During the year ended 30 September 2002 a company bought a fixed asset for £125,000. The company charges depreciation at the rate of 20% per annum on the reducing balance basis, with a full year's depreciation in the year of acquisition and none in the year of disposal. During the year ended 30 September 2005 the asset was sold for £45,000. What was the loss on sale of the asset? A. £5,000 B. £6,200 C. £19,000 D. £35,000 The answer is C but I was a bit stumped by this question. We haven't been given the estimated residual value or the expected lifetime of this asset but we are told that depreciation is charged "at the rate of 20% pa on the reducing balance basis" so £125,000 * 0.2 = £25,000 is depreciated per year. It is depreciated for the full year in it's year of acquisition but not in the year in which it is sold, so it is depreciated for a total of 3 years. It's estimated residual value should be £50,000 by the time it is sold and it is sold for £45,000 thus making a loss of £5,000 i would have thought. Any help would be much appreciated. Thanks Edit: Realised I need to take £25,000 the first year, then 20% on the following years thus getting £64,000 so loss of sale is £19,000. Not sure how to delete posts
Glad you solved it - the key is "reducing balance basis" - easy mistake to make - always read the question carefully
