Pixies Ltd is a small company that specialises in selling garden statues. The business needs to purchase an additional delivery van, as customers have been complaining that delivery times are too long. Management decides to purchase a van for 4,750 and agrees to pay 2,000 immediately in cash, and the remainder in six months time. The operations director estimated that the van will have a useful life of four years, and a second-hand value of 2,500 at the end of this time. The operations director proposes that the straight-line method of depreciation be used for the van. The accountant disagreed with the operations director and instead thought that 14.83% depreciation should be charged annually, on the reducing balance basis. Your task: (a) Record the purchase of the van using the expanded accounting equation. (b) Calculate the annual depreciation expense for the van if Pixies Ltd uses the straight-line method of depreciation (operations directors estimate). Prepare I/S extracts in relation to the depreciation expense and SOFP extracts in relation to the net book value of the van at the end of year 4. (c) Calculate the annual depreciation expense for the van if Pixies Ltd uses the reducing balance method of depreciation (accountants estimate). Prepare I/S extracts in relation to the depreciation expense and SOFP extracts in relation to the net book value of the van at the end of year 4. (d) Which method of depreciation results in a higher profit for year 1? Is this effect on profit temporary or permanent?

(a) Record the purchase of the van using the expanded accounting equation. Assets Expenses 0 Equity o Revenue o Liabilities o (b) Calculate the annual depreciation expense for the van if Pixies Ltd uses the straight-line method of depreciation (operations director's estimate). Prepare I/S extracts in relation to the depreciation expense and SOFP extracts in relation to the net book value of the van at the end of year 4. Annual depreciation expense (straight line method - year 4) Income Statement Extract for year 4 (straight line) Operating Expenses Depreciation: Van O SOFP Extract as at the end of year 4 (straight line) Non-current Assets Van: at costo Less Van: Accumulated depreciation Van: Net book value o (c) Calculate the annual depreciation expense for the van if Pixies Ltd uses the reducing balance method of depreciation (accountant's estimate). Prepare I/S extracts in relation to the depreciation expense and SOFP extracts in relation to the net book value of the van at the end of year 4. Annual depreciation expense (reducing balance method - year 4) Income Statement Extract for year 4 (reducing balance) Operating Expenses Depreciation: Van O SOFP Extract as at the end of year 4 (reducing balance) Non-current Assets SOFP Extract as at the end of year 4 (reducing balance) Non-current Assets Van: at costo Less Van: Accumulated depreciation o Van: Net book value o (d) Which method of depreciation results in a higher profit for year 1? Is this effect on profit temporary or permanent? Explain your answer here. O