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Note On Property Plan Equipment (IAS 16)

Home > Study Notes > Note On Property Plan Equipment (IAS 16)
Published in: Accounting
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Sohail A / Sharjah

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Qualification: M.phill Chemistry (Physical) University of the punjab Lahore M.Sc Chemistry (physical) from Punjab university lahore, B.Sc – Botany – Zoology – Chemistry and Completed B.Ed. (Bachelors of Education)

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  1. Property, Plant & Equipment [PPEI (IAS 16) These are those tangible items that: Are held for use in business for production or supply of goods or for administrative purposes; and Are expected to be used during more than on accounting period. The asset are capitalized and then depreciated over their useful life. Examples of these assets include: Land & Building Plant & Machinery Furniture & Fixtures Motor Vehicles Computer Equipment etc Depreciation is the systematic allocation of depreciable amount of an asset over its useful life. Depreciable Amount = Cost —Residua/ Value Cost means purchase price and all costs incurred in bringing the asset into working condition as intended by management. Residual Value is the amount expected to be obtained from an asset at the end of its useful life. Useful Life is the period over which asset is expected to be used by an entity. Methods of depreciation: Straight line method: Annual Depreciation = Cost — Residual Value Estimated useful life Rate of depreciation= x 100 Useful life In this method, depreciation will be same for every year. Reducing Balance method (Diminishing Balance Method): In this method, a rate of depreciation is calculated as follows: [I-n 1 x 100 n = Useful Life s = Scrap Value/ Residual Value c = Cost of asset The rate will then be multiplied in first year on the cost of asset ( without deducting residual value). From second accounting period onwards, rate of depreciation is multiplied with WDV at the beginning of the year, to calculate depreciation for the year. If however, a rate of depreciation is given then simply use that rate. Sum of year's digit method: Depreciation expense is calculated as follows: Sum of digits = n(n+l) 2 n = Useful life Depreciation —Factor of current vear x [cost — R. VI Sum of digits Page 1 of 35
  2. Machine Hour method: Machine Hour Rate = cost — R. V Effective total working Hours Depreciation for the year = Rate x Actual hours used during the period Production Units Method: cost - R.v Production unit rates — Total Units to be produced Depreciation for the year = Rate x Actual units produced during the period Discussion of methods: Straight Line Method: (Fixed Instalment Method) Example: Cost Residual Value Useful Life 100,000 20,000 4 years Date of Purchase 01-07-2014 Accounting year end = 30-06-2015 100,000 - 20,000 Depreciation = 20,000/Annum 4 If depreciation is to be calculated by rate, then: Rate=1/4XIOO -25% Depreciation = (Cost— Residual Value) x Rate = (100 - 20,000) x 25% = 20,000/Annum 2. Reducing Balance Method: (Diminishing Balance Method) In this method, rate is always required; if not available then it can be calculated as follows: Rate = I—n Cost 20,000 = 1—4 100,000 = 33.13% Calculation of Depreciation: Accumulated Depreciation Depreciation 30-06-2015 30-06-2016 30-06-2017 30-06-2018 100,000 x 33.13% 66,875 x 33.13% 44,723 x 33.13% 29,909 x 33.13% 33,125 22,152 14,814 9,907 79,998 33, 125 55,277 70,091 Written Down Value (WDV) 66,875 44,723 29,909 20,002 Page 2 of 35
  3. *At the end of the useful life: (1) Accumulated Depreciation = Depreciable amount; or (2) WDV = Residual Value Accumulated Depreciation: Means total depreciation that has been charged upto the period end. Sum of Digits Method: Accumulated Depreciation Depreciation 3. 4. 5. 2 3 4 10 4/10 x (100,000 - 20,000) = 3/10 x (100,000 - 20,000) = 2/10 x (100,000 - 20,000) = 1/10 x (100,000 - 20,000) = 32,000 24,000 16,000 8,000 32,000 56,000 72,000 80,000 Machine Hour Method: Cost of Machine Residual Value Estimated Total Working Hours Actual hours Used During the year Depreciation / Hour Depreciation for the year Production Units Method: Cost of Machine Residual Value Estimated Total units of production Actual units produced during the year Depreciation / Unit Depreciation for the year = 200,000 = 100,000 = 5,000 5000,000 - 200,000 = 481 hour 100,000 5,000 x 48 = 240,000 = 100,000 = 10,000 Units = 1,000 1000,ooo - 100,000 = 90 / unit 10,000 1,000 x 90 = 90,000 Accounting Entries of Depreciation If there is no separate ledger deprecation Depreciation Asset of Xx account xx If there is a separate ledger depreciation Depreciation Accumulated Depreciation of WDV 68,000 44,000 28,000 20,000 account Xx In this case closing balance in the ledger of asset will equal to WDV. Example: Cost = 100,000 RV 20,000 Useful Life - - 4 years Purchased = 01-07-14 In this case closing balance in the ledger of asset will equal to cost. Page 3 of 35
