4.2 Accounting for depreciation and disposal of non-current assets (3)
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1.
ABC Company uses the reducing balance method to depreciate a machine costing £20,000. At the beginning of Year 1, the book value is £12,000. At the end of Year 1, the depreciation expense is £4,000. Prepare the ledger account for Depreciation Expense and the corresponding journal entry.
Ledger Account: Depreciation Expense
| Depreciation Expense |
| Date | Description | Debit (£) | Credit (£) |
| 1 January 2023 | Opening Balance | 12,000 | |
| 31 December 2023 | Depreciation Expense | 4,000 | |
| Closing Balance | | 8,000 | |
Journal Entry:
Debit: Depreciation Expense £4,000
Credit: Accumulated Depreciation £4,000
2.
ABC Company purchased machinery for £25,000 on 1st January 2023. It has an estimated useful life of 5 years and no residual value. On 1st April 2027, the machinery was sold for £12,000. Prepare the journal entry and the ledger account entries to record this transaction.
Journal Entry (1st April 2027):
| Date | Particulars | Debit (£) | Credit (£) |
| 1st April 2027 | Sale of Machinery | 12,000 | |
Machinery Account (Ledger):
| Date | Particulars | Debit (£) | Credit (£) |
| 1st January 2023 | Cost of Machinery | 25,000 | |
| 1st April 2027 | Sale of Machinery | | 12,000 |
| Balance | 13,000 | |
3.
A company purchased a machine for £20,000 on 1st January 2023. The machine has an estimated useful life of 5 years and a residual value of £2,000. Using the reducing balance method, calculate the depreciation expense for the year ended 31st December 2023. Explain why the reducing balance method is often used.
Calculation of Depreciation (Reducing Balance Method):
- Calculate the depreciation rate: (100% - Residual Value / Original Cost) = (100% - (£2,000 / £20,000)) = 80%
- Calculate the depreciation expense for 2023: 80% of £20,000 = £16,000
Why the Reducing Balance Method is Often Used:
- Reflects Asset Decline: The reducing balance method reflects the fact that assets lose value more rapidly in their early years. A higher depreciation expense is recognized in the early years, and a lower expense is recognized in later years. This provides a more realistic representation of the asset's decline in value.
- Consistent Depreciation Rate: The depreciation rate is constant throughout the asset's useful life, simplifying calculations.
- Avoids Large Discharges of Depreciation: Unlike the straight-line method, the reducing balance method avoids large depreciation charges in the early years of an asset's life.