Question

Raj Ltd purchased a machine on 1st January 2019 for ₤100,000. Transporting the machine to its factory cost ₤1,600 and ₤1,000 was spent on installing it. Maintenance of the machine cost ₤750 in 2019 and the expenditure on maintenance increased by ₤200 in each of the following four years. The machine was expected to last until 31st December 2026 with a scrap (or residual) value at that date of ₤6,600. The company uses the straight-line method of depreciation. It provides for a full year’s depreciation in the year of acquisition and none in the year of sale.

The machine was sold for ₤34,000 on 30th June 2023.

Required:

Explain briefly what you understand by the term “depreciation” as used by accountants. In what circumstances would straight-line be the most appropriate method to use for an asset? Give the following calculations:

(i) the depreciation charge for 2019;
(ii) the profit or loss on sale of the machine in 2023.

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Depreciation Accounting

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