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FIA FFA/ACCA F3Financial AccountingFor exams from February 2014

BPP LEARNING MEDIASample

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SyllabusTechnical contentQuestion to considerAnswerPast exam questionAnswer to past exam questionReal world exampleLocal exampleDiagramKey conceptTackling the examSummaryCase study

BPP LEARNING MEDIASampleSyllabusA The context and purpose of financial reportingB The qualitative characteristics of financial informationC The use of double entry and accounting systemsD Recording transactions and eventsE Preparing a trial balanceF Preparing basic financial statementsG Preparing simple consolidated financial statementsH Interpretation of financial statements

BPP LEARNING MEDIASampleExam formatExam format35 questions for 2 marks each 702 questions for 15 marks each 30Total 100

Two hour exam all questions are compulsory.

BPP LEARNING MEDIASampleTackling multiple choice questions 1The MCQs in your exam contain four possible answers, you have to choose the option that best answers the question.

The three incorrect options are called distractors, these are included to test your understanding of the syllabus. The following slides detail how best to avoid the common pitfalls that most students fall into.

BPP LEARNING MEDIASampleTackling multiple choice questions 2Steps to follow when attempting MCQs:

Step 1: Skim read all MCQs and identify what appear to be the easier questions.

Step 2: Attempt each question:Start with the easier questionsRead the question thoroughly Try to work out the answer before looking at the options OR you may prefer to look at the options at the beginning

BPP LEARNING MEDIASampleTackling multiple choice questions 3Step 3: Read the four options and see if one matches your own answer.

Be careful with numerical questions as the distractors are designed to match answers that incorporate common errors.

Check your calculation is correct. Have you followed the requirement exactly? Have you included every stage calculation?

BPP LEARNING MEDIASampleTackling multiple choice questions 4Step 4: What to do if your answer does not match the options?

Re-read the question to ensure that you understand it and are answering the requirementEliminate any obviously wrong answersConsider which of the remaining answers is the most likely to be correct and select the option

BPP LEARNING MEDIASampleTackling multiple choice questions 5Step 5: If you are still unsure make a note and continue to the next question

Step 6: Revisit unanswered questions. When you come back to a question after a break you often find you are able to answer it correctly straight away.

If you are still unsure have a guess. You are not penalised for incorrect answers, so never leave a question unanswered!

BPP LEARNING MEDIASampleTackling multiple choice questions 6After extensive question practice and revision of MCQs you may find that you recognise a question when you sit the exam.

Be aware that the detail and/or requirement may be different. If the question seems familiar read the requirement and options carefully do not assume that it is identical.

BPP LEARNING MEDIASample

Chapter 8

InventoryCost of goods soldAccounting for opening and closing inventories Counting inventoriesValuing inventories IAS 2

BPP LEARNING MEDIASampleSyllabus learning outcomes 1Recognise the need for adjustments for inventory in preparing financial statements.Record opening and closing inventory.

BPP LEARNING MEDIASampleSyllabus learning outcomes 2Identify the alternative methods of valuing inventory.Understand and apply the IASB requirements for valuing inventories.Recognise which costs should be included in valuing inventories.

BPP LEARNING MEDIASampleSyllabus learning outcomes 3Calculate the value of closing inventory using 'first in, first out' and 'average cost'.Understand the use of continuous and period end inventory records.

BPP LEARNING MEDIASampleSyllabus learning outcomes 4Understand the impact of accounting concepts on the valuation of inventory.Identify the impact of inventory valuation methods on profit and on assets.

BPP LEARNING MEDIASampleOverviewAccounting adjustmentsInventoryValuationCostEffects on profitNet realisable valueMethods of estimating costFIFOAVCO

BPP LEARNING MEDIASampleCost of goods sold 1Formula for the cost of goods sold$Opening inventory valueXAdd: purchases (or production costs) X XLess: closing inventory value (X)Cost of goods sold X

BPP LEARNING MEDIASampleCost of goods sold 2Carriage inwardsCost paid by purchaser of having goods transported to his businessAdded to cost of purchases

BPP LEARNING MEDIASampleCost of goods sold 3Carriage outwardsCost to the seller, paid by the seller, of having goods transported to customerIs a selling and distribution expense

BPP LEARNING MEDIASampleAccounting for opening and closing inventories 1Entries during the yearDuring the year, purchases are recorded by the following entry.

