fa1 chapter 3 eng

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Chapter 3 Depreciation of Non-current Assets

Notestoteachers

1 Sometimes the differentiation between capital expenditure and revenue expenditure is not very clear.Students should master the definition of capital expenditure first. Any expenditure that fails to meet the

definition of capital expenditure should be classified as revenue expenditure.

2 Some students may have the misconception that depreciation is equivalent to a drop in the market value

of an asset or the wearing out of an asset. Teachers must clarify the true meaning of depreciation in

accounting, even though it may seem a bit abstract for most students.

3 The term depreciation is applicable to tangible non-current assets only. For intangible non-current assets

such as patents, the systematic write-off of the cost is known as amortisation.

4 The matching concept may help students understand the accounting rationale behind the treatment of

depreciation. But it is not necessary at this stage.

5 It is not diff icult for most students to understand the various depreciation methods. However, when a

new asset is acquired or an old asset is disposed of during a year, the calculation will become much more

complicated, especially when the reducing-balance method is used. In such situations, students must payattention to the date of the acquisition/disposal.

6 In recent years, minor changes have been made in making accounting entries for annual depreciation. Anominal account called depreciation expense/charges or simply depreciation is now usually opened in

the general ledger, while the contra-asset account provision for depreciation is now called accumulated

depreciation. Teachers can refer to Chapter 13 ofFrank Woods Financial Accounting 2 for the actualmeaning of provisions.

7 The accounting entries for the disposal of a non-current asset can be simplified as follows: Dr Accumulated depreciation

Dr Cash/Bank/Debtor

Cr Non-current asset

Cr Profit and loss (when there is a profit generated from the disposal)

provided that the entries are made at the year end.

The above presentation of entries is generally acceptable in public exams.

8 Note that the term net book value is now more commonly called carrying amount.

Q1 Capital expenditure is expenditure that generates long-term benefits (i.e., benefits which will last for a

number of periods) for an entity.

o es o e

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Examples include:

Purchase price of an office premise Cost of building an extension to an existing factory Cost of upgrading an existing computer system

Freight and installation cost of a newly purchased machine

Revenue expenditure is expenditure that generates short-term benefits only. It is usually spent on theday-to-day operations of an entity and provides benefits that will be consumed in the period in which it is

incurred.

Examples include:

Office rent Wages and salaries Petrol for a delivery van Capital expenditure should not be wholly written off as an expense in the period in which it is incurred.

Instead, it should be expensed over a number of periods.

Revenue expenditure should be wholly written off as an expense in the period in which it is incurred.

Q2 (a) This payment was made to improve an existing non-current asset (car); therefore, it is a capital

expenditure.

(b) This payment was for car maintenance; therefore it is a revenue expenditure.

Q3 The systematic allocation of the cost of a tangible non-current asset over its useful life is known as

depreciation.

Under the matching concept, the expenses recognised in each accounting period have to be matched

with the revenues or benefits that they generate in the same per iod. A non-current asset provideslong-term benefits and therefore its cost should not be wholly recognised as an expense in the period of

acquisition. Instead, it should be allocated over its useful life. The amount allocated to each accounting

period (as depreciation charges) should be matched with the amount of benefits generated in that period

(which usually refers to the usage of the asset during that period).

Q4 (a) Straight-l ine method:

Year ended 31 March Depreciation charged for the year 2010 $1,520 2011 $1,520

2012 $1,520

2013 $1,520

(b) Reducing-balance method:

Annual depreciation rate = 45%

Year ended 31 March Depreciation charged for the year 2010 $3,600

2011 $1,9802012 $1,089

2013 $599



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Q5 Year ended 31 March Depreciation charged for the year

2010 $12,000 2011 $12,000

2012 $8,000

2013 $4,800 2014 $3,200

Q6 (a) $103,000 (excluding the annual vehicle licence fee of $4,000 and the annual insurance premium of$3,000). The annual vehicle licence fee is just like the annual insurance premium. Both are running

expenses and not a cost of the asset.

Only costs that are necessary to bring the asset to the location and condition for its intended use

should be capitalised.

(b) Depreciation charged for the year ended 31 December 2013

= [$103,000 (1 40%)3] 40% = $8,899

Q7 General Ledger

Depreciation: Lorries

2009 $ 2009 $

Dec 31 Accumulateddepreciation 8,000 Dec 31 Profitandloss 8,000

2010 2010 Dec 31 Accumulateddepreciation 4,000 Dec31 Profitandloss 4,000

2011 2011

Dec 31 Accumulateddepreciation 2,000 Dec31 Profitandloss 2,000

Accumulated Depreciation: Lorries

2009 $ 2009 $

Dec 31 Balancec/f 8,000 Dec 31 Depreciation 8,000

2010 2010

Dec 31 Balancec/f 12,000 Jan 1 Balanceb/f 8,000

Dec 31 Depreciation 4,000

12,000 12,0002011 2011



14,000 14,000

Firm AIncome Statements for the years ended 31 December (extract)

2009 2010 2011 $ $ $

Expenses:

Depreciation:Lorries 8,000 4,000 2,000

Firm ABalance Sheets as at 31 December (extract)

2009 2010 2011 $ $ $

Non-currentassets Lorriesatcost 16,000 16,000 16,000

Less Accumulateddepreciation (8,000) (12,000) (14,000)

8,000 4,000 2,000



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Q8 According to the consistency principle, a firm should keep using the same accounting policy or method

for similar items. A change is allowed only if it can give a more accurate view of a business. To achieveconsistency, the same depreciation method and policy should be applied to all non-current assets in the

same class. Changing methods or policies without a good reason would lead to the reporting of

misleading results.

