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This session covers the following content from the ACCA Study Guide.
Session 9 Guidance
Concentrate on definitions in (s.3) and the depreciation methods of straight line and reducing balance
and then work through Illustrations 1 and 2 and Example 1.
Note the effect of changes in accounting estimates (s.3.8) and work Illustration 3.
Work through (s.4.1) disposals. Be sure to attempt Example 2 covering the basic entries before
working through (s.4.2) (part exchange).
NON-CURRENT ASSETS
PRACTICAL ISSUES
• Depreciation Methods
• Ledger Accounts
• Shortcut Calculations
• Fixed Asset Register
Session 9 Guidance
Appreciate that assets (usually properties) may be revalued and the effect which this would have
on the financial statements (s.5).
Understand the practical aspects of accounting for depreciation (s.6.1–6.3), which have particular
relevance for examination questions.
Appreciate that the fixed asset register (s.6.4) is neither a book of prime entry nor a ledger
account, but it plays an important role in controlling and accounting for non-current assets.
1 Non-current Assets
Non-current assets can be classified as tangible or intangible.*
Non-current assets—
Tangible assets are non-monetary assets having physical assets expected to be
substance. Examples include: used during more than
• Property, plant and equipment* one accounting period
(therefore not held for
• Investments (other than those held for the short-term)
trading purposes and
Intangible assets are non-monetary assets without physical not expected to be
substance. Examples include: realised in less than
• Copyrights 12 months).
• Manufacturing licences
• Goodwill
• Development costs
• Patented rights (e.g. medicines, inventions, etc)
• Brands
3 Depreciation
3.1 Introduction
A capital expenditure (e.g. purchase of a machine) is not
charged to the I&E a/c at the time of the expenditure, but
a revenue expenditure (e.g. repairs and maintenance) is
immediately charged to the I&E a/c (see Session 2).
Most tangible non-currents assets wear out with time and use,
so their capital costs are spread and charged to the I&E a/c
over their useful lives (thereby matching their cost with the
revenue generated from their use).
3.2 Terminology*
Property, plant and equipment: tangible assets held for use
in production or supply of goods or services (or for rental or
admin purposes) and expected to be used during more than one *More detailed
period. definitions are given in
Session 23.
Depreciation: systematic allocation of an asset's depreciable
amount over its useful life.
Depreciable amount: cost (or revalued amount) less residual
value.
Useful life: period of time over which an asset is expected to
be used.
Cost: amount of cash paid to acquire (or construct) an asset.
Residual value: net amount expected to be obtained for an
asset at the end of its useful life after deducting expected costs
of disposal.
Carrying amount:* for an asset, it is the amount recognised in
the statement of financial position after deducting accumulated
depreciation.
*Calculation:
Cost − Residual value
Useful life
*What constitutes
Usually expressed as: cost and the factors
straight line over n years (e.g. 5 years); or which affect the
determination of useful
at x% per year (per annum) on cost (e.g. 20%), life are considered
where x = 100/n. later in Session 23.
A new car is purchased on 1 January 2013 for $80,000. Its useful life is estimated to be four
years. Its residual value is expected to be $10,000.
Solution
Annual depreciation charge
$80,000 − $10,000
= $17,500
4
Carrying amount
End of Cost Depreciation Carrying amount
reporting period $ $ $
31.12.13 80,000 17,500 62,500
31.12.14 80,000 35,000 45,000
31.12.15 80,000 52,500 27,500
31.12.16 80,000 70,000 10,000
D/E Original purchase
$ $
Dr Asset (e.g. Motor vehicle) a/c* 80,000
Cr Cash, bank loan or accounts payable 80,000
Ledger Accounts
Motor vehicles a/c
$ $
(1) Cash (or payable) 80,000 31.12.13 Balance c/d 80,000
1.1.14 Balance b/d 80,000 31.12.14 Balance c/d 80,000
1.1.15 Balance b/d 80,000 etc...
*As long as the car is owned, this ledger account will show its Carrying amount does
original purchase price. not represent worth
(i.e. what the non-
current tangible asset
might be sold for). It
is simply the amount of
historical (i.e. original)
cost which has not
been expensed (as
depreciation) to the
I&E a/c.
D/E Depreciation
• One side of the double entry is an expense (charge) for the year a debit entry (to
depreciation expense).
• The other side of the double entry reduces the carrying amount of the asset (in the
statement of financial position) a credit entry (to accumulated depreciation).*
$ $
Dr Depreciation expense a/c 17,500
Cr Accumulated depreciation a/c 17,500
• The depreciation expense account will be closed to the I&E a/c at the end of each
accounting year:
$ $
Dr I&E a/c 17,500
Cr Depreciation expense a/c 17,500
A new car is purchased on 1 January 2013 for $81,000. Depreciation is charged at 33⅓% on the
reducing balance basis.
Solution
Annual depreciation charges
Year 1: $81,000 × 33⅓% = $27,000
Year 2: $54,000 × 33⅓% = $18,000
Year 3: $36,000 × 33⅓% = $12,000
etc...
Carrying amount
End of Cost Depreciation
reporting period (Motor Vehicles a/c) (Accumulated) Carrying amount*
$ $ $ $
31.12.13 81,000 27,000 54,000
31.12.14 81,000 45,000 36,000
31.12.15 81,000 57,000 24,000
31.12.16 81,000 65,000 16,000
etc...
31.12.20 81,000 77,842 3,161
Advantages Disadvantages
Accelerated depreciation expense Calculations are more complex (as the
reflects greater usage of assets in balance to which percentage is applied
earlier years. is reduced each year).