  4. Nature of accumulated depreciation account is just like a purchase return account, sale return account and drawings account etc. Suppose: Purchases Creditor Creditor Purchase Returns 500,000 500,000 40,000 40,000 Similarly, Accumulated depreciation account is prepared to reflect the decrease in the value of asset so that we have while having complete knowledge of cost, total depreciation & WDV of the asset. Conclusion: If question is silent, always use separate ledger of accumulated depreciation. Depreciation Policv: Time Basis: in this method, depreciation is charged from the date of purchase to date of disposal (sale). Full year Basis: in this method, depreciation is charged for full year in the year of purchase, while no depreciation is charged in the year of disposal. If the question is silent and the dates are available then always use policy of time basis. Example: Cost of Assets Residual value Date of purchase Useful life - 400,000 40,000 = 1-7-2010 10 years Year ended 31st December Time Basis: 400,000 - 40,000 Depreciation for the year ended 31st December = = 36,000 x 6/12 = 18,000 10 Full year Basis: 400,000 - 40,000 Depreciation for the year ended 31st December = = 36,000 10 Ouestion bank: 1. AUBREY Aubrey purchased a van for Rs.800 cash. He estimates that in four years it will have a scrap value of Rs. 104. Required: Calculate the annual depreciation charge on (a) the straight line method (b) the reducing instalment method (you will need to calculate the rate). Page 4 of 35
  5. cost - RV Straight Line = Useful Life Reducing Balance: 800 - 104 4 Rate RV x 100 104 = 1-4 x 100 Calculation of depreciation 800 x 480 x 288 x 173 x = 174 Depreciation 320 192 115 69 Accounting Depreciation 320 512 627 696 WDV 480 288 173 104 2.SUNDRY DEPRECIATION PROBLEMS a. The financial year of a company is 1st January to 31st December. A non-current asset was purchased on 1st May for Rs.60,000. Its expected useful life is five years and its expected residual value is zero. It is depreciated by the straight- line method. Required: Calculate the charge for depreciation in the year of acquisition if a proportion of a full year's depreciation is charged, according to the period for which the asset has been held. b. An office property cost Rs.5 million, of which the land value is Rs.2 million and the cost of the building is Rs.3 million. The building has an estimated life of 50 years. Required: Calculate the annual depreciation charge on the property, using the straight-line method? A.2. (a) 1-5-2000 60,000 - o 5 A.2. (b) 60,000 8 = 12,000 x = 8,000 12 3,000,000 = 60 , 000/Annum. 50 Page 5 of 35
  6. 3.MATURlN Maturin bought a machine for Rs.10,000 on 1 January 2012. He estimates a useful life of 8 years and a residual value of Rs.800. Depreciation is to be calculated on a straight line basis. Required: (a) Write up for 2012 and 2013 the (i) Machinery account (ii) Accumulated depreciation account (iii) Depreciation expense account. (b) Show how the machine would be presented in the statement of financial positions as at 31 December 2012 and 31 December 2013. Notes: The machinery account and accumulated depreciation accounts are statement of financial position items. Depreciation account is an income statement item. Important Points to remember: • Opening Balances are only of Assets, Liabilities and Capital (SOFP items). Income Statement items (Incomes & Expenses) are for the period. 1-1-12 31-12-12 Cash b/d c/d c/d Acc. Depreciation Acc. Depreciation Machinery Account 10,000 c/d 10,000 10,000 c/d 10,000 Accumulated Depreciation Account 31-12-12 Depreciation 1,150 1,150 b/d Depreciation 2,300 2,300 Depreciation Account 1,150 cid (IIS) 1,150 1,150 cid (IIS) 1,150 10,000 10,000 10,000 10,000 1,150 1,150 1,150 1,150 2,300 1,150 1,150 1,150 1,150 Page 6 of 35
