O-LevelAccountingAccounting procedures7707/21 · May/June 2010 · Q217 Marks

Sparky Ltd set up business on 1 May 2008 with the following assets: $ Property (Land and buildings) 150000 Computer equipment 40000 Inventory (stock in trade) 70000 Sparky Ltd decided on the following policy for depreciation: 1 Land costing $80000 was not to be depreciated. 2 Buildings are to be depreciated at 2% per annum on cost using the straight line method. 3 Computer equipment is to be depreciated at 25% per annum using the diminishing (reducing) balance method. On 30 April 2010 Sparky Ltd sold some of the computer equipment for $7000. The computer equipment had cost $12000 on 1 May 2008. Sparky Ltd charges a full year's depreciation in the year of disposal. During the year ended 30 April 2010, Sparky Ltd carried out work on the buildings. 1 Built an extension 2 Redecorated the interior 3 Installed air conditioning

(a)State two causes of depreciation.[2]
(b)(i)Explain why Sparky Ltd does not depreciate each of the following: Land[4]
(b)(ii)Explain why Sparky Ltd does not depreciate each of the following: Inventory (stock in trade)[4]
(c)Explain why depreciation is an application of the matching/accruals principle.[2]
(d)Calculate the depreciation on property (land and buildings) for the year ended 30 April 2009.[1]
(e)Prepare the disposal account on 30 April 2010 recording the disposal of the computer equipment.[5]
(f)State whether each item, 1 to 3 above, is capital expenditure or revenue expenditure.[3]

Mark scheme

Marking points from the official mark scheme (May/June 2010). The mark or mark type is shown in brackets.

[1] Wear and tear/physical deterioration
[1] Obsolescence/economic reasons
[1] Depletion
[1] Passage of time
[2] Land generally does not depreciate in value because it is a limited resource with an infinite life and can be used for a range of purposes.
[2] Inventory (Stock in trade) is not a fixed asset but is for resale. It is not in the business for a long period of time.
[1] Continuity of the business is assumed for an indefinite period.
[1] The cost of the non current (fixed) asset can be spread over the life of the asset.
[1] Non current (fixed) assets will be shown at their book value in the balance sheet and not their expected sale values.
[1] An estimated cost that must be included in the income statement.
[1] $150000 - $80000 = $70000 x 2% = $1400
[1] Computer equipment 12000
[2] Depreciation 5250
[1] Profit and Loss (Income Statement) 250
[1] Cash/Trade receivables 7000
[1] 1. Capital
[1] 2. Revenue
[1] 3. Capital

On Oracle Prep you can write or photograph your own answer and have it marked by AI against this mark scheme, with feedback on what you missed.