DEBIT Purchases$ amount boughtCREDIT Cash or payables$ amount bought

The inventory account is not touched at all.

BPP LEARNING MEDIASampleAccounting for opening and closing inventories 2Entries at year-endThe first thing to do is to transfer the purchases account balance to the statement of profit or loss:

DEBIT Statement of profit or loss$ total purchasesCREDIT Purchases$ total purchases

BPP LEARNING MEDIASampleAccounting for opening and closing inventories 3The balance on the inventory account is still the opening inventory balance. This must also be transferred to the statement of profit or loss:

DEBIT Statement of profit or loss$ opening inventoryCREDIT Inventory$ opening inventory

BPP LEARNING MEDIASampleAccounting for opening and closing inventories 4The exact reverse entry is made for the closing inventory (which will be next years opening inventory):

DEBIT Inventory$ closing inventoryCREDITStatement of profit or loss$ closing inventory

BPP LEARNING MEDIASampleCounting inventories 1Counting inventoriesIn order to make the entry for the closing inventory, we need to know what is held at the year-end. We find this out not from the accounting records, but by going into the warehouse and actually counting the boxes on the shelves.

BPP LEARNING MEDIASampleCounting inventories 2Some businesses keep detailed records of inventory coming in and going out, so as not to have to count everything on the last day of the year. These records are not part of the double entry system.

BPP LEARNING MEDIASampleValuing inventories 1ValuationInventories must be valued at the lower of:CostNet realisable value (NRV)

BPP LEARNING MEDIASampleValuing inventories 2CostCan use per IAS 2:FIFO (First In Last Out)Average costLIFO (Last In First Out) is not permitted

BPP LEARNING MEDIASampleValuing inventories 3NRVExpected selling price XLess: costs to get items ready for sale (X)selling costs (X) X

BPP LEARNING MEDIASampleValuing inventories 4Inventory forms a major part of the assets of some companies. So the value placed on the inventory can make a big difference to the profit or loss reported.

BPP LEARNING MEDIASampleValuing inventories in ChinaIn the 3rd quarter of 2012, the Youngor Group Co had inventory valued at CNY 24 billion.

BPP LEARNING MEDIASampleIAS 2IAS 2Inventories should be measured at the lower of cost and net realisable value the comparison between the two should ideally be made separately for each itemCost is the cost incurred in the normal course of business in bringing the product to its present location and condition, including production overheads and costs of conversion

BPP LEARNING MEDIASampleIAS 2 (contd)IAS 2Inventory can include raw materials, work in progress, finished goods, goods purchased for resaleFIFO and average cost are allowedLIFO is not allowed

BPP LEARNING MEDIASampleIAS 2 (contd)Inventories are assets:Held for sale in the ordinary course of businessIn the process of production for such sale; orIn the form of materials or supplies to be consumed in the production process or in the rendering of services

BPP LEARNING MEDIASampleIAS 2 (contd)Net realisable value is the estimated selling price:In the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale

BPP LEARNING MEDIASampleTackling the exam

Understanding IAS 2 is a very important and you will be expected to apply it in the exam.

BPP LEARNING MEDIASampleLecture example 1 According to IAS 2: Inventories, which of the following should not be included in determining the cost of the inventories of an entity? (1) Labour costs (2) Transport costs to deliver goods to customers (3) Administrative overheads (4) Depreciation on factory machine

BPP LEARNING MEDIASampleLecture example 1 (contd) AAll four items B1 only C2 and 3 only D2, 3, and 4 only

BPP LEARNING MEDIASampleAnswer to lecture example 1 C Transport costs to deliver goods to customers are an example of carriage outwards and should not be included. Administrative overheads do not relate to production and cannot therefore be included. The depreciation of the factory machine is a production overhead and should be included.

BPP LEARNING MEDIASampleLecture example 2 Jessie is trying to value her inventory. She has the following information available: $ Selling price 35 Costs incurred to date 20 Cost of work to complete item 12 Selling costs per item 1

Required What is the net realisable value of Jessie's inventory?

