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3.4 Depreciation

3.4 Depreciation Practice Topic

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14 views

3.4 Depreciation

3.4 Depreciation Practice Topic

Uploaded by

a.deandresatienza
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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IB Business Management – Finance and Accounts

3.4D: Final Accounts: Activity

IB Business Management: www.BusinessManagementIB.com

3.4 FINAL ACCOUNTS: ACTIVITY D

Read the case study information below and answer the questions that follow.

FESTA LTD

Ashleigh Yi started a new business in January


2012. She set the firm up as a private limited
company, Festa Ltd. Ashleigh took a majority 80
per cent shareholding in the business and
appointed herself as Chief Executive Officer. Her
accountant, Courtney Yule, joined Ashleigh
buying the remaining shares.
To finance the launch, Ashleigh estimated a
figure of $300,000. She produced a business plan
and forecast financial information as part of the
process of obtaining most of the required
finance (see table below). Ashleigh presented this financial information to Courtney Yule.
Courtney examined the figures and pointed out that Ashleigh had omitted a provision for
depreciation of the firm’s fixed assets, which were valued at $200,000 on start-up. She
suggested that Ashleigh worked on the basis of a four-year life for the assets and estimated a
residual value of $40, 000.
IB Business Management – Finance and Accounts
3.4D: Final Accounts: Activity
Non-operating income
(income unrelated to
Forecast financial information for Festa Ltd for sales; e.g. interest
the years 2014 and 2015 received, dividends from
shares held in other
2014 2015 companies, subsidies from
govt.) is added in here.
($000) ($000)

Turnover 485 870

Cost of sales 245 450

Expenses 91 138

Non-operating 11 13
income

Interest 20 55

Tax 35 60

Dividends 60 75
Source: www.BusinessManagementIB.com

QUESTIONS: 24 MARKS, 50 MINUTES

1. Define residual value. [2 marks]

2. Differentiate between straight line and the reducing balance methods of depreciation.
[4 marks]

3. If the company decides to use an annual depreciation rate of 30 per cent, use the
reducing balance method of depreciation to calculate the book value of Festa Ltd.’s
assets after three years. [4 marks]

4. Using straight-line depreciation, calculate the annual provision for depreciation that
George had omitted. (Show all of your working) [4 marks]

5. Using the financial information provided for 2014 and 2015, prepare profit and loss accounts
for the two years, adjusting the figures in the table above to include the provision for
(straight line) depreciation and re-calculating the tax payment to equal 25 per cent of net
profit before tax. [10 marks]

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