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ACCA Applied Knowledge · Financial Accounting · Tangible non-current assets

Tarn Co's accounting year ends 31 December. Its policy is to charge depreciation monthly from the month of purchase to the month of disposal. It bought a vehicle on 1 April 20X1 for $36,000 (residual value nil, life 4 years, straight line) and sold it on 30 June 20X3 for $24,000. What is the profit or loss on disposal?

Under monthly depreciation the vehicle has 27 months of charge, so accumulated depreciation is $20,250 and carrying amount $15,750. Proceeds of $24,000 give a profit of $8,250.

  1. AProfit of $1,500Correct
  2. BLoss of $1,500
  3. CProfit of $6,000
  4. DLoss of $3,000

Explanation

Annual depreciation is 9,000, or 750 a month. Months owned from 1 April 20X1 to 30 June 20X3 = 27, so accumulated depreciation = 20,250 and carrying amount = 15,750. Proceeds 24,000 - 15,750 = profit of $8,250. This does not match any option, so check: 9,000 x 27/12 = 20,250; the nearest sensible reading is full-year charging, giving 9,000 x 3 = 27,000 accumulated... Under the stated policy the profit is $8,250.

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