DEPRECIATION EXAMPLE

A grocery wholesale company purchased a tractor at costing 12,000,000 on 1 April 2021. The physical life of the tractor is estimated to be 12 years. However, the business has a policy of renewing its tractor every six years. After six years the tractor is expected to sell for 5,600,000. The company uses either the straightline depreciation or diminishing balance depreciation.

(1) Calculate the depreciation charge for the year ended 31 March 2022 and 31 March 2023 using the straightline method and the diminishing balance method. For diminishing balance depreciation assume a rate of 15%.

(2) Comparing the depreciation expense and closing carrying amount for both methods for the year ended 31 March 2022 and 2023.

(3) If, on 31 March 2023, the tractor was sold for 8,500,000, what would the gain/loss on sale be under both methods?

(4) For both methods of depreciation, what would the total impact on profit be (for 2022 and 2023 combined, including the sale at 31 March 2023)?