1
Contractors Ltd was formed on 1 January 2006 and the following purchases and sales of
machinery were made during the first 3 years of operations.
Date Asset Transaction Price
1 January 2006 Machines 1 and 2 purchase £40,000 each
1 October 2006 Machines 3 and 4 purchase £15,200 each
30 June 2008 Machine 3 sale £12,640
1 July 2008 Machine 5 purchase £20,000
Each machine was estimated to last 10 years and to have a residual value of 5% of its cost price.
Depreciation was by equal instalments, and it is company policy to charge depreciation for every
month an asset is owned.
Required:
(a) Calculate
(i) the total depreciation on Machinery for each of the years 2006, 2007, and 2008;
(ii) the profit or loss on the sale of Machine 3 in 2008.
(b) Contractors Ltd depreciates its vehicles by 30% per annum using the diminishing balance
method. What difference would it have made to annual reported profits over the life of a
vehicle if it had decided instead to depreciate this asset by 20% straight line?
(Scottish Qualifications Authority)