Chapter 3

Notes to teachers
1

Depreciation of Non-current Assets

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. 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. 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. The matching concept may help students understand the accounting rationale behind the treatment of depreciation. But it is not necessary at this stage. It is not difficult 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 pay attention to the date of the acquisition/disposal. In recent years, minor changes have been made in making accounting entries for annual depreciation. A nominal 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 of Frank Woods Financial Accounting 2 for the actual meaning of provisions. 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. Note that the term net book value is now more commonly called carrying amount.

3 4 5

7 8

Q1

Capital expenditure is expenditure that generates long-term benefits (i.e., benefits which will last for a number of periods) for an entity.

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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 the day-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. (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. 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 period. A non-current asset provides long-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). (a) Straight-line method: Year ended 31 March 2010 2011 2012 2013 (b) Reducing-balance method: Annual depreciation rate = 45% Year ended 31 March 2010 2011 2012 2013 Depreciation charged for the year $3,600 $1,980 $1,089 $599 Depreciation charged for the year $1,520 $1,520 $1,520 $1,520

Q2 Q3

Q4

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Q5 Q6

Year ended 31 March 2010 2011 2012 2013 2014

Depreciation charged for the year $12,000 $12,000 $8,000 $4,800 $3,200

(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
General Ledger Depreciation: Lorries
2009 Dec 31 2010 Dec 31 2011 Dec 31 Accumulated depreciation Accumulated depreciation Accumulated depreciation $ 2009 8,000 Dec 31 2010 4,000 Dec 31 2011 2,000 Dec 31 Profit and loss Profit and loss Profit and loss $ 8,000 4,000 2,000

Q7

Accumulated Depreciation: Lorries

2009 Dec 31 2010 Dec 31 2011 Dec 31 Balance c/f Balance c/f Balance c/f $ 2009 8,000 Dec 31 12,000 12,000 14,000 14,000 2010 Jan 1 Dec 31 2011 Jan 1 Dec 31 Depreciation Balance b/f Depreciation Balance b/f Depreciation $ 8,000 8,000 4,000 12,000 12,000 2,000 14,000

Firm A Income Statements for the years ended 31 December (extract)

Expenses: Depreciation: Lorries 2009 $ 8,000 2010 $ 4,000 2011 $ 2,000

Firm A Balance Sheets as at 31 December (extract)

Non-current assets Lorries at cost Less Accumulated depreciation 2009 $ 16,000 (8,000) 8,000 2010 $ 16,000 (12,000) 4,000 2011 $ 16,000 (14,000) 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 achieve consistency, 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 A2

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 a diminishing 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 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 estimated depreciation and actual depreciation. (a) Straight-line method. Under this method, the amount of depreciation charged in each period is constant 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 early years 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, this method 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. 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. 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. 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 remained the 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.

A3

A4 A5 A6

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ASSESSMENT

Short Questions
1 2 3X 4 5
(C) and (D) Capital expenditure: b, c, e, g Revenue expenditure: a, d, f, h Capital expenditure: c, e, g, j Revenue expenditure: a, b, d, f, h, i 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 (a) Straight-line method
Cost Year 1 Year 2 Year 3 Year 4 Depreciation* Depreciation Depreciation Depreciation 4 $ 12,500 (1,845) 10,655 (1,845) 8,810 (1,845) 6,965 (1,845) 5,120

(b) Reducing-balance method

Cost Year 1 Year 2 Year 3 Year 4 Depreciation (20% of $12,500) Depreciation (20% of $10,000) Depreciation (20% of $8,000) Depreciation (20% of $6,400) $ 12,500 (2,500) 10,000 (2,000) 8,000 (1,600) 6,400 (1,280) 5,120

* $12,500 $5,120 = $1,845

6X

(a) Reducing-balance method

Cost Year 1 Year 2 Year 3 Year 4 Year 5 Depreciation ($64,000 50%) Depreciation ($32,000 50%) Depreciation ($16,000 50%) Depreciation ($8,000 50%) Depreciation ($4,000 50%) $ 64,000 (32,000) 32,000 (16,000) 16,000 (8,000) 8,000 (4,000) 4,000 (2,000) 2,000

(b) Straight-line method

Cost Year 1 Year 2 Year 3 Year 4 Year 5 Depreciation* Depreciation Depreciation Depreciation Depreciation 5 $ 64,000 (12,400) 51,600 (12,400) 39,200 (12,400) 26,800 (12,400) 14,400 (12,400) 2,000

* $64,000 $2,000 = $12,400

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(a) Straight-line method

Cost Year 1 Year 2 Year 3 Year 4 Year 5 Depreciation* Depreciation Depreciation Depreciation Depreciation 5 $ 40,000 (7,000) 33,000 (7,000) 26,000 (7,000) 19,000 (7,000) 12,000 (7,000) 5,000

