Dagmar spent £11 700 on 1 February 20X2 in acquiring a new car for use in her business.The basic price of the car was £11 000, but she spent an additional £700 on air conditioning for it.Dagmar's policy is to depreciate on the reducing balance basis at a rate of 25%. What was the charge to depreciation in respect of this car for Dagmar's financial year ended 31 January 20X4 (to the nearest £)?
A)£6581
B)£1645
C)£2194
D)£2063

Question

Quizplus · Accepted Answer

The opening balance of the car cost as of 1 February 20X2 is £11 700.
The depreciation rate is 25% which means that each year, the value of the car will reduce by 25%. Therefore, the value of the car at the end of the first year (31 January 20X3) will be 75% of £11 700 = £8775. The value at the end of the second year (31 January 20X4) will be 75% of £8775 = £6581.25. 
The charge to depreciation in respect of this car for Dagmar's financial year ended 31 January 20X4 will be the difference between the opening balance and the closing balance, which is £11 700 - £6581.25 = £4118.75. Rounding this to the nearest £ gives £2194. Therefore, the answer is C) £2194.

Dagmar Spent £11 700 on 1 February 20X2 in Acquiring