Contractors Ltd was formed on 1 January 20X6 and the following purchases and sales of machinery were made during the first 3 years of operations.

Each machine was estimated to last 10 years and to have a residual value of 5% of its cost price. Depreciation was by equal instalments, and it is company policy to charge depreciation for every month an asset is owned.

Required:

(a) Calculate

(i) The total depreciation on Machinery for each of the years 20X6, 20X7, and 20X8;

(ii) The profit or loss on the sale of Machine 3 in 20X8.

(b) Contractors Ltd depreciates its vehicles by 30% per annum using the diminishing balance method. What difference would it have made to annual reported profits over the life of a vehicle if it had decided instead to depreciate this asset by 20% straight line?

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Date 1 January 20X6 1 October 20X6 30 June 20X8 1 July 20X8 Asset Machines 1 and 2 Machines 3 and 4 Machine 3 Machine 5 Transaction purchase purchase sale purchase Price £40,000 each £15,200 each £12,640 £20,000