(b) Reducing-balance method

Cost Year 1 Year 2 Year 3 Year 4 Year 5 $ 40,000 Depreciation (40% of $40,000) (16,000) 24,000 Depreciation (40% of $24,000) (9,600) 14,400 Depreciation (40% of $14,400) (5,760) 8,640 Depreciation (40% of $8,640) (3,456) 5,184 Depreciation (40% of $5,184) (2,074) 3,110

* $40,000 $5,000 = $7,000

(c) Units-of-production method

Cost Year 1 Year 2 Year 3 Year 4 Year 5 50,000 $35,000 Depreciation 50,000 + 50,000 + 40,000 + 40,000 +20,000 Depreciation 50,000 $35,000 200,000 Depreciation 40,000 $35,000 200,000 Depreciation 40,000 $35,000 200,000 Depreciation 20,000 $35,000 200,000

( ( ( ( (

$ 40,000 (8,750) 31,250 (8,750) 22,500 (7,000) 15,500 (7,000) 8,500 (3,500) 5,000

) ) ) )

Application Problems
8X
(a) (i) Straight-line method
Machinery
2007 Nov 1 2008 Nov 1 2009 Nov 1 Cash Balance b/f Balance b/f $ 2008 18,000 Oct 31 2009 18,000 Oct 31 2010 18,000 Oct 31 Balance c/f Balance c/f Balance c/f $ 18,000 18,000 18,000

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Accumulated Depreciation: Machinery

2008 Oct 31 2009 Oct 31 Balance c/f Balance c/f $ 2008 1,800 Oct 31 3,600 3,600 5,400 5,400 2008 Nov 1 2009 Oct 31 2009 Nov 1 2010 Oct 31 Depreciation ($18,000 10%) Balance b/f Depreciation Balance b/f Depreciation Balance b/f $ 1,800 1,800 1,800 3,600 3,600 1,800 5,400 5,400

2010 Oct 31 Balance c/f

2010 Nov 1

(ii) Reducing-balance method

Machinery
Cash Balance b/f Balance b/f $ 2008 18,000 Oct 31 2009 18,000 Oct 31 2010 18,000 Oct 31 Balance c/f Balance c/f Balance c/f $ 18,000 18,000 18,000

2007 Nov 1 2008 Nov 1 2009 Nov 1

Accumulated Depreciation: Machinery

2008 Oct 31 Balance c/f $ 2008 1,800 Oct 31 3,420 3,420 4,878 4,878 2008 Nov 1 2009 Oct 31 2009 Nov 1 2010 Oct 31 Depreciation ($18,000 10%) Balance b/f Depreciation [($18,000 $1,800) 10%] Balance b/f Depreciation [($18,000 $3,420) 10%] Balance b/f $ 1,800 1,800

2009 Oct 31 Balance c/f 2010 Oct 31 Balance c/f

1,620 3,420 3,420

1,458 4,878 4,878

2010 Nov 1

(b) (i) Straight-line method

Income Statements for the years ended 31 October (extract)
2008 2009 2010 Depreciation: Machinery Depreciation: Machinery Depreciation: Machinery $ 1,800 1,800 1,800

Balance Sheets as at 31 October (extract)

Machinery at cost Less Accumulated depreciation 2008 $ 18,000 (1,800) 16,200 2009 $ 18,000 (3,600) 14,400 2010 $ 18,000 (5,400) 12,600

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(ii) Reducing-balance method

Income Statements for the years ended 31 October (extract)
2008 2009 2010 Depreciation: Machinery Depreciation: Machinery Depreciation: Machinery $ 1,800 1,620 1,458

Balance Sheets as at 31 October (extract)

Machinery at cost Less Accumulated depreciation 2008 $ 18,000 (1,800) 16,200 2009 $ 18,000 (3,420) 14,580 2010 $ 18,000 (4,878) 13,122

(a)
2006 Jan 1 2007 Jan 1 2008 Jan 1 Cash Balance b/f Balance b/f

Motor Vehicles
$ 2006 12,500 Dec 31 2007 12,500 Dec 31 2008 12,500 Dec 31 Balance c/f Balance c/f Balance c/f $ 12,500 12,500 12,500

(b)
2006 Dec 31 2007 Dec 31 2008 Dec 31 Balance c/f Balance c/f Balance c/f

Accumulated Depreciation: Motor Vehicles

$ 2006 2,500 Dec 31 4,500 4,500 6,100 6,100 2007 Jan 1 Dec 31 2008 Jan 1 Dec 31 Depreciation ($12,500 20%) Balance b/f Depreciation [($12,500 $2,500) 20%] Balance b/f Depreciation [($12,500 $4,500) 20%] $ 2,500 2,500 2,000 4,500 4,500 1,600 6,100

(c)
2006 2007 2008

Income Statements for the years ended 31 December (extract)

