QUESTION ONE a) Differentiate between depreciation and amortization b) Explain the main courses of depreciation c) The following information relates to the Motor Vehicle account of Ayieye & Associates:

a) Depreciation and amortization are both accounting methods used to allocate the cost of an asset over its useful life. The key difference lies in the type of asset they apply to:

• Depreciation is the systematic allocation of the cost of tangible assets (physical assets like machinery, buildings, vehicles) over their useful life.
• Amortization is the systematic allocation of the cost of intangible assets (non-physical assets like patents, copyrights, trademarks, goodwill) over their useful life.

b) The main causes of depreciation include:

• Physical deterioration: This refers to the wear and tear on an asset from its use, exposure to elements, or simply the passage of time, leading to a decline in its physical condition and operational efficiency.
• Obsolescence: An asset becomes obsolete when it is no longer useful or competitive, often due to technological advancements, changes in consumer demand, or new regulations, even if it is still in good physical condition.
• Depletion: This specifically applies to natural resources (like mines, oil wells, timberland) and refers to the reduction in the quantity of the resource as it is extracted or consumed.
• Passage of time: Some assets, such as leasehold properties, lose value simply because their legal right to use expires over time, regardless of physical wear or obsolescence.

c)

i) Determine the profit or loss on the disposal of KAA 111A

Step 1: Calculate annual depreciation for KAA 111A.
The company uses the straight-line method.

$$\text{Annual Depreciation} = \frac{\text{Cost} - \text{Residual Value}}{\text{Useful Life}}$$ $$\text{Annual Depreciation} = \frac{\text{KES } 775,000 - \text{KES } 380,000}{5 \text{ years}} = \frac{\text{KES } 395,000}{5 \text{ years}} = \text{KES } 79,000$$

Step 2: Calculate accumulated depreciation for KAA 111A at the date of disposal.
KAA 111A was purchased on 01:04:2015 and disposed of on 01:07:2018. The policy states a full year's depreciation in the year of purchase and no depreciation in the year of disposal.

• Depreciation for 2015: KES 79,000
• Depreciation for 2016: KES 79,000
• Depreciation for 2017: KES 79,000
• Depreciation for 2018: KES 0 (year of disposal)

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