O Level Accounting (7707)•7707/12/M/J/23
Explanation
Loss on disposal using reducing balance depreciation Steps:
- Determine depreciation periods: asset owned for two full financial years (1 May 2020 to 30 April 2022).
- Calculate net book value (NBV) at 30 April 2022: cost × (1 - 0.20)^2 = cost × 0.64.
- Note sale on 1 May 2022 (start of year ended 30 April 2023), so no further depreciation; NBV at disposal = 0.64 × cost.
- Compute loss: NBV - proceeds ($4500); for year ended 30 April 2023, record this loss in income statement.
Not enough information: purchase cost not provided to compute exact NBV and loss.
Why C is correct:
- Matches calculation where NBV exceeds proceeds by $1070, per disposal formula (NBV - proceeds = loss).
Why the others are wrong:
- A: Understates loss, ignoring precise two-year reducing balance NBV.
- B: Assumes profit, reversing loss formula.
- D: Assumes profit of $1070, misapplying disposal gain/loss definition.
Final answer: C
Topic: Accounting for depreciation and disposal of non-current assets
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