Depreciation: Motor vehicles Depreciation: Motor vehicles Depreciation: Motor vehicles $ 2,500 2,000 1,600

(d)
Motor vehicles at cost Less Accumulated depreciation

Balance Sheets as at 31 December (extract)

2006 $ 12,500 (2,500) 10,000 2007 $ 12,500 (4,500) 8,000 2008 $ 12,500 (6,100) 6,400

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10X Depreciation charge per machine each year =

(a)
2007 Jan 1 2008 Jan 1 2009 Jan 1 Cash Balance b/f Balance b/f

$54,000 $3,000 = $8,500 6

Machinery

$ 2007 162,000 Dec 31 2008 162,000 Dec 31 162,000 162,000 2009 Jan 1 Dec 31

Balance c/f Balance c/f Machinery disposal Balance c/f

$ 162,000 162,000 54,000 108,000 162,000

(b)
2007 Dec 31 2008 Dec 31 2009 Jan 1 Dec 31 Balance c/f Balance c/f

Accumulated Depreciation: Machinery

$ 2007 25,500 Dec 31 51,000 51,000 17,000 51,000 68,000 2008 Jan 1 Dec 31 2009 Jan 1 Dec 31 Depreciation ($8,500 3) Balance b/f Depreciation Balance b/f Depreciation ($8,500 2) $ 25,500 25,500 25,500 51,000 51,000 17,000 68,000

Machinery disposal ($8,500 2) Balance c/f

(c)
2009 Jan 1 Machinery

Machinery Disposal
$ 54,000 54,000 2009 Jan 1 " 1 Dec 31 Accumulated depreciation Cash Profit and loss Loss on disposal $ 17,000 24,600 12,400 54,000

(d)
2007 2008 2009

Income Statements for the years ended 31 December (extract)

Depreciation: Machinery Depreciation: Machinery $ 25,500 25,500

Machinery disposal Loss on disposal 12,400 Depreciation: Machinery 17,000

(e)
Machinery at cost Less Accumulated depreciation

Balance Sheets as at 31 December (extract)

2007 $ 162,000 (25,500) 136,500 2008 $ 162,000 (51,000) 111,000 2009 $ 108,000 (51,000) 57,000

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11

(a)
2006 Apr " 1 1 Cash Cash Installation cost Balance b/f Balance b/f

Computers
$ 2007 9,500 Mar 31 500 10,000 2008 10,000 Mar 31 2009 10,000 Mar 31 Balance c/f Balance c/f Computers disposal $ 10,000 10,000 10,000 10,000

2007 Apr 1 2008 Apr 1

(b)
2007 Mar 31 2008 Mar 31 Balance c/f Balance c/f Computers disposal

Accumulated Depreciation: Computers

$ 2007 2,000 Mar 31 2007 4,000 Apr 1 2008 Mar 31 4,000 2008 4,000 Apr 1 Depreciation Balance b/f Depreciation Balance b/f $ 2,000 2,000 2,000 4,000 4,000

2009 Mar 31

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

2009 Mar 31 Computers

Computers Disposal
$ 10,000 10,000 2009 Mar 31 " 31 " 31 Accumulated depreciation Cash Profit and loss Loss on disposal $ 4,000 4,250 1,750 10,000

(d)
2007 2008 2009

Income Statements for the years ended 31 March (extract)

Depreciation: Computers Depreciation: Computers $ 2,000 2,000 1,750

Computers disposal Loss on disposal

(e)
Computers at cost Less Accumulated depreciation

Balance Sheets as at 31 March (extract)

2007 $ 10,000 (2,000) 8,000 2008 $ 10,000 (4,000) 6,000 2009 $

12

T Tang Revised Net Profit for the year ended 31 December 2008
Net profit before corrections Add Purchases overstated Loan interest overstated Less Motor repairs understated Revised net profit (i) (iii) (ii) $ 3,110 5,000 $ 28,910 8,110 37,020 (290) 36,730

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13X

S Pang Corrected Net Profit for the year ended 30 June 2009
Net profit before corrections Add Motor expenses overstated Less Repairs to fixtures understated Loan interest understated Corrected net profit (iii) (i) (ii) $ 750 540 $ 77,270 3,790 81,060 (1,290) 79,770

14X (a)
Gross profit as per accounts Add Purchases overstated Less Carriage inwards understated Purchases understated Corrected gross profit

Statement of Corrected Gross Profit

(iv) (ii) (v) $ 770 2,380 $ 316,290 7,900 324,190 (3,150) 321,040

(b)
Net profit as per accounts Add Motor expenses overstated Purchases overstated Less Carriage inwards understated Rent understated Purchases understated Corrected net profit

Statement of Corrected Net Profit

(i) (iv) (ii) (iii) (v) $ 15,500 7,900 770 20,000 2,380 $ 210,160 23,400 233,560

(23,150) 210,410

(c)
Non-current assets as per accounts Add Vans understated Machinery understated Less Fixtures overstated Buildings overstated Office equipment Corrected non-current assets

Statement of Corrected Non-current Assets

(i) (iv) (ii) (iii) (v) $ 15,500 7,900 770 20,000 2,380 $ 380,000 23,400 403,400

(23,150) 380,250

(d)
Current assets as per accounts* * No amendments are required.

