Adjustments for Provision for Depreciation (Cambridge (CIE) IGCSE Accounting)

Worked Example

Carlita owns a restaurant in her local area. Carlita’s financial year end is 30 April.

On 1 May 2022, she bought furniture costing £15 000 and paid for it by cheque. Carlita’s policy for the depreciation of furniture is to use the reducing balance method of depreciation at 20% per annum. Carlita charges depreciation in the year of purchase.

(a) Prepare an extract from the income statement for the year ended 30 April 2023 and an extract of the non-current assets section from the statement of financial position at 30 April 2023.

(b) Prepare an extract from the income statement for the year ended 30 April 2024 and an extract of the non-current assets section from the statement of financial position at 30 April 2024.

Answer

Part (a)

• Calculate the depreciation charge for the first year by finding 20% of the net book value

• In the first year, the netbook value and cost are the same

  • 20% ✕ $15 000 = $3 000

• Calculate the net book value at the end of the first year

• Subtract the total depreciation from the cost

  • $15 000 - $3 000 = $12 000

• Prepare the extracts

  • Only include the year’s depreciation on the income statement

  • Include the cost, total depreciation and net book value on the statement of financial position

Part (b)

• Calculate the depreciation charge for the second year by finding 20% of the net book value

  • 20% ✕ $12 000 = $2 400

• Find the total depreciation to date

  • $3 000 + $2 400 = $5 400

• Calculate the net book value at the end of the second year

• Subtract the total depreciation from the cost

  • $15 000 - $5 400 = $9 600

• Prepare the extracts

  • Only include the year’s depreciation on the income statement

  • Include the cost, total depreciation and net book value on the statement of financial position