MarCom SA purchased a new commercial vehicle with an estimated useful life of five years. The cost of the asset was 22,500 lei (net of VAT) and its residual value after five years was estimated to be 2500 lei. Show the effects of the annual depreciation.

Question

Accepted Answer

Using the straight-line method, the annual depreciation expense would be:
(22,500 − 2500)/5 = 20,000/5 = 4000 lei

Thus, profits would bear an annual expense of 4000 lei, while the cost of the vehicle would be reduced by the same amount each year in the Balance Sheet.

The journal entry to deal with the purchase of the asset would be:

26,775 lei % = Non-current asset suppliers 26,775 lei

22,500 lei Vehicles
4275 lei VAT deductible

At the end of the year, the Depreciation Expense account is debited with 4000 lei and the Accumulated Depreciation account is credited with the same amount. On the basis of this prerequisite, the financial statements will include the non current assets with the carrying amount of 18,500 lei in the Balance Sheet (disclosed as vehicles at cost 22,500 lei − less accumulated depreciation to date 4000 lei).
Journal entries would include :

4000 lei Depreciation expense = Accumulated depreciation 4000 lei

The depreciation expense for the year is closed into the P&L Account by the end of the year:

4000 lei Profit and Loss Account = Depreciation expense 4000 lei

Extract from Ledger Accounts

Depreciation Expense a/c

December 31st	December 31st
Accumulated depreciation 4000 lei	Profit and Loss a/c 4000 lei

Accumulated Depreciation a/c

December 31st	December 31st
Balance c/d 4000 lei	Depreciation Exp. a/c 4000 lei
	January 1st
	Balance b/d 4000 lei

Extract from the Profit and Loss Account

Depreciation	4000 lei
Heating and electricity	*
Motor vehicle running costs	*

Extract from the Balance Sheet

Non-current assets	Cost	Depreciation	Carrying amount (NBV)
Motor vehicles	22,500 lei	4000 lei	18,500 lei

Question 6.15: MarCom SA purchased a new commercial vehicle with an estimat...

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