Day: November 27, 2019

On 1 April 1991, a firm bought a machine for £420,000. On that date, the machine had an expected useful economic life of five years and an expected residual value of £20,000. On 1 April 1995, the firm spent £240,000 on a major refurbishment of the machine which extended its useful life by three years and revised its estimated residual value to £60,000.

If the firm uses the straight-line method of depreciation, the depreciation charge for this machine, to be included in the accounts for the year ended?

Select ONE answer:

1. £65,000
2. £70,000
3. £80,000
4. £93,333

Show your workings to arrive at your answer, and explain and justify your reasons:

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This multiple-choice question is suitable for Accounting KS5 classes.

The answer is 2

1. Not Correct
2. Initial depreciation charge = (£420,000 – £20,000) / 5 = £80,000 p.a.
   Depreciation charge for the years ended 31 March 1992 – 31 March 1995 (4 years) : £80,000 * 4 = £320,000
   Net Book Value at 1 April 1995 before refurbishment = £420k – £320k = £100,000
   Revised annual depreciation = (£100k + £240k – £60k) / 4 = £70,000
3. Not Correct
4. Not Correct

 

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