A1 Under the straight-line method, the cost of a non-current asset is allocated evenly as depreciation over its

estimated useful life. The amount of depreciation charged in each period is constant and is calculated as

follows:

(Cost Estimated residual value) Estimated useful life

Under the reducing-balance method, the cost of a non-current asset is allocated as depreciation at adiminishing rate over its estimated useful life. This means that the depreciation expense gets smaller each

period. The amount of depreciation charged in each period is diminishing and is calculated as follows: (Cost Depreciation already charged) Fixed depreciation rate

A2 The depreciation charged for 2013 (final year) should still be $1,000. If the difference is very significant,

prior year adjustments of depreciation charges and profits may be required. This means the business has

to adjust the results of its previous years as a result of the significant difference between estimateddepreciation and actual depreciation.

A3 (a) Straight-l ine method. Under this method, the amount of depreciation charged in each period isconstant and therefore the depreciation only needs to be calculated once.

(b) Reducing-balance method. Under this method, a larger amount of depreciation is charged in earlyyears and a smaller amount is charged in later years. It is often said that repairs and maintenance of

non-current assets in the early years of use will be far lower than in later years. Therefore, thismethod can help even out the annual expenditures on non-current assets.

(c) Usage-based method. Under this method, the amount of depreciation charged in each period is based

on actual usage during that period, which represents the actual benefits generated by the asset in

that period.

A4 Yes. Freehold land has an unlimited useful life. To put it simply, freehold land is land that can be held for

an indefinite period of time. Therefore, depreciation should not be charged for this type of asset.

A5 Expenses for the year will be overstated and the net profit will be understated. The net book value of

non-current assets will also be understated.

A6 In Exhibit 3.8, the depreciation charged for the year ended 31 December 2010 increased by $500, while

the loss on disposal decreased by $500. As a result, total expenses and the net profit for the year remainedthe same. Furthermore, the net book value of non-current assets (Machine No. 2 only) as at the year end

increased as less depreciation was charged in the year of purchase.



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ASSESSMENT

Short QuestionsShort Questions

1 (C) and (D)

2 Capital expenditure: b, c, e, g

Revenue expenditure: a, d, f, h

3X Capital expenditure: c, e, g, j

Revenue expenditure: a, b, d, f, h, i

4 Capital expenditure: (a) $1,500, (b) $500, (c) $23,000, (d) $400, (e) $500

Revenue expenditure: (a) $6,500, (b) $1,500, (c) $2,000, (d) $3,600, (e) $300

5 (a) Straight-line method (b) Reducing-balance method $ $

Cost 12,500 Cost 12,500 Year1 Depreciation* (1,845) Year1 Depreciation(20%of$12,500) (2,500) 10,655 10,000

Year2 Depreciation (1,845) Year2 Depreciation(20%of$10,000) (2,000)

8,810 8,000 Year3 Depreciation (1,845) Year3 Depreciation(20%of$8,000) (1,600)

6,965 6,400


5,120 5,120

*$12,500$5,120

4=$1,845

6X (a) Reducing-balance method (b) Straight-line method $ $

Cost 64,000 Cost 64,000 Year1 Depreciation($64,00050%) (32,000) Year1 Depreciation* (12,400) 32,000 51,600

Year2 Depreciation($32,00050%) (16,000) Year2 Depreciation (12,400)

16,000 39,200 Year3 Depreciation($16,00050%) (8,000) Year3 Depreciation (12,400)

8,000 26,800

Year4 Depreciation($8,00050%) (4,000) Year4 Depreciation (12,400)

4,000 14,400 Year5 Depreciation($4,00050%) (2,000) Year5 Depreciation (12,400)

2,000 2,000

*$64,000$2,000

5=$12,400



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7 (a) Straight-line method (b) Reducing-balance method

$ $

Cost 40,000 Cost 40,000

Year1 Depreciation* (7,000) Year1 Depreciation(40%of$40,000) (16,000) 33,000 24,000 Year2 Depreciation (7,000) Year2 Depreciation(40%of$24,000) (9,600)



12,000 5,184


5,000 3,110

*$40,000$5,000

5=$7,000

(c) Units-of-production method

$

Cost 40,000

Year1 Depreciation

( 50,000

50,000+50,000+40,000+40,000+20,000

$35,000

) (8,750)

31,250

Year2 Depreciation( 50,000200,000$35,000) (8,750) 22,500




Application Problems8X (a) (i)Straight-line method

Machinery

2007 $ 2008 $

Nov 1 Cash 18,000 Oct 31 Balancec/f 18,000

2008 2009

Nov 1 Balanceb/f 18,000 Oct 31 Balancec/f 18,000

2009 2010




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Accumulated Depreciation: Machinery

