A firm buys a fixed asset for £10,000. The firm estimates that the asset will be used for 5 years. After exactly IVl years, however, the asset is suddenly sold for £5,000. The firm always provides a full year’s depreciation in the year of purchase and no depreciation in the year of disposal.

Required:

{a) Write up the relevant accounts (including disposal account but not profit and loss account) for each of Years 1, 2 and 3:

(i) Using the straight-line depreciation method (assume 20% pa);

(ii) Using the reducing balance depreciation method (assume 40% pa).

{b) (i) What is the purpose of depreciation? In what circumstances would each of the two methods you have used be preferable?

(ii) What is the meaning of the net figure for the fixed asset in the balance sheet at the end of Year 2?

(c) If the asset was bought at the beginning of Year 1, but was not used at all until Year 2

(and it is confidently anticipated to last until Year 6), state under each method the appropriate depreciation charge in Year 1, and briefly justify your answer.

{Chartered Association of Certified Accountants)

22,1 In a new business during the year ended 31 December 19X4 the following debts are found to be bad, and are written off on the dates shown:
30 April 31 August 31 October H Gordon £110 D Bellamy Ltd £64 J Alderton ^12 On 31 December 19X4 the schedule of remaining debtors, amounting in total to £6,850, is examined, and it is decided to make a provision for doubtful debts of £220.
You are required to show:
{a) The Bad Debts Account, and the provision for Bad Debts Account.

(b) The charge to the Profit and Loss Account.
{c) The relevant extracts from the Balance Sheet as at 31 December 19X4.