ACCA Applied Knowledge · Financial Accounting · Depreciation
Tarn Co bought a vehicle on 1 April 20X1 for $40,000. It depreciates vehicles at 25% per year on the reducing balance method, with a full year's charge in the year of acquisition and none in the year of disposal. The financial year ends 31 December. What is the carrying amount at 31 December 20X2?
The carrying amount is $22,500. A full year's depreciation is charged in 20X1: 25% of $40,000 = $10,000, leaving $30,000. In 20X2 the 25% rate applies to the carrying amount: $7,500, leaving $22,500. Straight-line on cost would wrongly give $20,000.
- A$20,000
- B$22,500Correct
- C$30,000
- D$17,500
Explanation
Year 1 charge = 25% x 40,000 = 10,000, giving carrying amount 30,000. Year 2 charge = 25% x 30,000 = 7,500, giving 22,500. Option $20,000 applies 25% straight-line on cost for both years, which is wrong for reducing balance.
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