2008 $ 2008 $

Oct 31 Balancec/f 1,800 Oct 31 Depreciation($18,00010%) 1,800

2009 2008

Oct 31 Balancec/f 3,600 Nov 1 Balanceb/f 1,800 2009

Oct 31 Depreciation 1,800 3,600 3,600

2010 2009

Oct 31 Balancec/f 5,400 Nov 1 Balanceb/f 3,600 2010

Oct 31 Depreciation 1,800

5,400 5,400

2010

Nov 1 Balanceb/f 5,400

(ii)Reducing-balance method

Machinery

2007 $ 2008 $

Nov 1 Cash 18,000 Oct 31 Balancec/f 18,0002008 2009Nov 1 Balanceb/f 18,000 Oct 31 Balancec/f 18,000

2009 2010


Accumulated Depreciation: Machinery

2008 $ 2008 $

Oct 31 Balancec/f 1,800 Oct 31 Depreciation($18,00010%) 1,800

2009 2008Oct 31 Balancec/f 3,420 Nov 1 Balanceb/f 1,800

2009

Oct 31 Depreciation

[($18,000$1,800)10%] 1,620 3,420 3,420

2010 2009

Oct 31 Balancec/f 4,878 Nov 1 Balanceb/f 3,420

2010

Oct 31 Depreciation [($18,000$3,420)10%] 1,458

4,878 4,878

2010

Nov 1 Balanceb/f 4,878

(b) (i) Straight-line method

Income Statements for the years ended 31 October (extract)

$

2008 Depreciation:Machinery 1,800



Balance Sheets as at 31 October (extract)

2008 2009 2010 $ $ $

Machineryatcost 18,000 18,000 18,000


16,200 14,400 12,600



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(ii) Reducing-balance method

Income Statements for the years ended 31 October (extract)

$




Balance Sheets as at 31 October (extract)

2008 2009 2010 $ $ $

Machineryatcost 18,000 18,000 18,000


16,200 14,580 13,122

9 (a) Motor Vehicles

2006 $ 2006 $Jan 1 Cash 12,500 Dec 31 Balancec/f 12,500

2007 2007Jan 1 Balanceb/f 12,500 Dec 31 Balancec/f 12,500

2008 2008

Jan 1 Balanceb/f 12,500 Dec 31 Balancec/f 12,500

(b) Accumulated Depreciation: Motor Vehicles

2006 $ 2006 $Dec 31 Balancec/f 2,500 Dec 31 Depreciation($12,50020%) 2,500

2007 2007


Dec 31 Depreciation

[($12,500$2,500)20%] 2,000 4,500 4,500

2008 2008 Dec 31 Balancec/f 6,100 Jan 1 Balanceb/f 4,500

Dec 31 Depreciation

[($12,500$4,500)20%] 1,600 6,100 6,100

(c) Income Statements for the years ended 31 December (extract)

$

2006 Depreciation:Motorvehicles 2,500



(d) Balance Sheets as at 31 December (extract)

2006 2007 2008 $ $ $Motorvehiclesatcost 12,500 12,500 12,500


10,000 8,000 6,400



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10X Depreciation charge per machine each year =$54,000 $3,000

6= $8,500

(a) Machinery

2007 $ 2007 $

Jan 1 Cash 162,000 Dec 31 Balancec/f 162,000


2009 2009

Jan 1 Balanceb/f 162,000 Jan 1 Machinerydisposal 54,000

Dec 31 Balancec/f 108,000

162,000 162,000

(b) Accumulated Depreciation: Machinery

2007 $ 2007 $

Dec 31 Balancec/f 25,500 Dec 31 Depreciation($8,5003) 25,500

2008 2008



51,000 51,0002009 2009

Jan 1 Machinerydisposal($8,5002) 17,000 Jan 1 Balanceb/f 51,000

Dec 31 Balancec/f 51,000 Dec 31 Depreciation($8,5002) 17,000

68,000 68,000

(c) Machinery Disposal

2009 $ 2009 $Jan 1 Machinery 54,000 Jan 1 Accumulateddepreciation 17,000

" 1 Cash 24,600

Dec 31 ProfitandlossLossondisposal 12,400

54,000 54,000

(d) Income Statements for the years ended 31 December (extract)

$



2009 MachinerydisposalLossondisposal 12,400

Depreciation:Machinery 17,000

(e) Balance Sheets as at 31 December (extract)

2007 2008 2009 $ $ $Machineryatcost 162,000 162,000 108,000


136,500 111,000 57,000



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11 (a) Computers

2006 $ 2007 $

Apr 1 Cash 9,500 Mar 31 Balancec/f 10,000

" 1 CashInstallationcost 500 10,000 10,000

2007 2008

Apr 1 Balanceb/f 10,000 Mar 31 Balancec/f 10,000

2008 2009

Apr 1 Balanceb/f 10,000 Mar 31 Computersdisposal 10,000

(b) Accumulated Depreciation: Computers

2007 $ 2007 $Mar 31 Balancec/f 2,000 Mar 31 Depreciation 2,000

2008 2007

Mar 31 Balancec/f 4,000 Apr 1 Balanceb/f 2,000

2008

Mar 31 Depreciation 2,000

4,000 4,000

2009 2008

Mar 31 Computersdisposal 4,000 Apr 1 Balanceb/f 4,000

Depreciation charge per annum = $10,000 20% = $2,000

(c) Computers Disposal

2009 $ 2009 $

Mar 31 Computers 10,000 Mar 31 Accumulateddepreciation 4,000 " 31 Cash 4,250

" 31 ProfitandlossLossondisposal 1,750

10,000 10,000

(d) Income Statements for the years ended 31 March (extract)

