4 Based on Passage) Show Passage

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What will be asset value at the end of the fourth year?

Explanation

$1843.2

Cost of asset 4500

- Depreciation 900

3600

- Depreciation 720

2880

- Depreciation 576

2304

- Depreciation 460.8

1843.2

The value of asset at the end of fourth year is $1843.2

Question number: 141 (2 of 4 Based on Passage) Show Passage

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Peacock Limited compared the calculated net book value of the machinery after four years with its expected scrap value after four years, $750.

State whether you consider the percentage rate the company should be using to calculate the depreciation should be higher or lower. Give a reason for your answer.

Explanation

The percentage of depreciation is low.

The scrap value after the four year is $750 which is lower than the net book value of the machinery after four years. Hence $1843.2 is greater than the scrap value $750. The percentage of depreciation is lower when compared with net book value of the machinery.

Question number: 142 (3 of 4 Based on Passage) Show Passage

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Name any two methods adopted in calculating the depreciation of the firm.

Explanation

Straight line and reducing balance method

Under straight line method, depreciation is charged evenly every year throughout the effective life of an asset. This method is also known as fixed installment method or original coast method. Under reducing balance method, depreciation is charged at fixed rate on reducing balance of assets.