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Depreciation of Fixed Assets Euro Ltd., a sportswear manufacturer, prepares its final accounts to 31 December each year - Leaving Cert Accounting - Question 2 - 2015
Question 2
Depreciation of Fixed Assets Euro Ltd., a sportswear manufacturer, prepares its final accounts to 31 December each year. The company’s policy is to depreciate its m... show full transcript
Worked Solution & Example Answer:Depreciation of Fixed Assets Euro Ltd., a sportswear manufacturer, prepares its final accounts to 31 December each year - Leaving Cert Accounting - Question 2 - 2015
Step 1
The Machinery Account.
Answer
The Machinery Account will reflect the initial costs of the machinery purchased, along with the disposal transactions as they occur. It would appear as follows:
| Date | Details | € | Date | Details | € |
|---|---|---|---|---|---|
| 01/01/13 | Balance W1 | 190,000 | 01/03/13 | Disposal No. 1 | 50,000 |
| 01/03/13 | Bank - No. 4 | 60,000 | 31/12/13 | Balance | 261,400 |
| 01/01/14 | Balance | 261,400 | 01/04/14 | Bank - No. 5 | 55,000 |
| Disposal No. 2 | 65,000 | ||||
| Balance | 261,400 | ||||
| Total | 261,400 |
Step 2
The Provision for Depreciation Account.
Answer
The Provision for Depreciation Account indicates the depreciation expense recognized for the machinery over the years:
| Date | Details | € | Date | Details | € |
|---|---|---|---|---|---|
| 31/12/12 | Balance W2 | 27,233 | 31/12/13 | Balance | 33,408 |
| 01/01/14 | Disposal No. 1 | 12,667 | 31/12/14 | Balance | 34,308 |
| Profit & Loss a/c | |||||
| Total | 34,308 |
Step 3
The Machinery Disposal Account.
Answer
The Machinery Disposal Account captures the financial impact of disposals. For Machine No. 1 and Machine No. 2, it would appear as follows:
| Date | Details | € | Date | Details | € |
|---|---|---|---|---|---|
| 01/03/13 | Machine No. 1 | 50,000 | 01/04/14 | Machine No. 2 | 65,000 |
| Insurance | 25,000 | Profit & Loss a/c | 21,545 | ||
| Scrap allowance | 500 | ||||
| Total | 75,500 | Total | 86,545 |
Step 4
Explain why a company charges depreciation in calculating profit.
Answer
A company charges depreciation as it reflects the usage and wear of fixed assets over their useful lives. This ensures that the asset’s cost is systematically expensed over time, aligning with the revenue generated from its use. Failing to account for depreciation will lead to an overstated profit and can misrepresent the financial position of the company.
Step 5
List the factors which should be considered when determining the depreciation policy on a particular asset.
Answer
The factors to consider include:
- Type of asset: Different assets have varying useful lives and depreciation methods.
- Estimated life of asset: The expected time period the asset will be in use.
- Cost of asset: The initial purchase cost affects the depreciation calculation.
- Scrap value of asset at end of life: Estimated value when the asset is no longer in use.
- Method of depreciation: Straight-line, declining balance, or any other applicable methods.