Assets in use are never fully
depreciated.
No need to separately identify assets
(until disposed of).
Jan bought a new computer on 1 January 2013 for $12,000. Its useful life is estimated to be
five years, after which its second-hand value is expected to be $3,000.
Required:
(a) Calculate the annual depreciation charge using:
(i) Straight-line method
(ii) 25% reducing balance (with no residual value)
(b) Using the straight-line method:
(i) Write up the asset and accumulated depreciation ledger accounts over the
useful life of the asset.
(ii) Show the relevant extracts of the statements of financial position for each year.
Solution
(a) (i) Straight-Line Method
Depreciation per year =
(ii) Reducing Balance Method
Workings $
01.01.13 Cost
31.12.13 Depreciation
Solution
(b) (i) Ledger Accounts
With reference to Illustration 1. After two years it is expected that the car will remain in use for
the next four years (a six-year total life as compared to the original estimated life of four years).
Any residual value will then be considered negligible, as compared to the original residual value of
$10,000.
Solution
Carrying amount after two years is $45,000 (carry amount balance as of 31.12.14 in the Solution
to Illustration 1).
This carrying amount must now be depreciated over the remaining useful life assuming a residual
value of $0:
$45,000 − 0
Annual depreciation = = $11,250
4
4 Disposals
A car which cost $80,000 and has been depreciated for three years at 25% per year using the
straight-line method is sold for $25,000 cash. Assume that the residual value was estimated as
$0.
Solution
On disposal accumulated depreciation is $80,000 × 25% × 3 years = $60,000. This means
the carrying amount is $20,000 ($80,000 − 60,000) and a $5,000 gain has arisen on
disposal (sales price of $25,000 − carrying amount of $20,000).
Ledger Accounts
Car a/c
$ $
Balance b/d 80,000 (1) To disposals 80,000
Accumulated depreciation
$ $
(2) To disposals 60,000 Balance b/d 60,000
Disposals
$ $
(2) Accumulated
(1) Cost 80,000 60,000
depreciation
Profit on disposal Proceeds
(I & E a/c) 5,000 25,000
85,000 85,000
Grigory sold a motor vehicle for $15,000. This originally cost $70,000 and accumulated
depreciation amounted to $50,000.
Required:
Write up the disposals account to determine the profit or loss on disposal.
Solution
Disposals a/c
$ $
Tomas buys a BMW, list price $92,500, for cash $80,000 and trades in a VW.
Solution
D/E
$ $
Dr Motor vehicle a/c 80,000
Cr Cash (or bank) a/c 80,000
5 Revaluation
$
Opening cost 40,000
+ Additions 8,000
− Disposals (6,000)
42,000
@ 25% (say) 10,500 charge for year
$ $
Opening cost 40,000 Opening depreciation 15,000
+ Additions 8,000 (Not applicable)
− Disposals (6,000) On disposals (3,000)
42,000 12,000
Net amount $30,000 @ 25% (say) = $7,500 charge for year
The reducing balance method provides a progressively decreasing depreciation charge over
the life of the asset.
Depreciation using the reducing balance method is calculated as:
Carrying amount × annual depreciation rate (%)
D/E Annual depreciation charge, however calculated, is:
When an asset is disposed of, original cost and accumulated depreciation are transferred to
a disposals a/c. Profit or loss on a disposal is the difference between carrying amount and
sale proceeds (if any).
Gains arising on revaluation are unrealised and are not recognised in profit or loss.
They are included in other comprehensive income.
A full year's depreciation may be charged in the year of acquisition (with no charge in the
year of disposal). Alternatively, depreciation may be charged on a pro rata basis for each
month of use.
The fixed asset register provides a detailed log of all non-current tangible assets.
Session 9 Quiz
Estimated time: 25 minutes
1. State the main difference between tangible and intangible assets. (1)
2. Name the International Accounting Standard which deals with the accounting treatment of
tangible non-current assets. (2)
3. Define both residual amount and carrying amount. (3.2)
4. True or false? Carrying amount shows the value of an asset to a business. (3.2)
5. State under which depreciation method an asset will always have a carrying amount. (3.5)
6. Give TWO advantages and ONE disadvantage of the straight-line method. (3.6.1)
7. Give TWO advantages and ONE disadvantage of the reducing balance method. (3.6.2)
8. True or false? Depreciation of an asset will fall if its estimated life is increased. (3.7)
9. True or false? A change in residual value is a change in accounting estimate. (3.7)
10. State the double entries which you should expect to find in a disposals a/c. (4.1)
11. True or false? The value of an asset given in part exchange effectively represents its sale
proceeds. (4.2)
12. State the double entry for a gain on revaluation of a property. (5)
13. True or false? A revaluation gain is not an item of profit or loss. (5.1)
14. List FOUR items of information that may be included in a fixed asset register. (6.4)
EXAMPLE SOLUTIONS
Solution 1—Depreciation Methods
(a) (i) Straight-Line Method
Cost − Residual value ($12,000 − $3,000)
Depreciation per year = $1,800 =
Useful life 5
(ii) Reducing Balance Method
Workings $
01.01.13 Cost 12,000
31.12.13 Depreciation ($12,000 × 25%) (3,000)
*The cost will simply be carried down (c/d) and brought down (b/d)
at the end of each reporting period.
*The debit (Dr) entry for the charge for the year is to the
depreciation expense account (a/c). At the end of each year
the depreciation expense a/c will be closed when the expense is
transferred to the I&E a/c. The balance c/d and b/d at the end of
each reporting period are increased by the charge for the year.
NOTES