  7. Machinery Accumulated Depreciation Dr. 10,000 1,150 Depreciation Assets: Machine (10,000 Assets: Machine (10,000 4. SOPHIE -1,150) - 2,300) Statement of Financial Position As on 31-12-2012 (Extract) Statement of Financial Position As on 31-12-2013 (Extract) Cr. 2,300 8,850 7,700 Since he commenced business on 1 January 2010 Sophie has purchased for cash the following three machines. Machine 1 Machine 2 Machine 3 Date of purchase 20 January 2010 17 April 2011 11 July 2012 Cost 4,200 5,000 3,500 Rate of depreciation 25% 35% Sophie's policy is to charge a full year's depreciation in the year of purchase irrespective of the date of purchase. The reducing balance method is used to calculate depreciation. Accounts are prepared to 31 December each year. Required: (a) (b) A.4 (a) 10-1-10 31-12-12 17-4-11 31-12-1 1 Prepare the machinery account and accumulated depreciation account showing the charge to the depreciation account for each year. Show the relevant statement of financial position extracts for each year. Cash b/d Cash b/d Machinery Account 4,200 c/d 4,200 4,200 5,000 c/d 9,200 9,200 4,200 4,200 9,200 9,200 Page 7 of 35
  8. 11-7-12 31-12-13 Cash c/d cid cid 3,500 c/d 12,700 Accumulated Depreciation Account 31-12-10 1 ,050 1 ,050 3,338 3,338 6,204 6,204 Depreciation (W-l) b/d Depreciation (W-ll) b/d Depreciation (W-lll) (b) Statement of Financial Position (Extract) For the year ended 31-12-2010 Assets: Machinery (4,200 Assets: Machinery (9,200 Assets: - 1,050) - 3,338) Statement of Financial Position (Extract) For the year ended 31-12-2011 Statement of Financial Position (Extract) For the year ended 31-12-2012 Machinery (12,700 - 6,204) Workings: W-l Depreciation for 2010: 4,200 x 25% = 1,050 W-ll W-lll Depreciation for 2011: Machine # 1 Machine # 2 = [4,200- 1,050] x 25% 5,000 x = Depreciation for 2012: Machine # 1 Machine # 2 Machine # 3 [4,200-1 ,050 - 788] x 3,500 x Cost of Purchase of a Non-Current Asset: 12,700 12,700 1 ,050 1 ,050 1 ,050 2,288 3,338 3,338 2,866 6,204 3,150 5,862 6,496 788 1 ,500 2,288 591 1 ,225 2,866 Page 8 of 35
  9. All amount incurred to bring the asset into working condition as intended by management of business are added to the cost of Asset: (means capitalized to the Cost of Asset) Purchase Price Add Carriage Inwards Add Custom duty Add Assembly cost Add Installation / wiring Cost of Asset Expenditures Capital Expenditures Expenditure which has a useful life of more than one accounting period. Accounting Treatment: Record these expenditures as an asset and then depreciate them over their useful life. Example: Land, Building, Vehicle, Machinery etc. However land is generally not depreciated because it has an indefinite useful life. Conclusion: Revenue Expenditures Expenditures which benefit the business upto one accounting period. Accounting Treatment: Record these expenditures as an expense in the period in which they are incurred. Example: Salaries, Rent, Utilities, Advertisement, Stationary etc. Capital Expenditure are Capitalized (means recorded as an asset) and Revenue expenditures are expensed out (means recorded) as an expense. Important point to remember: Repairs of an asset are always considered as a revenue expense unless it is mentioned that it will improve efficiency or the benefit the business for more than me accounting period. 6. TIME LIFE ENTERPRISES The draft statement of financial position of Time Life Enterprises (TLE) as on December 31 , 2013, depicts the following: Rupees Plant and Machinery — Cost Less: Accumulated Depreciation On reviewing the accounts of the business, its auditor found that the records have been correctly maintained except for the following events: (i) On January 17, 2013 a contract was signed for the purchase of a machine from Makers Limited for Rs. 1,125,000 which is to be delivered on July 17, 2014. TLE paid an advance of Rs. 450,000 on the signing of the contract and the balance was to be paid on delivery of the machine. The advance was debited to plant and machinery account. Installation of a machine was completed on January 21, 2013. The cost of machine of Rs. 2,700,000 was debited to plant and machinery account. The cost of installation amounting to Rs. 300,000 had been debited to Repairs Account. Depreciation is charged on a reducing balance method at 10% per annum. Depreciation on new assets commences in the month in which the asset is acquired. The depreciation expense for the year 2013 have been correctly calculated and Page 9 of 35