$

2007 Depreciation:Computers 2,0002008 Depreciation:Computers 2,000

2009 ComputersdisposalLossondisposal 1,750

(e) Balance Sheets as at 31 March (extract)

2007 2008 2009 $ $ $Computersatcost 10,000 10,000

Less Accumulateddepreciation (2,000) (4,000)

8,000 6,000

12 T Tang

Revised Net Profit for the year ended 31 December 2008 $ $

Netprofitbeforecorrections 28,910

Add Purchasesoverstated (i) 3,110

Loaninterestoverstated (iii) 5,000 8,110 37,020

Less Motorrepairsunderstated (ii) (290)

Revisednetprofit 36,730



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13X S PangCorrected Net Profit for the year ended 30 June 2009

$ $

Netprofitbeforecorrections 77,270

Add Motorexpensesoverstated (iii) 3,790

81,060

Less Repairstofixturesunderstated (i) 750 Loaninterestunderstated (ii) 540 (1,290)Correctednetprofit 79,770

14X (a) Statement of Corrected Gross Profit

$ $

Grossprofitasperaccounts 316,290

Add Purchasesoverstated (iv) 7,900

324,190

Less Carriageinwardsunderstated (ii) 770

Purchasesunderstated (v) 2,380 (3,150)

Correctedgrossprofit 321,040

(b) Statement of Corrected Net Profit

$ $

Netprofitasperaccounts 210,160

Add Motorexpensesoverstated (i) 15,500

Purchasesoverstated (iv) 7,900 23,400

233,560

Less Carriageinwardsunderstated (ii) 770 Rentunderstated (iii) 20,000

Purchasesunderstated (v) 2,380 (23,150)

Correctednetprofit 210,410

(c) Statement of Corrected Non-current Assets

$ $

Non-currentassetsasperaccounts 380,000Add Vansunderstated (i) 15,500

Machineryunderstated (iv) 7,900 23,400

403,400

Less Fixturesoverstated (ii) 770 Buildingsoverstated (iii) 20,000

Officeequipment (v) 2,380 (23,150)

Correctednon-currentassets 380,250

(d) Statement of Corrected Current Assets

$Currentassetsasperaccounts* 77,600

*Noamendmentsarerequired.

15 (a) The straight-line method is being used for machinery. The reducing-balance method is being used for

fixtures.

(b) Machinery: $48,000 $16,000 $16,000 = $16,000

Depreciation rate for fixtures is 25% per annum.

Fixtures: $20,250 $5,063 $3,797 = $11,390

(c) Machinery: $80,000 $20,000 $15,000 $11,250 $8,438 = $25,312



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16X (a) The straight-line method is being used for office equipment. The reducing balance method with a rate

of 3313% is being used for fixtures.

(b) (A) 12,000 (B) 1,900 (C) 10,100 (D) 8,200 (E) 1,900 (F) 4,400

(G) 1,900 (H) 2,500 (T) 30,375 (U) 10,125 (V) 20,250 (W) 6,750

(X) 13,500 (Y) 2,000 (Z) 4,000

17X (a) As the cost of running the van is likely to be the same each year, then the straight-line method shouldbe used.

Depreciation for each of the 5 years =$88,000 $6,000 (residual value)

5

= $16,400

$

Cost 88,000

Year1 Depreciation (16,400)

71,600


55,200 Year3 Depreciation (16,400)

38,800

Year4 Depreciation (16,400) 22,400


6,000

(b) For a machine that will incur few repairs in the first year and increasing amounts in subsequent

years, the reducing-balance method should be used as this would help even out the expensesincurred on the machine.

Of the three figures shown, 3313% will bring the net book value at disposal nearest to the amount to

be received.

Proof:

Depreciationrate 50% 3313% 20%

$ $ $

Cost 72,000 72,000 72,000 Year1 Depreciation (36,000) (24,000) (14,400)

36,000 48,000 57,600

Year2 Depreciation (18,000) (16,000) (11,520)

18,000 32,000 46,080

Year3 Depreciation (9,000) (10,667) (9,216) 9,000 21,333 36,864

Year4 Depreciation (4,500) (7,111) (7,373)

Netbookvalueatdisposal 4,500 14,222 29,491

18 (a) Depreciation is that part of the cost of a tangible non-current asset consumed during its period of use

by the firm. Depreciation must be charged to the profit and loss account of the firm because itrepresents the cost of using its tangible non-current assets.



