Harborline Print: Depreciation Policy, a Mid-Year Disposal and a Van That No Longer Exists
Harborline Print & Design Ltd prepares accounts to 31 December. Its stated policy is straight-line depreciation on printing presses at 20% of cost, with a full year's charge in the year of acquisition and none in the year of disposal, and reducing-balance depreciation on delivery vehicles at 25%. On 30 September 2024 the company sold a press bought on 1 January 2021 for $48,000, receiving $9,500. The only other press, bought on 1 July 2022 for $72,000, is still in use. The vehicles account shows cost $66,000 and accumulated depreciation $38,500 at 1 January 2024. A van bought in 2022 for $22,000 is still in the register with a carrying amount of $7,900 at the date it was sold, but the fleet manager confirms it was sold in June 2023 for $6,200 and the proceeds were credited to sundry income. No disposal entries were ever made and depreciation continued to be calculated on the full fleet. The directors are also considering switching presses to monthly apportionment.
1. Calculate the depreciation charge on presses and on vehicles for the year ended 31 December 2024 and the profit or loss on the press disposal, applying the stated policy. Show accumulated depreciation and carrying amounts.
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Presses - 20% straight line on cost; full year in year of acquisition, none in year of disposal
Press sold 30 September 2024 (cost $48,000): charge for 2021, 2022 and 2023 = 3 × $9,600 = $28,800; carrying amount at disposal $48,000 − $28,800 = $19,200; proceeds $9,500, so loss on disposal $9,700. No 2024 charge under the stated policy.
Press retained (cost $72,000, acquired 1 July 2022): full year charged in 2022 under the policy, then 2023 and 2024 = 3 × $14,400 = $43,200 accumulated at 31 December 2024; 2024 charge $14,400; carrying amount $28,800.
Total press charge for 2024 = $14,400.
Vehicles - 25% reducing balance
The van sold in June 2023 must come out first, otherwise every later depreciation charge is built on an asset the company does not own:
- Van: cost $22,000, carrying amount $7,900 → accumulated depreciation $14,100.
- Restated fleet at 1 January 2024: cost $66,000 − $22,000 = $44,000; accumulated depreciation $38,500 − $14,100 = $24,400; carrying amount $19,600.
- 2024 charge = 25% × $19,600 = $4,900.
If the register is left uncorrected the charge is 25% × ($66,000 − $38,500) = $6,875, i.e. $1,975 too high, and the carrying amount of vehicles is overstated by $7,900.
The loss of $9,700 on the press is a loss on disposal reported separately; it is not part of the depreciation charge.
2. Quantify the effect of the unrecorded van disposal on 2023 profit, on the 2024 depreciation charge and on net assets at 31 December 2024, and state the entries that should have been made in 2023.
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Entries that should have been made in June 2023
Dr Disposal 7,900 Dr Accumulated depreciation 14,100 Cr Vehicles (cost) 22,000
Dr Bank 6,200 Cr Disposal 6,200
Dr Profit or loss - loss on disposal 1,700 Cr Disposal 1,700
What actually happened and its consequences
| Effect | |
|---|---|
| 2023 profit | Credited $6,200 to sundry income instead of charging a $1,700 loss → overstated by $7,900 |
| 2024 depreciation | 25% charged on a carrying amount that still includes $19,600 of van → charge $6,875 instead of $4,900, overstated by $1,975 |
| Net assets at 31 December 2024 | Van cost $22,000 less $14,100 accumulated depreciation is overstated by $7,900; this is offset in 2024 profit only by the excess depreciation of $1,975 |
| Receivables/payables | No effect - the sale was for cash, recorded in the bank |
The $7,900 is one error with a profit effect in 2023, a depreciation effect in 2024 and a closing balance sheet effect at 31 December 2024. If the 2024 accounts are not yet finalised, correct the 2024 comparative figures; if they are finalised and the amount is material, treat it as a prior period adjustment through retained earnings rather than as a 2024 gain, because the transaction belongs to 2023.
Control lesson: keep the non-current asset register reconciled to a physical verification each year, and match every disposal to an authorised disposal note, cash receipt and the register entry. A register that records an asset the company sold 18 months ago means depreciation, profit and net assets are all unreliable.
3. Advise the directors on whether to change press depreciation to monthly apportionment, supporting your advice with figures for the press sold on 30 September 2024.
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Figures under monthly apportionment
Press sold 30 September 2024: charge 2021–2023 = $28,800 plus 9/12 × $9,600 = $7,200 → accumulated depreciation $36,000; carrying amount $12,000; proceeds $9,500 → loss $2,500 instead of $9,700.
Press retained: 6/12 × $14,400 = $7,200 in 2022, plus $14,400 in 2023 and $14,400 in 2024 → accumulated depreciation $36,000, carrying amount $36,000 instead of $28,800.
Assessment
- Monthly apportionment matches the depreciation expense to the period the asset was actually used. The present policy charges no depreciation in 2024 for an asset used for nine months and charged a full year in 2021 for an asset used for twelve - the errors happen to be small here, but they are arbitrary.
- The current policy front-loads depreciation on assets sold early, producing a $9,700 loss where monthly apportionment gives $2,500. That volatility pushes the directors towards holding on to assets simply to avoid a disposal loss.
- The carrying amount under the current policy ($28,800 on the retained press) understates the asset still in use, which distorts ROCE and asset turnover.
- IAS 16 requires the depreciation method to reflect the pattern of consumption of the asset's future economic benefits; a full-year/nil convention is only acceptable if it is not materially different from that pattern.
Against: more record-keeping, monthly depreciation runs, and the need for accurate acquisition and disposal dates.
Recommendation: change, applied prospectively as a change in accounting estimate (no restatement of prior years), with disclosure of the nature and effect of the change. The 2024 press charge stays at $14,400 for the retained press, but the disposal loss falls to $2,500 and the carrying amount rises by $7,200.