BPP LEARNING MEDIASampleAnswer to lecture example 2Net realisable value is: $Estimated selling price 35Less: costs of completion (12)Less: selling costs (1) 22

BPP LEARNING MEDIASampleLecture example 3On 1 January 20X7 a company held 200 units of finished goods valued at $10 each. During January the following transactions took place:

DateUnits purchasedCost per unit10 January300$10.8520 January350$11.5025 January250$13.00

BPP LEARNING MEDIASampleLecture example 3 (contd) Sales during January were as follows:DateUnits purchasedCost per unit14 January280$18.0021 January400$18.0028 January80$18.00

BPP LEARNING MEDIASampleLecture example 3 (contd)Required Determine the valuation of closing inventories and cost of sales using: (a) FIFO (b) Weighted average cost

BPP LEARNING MEDIASampleAnswer to lecture example 3(a) Closing inventories (FIFO) PurchasesOpeninginventories10 Jan20 Jan25 Jan

200 300 350250Sales14 Jan21 Jan26 Jan(200)

Nil (80)(220)

Nil(180) (80) 90@ $11.50= $1,035250@ $13.00= $3,250

$4,285

BPP LEARNING MEDIASampleAnswer to lecture example 3 (contd)Cost of sales (FIFO)$ Opening inventories (200 $10)2,000Purchases10,53012,530Less: closing inventories (4,285)8,245

BPP LEARNING MEDIASampleAnswer to lecture example 3 (contd)(b) Closing inventories and cost of sales (AVCO)UnitsCost$AverageUnit Cost$ TotalCost$Cost ofSales$1.1.X2b/f20010.002,00010.1.X2Purchase30050010.85(W1) 10.513,2555,25514.1.X2Sales(280)220 10.51(2,943)2,3122,94320.1.X2Purchase35057011.50(W2) 11.124,0256,33721.1.X2Sales(400)170 11.12(4,448)1,8894,44825.1.X2Purchase25042013.00(W3) 12.243,2505,13928.1.X2Sale(80)340 12.24 (979)4,160 9798,370

BPP LEARNING MEDIASampleAnswer to lecture example 3 (contd)(W1) $5,255/500 = $10.51(W2) $6,337/570 = $11.12(W3) $5,139/420 = $12.24

BPP LEARNING MEDIASampleChapter summary 11IntroductionInventories can be a significant figure in an entitys accounts and will impact both the profit figure and the net asset position. It is important therefore that it is recorded correctly.

BPP LEARNING MEDIASampleChapter summary 22Accounting adjustmentAs seen in chapter 6 the statement of profit or loss matches the sales revenue earned in a period with the cost of sales incurred to generate that revenue. There are therefore two inventory adjustments: the opening inventory adjustment and the closing inventory adjustment.

BPP LEARNING MEDIASampleChapter summary 33ValuationInventories should be valued at the lower of cost and net realisable value.

BPP LEARNING MEDIASampleChapter summary 44CostThe cost of inventory includes the cost of purchase, costs of conversion and any other costs necessary to bring the inventory to its present location and condition.

BPP LEARNING MEDIASampleChapter summary 55Net realisable value (NRV)Net realisable value is the estimated selling price less the costs to completion and any selling and distribution costs.

BPP LEARNING MEDIASampleChapter summary 66Theoretical methods of estimating costMethods available to estimate the cost of inventories are first in, first out (FIFO) and average cost. Under FIFO the inventories held at the year end are the most recent purchases but under average cost the cost of all inventories purchased during the year is weighted to produce an average figure.

BPP LEARNING MEDIASampleChapter summary 77Valuation effects on profitIn times of rising prices, using FIFO will mean the financial statements show higher inventory values and higher profits.

BPP LEARNING MEDIASample

Chapter 9

Tangible non current assetsCapital and revenue expenditureIAS 16DepreciationNon-current asset disposalsRevaluationsDisclosure

BPP LEARNING MEDIASampleSyllabus learning outcomes 1Define non-current assets and recognise the difference between current and non-current assets.Explain the difference between capital and revenue items and classify expenditure accordingly.

BPP LEARNING MEDIASampleSyllabus learning outcomes 2Prepare ledger entries to record the acquisition, disposal, depreciation and accumulated depreciation of noncurrent assets.Calculate and record profits or losses on disposal of non-current assets in the statement of profit or loss.

BPP LEARNING MEDIASampleSyllabus learning outcomes 3Record the revaluation of a non-current asset and calculate its subsequent depreciation and profit or loss on disposal.

BPP LEARNING MEDIASampleSyllabus learning outcomes 4Illustrate how non-current asset balances and movements are disclosed in company financial statements.