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(b) (i) Lorries

2007 $ 2007 $

Jan 1 Cash($48,0003) 144,000 Dec 31 Balancec/f 144,000


2009 2009

Jan 1 Balanceb/f 144,000 Jan 1 Lorriesdisposal 48,000 Dec 31 Balancec/f 96,000

144,000 144,000

(ii) Accumulated Depreciation: Lorries

2007 $ 2007 $

Dec 31 Balancec/f 27,000 Dec 31 Depreciation(W1) 27,000

2008 2008


Dec 31 Depreciation 27,000 54,000 54,000

2009 2009

Jan 1 Lorriesdisposal(W2) 18,000 Jan 1 Balanceb/f 54,000

Dec 31 Balancec/f 54,000 Dec 31 Depreciation 18,000 72,000 72,000

Workings:

(W1) Depreciation per lorry per year is$48,000 $3,000

5=

$45,000

5= $9,000

Depreciation for the 3 lorries per year = $9,000 3 = $27,000

(W2) 2 years depreciation on the lorry sold = $9,000 2 = $18,000

(iii) Lorries Disposal

2009 $ 2009 $

Jan 1 Lorries 48,000 Jan 1 Accumulateddepreciation 18,000

" 1 Cash 25,000 Dec 31 ProfitandlossLossondisposal 5,000

48,000 48,000

19X (a) Machinery

2007 $ 2007 $

Jan 1 Bank 6,400 Dec 31 Balancec/f 6,400


Oct 1 Bank 7,200

13,600 13,600



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(b) Fixtures

2007 $ 2007 $

Jan 1 Bank 1,000 Dec 31 Balancec/f 3,000Jul 1 Bank 2,000

3,000 3,000

2008 2008

Jan 1 Balanceb/f 3,000 Dec 31 Balancec/f 3,500Dec 1 Bank 500 3,500 3,500

(c) Accumulated Depreciation: Machinery

2007 $ 2007 $

ec 31 Balancec/f 800 Dec 31 Depreciation($6,40012%) 800

2008 2008

Dec 31 Balancec/f 2,400 Jan 1 Balanceb/f 800 Dec 31 Depreciation

{[($6,400$800)+$7,200]12 %} 1,600 2,400 2,400

Accumulated Depreciation: Fixtures2007 $ 2007 $

Dec 31 Balancec/f 300 Dec 31 Depreciation($3,000x10%) 300

2008 2008

Dec 31 Balancec/f 620 Jan 1 Balanceb/f 300

Dec 31 Depreciation

{[($3,000$300)+$500]10%} 320

620 620

(d) Balance Sheets as at 31 December (extract)

2007 $ $

Machineryatcost 6,400

Less Accumulateddepreciation (800) 5,600

Fixturesatcost 3,000Less Accumulateddepreciation (300) 2,700

2008

Machineryatcost 13,600

Less Accumulateddepreciation (2,400) 11,200

Fixturesatcost 3,500

Less Accumulateddepreciation (620) 2,880

20 (a) Machinery

2007 $ 2007 $

Jan 1 Bank(No.1) 24,000 Dec 31 Balancec/f 51,000

Jul 1 Bank(No.2) 27,000

51,000 51,0002008 2008


Apr 1 Bank(No.3) 30,000

81,000 81,000

2009 2009Jan 1 Balanceb/f 81,000 Jan 1 Machinerydisposal(No.1) 24,000

" 1 Bank(No.4) 28,000 Dec 31 Balancec/f 85,000

109,000 109,000

1212

1212



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(b) Accumulated Depreciation: Machinery

2007 $ 2007 $

Dec 31 Balancec/f 7,500 Dec 31 Depreciation(W1) 7,500

2008 2008Dec 31 Balancec/f 22,200 Jan 1 Balanceb/f 7,500

Dec 31 Depreciation(W2) 14,700

22,200 22,2002009 2009

Jan 1 Machinerydisposal(No.1)(W3) 9,600 Jan 1 Balanceb/f 22,200Dec 31 Balancec/f 29,600 Dec 31 Depreciation(W3) 17,000

39,200 39,200

Workings:

(W1) 2007: (No. 1) : $24,000 20% = $4,800; (No. 2) : $27,000 20% 612 = $2,700. Total = $7,500.

(W2) 2008: (No. 1) : $4,800; (No. 2) : $5,400; (No. 3) : $30,000 20% 912 = $4,500. Total = $14,700.

(W3) 2009: On machine sold (No. 1) : (2007) $4,800 + (2008) $4,800 = $9,600.

On machines kept: (No. 2) $5,400 + (No. 3) $6,000 + (No. 4) $5,600 ($28,000 20%).

Total = $17,000.

(c)The Journal

Date Details Dr Cr

2009Jan 1

Dec 31

Accumulateddepreciation:Machinery

Cash

Machinerydisposal

Machinery

ProfitandlossLossondisposal

Machinerydisposal

$9,600

12,950

1,450

1,450

$

24,000

1,450

(d) Balance Sheets (extract)

31.12.2007 31.12.2009 $ $ $ $

Machineryatcost 51,000 85,000

Less Accumulateddepreciation (7,500) 43,500 (29,600) 55,400



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21X Motorvehicles Machinery Reducing-balance Straight-line Reducing-balance Straight-line

25% 20%

2006 $ $ $ $

Annualdepreciation 40,000 40,000 15,000 12,500

($160,00025%) ($160,0004) ($75,00020%) ($75,0006)

2007

Annualdepreciation 30,000 40,000 21,000 20,000 [($160,000 {[($75,000$15,000) [$12,500

$40,000)25%] +$45,000]20%} +($45,0006)]

2008

Annualdepreciation 52,500 70,000 16,800 20,000

{[($160,000$40,000 [$40,000 [($75,000+$45,000

$30,000)+$120,000]25%} +($120,0004)] $15,000$21,000)20%] Reducing-balance Straight-line Change in depreciation