Statement of Corrected Current Assets

$ 77,600

15
36

(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 33 1 % is being used for fixtures. 3 (B) 1,900 (H) 2,500 (Y) 2,000

(b) (A) 12,000 (G) 1,900 (X) 13,500

(C) 10,100 (T) 30,375 (Z) 4,000

(D) 8,200 (U) 10,125

(E) 1,900 (V) 20,250

(F) 4,400 (W) 6,750

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

Depreciation for each of the 5 years =

Cost Year 1 Year 2 Year 3 Year 4 Year 5 Depreciation Depreciation Depreciation Depreciation Depreciation

$88,000 $6,000 (residual value) 5

$ 88,000 (16,400) 71,600 (16,400) 55,200 (16,400) 38,800 (16,400) 22,400 (16,400) 6,000

= $16,400

(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 expenses incurred on the machine. Of the three figures shown, 33 1 % will bring the net book value at disposal nearest to the amount to 3 be received. Proof:
Depreciation rate Cost Year 1 Depreciation Year 2 Depreciation Year 3 Depreciation Year 4 Depreciation Net book value at disposal 50% $ 72,000 (36,000) 36,000 (18,000) 18,000 (9,000) 9,000 (4,500) 4,500 33 3 % $ 72,000 (24,000) 48,000 (16,000) 32,000 (10,667) 21,333 (7,111) 14,222
1

20% $ 72,000 (14,400) 57,600 (11,520) 46,080 (9,216) 36,864 (7,373) 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 it represents the cost of using its tangible non-current assets.

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(b) (i)
2007 Jan 1 2008 Jan 1 2009 Jan 1 Cash ($48,000 3) Balance b/f Balance b/f

Lorries
$ 2007 144,000 Dec 31 2008 144,000 Dec 31 144,000 144,000 2009 Jan 1 Dec 31 Balance c/f Balance c/f Lorries disposal Balance c/f $ 144,000 144,000 48,000 96,000 144,000

(ii)
2007 Dec 31 2008 Dec 31 2009 Jan 1 Dec 31 Balance c/f Balance c/f Lorries disposal (W2) Balance c/f

Accumulated Depreciation: Lorries

$ 2007 27,000 Dec 31 54,000 54,000 18,000 54,000 72,000 2008 Jan 1 Dec 31 2009 Jan 1 Dec 31 Depreciation (W1) Balance b/f Depreciation Balance b/f Depreciation $ 27,000 27,000 27,000 54,000 54,000 18,000 72,000

Workings: (W1) Depreciation per lorry per year is

$48,000 $3,000 $45,000 = = $9,000 5 5

Depreciation for the 3 lorries per year = $9,000 3 = $27,000 (W2) (iii)
2009 Jan 1 Lorries

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

Lorries Disposal
$ 48,000 48,000 2009 Jan 1 " 1 Dec 31 Accumulated depreciation Cash Profit and loss Loss on disposal $ 18,000 25,000 5,000 48,000

19X (a)
2007 Jan 1 2008 Jan Oct 1 1 Bank Balance b/f Bank

Machinery
$ 2007 6,400 Dec 31 6,400 7,200 13,600 2008 Dec 31 Balance c/f Balance c/f $ 6,400 13,600 13,600

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(b)
2007 Jan Jul 2008 Jan Dec 1 1 1 1 Bank Bank Balance b/f Bank

Fixtures
$ 1,000 2,000 3,000 3,000 500 3,500 2007 Dec 31 2008 Dec 31 Balance c/f Balance c/f $ 3,000 3,000 3,500 3,500

(c)
2007 ec 31 2008 Dec 31 Balance c/f Balance c/f

Accumulated Depreciation: Machinery

$ 2007 800 Dec 31 2,400 2,400 2008 Jan 1 Dec 31 1 Depreciation ($6,400 12 %) 2 $ 800

Balance b/f 800 Depreciation {[($6,400 $800) + $7,200] 121 %} 1,600 2 2,400

Accumulated Depreciation: Fixtures

2007 Dec 31 2008 Dec 31 Balance c/f Balance c/f $ 2007 300 Dec 31 620 620 2008 Jan 1 Dec 31 Depreciation ($3,000 x 10%) Balance b/f Depreciation {[($3,000 $300) + $500] 10%} $ 300 300 320 620

(d)
2007 Machinery at cost Less Accumulated depreciation Fixtures at cost Less Accumulated depreciation 2008 Machinery at cost Less Accumulated depreciation Fixtures at cost Less Accumulated depreciation

