Describe one disadvantage of using the reducing/declining balance method of depreciation.

Using the reducing/declining balance method of depreciation, calculate PB Ltd’s annual depreciation of fixed assets for 2019 and 2020. Use 5 % as the depreciation rate (show all your working).

Using the selected financial information in Table 1 and your answer from (b)(i), prepare a balance sheet for PB Ltd for 31 December 2020.

The main disadvantage of the reducing balance method is the choice of an accurate/realistic percentage with which to depreciate the assets.

Secondly, the value of the asset with reducing balance is never fully written off by the business.

Award [1] for stating an appropriate disadvantage and [1] for an appropriate description (application not required), up to a maximum of [2].

Depreciation allowance in $

[3] Marks for correct figures of the depreciation allowance/yearly depreciation for each year – max 2 marks.Working is shown or clear. It is not necessary to show net fixed assets.

Subtract [1] for any omission or for a mistake in the method or the actual calculation or if the working (for one or both years) is not presented.

B/S for PB Ltd for the end of 2020. (All figures are in $)

Accurate presentation refers to the correct heading, sub-heading and to the inclusion of all and only the relevant figures.

Allow OFR.

The presentation of the B/S can be done in one column.

Award [0] if the B/S does not reach a standard described below.

Award [1] if the B/S is not accurately constructed, and/or the calculations within and between the various components are not presented or largely incorrect. However, there is limited evidence of a general understanding
of the format. More than four mistakes/omissions are evident.

Deduct 1 mark for each irrelevant addition of figures/irrelevant heading/omission which can includes the overall heading.

Award [5] if the B/S is accurately constructed in the expected IBO format. All the relevant headings of each component/parts are used and correctly classified.

Do not penalise for internal order of classification. All and only the relevant figures are presented. No extra irrelevant figures that belong to the P/L are included. The calculations under each part/component of the B/S are
correct and well presented.

To get full marks the candidate has to present the format in full as presented in the IB programme. For example, the presentation, calculation of working capital, the subtraction of LTL to arrive at Net Assets.

For full marks candidates must use the depreciation to arrive at net fixed asset. Ignoring the net fixed assets/depreciation should be rated as 1 mistake as the account will not balance for another deduction.

N.B. If the candidate does not follow the IBO format award up to [2] marks.

Deduct 1 mark for each irrelevant addition of figures/irrelevant heading/omission.

N.B. The values in table 1 assume that Phoebe has included the depreciation in the P/L which leads to the calculation of given retained profit. If a student does not make this assumption but tries to recalculate retained profit do NOT penalize but apply OFR to the extent possible. The BS will not balance (minus 1 mark) Mark all other calculations and headings as normal.

If candidates start the B/S with Fixed assets of 19000 (because they have already deducted the depreciation for 2019) and then proceed to deduct just 2020 depreciation then allow this.

Accept Capital Employed as an alternative definition of Total Assets minus Current Liabilities heading.

Many responses seemed to focus on advantages and therefore did not answer the question. Gaining the second mark here was also difficult and required some knowledge of the negative consequences of choosing this method over the straight-line method e.g., tax – higher depreciation in earlier years leads to lower net profits.

Relatively straight forward calculation with most candidates who attempted it, gaining full marks.

Despite the question specifically asking candidates to use the information in (b)(i) many candidates failed to do so. Some candidates made the error of only subtracting one years’ worth of depreciation. Unfortunately, although compiling balance sheets is a common exam question in Section A, it is mainly without taking account of depreciation and some students were confused by this. There was perhaps a little confusion in the figures supplied, in that depreciation had already been factored into to the Profit and loss account. Where candidates tried to do the profit and loss calculation they obviously would not get the balance sheet to balance. The mark scheme was adjusted to give these candidates credit for their attempt.