Amayi owns a manufacturing business. Her financial year ends on 30 April. She has the following depreciation policy: Machinery is depreciated at the rate of 25% per annum using the diminishing (reducing) balance method. Office furniture is depreciated at the rate of 10% per annum using the straight-line method. Loose tools are depreciated using the revaluation method. A full year’s depreciation is charged on assets in the year of purchase but no depreciation is charged in the year of sale. REQUIRED

Mark scheme

Marking points from the official mark scheme (May/June 2011). The mark or mark type is shown in brackets.

1. [max 4] To account for cost consumed / used during the financial year; To charge a share of the cost to the income statement for the year; Reduce the book value of non-current assets in the balance sheet; To spread the cost over its useful economic life; Wear & tear, passage of time, obsolescence & depletion (2 per point); Comply with accounting principles and concepts, e.g. prudence, matching. (2-0) × 2 points
2. [2] Machinery will lose a high proportion of its value in the early years; Low maintenance costs in early years, higher in later years; Changes in technology may outdate the machinery (2-0) × 2 points
3. [2-0] Depreciation for Machinery: ($80 000 + $18 000 - $60 000) x 25% = $9 500
4. [2-0] Depreciation for Office furniture: ($15 000 - $1 000) x 10% = $1 400
5. [2-0] Depreciation for Loose tools: $1 050 (opening valuation) + $630 (additional purchases) - $1 400 (closing valuation) = $280
6. [1] Cost of office furniture sold: $1 000
7. [1] Accumulated depreciation on office furniture sold: $1 000 x 10% x 2 years = $200
8. [1of] Net book value of office furniture sold: $1 000 - $200 = $800
9. [1] Sale price of office furniture: $550
10. [1of] Loss on sale of office furniture: $800 - $550 = $250
11. [1of] Net book value of Machinery: ($80 000 + $18 000 - $60 000 - $9 500) = $28 500
12. [1of] Net book value of Office furniture: ($15 000 - $1 000) - ($5 000 - $200 + $1 400) = $7 800
13. [1] Purchase of spares for machinery: Revenue expenditure
14. [1] Installation of additional machinery: Capital expenditure
15. [1] Repairs to office furniture: Revenue expenditure
16. [1] Purchase of loose tools: Capital expenditure