Context: Miu is a sole trader and prepares her financial statements to 31 May each year. She depreciates her motor vehicles using the reducing balance method at a rate of 20% per annum. Depreciation is charged monthly Miu purchased a motor vehicle on 1 June 2013 for $152 000. On 1 March 2015, a new motor vehicle was purchased at a cost of $190 000.The old motor vehicle was part-exchanged at a value of $84000. The balance was settled by a bank loan repayable over 3 years. Prepare the motor vehicle provision for depreciation account for the years ended 31 May 2014 and 31 May 2015.
Question
Context: Miu is a sole trader and prepares her financial statements to 31 May each year. She depreciates her motor vehicles using the reducing balance method at a rate of 20% per annum. Depreciation is charged monthly Miu purchased a motor vehicle on 1 June 2013 for 190 000.The old motor vehicle was part-exchanged at a value of $84000. The balance was settled by a bank loan repayable over 3 years. Prepare the motor vehicle provision for depreciation account for the years ended 31 May 2014 and 31 May 2015.
Solution
To calculate the provision for depreciation, we need to apply the reducing balance method at a rate of 20% per annum, charged monthly.
For the year ended 31 May 2014:
The motor vehicle was purchased on 1 June 2013 for 152,000, which equals $30,400.
The provision for depreciation account would look like this:
| Date | Particulars | Amount ($) |
|---|---|---|
| 1 June 2013 | Balance b/d | 152,000 |
| 31 May 2014 | Depreciation | 30,400 |
| 31 May 2014 | Balance c/d | 121,600 |
For the year ended 31 May 2015:
The balance brought down from the previous year is 190,000 and the old one was part-exchanged for 121,600 - 190,000 = $227,600.
The depreciation for the year would be 20% of 45,520.
The provision for depreciation account would look like this:
| Date | Particulars | Amount ($) |
|---|---|---|
| 1 June 2014 | Balance b/d | 121,600 |
| 1 March 2015 | Purchase of new vehicle | 190,000 |
| 1 March 2015 | Part-exchange of old vehicle | -84,000 |
| 31 May 2015 | Depreciation | 45,520 |
| 31 May 2015 | Balance c/d | 182,080 |
Please note that the depreciation is calculated for the full year, even though the new vehicle was only owned for a part of the year. This is because the question does not specify otherwise.
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