BPP LEARNING MEDIASampleSyllabus learning outcomes 5Explain the purpose and function of an asset register.

BPP LEARNING MEDIASampleSyllabus learning outcomes 6Understand and explain the purpose of depreciation.Calculate the charge for depreciation using the straight line and reducing methods, identifying when each is appropriate.Calculate the adjustments to depreciation necessary if changes are made in the estimated useful life and/or residual value of a non-current asset.Record depreciation in the statement of profit or loss and statement of financial position.

BPP LEARNING MEDIASampleOverviewCapital versus revenueexpenditureCostTangible non-currentassetsDisposalsDepreciationRevaluationsStraight linemethodReducing balancemethod

BPP LEARNING MEDIASampleCapital and revenue expenditure 1What is capital expenditure?Capital expenditure results in the acquisition of non-current assets, or an increase in their earning capacity.

BPP LEARNING MEDIASampleCapital and revenue expenditure 2What is revenue expenditure?Revenue expenditure is incurred for the purpose of trade or to maintain the existing earning capacity of the non-current assets.

BPP LEARNING MEDIASampleTackling the examIt is highly likely that some questions in your exam will focus on the distinction between capital and revenue expenditure.

BPP LEARNING MEDIASampleIAS 16IAS 16 Initial measurement at cost Components of cost Purchase price (incl import duties, excl trade discount, recoverable sales tax) Initial estimate of dismantling and restoration costs Directly attributable costs, eg site preparation, delivery and handling costs installation, assembly costs, testing and professional fees

BPP LEARNING MEDIASampleTackling the examExam focus point:

Only staff costs arising directly from the construction or acquisition of the asset can be capitalised as part of the cost of the asset.

The costs of training staff to use a new asset cannot be capitalised because it is not probable that economic benefits will be generated from training the staff as we cant guarantee that those staff will stay and use the asset. The costs of training staff should be expensed.

Watch out for this in your exam!

BPP LEARNING MEDIASampleIAS 16 (contd) Subsequent expenditure added to carrying amount if improves condition beyond previous performance

Repairs and maintenance costs are expensed.

BPP LEARNING MEDIASampleSpecimen exam question

BPP LEARNING MEDIASampleSpecimen exam answer

BPP LEARNING MEDIASampleDepreciation 1Depreciation accruals conceptIs a process of spreading the original cost of a non-current asset over the accounting periods in which its benefit will be felt

BPP LEARNING MEDIASampleDepreciation 2Two methodsStraight line depn =Reducing balancedepn = cost RB%

BPP LEARNING MEDIASampleDepreciation 3The double entry for depreciation is as follows:

DEBIT Depreciation expense (SPL)CREDIT Accumulated depreciation (SOFP)

BPP LEARNING MEDIASampleDepreciation 4Change in expected lifeIf after a period of an assets life it is realised that the original useful life has been changed, then the depreciation charge needs to be adjusted.The revised charge from that date becomes:CV at revised dateRemaining useful life

BPP LEARNING MEDIASampleTackling the examExam focus point:

If an exam question gives you the purchase date of a non-current asset which is part way through an accounting period, you should generally assume that depreciation should be calculated in this way as a part year amount, unless the question states otherwise.

BPP LEARNING MEDIASampleNon-current asset disposals 1DisposalOn disposal of an asset a profit or loss will arise depending on whether disposal proceeds are greater or less than the carrying value of the asset. If proceeds > CV = profit If proceeds < CV = loss

BPP LEARNING MEDIASampleNon-current asset disposals 2Double entry for a disposalEliminate costDEBIT DisposalsCREDIT Non-current assets

Eliminate accumulated depreciationDEBITProvision for depreciationCREDIT Disposals

BPP LEARNING MEDIASampleNon-current asset disposals 3Account for sales proceedsDEBIT CashCREDIT Disposalsor if part exchange dealDEBIT Non-current assetsCREDIT Disposalswith part exchange value

Transfer balance on disposals account to the statement of profit or loss

BPP LEARNING MEDIASampleRevaluations 1IAS 16 allows a choice betweenKeeping asset at costRevaluing to fair valueFair value may give fairer view on business.

