Reducing/ Diminishing method EXAMPLES
Example 1 Reducing/ Diminishing method
The financial year-end of the business ends on 31 March.
The following information was extracted from the general ledger of Rea-Gona Manufacturers:
1. Land and buildings
Extract from trial balance - 31/3/2017 Debit -R Credit - R
Land and buildings 2 400 000
Accumulated depreciation – buildings ?
1.1 Rea-Gona Manufacturers purchased land and buildings on 1 December 2013 for cash. 80%
of the total cost is attributable to buildings and the balance of the cost to land. The building
was available for use on 1 January 2014, after all renovations were completed. The
employer and all employees attended prior operations training in Cape Town, from 2
January to 31 January 2014. They started using the building on 1 February 2014.
It is the policy of Rea-Gona Manufacturers to depreciate buildings over its estimated useful
life of 30 years, using the diminishing balance method with no residual value.
REQUIRED:
1. Indicate the date on which the business will start to depreciate the building and briefly
explain your answer. (4 Marks)
2. Prepare the journal entries in respect of the purchase of the land and buildings as
described in Note 1. (5.5 Marks)
-Journal narrations are NOT required.
-Journal date is required.
-Show all calculation.
3. Prepare the journal entry in respect of the depreciation expense for the building for the
year ended 31 March 2017. Refer to Note 1. (7 Marks)
-Journal narrations are required.
-Journal dates are required.
-Show all calculations
Example 2 Reducing/ Diminishing method
Usejumbana Toys Manufacturers is a business that produces and sells toys for young children.
The business is NOT a registered VAT vendor. The business commenced on 1 October [Link]
year end is 30 September.
1. Land and buildings
1.1. Usejumbana Toys Manufacturers purchased land and buildings on the 1 October 2013
at a cost of R800 000 and paid a deposit of R500 000 on the same day. 70% of the total
cost is attributable to buildings and the balance to the land. It is the policy of the
business to depreciate buildings over its estimated useful life of 20 years using, the
reducing balance method. Buildings have no residual value. Usejumbana Toys
Manufacturers occupied the buildings on the acquisition date.
1.2. 0n 2 October 2015, Usejumbana Toys Manufacturer settled the outstanding balance.
(Refer to note 1.1)
REQUIRED:
1) Refer to the information given in NOTE 1 (Land and buildings) only.
a) Provide the general journal for the recognition of land and buildings as given in note 1.1
in the accounting records of Usejumbana Toys Manufacturers. (5.5 Marks)
b) Prepare the journal entry in respect of note 1.2 (2.5 Marks)
c) Provide the relevant journal in respect to depreciation expense as it would appear in
the accounting records of Usejumbana Toys Manufacturers for the year ended 30
September 2016. (5.5 Marks)
- Journal dates are required.
- Journal narrations are NOT required.
Example 3 Reducing/ Diminishing method
Mr Nkalakatha is the owner of Godoba Paper Production “GPP”. The business is NOT registered
for VAT. The year-end of the business is on 30 June.
Godoba Paper Production
Extract from trial balance - 30/6/2016 Notes Debit - R Credit - R
Motor vehicles - 30/6/2016 1 320 000
Accumulated depreciation - Motor vehicles - 30/6/2015 1 64 000
1. Motor vehicles
a. On 31 December 2015 a vehicle was sold for R105 000 cash. The vehicle was
originally purchased on 1 July 2014 at a cost of R160 000.
b. Motor vehicles are depreciated at a rate of 20% per annum using the reducing
balance method.
REQUIRED:
1. Prepare the following accounts as they would appear in the general ledger of Godoba
Paper Production for the year ended 30 June 2016:
a. Note 1 (Motor vehicles)
i. Motor vehicle at cost. (7 Marks)
ii. Accumulated depreciation. (7.5 Marks)
iii. Depreciation expense. (2.5 Marks)
NB: The general ledger accounts must be properly balanced, dated and cross referenced