Van Purchase, Disposal and Depreciation at Bafoussam Trading
Bafoussam Trading closes its accounts on 31 December. On 1 January 2024 its motor vehicles account showed cost of 20,000,000 FCFA and accumulated depreciation of 9,000,000 FCFA. Depreciation is 20% per annum straight-line, charged pro rata from the month of purchase and up to the month before disposal. On 1 July 2024 a new van was bought for 2,800,000 FCFA and the amount was debited to motor expenses. On 1 October 2024 a van was sold for 1,500,000 FCFA and the proceeds were credited to sales. This van had cost 5,000,000 FCFA on 1 January 2020. The draft profit of 8,000,000 FCFA was calculated before charging any depreciation for 2024 and before correcting the two entries. No other vehicles were bought or sold.
1. Explain why the van purchase and the sale proceeds require correction, and state the accounts that should have been used.
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The van purchase is capital expenditure. It creates a non-current asset that will be used for several years, so it should be debited to motor vehicles, not to motor expenses. Debiting it to motor expenses understates profit and understates non-current assets.
The sale proceeds are not sales revenue. Selling a vehicle is a disposal of a non-current asset, so the proceeds should be credited to a disposal account. The vehicle's cost and accumulated depreciation must be removed from the motor vehicles and provision for depreciation accounts. Crediting the proceeds to sales overstates sales and leaves the sold vehicle in the books.
2. Prepare the disposal account for the van sold and calculate the total depreciation charge for 2024.
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Disposal account
| Dr | FCFA | Cr | FCFA |
|---|---|---|---|
| Motor vehicle at cost | 5,000,000 | Accumulated depreciation: 4,000,000 + 750,000 | 4,750,000 |
| Profit on disposal | 1,250,000 | Bank / receivable | 1,500,000 |
| Total | 6,250,000 | Total | 6,250,000 |
The van was bought on 1 January 2020. By 1 January 2024 it had four years' depreciation: 5,000,000 × 20% × 4 = 4,000,000 FCFA. Depreciation to 30 September 2024 is 5,000,000 × 20% × 9/12 = 750,000 FCFA. Carrying amount at disposal = 5,000,000 − 4,750,000 = 250,000 FCFA. Profit = 1,500,000 − 250,000 = 1,250,000 FCFA.
Depreciation charge for 2024
| Asset group | Calculation | FCFA |
|---|---|---|
| Remaining old fleet: 20,000,000 − 5,000,000 | 15,000,000 × 20% | 3,000,000 |
| Van sold: January to September | 5,000,000 × 20% × 9/12 | 750,000 |
| New van: July to December | 2,800,000 × 20% × 6/12 | 280,000 |
| Total | 4,030,000 |
3. Compute the corrected profit for 2024 and prepare the non-current asset extract at 31 December 2024.
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| Corrected profit | FCFA |
|---|---|
| Draft profit | 8,000,000 |
| Add back van purchase wrongly debited to expenses | 2,800,000 |
| Less sale proceeds wrongly credited to sales | (1,500,000) |
| Add profit on disposal | 1,250,000 |
| Less depreciation charge | (4,030,000) |
| Corrected profit | 6,520,000 |
Non-current assets extract
| Motor vehicles | FCFA |
|---|---|
| Cost: 20,000,000 + 2,800,000 − 5,000,000 | 17,800,000 |
| Accumulated depreciation: 9,000,000 − 4,750,000 + 4,030,000 | (8,280,000) |
| Carrying amount | 9,520,000 |
Check: remaining old fleet carrying amount = 15,000,000 − (5,000,000 + 3,000,000) = 7,000,000; new van = 2,800,000 − 280,000 = 2,520,000; total = 9,520,000 FCFA.