Year 2006 $40,000 + $15,000 = $55,000 $40,000 + $12,500 = $52,500 $2,500

Year 2007 $30,000 + $21,000 = $51,000 $40,000 + $20,000 = $60,000 +$9,000

Year 2008 $52,500 + $16,800 = $69,300 $70,000 + $20,000 = $90,000 +$20,700

Recalculation of Net Profit

2006 2007 2008 $ $ $

Originalnetprofit 114,500 138,490 127,140

Add Decreaseindepreciation 2,500

Less Increaseindepreciation (9,000) (20,700)Recalculatednetprofit 117,000 129,490 106,440

22X (a) Depreciationperyear Netbookvalue Cost 2004 2005 2006 2007 2008 Total asat31.12.2008

$ $ $ $ $ $ $ $ ComputerNo.1 32,500 6,500 6,500 6,500 6,500 6,500 32,500 ComputerNo.2 35,000 7,000 7,000 7,000 7,000 28,000 7,000

ComputerNo.3 48,000 9,600 9,600 9,600 28,800 19,200

ComputerNo.4 42,500 8,500 8,500 17,000 25,500

ComputerNo.5 40,000 40,000 198,000 6,500 13,500 23,100 31,600 31,600 106,300 91,700

(b)The Journal

Date Details Dr Cr

2009

Jan 1

Dec 31

Accumulateddepreciation:Computers($9,6003)

CashComputerdisposals

Computers

ProfitandlossLossondisposal

Computerdisposals

$

28,800

16,2502,950

2,950

$

48,000

2,950



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23X (a) Physical deterioration Economic factors: obsolescence and inadequacy Depletion

(b) (i) Physical deterioration (ii) Obsolescence (iii) Depletion

(c) (i) Lorries

2008 $ 2008 $


Sept 30 Cash(No.3) 48,000

" 30 Cash(No.3) 6,000 122,000 122,000

2009 2009

Jan 1 Balanceb/f 122,000 Jul 16 Lorriesdisposal(No.3)

Jul 14 Cash(No.4) 30,000 ($48,000+$6,000) 54,000

" 14 Cash(No.5) 28,000 Dec 31 Balancec/f 126,000 180,000 180,000

2010 2010

Jan 1 Balanceb/f 126,000 Nov 5 Lorriesdisposal(No.2) 36,000

Nov 5 KamMotors(No.6) 31,350 Dec 31 Balancec/f 140,000

" 5 LorriesdisposalTrade-in allowance(No.2) 18,650

176,000 176,000

(ii) Accumulated Depreciation: Lorries

2008 $ 2008 $


Dec 31 Depreciation 26,250 43,250 43,250

2009 2009

Jul 16 Lorriesdisposal(No.3) 13,500 Jan 1 Balanceb/f 43,250


67,313 67,313

2010 2010Nov 5 Lorriesdisposal(No.2) 20,813 Jan 1 Balanceb/f 53,813


80,563 80,563

For depreciation, refer to the workings below.

Workings: Depreciation

No.1 No.2 No.3 No.4 No.5 No.6 Total $ $ $ $ $ $ $

2007 32,000 36,000

Less 25% (8,000) (9,000) 17,000

24,000 27,000 2008 54,000

Less 25% (6,000) (6,750) (13,500) 26,250 18,000 20,250 40,500

2009 30,000 28,000

Less 25% (4,500) (5,063) (7,500) (7,000) 24,063 13,500 15,187 22,500 21,000

2010 50,000

Less 25% (3,375) (5,625) (5,250) (12,500) 26,750

10,125 16,875 15,750 37,500 94,063



18/24

Proof:

Total $94,063 Sold (No. 2) $20,813 Sold (No. 3) $13,500 = $59,750, which is the balance in the

accumulated depreciation account.

(iii) Lorries Disposal

2009 $ 2009 $Jul 16 Lorries(No.3) 54,000 Jul 16 Accumulateddepreciation 13,500

" 16 Bank 35,680 Dec 31 ProfitandlossLossondisposal 4,820

54,000 54,000

2010 2010

Nov 5 Lorries(No.2) 36,000 Nov 5 Accumulateddepreciation 20,813

Dec 31 ProfitandlossProfitondisposal 3,463 " 5 LorriesTrade-inallowance(No.2) 18,650 39,463 39,463

(iv) Balance Sheets as at 31 December (extract)

2008 2009 2010 $ $ $

Lorriesatcost 122,000 126,000 140,000

Less Accumulateddepreciation (43,250) (53,813) (59,750) 78,750 72,187 80,250

24X Stephen KwanIncome Statement for the year ended 31 March 2009

$ $

Sales 182,500

Less Costofgoodssold: Inventoryasat1April2008 40,000

Add Purchases 122,500

162,500 Less Inventoryasat31March2009 (42,500) 120,000

Grossprofit 62,500

Add Otherrevenues: Discountsreceived 3,000 Interestrevenue 4,380 7,380

69,880

Less Expenses: Sundryexpenses 1,620

Rentandrates($12,000$1,000) 11,000 Insurance 3,250

Wagesandsalaries($29,750+$2,750) 32,500

Discountsallowed 4,750

Baddebts 1,130 Allowancefordoubtfulaccounts[($46,130$1,130)5%$1,500] 750

Depreciation:Officeequipment[($7,50010%)+($2,50010%)] 875

Motorvehicles($20,00020%) 4,000 (59,875)

