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Explain the purpose of depreciation Calculate depreciation, and disclose
depreciation per the AFS Explain the function of share capital,
other reserves and retained earnings
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Depreciation required, why? All non-current assets are ‘used up’
during their economic lives Except land, why? Land usually revalued over time
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Income statement reflects the cost of using the non-current assets not the value of non-current assets purchased during the year.
2 reasons for this: Real loss = value of asset start of year –
value of asset end of the year Amount spent on non-current assets vary
year to year (expenditure distorts profits) So…Instead of reflecting expenditure
companies reflect depreciation over the year
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So…Depreciation measures the amount of capital stock that has been used up during the year. Therefore…The purpose is to charge the purchase price of non-current asset in the I/S in a systemic way.Application of the matching concept
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Straight line basis Reducing balance method
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= (Cost – Estimated residual value) Estimated useful life
Depreciation per I/S = (R100 000 – R10 000)/5 years= R18 000 per annum
If no residual value: 20% of cost p.a. Intangible assets treated similar (example: right
to use name for 20 years at cost of R60 000 suffer depreciation of R3000 p/a - p4)
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Method of charging fixed % of book value I will provide the rate to you!! Example: Depreciation rate = 37% of
book value which is R100 000
Year Depreciation Book value end of year
1 R37 000 R63 000
2 R23 310 R39 690
3 R14 685 R25 005
4 R9 252 R15 753
5 R5 829 R9 924
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Reducing balance method:Depreciation charge higher when asset is new.
In practice, assume all asset classes will last a “standard” life (example vehicles 4 years and manufacturing plant 10 years)
Estimates of useful life and residual value
Disposals: negative depreciation: why? (p7)
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Solution 9.1 Solution Question 9.1.docx
Solution 9.3 Solution Question 9.3.docx
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Equity = Assets – Liabilities,The SH’s share in the business after all liabilities have been paid
Equity can arise by:› Issuing shares› Adjustments e.g. revaluation of assets› Retention of profit
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Nominal (par) value as per Memorandum of Association
Differ from Market value – why? Share premium = Issuing price of shares –
nominal value Share premium – disclosed under ‘other
reserves’ per BS Example:
› Company Y’s shares has a nominal value of R1.15 and a 1,000 shares were issued at R1.50 per share. Effect on Statement of financial position?
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Company X has a building. Cost: R300 000 Accumulated depreciation: R 70
000Revalued to R400 000. What is the effect on: Statement of Comprehensive Income? Statement of Financial Position?
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Journals:Dt Accumulated depreciation (-) R 70 000Dt Building: Cost (+) R100 000Ct Gains on revaluation (+) R170 000
Statement of Comprehensive Income:› Gains on revaluation: R170 000
Statement of Financial Position:Assets
Building R400 000Equity
Other reserves (revaluation reserve) R170 000
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Statement of changes in equityOther reserves
Opening balance -
Gains on revaluation
R170 000
Closing balance R170 000
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After revaluation calculate depreciation on the ‘revalued balance’
VERY IMPORTANT! Check when the asset was revalued before calculating the depreciation…
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3 main categories of investments:
• Held-to-maturity investments (example government bonds - valued historical cost)
• Available-for-sale investments (example property – valued at market value)
• Trading investments (listed investments – valued at market value)
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Retained earnings = profits retained in the company – dividends paid to shareholders
Max dividend payable: Distributable reserves. (Retained earnings)
Why?To protect the interests of creditors (and lenders)
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Question 9.6 p11 Fair value Question 9.7 p12 Revaluation reserve
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John Jeff Malatji Please come and see me urgently after
class today!!!!
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Please note that my consulting hours is available on clickUP and by appointment only.
Please e-mail me in advance to notify me with the time on a Wednesday morning or Thursday afternoon.
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Venue: Centenary 1 and 2 Time: 16h00 Duration: 1hours Total: 40 marks Chapters 1,2,7,8 and 9 Learning areas 1,2,4,5 and 6