Question:

Agatha Co. is a trading company making up its accounts regularly to 31 December each year.

At 01 January 2005 the following balances existed in the records of Agatha Co.
                                                                                                Rs 000`s

Freehold Buildings - Cost                                                            500
Accumulated depreciation on buildings to 31.12.2004                210
Office equipment - Cost                                                               40
Accumulated depreciation on Office equipment to 31.12.2004    24

The company`s depreciation policies are as follows:

Freehold building - depreciation allowed at 2% per annum on cost on the straight line basis

Office equipment - depreciation allowed at 12.5% per annum on the straight line basis.

A full year's depreciation is charged in the year of acquisition of all assets and none in the year of disposal.

During the two years to 31 December 2006 the following transactions took place.

Year ended 31 December 2005.

(i) 10 June - Office equipment purchased for Rs 16,000. This equipment was to replace some old items which were given in part exchange. Their agreed part exchange value was Rs 4,000. They had originally cost Rs 8,000 and their book value was Rs 1,000. The company paid the balance of Rs 12,000 in cash.

(ii) 8 October - An extension was made to the building at a cost of Rs 50,000 Year ended 31 December 2006 1 March - Office equipment which had cost Rs 8,000 and which had a written down value of Rs 2,000 was sold for Rs 3,000.

Required:

(a) Write up the necessary ledger accounts to record these transactions for the two years ended 31 December 2006.

(b) Provide three reasons why depreciation might occur.

(c) Explain briefly two methods of calculating depreciation.

(d) In what way do you think that the concept of consistency applies to depreciation?