Question 6

Hammond Limited bought plant and equipment on January 1, 2009 for GH400,000 with an estimated useful life of 4 years and a scrap value of GH25,000. The plant and equipment would produce a similar number of goods each year and the annual profit before depreciation was expected to be GH200,000.

At the companys management meeting, the Managing Director, Mr. Kofi Hammond was of the view that the non-current asset should be depreciated using the reducing balance method. However, the Chief Accountant, Mr. Isaac Peprah, suggested the use of the straight-line method.

Required:

Calculate the annual depreciation charges and the net book value (NBV) of the fixed asset at the end of 2009, 2010, 2011 and 2012 using:

1. The straight line method (7 marks)

2. The reducing balance method (7 marks)