On 1 January Year 1, Company A purchased a bus costing £70,000. It was estimated to have a useful life of three years and a residual value of £4,000. It was sold for £8,000 on the last day of Year 3.
On 1 January Year 1, Company B purchased a bus also costing £70,000. It was estimated to have a useful life of three years and a residual value of £7,000. It was sold for £8,000 on the last day of Year 3.
Both companies have a net profit of £50,000 before depreciation. Calculate the depreciation charge and net profit of each company for each of the three years. Show that over the three years the total depreciation charge for each company is the same. (See Table 8.11 for an example.)
Table 8.11:
Table of depreciation charge

Transcribed Image Text:

(a) A van cost £60,000, was estimated to have a useful life of three years and a residual value of £6,000. It was sold for £9,000 on the last day of Year 3. Net profit before depreciation is £62,000. Cost less accumulated depreciation Year Net book Net profit before depreciation Deprediation expense of the year Net profit after depreciation value 62,000 62,000 62,000 18,000 18,000 15,000 44,000 44,000 47,000 60,000 – 18,000 60,000 – 36,000 60,000 – 54,000 42,000 24,000 6,000 2 Total depreciation charge Total reported net profit 51,000 135,000 Proceeds of sale exceed net book value by £3,000. This gain is deducted from the depreciation expense of £18,000 leaving £15,000 as the expense of the year. (b) A van cost £60,000, was estimated to have a useful life of three years and a residual value of £9,000. The annual depreciation was calculated as £17,000. The van was sold for £9,000 on the last day of Year 3. Net profit before depreciation is £62,000. Depreciation expense of the year Year Net profit before depreciation Net profit after depreciation Cost less accumulated Net book depreciation value 62,000 62,000 62,000 17,000 17,000 17,000 1 45,000 45,000 45,000 60,000 – 17,000 60,000 – 34,000 60,000 – 51,000 43,000 26,000 9,000 Total depreciation charge Total reported net profit 51,000 135,000 Net book value equals proceeds of sale so the depreciation charge of Year 3 is the same as that of previous years.