Practice Exercises

Question 1:
The following trial balance was extracted from the books of Piccolo at 31 May 2016:

Dr. $ Cr. $
Freehold land and buildings at cost 100,000
Provision for depreciation of freehold buildings 40,000
Plant and machinery at cost 76,000
Provision for depreciation of plant and machinery 32,000
Trade receivables 14,000
Trade payables 6,300
Bank 5,500
Sales 300,000
Purchases 190,000
Inventory 30,000
Wages 56,000
Heating and lighting 17,600
Repairs to plant and machinery 5,100
Advertising 7,000
Drawings 27,100
Capital 150,000
528,300 528,300

Additional information:
1. Inventory at 31 May 2016: $42,000.
2. Freehold land and buildings at cost is made up as follows: land $20,000; buildings $80,000.
3. Freehold buildings are depreciated at 4% per annum on the straight-line basis.
4. Plant and machinery are depreciated at 25% per annum on the reducing-balance basis.
5. At 31 May 2016, $1,800 was owing for heating and lighting. $6,000 of the cost of advertising related to the year
beginning 1 June 2016.
6. In the year ended 31 May 2016, Piccolo had taken inventory costing $4,000 for his personal use. No entry had been
made in the books for this.

Required
a) Explain the difference between the straight-line method of depreciation and the reducing-balance method of
depreciation.
b) Prepare Piccolo's income statement for the year ended 31 May 2016. Prepare the statement of financial position at
31 May 2016.
Additional information:
Piccolo is considering changing the method of depreciation he currently used for plant and machinery to the straight-line
method.

Required
Advise Piccolo whether he should change his method of depreciation for plant and machinery. Justify your answer by
discussing any relevant accounting concept.
Question 2:
Wilhelmina is a trader whose financial year ends on 31 March. Her trial balance at 31 March 2016 was as follows:

Dr ($) Cr. ($)

Leasehold property at cost 45,000
Provision for depreciation of leasehold property 13,500
Plant and machinery at cost 21,000
Provision for depreciation of plant and machinery 9,200
Office equipment at cost 7,000
Provision for depreciation of office equipment 2,400
Trade receivables 1,526
Trade payables 973
Inventory 13,000
Bank 1,964
Wages 13,017
Electricity 1,012
Repairs to machinery 643
Other operating expenses 1,234
Interest on loan 1,000
Sales 80,600
Sales returns 1,590
Purchases 50,914
Purchases returns 825
Long-term loan 20,000
Drawings 18,598
Capital 50,000
177,498 177,498

Additional information
1. Inventory at 31 March 2016 cost $16,000.
2. The loan was received in 2013 and is repayable in 2020. Interest on the loan is at the rate of 10% per annum.
3. Plant and machinery at cost include $6,000 for a machine bought on hire purchase on 1 January 2016. The cash
price of the machine is $30,000. The balance is payable in four quarterly installments of $6,200, including interest,
on 1 April 2016, 1 July 2016, 1 October 2016 and 1 January 201732.
4. The leasehold property was acquired on 1 October 2014 for a period of 15 years. It is being amortised on the
straight-line basis.
5. Plant and machinery are depreciated for the full year on the reducing-balance method using the annual rate of 25%.
6. Office equipment is depreciated at 15% per annum on the straight-line basis.
7. At 31 March 2016, $300 was owing for electricity, and other operating expenses of $180 had been prepaid.
Required

a) Prepare Wilhelmina's income statement for the year ended 31 March 2016.
b) Prepare the statement of financial position at 31 March 2016.

Multiple-choice questions

1. Why is depreciation on non-current assets charged in the accounts of a business?

A to ensure that assets are replaced when they are worn out
B to make sure that cash is available to replace assets when they are worn out
C to show what assets are worth in the statement of financial position
D to spread the cost of assets over their useful lives

2. A business purchased a crane for $40,000 on 1 January 2013. The crane was depreciated at the rate of 30% per
annum using the reducing-balance method. The crane was sold on 31 December 2015 for $7,750. A full year's
depreciation was charged in the year of disposal. What was the profit or loss on disposal?
A $3,750 loss
B $3,750 profit
C $5,970 loss
D $5,970 profit

3. The following information relates to the non-current assets of a business:

$
Cost at 1 April 2015 32,000
Accumulated depreciation at 1 April 2015 13,600
Non-current assets purchased in year ended 31 March 2016 7,000
Depreciation charged for the year ended 31 March 2016 4,200

Depreciation is calculated on the reducing-balance basis at the rate of 30%. What was the net book value of the
assets that were disposed of in the year ended 31 March 2016?
A $11,400
B $16,800
C $18,400
D $25,400
4. The following information is extracted from the books of a business:

At 31 Dec 2014 At 31 Dec 2015

$ $
Non-current assets (at cost) 230,000 275,000
Less: accumulated depreciation 85,000 98,000

Further information for the year ended 31 December 2015 is as follows:

$
Depreciation charged in the income statement 25,000
Additions to non-current assets (at cost) 60,000
Loss on sale of non-current assets 1,000

How much was received from the sales of non-current assets?

A $2,000
B $3,000
C $4,000
D $5,000