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Summary Straight Line Disposal AAT Level 3 (Depreciation)
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This document explains how to answer a double entry depreciation disposal question
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Disposal of a Non-Current Asset (Straight-Line Method)Question: You are working on the accounts of a business that is registered for VAT
A new machine has been acquired. VAT can be reclaimed on this machine
The cost excluding VAT was £8,000: this was paid from the bank
The residual value is expected to be £3,000 excluding VAT
The depreciation policy for machines is that they are depreciated on a straight-line basis over four years
Depreciation has already been entered into the accounts for the existing machines
You are to make entries to account for:
- The purchase of a new machine
- The depreciation on the new machine
2.The £1,250 is credited to the accumulated depreciation account because we will not get this money back (liability)
1.First we need to work out the depreciation using a simple equation: Price (when brought) - Residual Value (scrap value) / Useful Life (in years)
So…
£8,000-£3,000/4 years = £1,250
From the question, we can see that:
- The bal b/d is a debit in the machinery at cost account because it is an asset
- The bal b/d in the accumulated depreciation account is a credit because it is a liability
- The bal b/d in the depreciation charges account is a debit because it is an expense
3.The double entry to this is debit the depreciation charges account (expense) of £1,250
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