Balance Sheets as at 31 December (extract)

$ 6,400 (800) 3,000 (300) 13,600 (2,400) 3,500 (620) $ 5,600 2,700

11,200 2,880

20

(a)
2007 Jan Jul 2008 Jan Apr 2009 Jan " 1 1 1 1 1 1 Bank (No. 1) Bank (No. 2) Balance b/f Bank (No. 3) Balance b/f Bank (No. 4)

Machinery
$ 24,000 27,000 51,000 51,000 30,000 81,000 81,000 28,000 109,000 2007 Dec 31 2008 Dec 31 2009 Jan 1 Dec 31 Balance c/f Balance c/f Machinery disposal (No. 1) Balance c/f $ 51,000 51,000 81,000 81,000 24,000 85,000 109,000

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(b)
2007 Dec 31 2008 Dec 31 2009 Jan 1 Dec 31 Balance c/f Balance c/f

Accumulated Depreciation: Machinery

$ 2007 7,500 Dec 31 22,200 22,200 9,600 29,600 39,200 2008 Jan 1 Dec 31 2009 Jan 1 Dec 31 Depreciation (W1) Balance b/f Depreciation (W2) Balance b/f Depreciation (W3) $ 7,500 7,500 14,700 22,200 22,200 17,000 39,200

Machinery disposal (No. 1) (W3) Balance c/f

Workings: (W1) (W2) (W3)

6 2007: (No. 1) : $24,000 20% = $4,800; (No. 2) : $27,000 20% 12 = $2,700. Total = $7,500. 9 2008: (No. 1) : $4,800; (No. 2) : $5,400; (No. 3) : $30,000 20% 12 = $4,500. Total = $14,700.

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.
The Journal
Date 2009 Jan Details 1 Accumulated depreciation: Machinery Cash Machinery disposal Machinery 31 Profit and loss Loss on disposal Machinery disposal Dr $ 9,600 12,950 1,450 1,450 1,450 Cr $

(c)

24,000

Dec

(d)
Machinery at cost Less Accumulated depreciation

Balance Sheets (extract)

31.12.2007 $ $ 51,000 (7,500) 43,500 31.12.2009 $ $ 85,000 (29,600) 55,400

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21X

Motor vehicles Reducing-balance 25% $ 40,000 ($160,000 25%) 30,000 [($160,000 $40,000) 25%]

Straight-line $

Machinery Reducing-balance 20% $ 15,000 ($75,000 20%) 21,000 {[($75,000 $15,000) + $45,000] 20%} 16,800 [($75,000 + $45,000 $15,000 $21,000) 20%]

Straight-line $ 12,500 ($75,000 6) 20,000 [$12,500 + ($45,000 6)] 20,000

2006

Annual depreciation 2007 Annual depreciation

40,000 ($160,000 4) 40,000 70,000 [$40,000 + ($120,000 4)]

2008 Annual depreciation 52,500 {[($160,000 $40,000 $30,000)+ $120,000] 25%}

Year 2006 Year 2007 Year 2008

Reducing-balance $40,000 + $15,000 = $55,000 $30,000 + $21,000 = $51,000 $52,500 + $16,800 = $69,300

Straight-line $40,000 + $12,500 = $52,500 $40,000 + $20,000 = $60,000 $70,000 + $20,000 = $90,000

Change in depreciation $2,500 +$9,000 +$20,700

Recalculation of Net Profit

Original net profit Add Decrease in depreciation Less Increase in depreciation Recalculated net profit 2006 $ 114,500 2,500 117,000 2007 $ 138,490 2008 $ 127,140

(9,000) 129,490

(20,700) 106,440

22X (a)

Computer No. 1 Computer No. 2 Computer No. 3 Computer No. 4 Computer No. 5

Cost $ 32,500 35,000 48,000 42,500 40,000 198,000

2004 $ 6,500 6,500

Depreciation per year 2005 2006 2007 $ $ $ 6,500 6,500 6,500 7,000 7,000 7,000 9,600 9,600 8,500 13,500 23,100 31,600

2008 Total $ $ 6,500 32,500 7,000 28,000 9,600 28,800 8,500 17,000 31,600 106,300

Net book value as at 31.12.2008 $ 7,000 19,200 25,500 40,000 91,700

(b)
Date 2009 Jan Details

The Journal
Dr $ 28,800 16,250 2,950 2,950 2,950 Cr $

1 Accumulated depreciation: Computers ($9,600 3) Cash Computer disposals Computers 31 Profit and loss Loss on disposal Computer disposals

48,000

Dec

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23X (a)

