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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
Dec 31 Balancec/f 14,000 Jan 1 Balanceb/f 12,000
Dec 31 Depreciation 2,000
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
Year4 Depreciation (1,845) Year4 Depreciation(20%of$6,400) (1,280)
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)
26,000 14,400 Year3 Depreciation (7,000) Year3 Depreciation(40%of$14,400) (5,760)
19,000 8,640 Year4 Depreciation (7,000) Year4 Depreciation(40%of$8,640) (3,456)
12,000 5,184
Year5 Depreciation (7,000) Year5 Depreciation(40%of$5,184) (2,074)
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
Year3 Depreciation( 40,000200,000$35,000) (7,000) 15,500
Year4 Depreciation( 40,000200,000$35,000) (7,000) 8,500
Year5 Depreciation( 20,000200,000$35,000) (3,500) 5,000
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
Nov 1 Balanceb/f 18,000 Oct 31 Balancec/f 18,000
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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
Nov 1 Balanceb/f 18,000 Oct 31 Balancec/f 18,000
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
2009 Depreciation:Machinery 1,800
2010 Depreciation:Machinery 1,800
Balance Sheets as at 31 October (extract)
2008 2009 2010 $ $ $
Machineryatcost 18,000 18,000 18,000
Less Accumulateddepreciation (1,800) (3,600) (5,400)
16,200 14,400 12,600
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(ii) Reducing-balance method
Income Statements for the years ended 31 October (extract)
$
2008 Depreciation:Machinery 1,800
2009 Depreciation:Machinery 1,620
2010 Depreciation:Machinery 1,458
Balance Sheets as at 31 October (extract)
2008 2009 2010 $ $ $
Machineryatcost 18,000 18,000 18,000
Less Accumulateddepreciation (1,800) (3,420) (4,878)
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 Balancec/f 4,500 Jan 1 Balanceb/f 2,500
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
2007 Depreciation:Motorvehicles 2,000
2008 Depreciation:Motorvehicles 1,600
(d) Balance Sheets as at 31 December (extract)
2006 2007 2008 $ $ $Motorvehiclesatcost 12,500 12,500 12,500
Less Accumulateddepreciation (2,500) (4,500) (6,100)
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
2008 2008Jan 1 Balanceb/f 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
Dec 31 Balancec/f 51,000 Jan 1 Balanceb/f 25,500
Dec 31 Depreciation 25,500
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)
$
2007 Depreciation:Machinery 25,500
2008 Depreciation:Machinery 25,500
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
Less Accumulateddepreciation (25,500) (51,000) (51,000)
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
Year2 Depreciation (16,400)
55,200 Year3 Depreciation (16,400)
38,800
Year4 Depreciation (16,400) 22,400
Year5 Depreciation (16,400)
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
2008 2008Jan 1 Balanceb/f 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 Balancec/f 54,000 Jan 1 Balanceb/f 27,000
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
2008 2008Jan 1 Balanceb/f 6,400 Dec 31 Balancec/f 13,600
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
Jan 1 Balanceb/f 51,000 Dec 31 Balancec/f 81,000
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 $
Jan 1 Balanceb/f 68,000 Dec 31 Balancec/f 122,000
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 Balancec/f 43,250 Jan 1 Balanceb/f 17,000
Dec 31 Depreciation 26,250 43,250 43,250
2009 2009
Jul 16 Lorriesdisposal(No.3) 13,500 Jan 1 Balanceb/f 43,250
Dec 31 Balancec/f 53,813 Dec 31 Depreciation 24,063
67,313 67,313
2010 2010Nov 5 Lorriesdisposal(No.2) 20,813 Jan 1 Balanceb/f 53,813
Dec 31 Balancec/f 59,750 Dec 31 Depreciation 26,750
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
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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) 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
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(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 $
Dec 31 Balancec/f 129,600 Dec 31 Depreciation 129,600
($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
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(iii) Plant and Machinery Disposal
2008 $ 2008 $
Dec 1 Plantandmachinery 129,600 Dec 1 Accumulateddepreciation: Plantandmachinery 10,800
" 1 Bank 100,800
" 31 ProfitandlossLossondisposal 18,000
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
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(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
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(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
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(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
" 30 ProfitandlossLossondisposal 52,000
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.