Depreciation and gain/loss calculations and effects Michelle’s Express Ltd has a small fleet of delivery trucks. Each one is depreciated on the reducing balance method (rate 20 per cent; half of that in the year of acquisition and in the year of disposal) with no salvage value. Truck 4 was purchased on 1 July 2019 for $46 000, and sold three years later, on 30 June 2022, for

$15 000. The company’s financial year-end is 31 December.

1 What was the total depreciation on truck 4 to the date of its disposal?

2 Based on your answer to question 1, write a journal entry to record the disposal of truck 4.

3 Redo questions 1 and 2, assuming the company uses straight-line depreciation at 15 per cent per year and an estimated salvage value of $6000.

4 Calculate the different effects of the two depreciation methods on the company’s 2022 profit. Ignore income tax effects.

5 What implications (if any) would the use of different depreciation methods by the company have for potential creditors or investors?

6 The use of different depreciation methods could affect financial performance comparisons between financial years for a particular company, and between different companies for the same financial year.

How are these differences mitigated?