Netprofit 10,005

6126

12



19/24


20/24

(b) Ruth CoBalance Sheet as at 30 June 2009

$ $ $ Accumulated Netbook

Non-currentassets Cost depreciation value Machinery 15,000 11,250 3,750

Furnitureandfittings 10,000 7,500 2,500Motorvehicles 21,250 13,600 7,650

46,250 32,350 13,900

CurrentassetsInventory 23,000

Accountsreceivable 65,500

Less Allowancefordoubtfulaccounts (1,965) 63,535

Prepayments 4,000

Bank 10,175

Cash 500 101,210

Less Currentliabilities Accountspayable 46,100

Accruals 1,875 (47,975)Netcurrentassets 53,235

67,135

Financedby:Capitalasat1July2008 112,500

Less Netlossfortheyear 13,940

Drawings 31,425 (45,365) 67,135

26 (a) (i) Plant and Machinery

2006 $ 2006 $

Apr 1 Bank 864,000 Dec 31 Balancec/f 864,000

2007 2007

Jan 1 Balanceb/f 864,000 Dec 31 Balancec/f 1,209,600

Aug 1 Bank 345,600 1,209,600 1,209,600

2008 2008

Jan 1 Balanceb/f 1,209,600 Dec 1 Plantandmachinerydisposal 129,600

" 31 Balancec/f 1,080,000 1,209,600 1,209,600

(ii) Accumulated Depreciation: Plant and Machinery

2006 $ 2006 $


($864,00020%)

2007 2007Dec 31 Balancec/f 331,200 Jan 1 Balanceb/f 129,600

Dec 31 Depreciation

[($864,00020%)+($345,600 20%)] 201,600 331,200 331,200

2008 2008

Dec 1 Plantandmachinerydisposal Jan 1 Balanceb/f 331,200

($129,60020%) 10,800 Dec 31 Depreciation[($864,000

" 31 Balancec/f 536,400 +$345,600$129,600)20%] 216,000 547,200 547,200

9129

12

5125

12

5125

12



21/24

46

(iii) Plant and Machinery Disposal

2008 $ 2008 $

Dec 1 Plantandmachinery 129,600 Dec 1 Accumulateddepreciation: Plantandmachinery 10,800

" 1 Bank 100,800


129,600 129,600

(b) The reasons for charging depreciation on plant and machinery are:

1 Physical deterioration: wear and tear; rust, rot and decay

2 Economic factors: obsolescence and inadequacy

27X (a) (i) Machinery

2006 $ 2007 $Oct 1 BankMachineryW 28,000 Sept 30 Balancec/f 61,600

2007

Sept 15 BankMachineryX 33,600

61,600 61,600

2007 2008 Oct 1 Balanceb/f 61,600 Sept 30 Balancec/f 100,800

2008

Jan 30 BankMachineryY 39,200

100,800 100,800

2008 2008 Oct 1 Balanceb/f 100,800 Oct 5 MachinerydisposalW 28,000

" 5 BankMachineryZ 44,800 2009

Sept 30 Balancec/f 117,600

145,600 145,600

(ii) Machinery Accumulated Depreciation

2007 $ 2007 $

Sept 30 Balancec/f 11,200 Sept 30 Machinerydepreciation 11,200

($28,00025%)+($33,600

25%)2008 2007

Sept 30 Balancec/f 36,400 Oct 1 Balanceb/f 11,200

2008

Sept 30 Machinerydepreciation

($100,80025%) 25,200 36,400 36,400

2008 2008

Oct 11 MachinerydisposalW Oct 1 Balanceb/f 36,400

($28,00025%2) 14,000 2009

2009 Sept 30 MachinerydepreciationSept 30 Balancec/f 51,800 ($117,60025%) 29,400

65,800 65,800

(iii) Machinery Disposal

2008 $ 2008 $

Oct 5 Machinery 28,000 Oct 5 Machineryaccumulateddepreciation 14,0002009 " 5 Bank 18,900

Sept 30 ProfitandlossProfitondisposal 4,900

32,900 32,900

1212



22/24

(iv) Computers and Office Equipment Accumulated Depreciation

2007 $ 2007 $

Sept 30 Balancec/f 3,500 Sept 30 Depreciation(W1) 3,500

2008 2007Sept 1 Balancec/f 11,375 Oct 1 Balanceb/f 3,500

2008

Sept 30 Depreciation(W2) 7,875 11,375 11,375

2009 2008Sept 30 Balancec/f 24,290 Oct 1 Balanceb/f 11,375

2009

Sept 30 Depreciation(W3) 12,915

24,290 24,290

Workings:

(W1) $14,000 25% = $3,500

(W2) {[($14,000 $3,500) 25%] + ($21,000 25%)} = $7,875

(W3) {[($14,000 $3,500 $2,625) 25%] + [($21,000 $5,250) 25%] + ($28,035 25%)} = $12,915

(b) (i) Under the reducing-balance method, a fixed percentage for depreciation is deducted from thecost in the first year. In the second and later years the same percentage is applied to the reduced

balance.

