Describe one disadvantage for GD of leasing.

Calculate the value (also known as net book value) of new machinery at 31 December 2017 using the straight line depreciation method (show all your working).

Calculate the value (also known as net book value) of new machinery at 31 December 2017 using the reducing/declining balance method, applying the industry depreciation rate of 40% per annum (show all your working).

Explain one advantage for GD of using the straight line balance depreciation method.

One of the disadvantages for GD of leasing rather than buying the machinery is that the machine will not be recorded as part of its fixed assets. Hence, GD will show lower fixed assets on its balance sheet with some financial consequences, like fewer assets being available for collateral.

By leasing, GD will have to pay for the machines throughout the time used but will never own the machines.

Accept any other relevant description.

Application is not expected.

Do not credit examples

Award [1] for identifying an appropriate disadvantage and [1] for an appropriate description up to a maximum of [2].

$\frac{\text{Purchase costs}-\text{Residual value}}{\text{Life span}}$ = Annual depreciation

All figures are in $

$\frac{50000-8000}{4}$ = 10500 per year

By the end of 2017, the new machinery will have a book value of 50000 − (10500 × 2 years) = $29000

Candidates do not have to present the formula in words as long as the figures are correct.

Award [1] for a correct use of the formula and clear working.
Award [1] for a correct final figure of net book value.

Award a maximum of [1] if the final figures are correct but no working shown.

Net book value using reducing balance method:
Original costs − accumulated depreciation
All figures are in $.

It is expected that the candidates produce for each year a clear working of the depreciation allowance as well as the calculation of the net book. Marks to be awarded for the two stages.

For the end of 2016:
Award [1] for a correct working method and a figure of the depreciation allowance, and [1] for the correct working and figure of the net book value.
Candidates can be awarded the marks even if the terms NBV or depreciation allowance are not explicitly written as long as the calculations are clear
If only a correct figure is presented without working award a maximum of [1].

The exact year or year 1 or year 2 for which the calculations are done should be written for full marks.

For the end of 2017:
Award [1] for a correct working method and a figure of the depreciation allowance and [1] for the correct working and figure of the net book value. Candidates can be awarded the marks even if the terms NBV or depreciation allowance are not explicitly written as long as the calculations are clear
If only a correct figure is presented without working award a maximum of [1].

If the net book value is correct but there is no working/r evidence of the calculation of the depreciation allowance award [1]

Producing a final correct figure of net book value for 2017 using a short cut mathematical formula with a use of graphic calculator is not sufficient for full marks as it is judged as using a one stage approach.

Award [2] If mathematically the candidates arrived at the correct net book value for end of 2017 by using a mathematical formula which is stated/ presented with no interim explicit calculations/ expression of the depreciation allowance or the net book value for 2016.

Allow OFR.

• The straight line method is simpler and therefore easier for GD to calculate and less time consuming. As GD is an engineering company rather than an accounting company as well as new company, perhaps the easier method will be chosen.
• It allows for a constant expense to be accounted for in the profit and loss account. GD’s accountant might want to show a higher profit level to attract more investors. The use of a straight line depreciation method will result in lower expenses compared with reducing balance depreciation allowance. For example, 10,500 as opposed to 20,000 using the reducing balance methods.
• The use of a straight line method will result in the same figure $8000 as estimated as residual value hence make the process easier/ more accurate/ more straightforward for GD’s accountant.

Award [1] for an advantage of the straight line method.
Award [1] for some application to GD that goes beyond just mentioning the name GD.

Most candidates were able to answer this question well. Those candidates awarded 1 mark only listed or outlined a potentially relevant disadvantage but did not describe the disadvantage.

Many candidates produced a clear and correct responses with full working shown. However, a noticeable number of candidates just calculated the depreciation allowance. Some calculated the net book value for 2016 rather than 2017.

Few candidates were awarded full marks. Some candidates produced a clear calculation of both the depreciation allowance and the final net book value for each year. Some candidates who opted for this question did not show all of their working or stopped at 2016. A number of candidates continued beyond the request of the question to stop at 2017 and some candidates had no idea how to use any of the depreciation methods, yet opted for Q2.

A significant number of candidates were not awarded full marks due to not specifically referring to the advantage of the method in relation to GD. Otherwise, most candidates provided a relevant theoretical advantage. Some referred to a disadvantage.