Physical deterioration Economic factors: obsolescence and inadequacy Depletion (ii) Obsolescence
Lorries
Balance b/f Cash (No. 3) Cash (No. 3) Balance b/f Cash (No. 4) Cash (No. 5) Balance b/f Kam Motors (No. 6) Lorries disposal Trade-in allowance (No. 2) $ 68,000 48,000 6,000 122,000 122,000 30,000 28,000 180,000 2008 Dec 31 Balance c/f $ 122,000

(b) (i) Physical deterioration (c) (i)

2008 Jan 1 Sept 30 " 30 2009 Jan 1 Jul 14 " 14 2010 Jan Nov " 1 5 5

(iii) Depletion

Lorries disposal (No. 3) ($48,000 + $6,000) Balance c/f Lorries disposal (No. 2) Balance c/f

122,000

2009 Jul 16 Dec 31

54,000 126,000 180,000 36,000 140,000

2010 126,000 Nov 5 31,350 Dec 31 18,650 176,000

176,000

(ii)
2008 Dec 31 2009 Jul 16 Dec 31 2010 Nov 5 Dec 31 Balance c/f Lorries disposal (No. 3) Balance c/f Lorries disposal (No. 2) Balance c/f

Accumulated Depreciation: Lorries

$ 43,250 43,250 13,500 53,813 67,313 20,813 59,750 80,563 2008 Jan 1 Dec 31 2009 Jan 1 Dec 31 2010 Jan 1 Dec 31 Balance b/f Depreciation Balance b/f Depreciation Balance b/f Depreciation $ 17,000 26,250 43,250 43,250 24,063 67,313 53,813 26,750 80,563

For depreciation, refer to the workings below. Workings:

2007 Less 25% 2008 Less 25% 2009 Less 25% 2010 Less 25% No. 1 $ 32,000 (8,000) 24,000 (6,000) 18,000 (4,500) 13,500 (3,375) 10,125 No. 2 $ 36,000 (9,000) 27,000 (6,750) 20,250 (5,063) 15,187 No. 3 $ 54,000 (13,500) 40,500 Depreciation No. 4 $ No. 5 $ No. 6 $ Total $ 17,000

30,000 (7,500) 22,500 (5,625) 16,875

28,000 (7,000) 21,000 (5,250) 15,750

26,250

50,000 (12,500) 37,500

24,063

26,750 94,063

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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)
2009 Jul 16 2010 Nov 5 Dec 31 Lorries (No. 3)

Lorries Disposal
$ 54,000 54,000 36,000 3,463 39,463 2009 Jul 16 " 16 Dec 31 2010 Nov 5 " 5 Accumulated depreciation Bank Profit and loss Loss on disposal Accumulated depreciation Lorries Trade-in allowance (No. 2) $ 13,500 35,680 4,820 54,000 20,813 18,650 39,463

Lorries (No. 2) Profit and loss Profit on disposal

(iv)
Lorries at cost Less Accumulated depreciation

Balance Sheets as at 31 December (extract)

2008 $ 122,000 (43,250) 78,750 2009 $ 126,000 (53,813) 72,187 2010 $ 140,000 (59,750) 80,250

24X

Stephen Kwan Income Statement for the year ended 31 March 2009
Sales Less Cost of goods sold: Inventory as at 1 April 2008 Add Purchases Less Inventory as at 31 March 2009 Gross profit Add Other revenues: Discounts received Interest revenue Less Expenses: Sundry expenses Rent and rates ($12,000 $1,000) Insurance Wages and salaries ($29,750 + $2,750) Discounts allowed Bad debts Allowance for doubtful accounts [($46,130 $1,130) 5% $1,500] 6 Depreciation: Office equipment [($7,500 10%) + ($2,500 10% )] 12 Motor vehicles ($20,000 20%) Net profit $ 40,000 122,500 162,500 (42,500) 3,000 4,380 1,620 11,000 3,250 32,500 4,750 1,130 750 875 4,000 $ 182,500

120,000 62,500

7,380 69,880

(59,875) 10,005

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Stephen Kwan Balance Sheet as at 31 March 2009

Non-current assets Office equipment, net Motor vehicles, net Current assets Inventory Accounts receivable Less Allowance for doubtful accounts Prepayments Interest receivable Cash Less Current liabilities Accounts payable Accruals Bank overdraft Net current assets Financed by: Capital as at 1 April 2008 Add Net profit for the year Less Drawings $ $ $ 9,125 16,000 $

25,125

45,000 (2,250)

42,500 42,750 1,000 4,380 2,500

93,130

30,000 2,750 26,750

(59,500)

33,630 58,755 67,500 10,005 77,505 (18,750) 58,755

25

(a)

Ruth Co Income Statement for the year ended 30 June 2009

$ 339,000 (4,750) $ 17,500 334,250 351,750 4,550 356,300 (23,000) 1,750 127,500 12,000 12,000 7,500 9,200 15,675 12,950 5,100 3,750 2,500 1,965 $ 538,250 (7,000) 531,250

