A vehicle bought for £30,000 is depreciated at 20% a year straight line with no residual value, with a full year's charge in the year of purchase and none in the year of disposal. It is sold in the fourth year for £11,000. What is the result on disposal?
Answer and explanation
Correct answer: A. Loss of £1,000
- Step 1: Charges are made in years 1, 2 and 3 only: £30,000 × 20% × 3 = £18,000.
- Step 2: Carrying amount = £30,000 - £18,000 = £12,000.
- Step 3: Proceeds of £11,000 are £1,000 below the carrying amount, so there is a loss of £1,000.
Answer
Loss of £1,000.
Why not the others: Profit of £1,000 has the right size but the wrong sign, because proceeds are lower than the carrying amount. Loss of £7,000 compares proceeds with accumulated depreciation of £18,000 instead of the carrying amount. Profit of £5,000 charges a fourth year of depreciation in the year of disposal, giving a carrying amount of £6,000.
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