BPP LEARNING MEDIASampleRevaluations 2Accounting for a revaluationA revaluation is recorded as follows:

DEBIT Non-current asset(revalued amount less original cost)DEBIT Accumulated depreciation(total depreciation to date)CREDIT Revaluation surplus(revalued amount less carrying value)

BPP LEARNING MEDIASampleDisclosureDisclosureWith regard to disclosure, a proforma non-current asset note is shown here.TotalLand andbuildingsPlan andequipment$ 000$ 000$ 000Cost or valuationAt January 20X716010060Revaluation surplus2020-Additions in year503020Disposals in year (45)(15)(30)At 31 December 20X718513550DepreciationAt 1 January 20X7302010Charge for year752Eliminated on disposals(3)-(3)At 31 December 20X734259Carrying valueAt 31 December 20X715111041At 1 January 20X71308050

BPP LEARNING MEDIASampleTackling the exam 1Exam focus point:

There was a question on revaluations in the December 2012 exam. This asked for the depreciation charge and balance on the revaluation reserve at the end of the financial year, following a revaluation at the beginning of the year.

The examiner commented that this was one of the questions with the lowest pass rates that session. Students correctly calculated the balance on the revaluation reserve but failed to identify the correct depreciation charge for the year.

BPP LEARNING MEDIASampleTackling the exam 2As the revaluation took place at the beginning of the year, a whole years depreciation had to be calculated using the revalued amount over the remaining useful economic life.

The remaining useful life needed to be calculated by working out the original depreciation charge and comparing this to the accumulated depreciation brought forward to find out how long the asset had been held.

Students who answered the question wrongly had used the original useful economic life rather than the remaining useful economic life figure.

BPP LEARNING MEDIASampleLecture example 1Required What examples of tangible non-current assets can you identify?

BPP LEARNING MEDIASampleAnswer to lecture example 1Examples include: (a)Land and buildings (b)Plant and equipment (c)Motor vehicles (d)Furniture and fittings, computers

BPP LEARNING MEDIASampleLecture example 2 On 10 December 20X7 an entity bought a machine. The breakdown on the invoice showed: $ Cost of machine 20,000 Delivery costs 200 One-year maintenance contract 900 21,100 Further installation costs of $500 were also incurred.

BPP LEARNING MEDIASampleLecture example 2 (contd)Required At what amount should the machine be capitalised in the entity's records? A$20,000 B$20,700 C$20,200 D$21,600

BPP LEARNING MEDIASampleAnswer to lecture example 2 B The cost capitalised should include the purchase price ($20,000) plus all directly attributable costs (delivery and installation).

The cost of the maintenance contract should be shown as an expense in the statement of profit or loss.

BPP LEARNING MEDIASampleLecture example 3A business buys a machine for $2,500. It is expected to have a useful life of three years after which time it will have a scrap value of $250.

Required (a) Calculate the annual depreciation charge. (b) Calculate the cost, accumulated depreciation and net book value (NBV) for each year of the asset's life. Note: NBV = cost accumulated depreciation to date.

BPP LEARNING MEDIASampleAnswer to lecture example 3

Straight line method:2,500 250

3 years= $750 per annumDepreciation charge=

BPP LEARNING MEDIASampleAnswer to lecture example 3 (contd)

YearCostAccumulated depreciationNBV12,5007501,75022,5001,5001,00032,5002,250250

BPP LEARNING MEDIASample

Answer to lecture example 3 (contd)Graphical representation

$2,500

250

0 3YearNBV

BPP LEARNING MEDIASampleLecture example 4A business buys a machine costing $6,000. The depreciation rate is 40% on a reducing balance basis.

RequiredCalculate depreciation expense, accumulated depreciation and net book value of the asset for the first three years.

BPP LEARNING MEDIASampleAnswer to lecture example 4

YearDepn rateDepn expenseAccddepnNBV140%2,4002,4003,600240%1,4403,8402,160340%8644,7041,296

BPP LEARNING MEDIASample

Answer to lecture example 4 (contd)

Graphical representation

$6,00012345YearNBV3,6002,1601,296

BPP LEARNING MEDIASampleLecture example 5Required Using the information in Lecture example 3, show: (a) The journal entry which would have been written at the end of the first year. (b) The treatment of depreciation for all years in the relevant ledger accounts. (c) The relevant statement of profit or loss and statement of financial position extracts for each year.