Sales Less Returns inwards Less Cost of goods sold: Inventory as at 1 July 2008 Add Purchases Less Returns outwards Add Carriage inwards Less Inventory as at 30 June 2009 Gross profit Less Expenses: Carriage outwards Wages and salaries Rent and rates ($16,000 $4,000) Lighting and heating Vehicle running costs Repairs and maintenance Telephone expenses ($13,800 + $1,875) General office expenses Depreciation: Motor vehicles [($21,250 $8,500) 40%] Machinery ($15,000 25%) Furniture and fittings ($10,000 25%) Allowance for doubtful accounts ($65,500 3%) Net loss

(333,300) 197,950

(211,890) (13,940)

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(b)
Non-current assets Machinery Furniture and fittings Motor vehicles Current assets Inventory Accounts receivable Less Allowance for doubtful accounts Prepayments Bank Cash Less Current liabilities Accounts payable Accruals Net current assets Financed by: Capital as at 1 July 2008 Less Net loss for the year Drawings

Ruth Co Balance Sheet as at 30 June 2009

$ Cost 15,000 10,000 21,250 46,250 65,500 (1,965) 46,100 1,875 $ Accumulated depreciation 11,250 7,500 13,600 32,350 23,000 63,535 4,000 10,175 500 101,210 $ Net book value 3,750 2,500 7,650 13,900

(47,975) 13,940 31,425

53,235 67,135 112,500 (45,365) 67,135

26

(a) (i)
2006 Apr 1 2007 Jan Aug 2008 Jan 1 1 1 Bank Balance b/f Bank Balance b/f

Plant and Machinery

$ 2006 864,000 Dec 31 2007 864,000 Dec 31 345,600 1,209,600 1,209,600 1,209,600 2008 Dec 1 " 31 Balance c/f Balance c/f $ 864,000 1,209,600 1,209,600 129,600 1,080,000 1,209,600

Plant and machinery disposal Balance c/f

(ii)
2006 Dec 31 2007 Dec 31 2008 Dec 1 " 31 Balance c/f Balance c/f

Accumulated Depreciation: Plant and Machinery

$ 129,600 331,200 331,200 10,800 536,400 547,200 2006 Dec 31 2007 Jan 1 Dec 31 2008 Jan 1 Dec 31 Depreciation 9 ($864,000 20% )
12

$ 129,600

Balance b/f Depreciation [($864,000 20%) + ($345,600 5 20% )] 12 Balance b/f Depreciation [($864,000 + $345,600 $129,600) 20%]

129,600

201,600 331,200 331,200 216,000 547,200

Plant and machinery disposal 5 ($129,600 20% ) 12 Balance c/f

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(iii)
2008 Dec 1 Plant and machinery

Plant and Machinery Disposal

$ 129,600 129,600 2008 Dec 1 " 1 " 31 Accumulated depreciation: Plant and machinery Bank Profit and loss Loss on disposal $ 10,800 100,800 18,000 129,600

(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
Machinery
Bank Machinery W Bank Machinery X Balance b/f Bank Machinery Y Balance b/f Bank Machinery Z $ 2007 28,000 Sept 30 33,600 61,600 Balance c/f Balance c/f Machinery disposal W Balance c/f $ 61,600

27X (a) (i)

2006 Oct 1 2007 Sept 15 2007 Oct 1 2008 Jan 30 2008 Oct " 1 5

61,600 100,800

2008 61,600 Sept 30 39,200 100,800 100,800 44,800 145,600

100,800 28,000 117,600 145,600

2008 Oct 5 2009 Sept 30

(ii)
2007 Sept 30 2008 Sept 30 2008 Oct 11 2009 Sept 30 Balance c/f Balance c/f Machinery disposal W ($28,000 25% 2) Balance c/f

Machinery Accumulated Depreciation

$ 11,200 36,400 36,400 14,000 51,800 65,800 2007 Sept 30 2007 Oct 1 2008 Sept 30 2008 Oct 1 2009 Sept 30 Machinery depreciation ($28,000 25%) + ($33,600 1 25% ) 2 Balance b/f Machinery depreciation ($100,800 25%) Balance b/f Machinery depreciation ($117,600 25%) $ 11,200

11,200

25,200 36,400 36,400

29,400 65,800

(iii)
2008 Oct 5 2009 Sept 30 Machinery Profit and loss Profit on disposal

Machinery Disposal
$ 28,000 4,900 32,900 2008 Oct " 5 5 Machinery accumulated depreciation Bank $ 14,000 18,900 32,900

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(iv)
2007 Sept 30 2008 Sept 1 Balance c/f Balance c/f Balance c/f

