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Trans Haulage Ltd prepares its final accounts to 31st December each year - Leaving Cert Accounting - Question 3 - 2010
Question 3
Trans Haulage Ltd prepares its final accounts to 31st December each year. The company’s policy is to depreciate its vehicles at the rate of 20% of Book Value (reduci... show full transcript
Worked Solution & Example Answer:Trans Haulage Ltd prepares its final accounts to 31st December each year - Leaving Cert Accounting - Question 3 - 2010
Step 1
The Vehicles Account
Answer
The Vehicles Account for 2008 and 2009 is compiled as follows:
Date | Details | Amount (€) | Balance (€)
01/01/2008 | Balance b/d | 166,000 | 166,000
01/08/2008 | Trade-in (Veh No. 1) | -6,000 | 160,000
01/08/2008 | Balance c/d | 60,000 | 240,000
01/01/2009 | Balance b/d | 240,000 | 240,000
01/08/2009 | Disposal (Veh No. 2) | -46,000 | 194,000
31/12/2009 | Balance c/d | 0 | 0
The final balance for the year 2008 is €240,000 and for the year 2009 is €0.
Step 2
The Provision for Depreciation Account
Answer
The Provision for Depreciation Account for the years 2008 and 2009 is as follows:
Date | Details | Amount (€)
01/01/2008 | Balance b/d | 76,016
31/12/2008 | Expense | 33,047
31/12/2008 | Balance c/d | 92,144
01/01/2009 | Balance b/d | 92,144
31/12/2009 | Expense | 47,340
31/12/2009 | Balance c/d | 60,816
The final balance for the Provision for Depreciation for 2008 is €92,144 and for 2009 is €60,816.
Step 3
Step 4
Why does a company charge depreciation in calculating profit?
Answer
i) Depreciation is the measure of the wearing away or loss in value of a fixed asset as a result of wear and tear, passage of time, obsolescence or extraction. This is vital for accurate financial reporting.
ii) Depreciation is an expense. Failure to include depreciation in the financial results will result in the profits being overstated and thus the balance sheet will not show a true picture of the company's financial position.