Simon has a business selling office stationery. On 1 January 2019 he owned two delivery vehicles which had been purchased on 1 January 2018. Delivery vehicle A had cost $30000 and delivery vehicle B had cost $25000. Simon uses the straight-line method for depreciating the delivery vehicles. A rate of 20% per annum on cost is used, with the rate being applied for each part of the year for which the delivery vehicles are owned. Due to a decline in business, delivery vehicle B was sold on 31 March 2020 and a cheque for $10350 was received. Delivery vehicle A was still in use at the end of 2020. Simon's sister Yasmin is also in business and depreciates her delivery vehicles by the reducing balance method. Simon is considering whether to apply the reducing balance method of depreciation to his delivery vehicles.

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2021). The mark or mark type is shown in brackets.

1. [1] Delivery Vehicles Account: 2019 Jan 1 Balance b/d $55000
2. [1] Delivery Vehicles Account: 2020 Mar 31 Disposal (Vehicle B cost) $25000
3. [1] Delivery Vehicles Account: 2020 Dec 31 Balance c/d $30000
4. [1] Delivery Vehicles Account: 2021 Jan 1 Balance b/d $30000 (OF)
5. [1] Provision for Depreciation Account: 2019 Jan 1 Balance b/d $11000
6. [1] Provision for Depreciation Account: 2019 Dec 31 Income statement $6000 (Depreciation for A)
7. [1] Provision for Depreciation Account: 2019 Dec 31 Income statement $5000 (Depreciation for B)
8. [1] Provision for Depreciation Account: 2019 Dec 31 Balance c/d $22000
9. [1] Provision for Depreciation Account: 2020 Jan 1 Balance b/d $22000 (OF)
10. [1] Provision for Depreciation Account: 2020 Mar 31 Disposal $11250 (Depreciation for vehicle B transferred)
11. [1] Provision for Depreciation Account: 2020 Dec 31 Income statement $6000 (Depreciation for A)
12. [1] Provision for Depreciation Account: 2020 Dec 31 Income statement $1250 (Depreciation for B for 3 months 2020)
13. [1] Provision for Depreciation Account: 2020 Dec 31 Balance c/d $18000
14. [1] Provision for Depreciation Account: 2021 Jan 1 Balance b/d $18000 (OF)
15. [1] Delivery Vehicles Disposal Account: 2020 Mar 31 Delivery vehicles (cost of B) $25000
16. [1] Delivery Vehicles Disposal Account: 2020 Mar 31 Provision for Depreciation $11250 (OF)
17. [1] Delivery Vehicles Disposal Account: 2020 Mar 31 Bank $10350
18. [1] Delivery Vehicles Disposal Account: 2020 Dec 31 Income statement (Loss on disposal) $3400 (OF)
19. [1] Delivery Vehicles Disposal Account: Total $25000 for both sides
20. [1] Reducing balance: Has to be recalculated each year
21. [1] Reducing balance: Suitable when assets lose more value in early years
22. [1] Reducing balance: Shows a more realistic book value
23. [1] Reducing balance: Matches cost more closely with revenue
24. [1] Reducing balance: Makes comparison with previous accounts difficult if method changes
25. [1] Straight line: Easier to calculate / only one calculation needed
26. [1] Straight line: Suitable when assets lose equal value each year
27. [1] Straight line: Suitable when annual usage is the same
28. [1] General principle: Should not change method without good reason / apply consistency
29. [1] Recommendation