(ii) The straight-line method is sometimes also called the fixed instalment method. Under this

method, the useful life is estimated (in years). The depreciable cost (i.e., cost estimated residualvalue) is then divided by the estimated useful life to give the annual depreciation charge.

28X (a) (i) Photocopiers

2008 $ 2009 $

Apr 1 Balanceb/f(W1) 52,000 Mar 31 Balancec/f 52,000

(ii) Accumulated Depreciation: Photocopiers2009 $ 2008 $

Mar 31 Balancec/f 27,560 Apr 1 Balanceb/f(W2) 15,600

2009 Mar 31 Depreciation 11,960

27,560 27,560

Workings:

(W1) Cost of the photocopier = $50,000 + $2,000 = $52,000

(W2) Depreciation for the year ended 31 March:

$ 2007 $52,000 150,000

2,500,000 3,120

2008 $52,000 600,0002,500,000

12,480

2009 $52,000 575,000

2,500,000 11,960

27,560

Depreciationfortheperiod1/4/2009to30/9/2009:

$52,000 250,000

2,500,000 5,200

32,760



23/24

48

(b)The Journal

Date Details Dr Cr

2009Sept 30

" 30

" 30

Photocopierdisposals

Photocopiers

Accumulateddepreciation:Photocopiers(W2)

Photocopierdisposals

Photocopiers

Photocopierdisposals(trade-inallowance)

Bank

$52,000

32,760

64,000

$

52,000

32,760

12,000

52,000

(c) $ Cost 52,000 Less Accumulateddepreciation (32,760)

Netbookvalue 19,240

Less Trade-inallowance (12,000)

Lossondisposal 7,240

(d) The units-of-output method matches the annual depreciation with the economic benefits (in terms ofoutput produced) that are expected to be derived from the use of an asset each year. However, it may

not be applicable to assets for which it is difficult to measure the units of output produced (e.g.,

furniture and fixtures).

Past Exam QuestionsPast Exam Questions

30 (a) Machines Account

2003 $ 2004 $

Jul 1 Bank(No.1) 400,000 Jun 30 Balancec/d 1,000,0002004

Mar 1 Bank(No.2) 600,000

1,000,000 1,000,000

2004 2005

Jul 1 Balanceb/d 1,000,000 Jun 1 Disposal(No.1) 400,0002005 " 30 Balancec/d 1,140,000

May 1 Bank(No.3) 540,000

1,540,000 1,540,000

(b) Provision for Depreciation on Machines Account

2004 $ 2004 $

Jun 30 Balancec/d 240,000 Jun 30 Profitandloss 240,000 [($400,00040%)+($600,000

40%)]

240,000 240,0002005 2004

Jun 1 Disposal(No.1) 248,000 Jul 1 Balanceb/d 240,000 {$160,000+[($400,000 2005

$160,000)40%]} Jun 30 Profitandloss 332,000

" 30 Balancec/d 324,000 {[($400,000$160,000)40% ]

+[($600,000$80,000)40%] +($540,00040%)}

572,000 572,000

4124

12

11121112 11

121112

2122

12



24/24

(c) Machines Disposal Account

2005 $ 2005 $

Jun 1 Machine(No.1) 400,000 Jun 1 Provisionfordepreciation onmachines(No.1) 248,000

" 1 Bank 100,000


400,000 400,000

31X (a) (i) Plant and Machinery Account

2005 $ 2005 $

Jan 1 Balanceb/d 860,000 May 5 Disposal 150,500

May 5 Bank 130,000 Dec 31 Balancec/d 862,500

" 5 Disposal 23,000 1,013,000 1,013,000

2006 2006

Jan 1 Balanceb/d 862,500 Sept 20 Disposal 170,000

Dec 31 Balancec/d 692,500

862,500 862,500

(ii) Provision for Depreciation on Plant and Machinery Account

2005 $ 2005 $May 5 Disposal($150,500$68,000) 82,500 Jan 1 Balanceb/d 320,000

Dec 31 Balancec/d 323,750 Dec 31 Profitandloss

[($860,000+$153,000

$150,500)10%] 86,250 406,250 406,250

2006 2006

Sept 20 Disposal($170,000$86,000) 84,000 Jan 1 Balanceb/d 323,750

Dec 31 Balancec/d 309,000 Dec 31 Profitandloss

[($862,500$170,000)10%] 69,250 393,000 393,000

(iii) Plant and Machinery Disposal Account2005 $ 2005 $

May 5 Plantandmachinery 150,500 May 5 Provisionfordepreciation

onplantandmachinery 82,500

" 5 Plantandmachinery 23,000 Dec 31 ProfitandlossLossondisposal 45,000

150,500 150,500

2006 2006

Sept 20 Plantandmachinery 170,000 Sept 20 Provisionfordepreciationon

Dec 31 ProfitandlossProfitondisposal 12,000 plantandmachinery 84,000 " 20 BankSalesproceeds 98,000

182,000 182,000

(b) The purpose of providing depreciation is to apply the matching principle to fixed assets. The benefits

arising from the use of fixed assets are spread over the periods of their useful lives in the business so

that the costs incurred in using the fixed assets can be matched with the benefits.

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