Accounting multiple choice question on depreciation. please help!?

Question

a company buys a machine on Aug 1st 2204 for €225,000 and puts it into use immediately.

the machine has useful life of 10yrs and residual value of €5,000.

on may 30th 2007 the machine was disposed of for 125,000.

the company's year end is 30th September. its accounting policy is to charge depreciation using straight line method with a proportionate charge in the year of acquisition and disposal.

the profit and loss on disposal of the machine is...

a: loss of €32,666

b: loss of €37,666

c: loss of €12,000

d: profit of €35,666

please help!! and if you can explain how to get the answer with working thanks!!

Answer 1

Divide the 220000 by 10 years to work out the yearly deprecation , then work out the % deprecation , over the length of time the machine was in use , the difference in the estimated depression , and the actual is you profit / loss . Hint its looking like a loss

Answer 2

The company was prepared to buy for 225k and finish up with a machine worth 5k - so the depreciation was 220k over 10 years, which is 22k in a full year.

They actually had the machine for 2 years and 10 months (2.8333 years) - so the depreciation they had allowed for was 62333 ( 2.8333 x 22000).

The final sum looks like this.

Cost 225000

Disposal revenue 125000

loss = 100000 less depreciation already calculated and allowed for in the accounts (62333 as shown above).........

Means the loss on disposal was 37666 (answer b).

Hope that is clear for you.