Computers and Office Equipment Accumulated Depreciation

$ 2007 3,500 Sept 30 11,375 11,375 24,290 24,290 2007 Oct 1 2008 Sept 30 2008 Oct 1 2009 Sept 30 Depreciation (W1) Balance b/f Depreciation (W2) Balance b/f Depreciation (W3) $ 3,500 3,500 7,875 11,375 11,375 12,915 24,290

2009 Sept 30

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 the
cost 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 residual value) is then divided by the estimated useful life to give the annual depreciation charge.
Photocopiers
Balance b/f (W1) $ 2009 52,000 Mar 31 Balance c/f $ 52,000

28X (a) (i)

2008 Apr 1

(ii)
2009 Mar 31 Balance c/f

Accumulated Depreciation: Photocopiers

$ 27,560 27,560 2008 Apr 1 2009 Mar 31 Balance b/f (W2) Depreciation $ 15,600 11,960 27,560

Workings: (W1) (W2)

Cost of the photocopier = $50,000 + $2,000 = $52,000 Depreciation for the year ended 31 March:
2007 2008 $52,000 150,000 2,500,000 $52,000 600,000 2,500,000 $52,000 575,000 2,500,000 $52,000 250,000 2,500,000 $ 3,120 12,480 11,960 27,560 5,200 32,760

2009 Depreciation for the period 1/4/2009 to 30/9/2009:

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(b)
Date 2009 Sept " " Details 30 Photocopier disposals Photocopiers

The Journal
Dr $ 52,000 32,760 32,760 64,000 12,000 52,000 Cr $ 52,000

30 Accumulated depreciation: Photocopiers (W2) Photocopier disposals 30 Photocopiers Photocopier disposals (trade-in allowance) Bank

(c)
Cost Less Accumulated depreciation Net book value Less Trade-in allowance Loss on disposal

$ 52,000 (32,760) 19,240 (12,000) 7,240

(d) The units-of-output method matches the annual depreciation with the economic benefits (in terms of output 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 Questions

30
(a)
2003 Jul 2004 Mar 2004 Jul 2005 May 1 1 1 1 Bank (No. 1) Bank (No. 2) Balance b/d Bank (No. 3)

Machines Account
$ 2004 400,000 Jun 30 600,000 1,000,000 1,000,000 540,000 1,540,000 Balance c/d $ 1,000,000

Disposal (No. 1) Balance c/d

1,000,000 400,000 1,140,000 1,540,000

2005 Jun 1 " 30

(b)
2004 Jun 30 2005 Jun 1 " 30 Balance c/d

Provision for Depreciation on Machines Account

$ 240,000 240,000 248,000 324,000 572,000 2004 Jun 30 2004 Jul 1 2005 Jun 30 Profit and loss [($400,000 40%) + ($600,000 4 40% )] 12 Balance b/d $ 240,000

240,000 240,000

Disposal (No. 1) {$160,000 + [($400,000 11 $160,000) 40% ]} 12 Balance c/d

Profit and loss 332,000 11 {[($400,000 $160,000) 40% ] 12 + [($600,000 $80,000) 40%] 2 + ($540,000 40% )} 12 572,000

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(c)
2005 Jun 1 Machine (No. 1)

Machines Disposal Account

$ 400,000 400,000 2005 Jun 1 " 1 " 30 Provision for depreciation on machines (No. 1) Bank Profit and loss Loss on disposal $ 248,000 100,000 52,000 400,000

31X (a) (i)

2005 Jan May " 2006 Jan 1 5 5 1 Balance b/d Bank Disposal Balance b/d

Plant and Machinery Account

$ 860,000 130,000 23,000 1,013,000 862,500 862,500 2005 May 5 Dec 31 2006 Sept 20 Dec 31 Disposal Balance c/d Disposal Balance c/d $ 150,500 862,500 1,013,000 170,000 692,500 862,500

(ii)
2005 May 5 Dec 31 2006 Sept 20 Dec 31

Provision for Depreciation on Plant and Machinery Account

Disposal ($150,500 $68,000) Balance c/d Disposal ($170,000 $86,000) Balance c/d $ 82,500 323,750 406,250 84,000 309,000 393,000 2005 Jan 1 Dec 31 2006 Jan 1 Dec 31 Balance b/d Profit and loss [($860,000 + $153,000 $150,500) 10%] $ 320,000

86,250 406,250 323,750 69,250 393,000

Balance b/d Profit and loss [($862,500 $170,000) 10%]

(iii)
2005 May 5 Plant and machinery

Plant and Machinery Disposal Account

$ 150,500 150,500 170,000 12,000 182,000 2005 May 5 " 5 Dec 31 2006 Sept 20 " 20 Provision for depreciation on plant and machinery Plant and machinery Profit and loss Loss on disposal Provision for depreciation on plant and machinery Bank Sales proceeds $ 82,500 23,000 45,000 150,500

2006 Sept 20 Dec 31

Plant and machinery Profit and loss Profit on disposal

84,000 98,000 182,000

(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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