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Brian Makanda

John Regan set up a garage and car sales business on 1 January 2024 with the following assets:

Land and Buildings: $120 000

Plant & Equipment: $60 000

Loose Tools: $5 000

Inventory of motor vehicles: $45 000

Inventory of car parts: $7 000

Cash at bank: $1 000


John decided on the following policy for depreciation 

  1. Land, costing $70 000, is not to be depreciated.
  2. Buildings, costing $50 000, are to be depreciated at 4% per annum on cost using the straight line method.
  3. Plant and equipment is to be depreciated at 50% per annum using the diminishing balance method.
  4. Loose tools are to be depreciated using the revaluation method.

Explain why John Regan does not depreciate each of the following:

(a) Land

(b) Inventory of motor vehicles 

Explain why John Regan uses the revaluation method to depreciate loose tools.

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Zoe
  1. land is limited in supply because it cannot be produced to meet rising demand therefore its value appreciates. Also land has an infinite life therefore its cost can not be spread over a number of infinite years
  2. inventory of motor vehicle can not be depreciated because these are goods meant for sale to earn a profit. Inventory is valued at the lower of cost and net realizable value, not depreciated.
  3. loose tools are small and numerous and can easily be lost, broken, or stolen hence it is not prudent to apply the standard methods of calculating depreciation (straight line method and reducing balance method) for each and every $10 spanner.
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