BPP LEARNING MEDIASampleAnswer to lecture example 5 (a) Journal entry Debit Credit $ $ Depreciation expense 750 Accumulated depreciation 750 Being annual depreciation charged on machine

BPP LEARNING MEDIASampleAnswer to lecture example 5 (contd) Accounting for depreciation:

Machine (SOFP)$$Cash2,500Bal c/d2,5002,5002,500Bal b/d2,500

BPP LEARNING MEDIASampleAnswer to lecture example 5 (contd) Depreciation expense (SPL) $ $Year 1 Accumulated depnYear 2 Accumulated depnYear 3 Accumulated depn750750750Year 1 SPLYear 2 SPLYear 3 SPL750750750

BPP LEARNING MEDIASampleAnswer to lecture example 5 (contd) Accumulated depreciation (SOFP) $ $ Bal c/dBal c/d

Bal c/d 7501,500

1,5002,250

2,250Year 1 Depreciation expenseYear 2 Bal b/d Depreciation expense

Year 3 Bal b/d Depreciation expense 750750 7501,5001,500 7502,250

BPP LEARNING MEDIASampleAnswer to lecture example 5 (contd) Statement of profit or loss (extracts): Year 1 Year 2 Year 3 $ $ $ Expenses Depreciation 750 750 750 Statement of financial position (extracts): Cost Accumulated Net Book Depreciation Value $ $ $ (Year 1) Machine 2,500 (750) 1,750 (Year 2) Machine 2,500 (1,500) 1,000 (Year 3) Machine 2,500 (2,250) 250

BPP LEARNING MEDIASampleLecture example 6 The machine costing $6,000 in Lecture example 4 is sold in year 3 for $3,000. No depreciation is charged in the year of disposal.

Required (a)Calculate the profit or loss on disposal of the machine. (b)Complete the ledger accounts to show how the disposal would be accounted for.

BPP LEARNING MEDIASampleAnswer to lecture example 6(a) $ Sales proceeds 3,000 NBV at end of year 2 (2,160) 840

BPP LEARNING MEDIASampleAnswer to lecture example 6 (contd)(b)

Machine (SOFP) Bal b/d $ 6,000(a) Disposal account $6,000

Accumulated depreciation (SOFP)(b) Disposal account $ 3,840Bal b/d

$3,840

BPP LEARNING MEDIASampleAnswer to lecture example 6 (contd) Disposal account (SPL)(a) Machine Balance = profit on disposal (SPL) $ 6,000 840

6,840(c) Cash

(b) Accumulated depn $3,000

3,8406,840

BPP LEARNING MEDIASampleLecture example 7 Assume in Lecture example 6 that instead of cash proceeds of $3,000, there is a part exchange allowance of $3,000 on a replacement machine costing $10,000.

Required (a) Calculate the profit or loss on disposal of the machine. (b) Calculate the amount of cash paid for the new machine. (c) Complete the ledger accounts to show both the disposal and the acquisition.

BPP LEARNING MEDIASampleAnswer to lecture example 7The profit on disposal is still $840, the only difference is that the proceeds were not received in cash, but in the form of a part exchange allowance.Cash paid for the new machine is $7,000 ($10,000 $3,000)

BPP LEARNING MEDIASampleAnswer to lecture example 7 (contd) Old machine (SOFP) Bal b/d $ 6,000(a) Disposal account $6,000

Accumulated depreciation (SOFP)(b) Disposal account $3,840Bal b/d

$3,840

BPP LEARNING MEDIASampleAnswer to lecture example 7 (contd) New machine (SOFP)(c) Disposal account Cash

Bal b/d $ 3,000 7,00010,00010,000Bal c/d $10,00010,000

BPP LEARNING MEDIASampleAnswer to lecture example 7 (contd) Disposal account (SPL)(a) Machine Profit disposal (SPL) $ 6,000 840 6,840(c) New machine (part exchange)(b) Accumulated depreciation

$3,000

3,840

6,840

BPP LEARNING MEDIASampleLecture example 8 A building costing $100,000 on which depreciation of $20,000 has been charged is to be revalued to $150,000.

Required (a) Show the double entry to record the revaluation and make the postings to the ledger accounts. (b) What would be the depreciation charge for the year if the building has a remaining useful life of 40 years?

