Question 53

Jones Ltd purchased a new vehicle 1 July 2018. The vehicle cost $37,000; the vehicle needed to be fitted with a hoist to make it useful for the business costing $4,000. With the new fit out, it was estimated that the vehicle would have a useful life of five (5) years and a salvage value of $8,000.

Required:

1. What would be the amount of accumulated depreciation and the carrying value of the asset at the 30 June 2021, if we were to use the straight-line depreciation method?

[2 marks]

2. On 1 July 2021 Jones Ltd was approached by a car salesperson who offered to purchase the vehicle for $18,000. Should Jones Ltd accept this offer? Gives reasons for your answer.

[1 mark]

c. If Jones Ltd decided to accept the offer in (b) where would the transaction be recorded? Give reasons for your answer.

[2 marks]

d. Into which of the three components of the statement of cash flows would the sale of the vehicle be allocated?

[1 mark]

e. The car salesman comes back with a new offer of $4,000 in cash and a $16,000 replacement vehicle. The replacement vehicle is 3 years old and was originally purchased for $40,000 in June 2018. It has an estimated useful life of 5 years and $0 scrap value. Should Jones Ltd accept this offer? Give reasons for your answer.

[2 marks]

f. The CEO of Jones Ltd believes that depreciation is a result of the fall in the market value of the vehicle and does not need to be included in the income statement. Explain to the CEO how depreciation arises and why it is required to be included on the income statement.