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9706 · 1.3.2

Changing asset values — practice questions

Practice and worked examples for 9706 Changing asset values. Short previews only — attempt the full question in MarkScheme against the official scheme.

Worked example 1

A machine cost $20,000, has a residual value of $2,000, and a useful life of 5 years. Depreciation is on a straight-line basis. After 3 years, it was sold for $9,500. Calculate the annual depreciation and the profit or loss on disposal.

Show solution outline

Step 1: Calculate annual depreciation Annual Depreciation = (Cost - Residual Value) / Useful Life Annual Depreciation = ($20,000 − $2,000) ÷ 5 = $3,600

Step 2: Calculate accumulated depreciation after 3 years Accumulated Depreciation = Annual Depreciation × 3 years Accumulated Depreciation = $3,600 × 3 = $10,800

Step 3: Calculate Net Book Value (NBV) at disposal NBV = Cost - Accumulated Depreciation NBV = $20,000 − $10,800 = $9,200

Step 4: Calculate profit or loss on disposal Profit/Loss = Disposal Proceeds - NBV Profit/Loss = $9,500 − $9,200 = $300

Final Answer: A profit on disposal of $300 is made, which is credited to the Statement of Profit or Loss.

Worked example 2

A business buys a vehicle for $40,000 on 1 Jan 20X1. It is depreciated at 25% per annum using the reducing balance method. A full year's depreciation is charged in the year of purchase, and none in the year of sale. The vehicle is sold for $18,000 on 10 Jan 20X4. Calculate the profit or loss on disposal.

Show solution outline

Step 1: Calculate annual depreciation and Net Book Value (NBV).

  • Cost (1 Jan 20X1): $40,000
  • Depreciation for 20X1: 40,000×25%=40,000 \times 25\% = 10,000. NBV at 31 Dec 20X1 = $30,000.
  • Depreciation for 20X2: 30,000×25%=30,000 \times 25\% = 7,500. NBV at 31 Dec 20X2 = $22,500.
  • Depreciation for 20X3: 22,500×25%=22,500 \times 25\% = 5,625. NBV at 31 Dec 20X3 = $16,875.

Step 2: Calculate total accumulated depreciation at the date of disposal.

  • The asset is sold early in 20X4, so no depreciation is charged for 20X4.
  • Total Accumulated Depreciation = $10,000 (20X1) + $7,500 (20X2) + $5,625 (20X3) = $23,125.

Step 3: Calculate the Net Book Value at disposal.

  • NBV = Cost - Accumulated Depreciation
  • NBV = $40,000 - $23,125 = $16,875.

Step 4: Calculate the profit or loss on disposal.

  • Profit/Loss = Disposal Proceeds - NBV at disposal
  • Profit/Loss = $18,000 - $16,875 = $1,125

Final Answer: The business made a profit on disposal of $1,125. This will be credited to the Statement of Profit or Loss.

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