BPP LEARNING MEDIASampleAnswer to lecture example 8 (a) The double entry is $ $ Dr Non-current asset building (150 100) 50,000 Dr Accumulated depreciation building 20,000 Cr Revaluation reserve () 70,000

BPP LEARNING MEDIASampleAnswer to lecture example 8 (contd)Building (SOFP) $ $Bal b/d100,000Revaluation reserve 50,000Bal c/d150,000150,000150,000150,000

BPP LEARNING MEDIASampleAnswer to lecture example 8 (contd)Accumulated depreciation (SOFP) $ $Revaluation reserve20,000Bal b/d20,000

Revaluation reserve (SOFP) $ $Building50,000Revaluation reserve70,000Accumulated depreciation20,00070,00070,000Bal b/d70,000

BPP LEARNING MEDIASampleAnswer to lecture example 8 (contd)(b) Depreciation charge is $150,000 / 40 years = $3,750

BPP LEARNING MEDIASampleLecture example 9 1.1.X1 Asset cost $40,000 Estimated useful life five years No residual value 1.1.X3 Total useful life revised to four years.

RequiredCalculate the depreciation charge, accumulated depreciation and NBV for each year of the asset's life (year end 31 December).

BPP LEARNING MEDIASampleAnswer to lecture example 9Review of useful life:YearDepreciationcharge$Accumulateddepreciation$NBV

$20X140,000/5=8,0008,00032,00020X240,000/5=8,00016,00024,00020X324,000/2=12,00028,00012,00020X424,000/2=12,00040,00040,0000

BPP LEARNING MEDIASampleLecture example 10 1.1.X1 Asset cost $40,000 Residual value $1,500 Useful life five years Depreciation: 25% reducing balance 1.1.X3 Change depreciation method to straight line

RequiredCalculate the depreciation charge, accumulated depreciation and NBV for each year of the assets life (year ended 31 December).

BPP LEARNING MEDIASampleAnswer to lecture example 10Change in method of depreciation: Depn charge $Accumulateddepreciation$NBV

$20X140,000 25%10,00010,00030,00020X230,000 25%7,50017,50022,50020X3(22,500-1,500)/37,00024,50015,50020X47,00031,5008,50020X5 7,00038,50038,5001,500

BPP LEARNING MEDIASampleChapter summary 11IntroductionExpenditure on non-current assets is often significant and it is important therefore that it is accounted for appropriately.

BPP LEARNING MEDIASampleChapter summary 22Non-current assetsCapital expenditure results in a non-current asset being shown on the statement of financial position. Revenue expenditure, such as repairs and maintenance, is shown as an expense in the statement of profit or loss.Tangible non-current assets should initially be recorded at cost. This includes the purchase price of the item plus any directly attributable costs to bring the item to its intended location and ready to use.

BPP LEARNING MEDIASampleChapter summary 33DepreciationDepreciation is an expense charged in relation to the asset each year to reflect the using up of the asset. Land usually has an unlimited useful life and so is not depreciated.

BPP LEARNING MEDIASampleChapter summary 44Methods of depreciationDepreciation is usually calculated on a straight line or reducing balance basis.

BPP LEARNING MEDIASampleChapter summary 55Straight line methodThis method is suitable for assets which are used up evenly during their life time. The depreciation expense is the same each year.

BPP LEARNING MEDIASampleChapter summary 66Reducing balance methodThis method is suitable for assets which generate more revenue in the earlier years of their life. The depreciation expense is higher in the initial years.

BPP LEARNING MEDIASampleChapter summary 77Accounting for depreciationDepreciation is recorded by way of a journal entry. The expense is recorded as a debit entry and reduces profit. The credit is made to the accumulated depreciation account and reduces the carrying value of the asset in the statement of financial position.

BPP LEARNING MEDIASampleChapter summary 88Disposal of non-current assetsOn disposal of a non-current asset the sales proceeds are compared to the net book value of the asset in order to calculate the profit or loss on disposal. Where an asset is given in part exchange for another asset, the part exchange allowance takes the place of the sales proceeds.

BPP LEARNING MEDIASampleChapter summary 99RevaluationsAn entity may choose to revalue its assets rather than hold them at cost this is a choice of accounting policy. Where an entity revalues, it must revalue all assets in the same class and the depreciation charge is based on the revalued amount.

BPP LEARNING MEDIASampleChapter summary 1010 Depreciation revisited If an entity changes the method of depreciation used from straight line to reducing balance (or vice versa) or revises the useful life of an asset it should write off the assets net book value using the revised method or useful life.

BPP LEARNING MEDIASample