A client's plant and machinery has a cost brought forward of £480,000. Additions in the year cost £60,000 and there were no disposals. The accounting policy is 20% straight-line, with a full year's charge in the year of acquisition. The client has charged depreciation of £102,000. What is the expected charge and what does the comparison show?

Correct answer: C) £108,000; the charge is understated by £6,000

Explanation

Expected depreciation = (£480,000 + £60,000) x 20% = £540,000 x 20% = £108,000. The client's charge of £102,000 is £6,000 lower, which equals half a year's depreciation on the additions (£60,000 x 20% x 6/12), suggesting a time-apportioned charge was used contrary to policy. £96,000 omits the additions altogether.