  10. recorded except for the impact of errors discussed above. Required: Determine the correct balances as at December 31 , 2013 by recording appropriate adjustments in the following accounts: (a) Plant and machinery (b) Accumulated depreciation - plant and machinery Plant Cash Advance to Supplier Cash Advance to Supplier Plant Repairs 300,000 Cash (Posted) Unadjusted balance Repairs Depreciation (W) cid (adjusted) Workings: 450,000 450,000 450,000 450,000 450,000 450,000 Plant & Machinery 300,000 (Posted entry) (Required entry) (Rectifying entry) Plant & Machinery 300,000 300,000 Cash (Required) 300,000 Repairs (Rectifying) Plant & Machinery Account (Adjusted) Advance 300,000 c/d (adjusted) Accumulated Depreciation Account (Adjusted) 45,000 Unadjusted balance Depreciation (W) Depreciation Adjustments: 450,000 x 10% = 45,000 (to be reversed) Accumulated Depreciation Depreciation 45,000 300,000 x = 30,000 (to be charged) Depreciation Accumulated Depreciation 30,000 45,000 30,000 300,000 450,000 30,000 Page 10 of 35
  11. DISPOSAL/ SALE OF ASSET Machine Cost Accumulated Depreciation = Written down value Suppose this machine is now sold for 180,000. 750,000 600 000 150 000 Gain / Loss Gain different between WDV and Sale proceeds. 180,000 -150,000 30,000 ACCOUNTING ENTRIES OF DISPOSAL (a) Calculating Gain / Loss by Entries If there is no separate ledger accumulated If there is a separate ledger of accumulated depreciation Cash Machine WDV) Gain (Bal.) 130,000 150,000 30,000 depreciation Cash Account Depreciation Machine Cost) Gain (Bal.) 180,000 600,000 (At 750,000 30,000 Difference in this entry is gain or loss to be recognised in Income Statement (b) Calculating Gain / Loss by Disposal Account Difference in this entry is gain or loss to be recognized in Income Statement It is a ledger which is used to calculate the gain or loss on disposal of an asset. Machine Gain (IIS) Machine Gain (IIS) Disposal Account (if asset account is at WDV) 150,000 Cash 30,000 Disposal Account(if asset account is at cost) 750,000 Cash Accumulated Depreciation 30,000 180,000 180,000 600,000 SUMMARY OF ACCOUNTING ENTRIES IF A DISPOSAL ACCOUNT IS REQUIRED TO BE PREPARED No separate ledger of accumulated depreciation Separate ledger of accumulated depreciation Cash Disposal A/c Disposal A/c Machine xx xx Cash xx Disposal A/c xx Disposal A/c Machine xx xx xx xx Page 11 of 35
  12. WDV) Cost) Acc Depreciation Disposal A/c xx xx Q. 1 The Machinery Account (at Cost) of a firm for the three years ended December 31, 2014 appears as follows 2012 Jan 1 to Cash (No-I) 2013 Jan 1 Balance b/d July 1 to Cash (No-2) 2014 Jan 1 Balance b/d July 1 to Cash (No-3) Machinery 50,000 50,000 50,000 20,000 70,000 70,000 15,000 85,000 2012 Dec 31 Balance c/d 2013 Dec 31 Balance c/d 2014 Dec 31 Balance c/d 50,000 50,000 70,000 70,000 85,000 85,000 Depreciation @20% on the diminishing value basis was accumulated in provision for depreciation Account On October 1, 2015 machines # 2 was damaged and has to be replaced by a new machine costing Rs. 25,000 . The Machine was insured and insurance claim of Rs. 12,400 was received. Required: Prepare the 2015 Machinery Account, Provision for Depreciation Account and machinery disposal Account. All workings are to be shown. Depreciation is provided on time basis. Note: Provision for depreciation account is another name of accumulated depreciation account. b/d 1-10 cash Disposal A/c (W-3) c/d Machinery Gain (IIS)' Machinery Account — At Cost 85,000 1-10 Disposal Account 25,000 c/d Accumulated Depreciation Account 7,760 b/d (W-1) Depreciation (W-2) 34,970 *Disposal Account 20,000 cash Acc Depreciation 160 20,000 90,000 31,500 11,230 12,400 7,760 Page 12 of 35
  13. *It is prepared to find out the gain or loss on disposal of an asset. It is prepared for the year; therefore there is no concept of opening and closing balance in this ledger (an income statement item). WORKINGS: (W-1) Accumulated Depreciation as on 1st January, 2015: Machine No. 1 (1-1-2012) 2 (1-1-2013) 3 (1-1-2014) Cost 50,000 20,000 15,000 2012 10,000 10,000 2013 8,000 2,000 10,000 2014 6,400 3,600 1,500 11,500 (W-2) Depreciation for the year 2015: Machine # 1 2 3 4 Calculations (50,000 - 24,400) x (20,000 - 5,600) x x 9/12 (15,000 - 1,500) x 25,000 x x 3/12 Total 24,400 5,600 1,500 31,500 Depreciation 5,120 2,160 2,700 1,250 11,230 (W-3) Accounting Depreciation of Asset Disposed Off: 5,600 + 2,160 = 7,760 Q.2 A Company charges depreciation on Plant and Machinery under reducing balance method at the rate of 15% p.a. On 1 st April 1997, the balance in the ledger stood as 460,000 (WDV). The following particulars are given relating to the plant and machinery during the four years ending 31 March 2001. Date I-sep-1997 I-Jul-1998 31-Aug-1999 I-Nov-2000 Required: A Machine purchased for Rs. 21,000 on 1 May 1995 was fully destroyed in an accident A new Machine was purchased costing 52,500. A sum of Rs .30,000 was paid on the same date and remaining balance was paid in May 1999 Plant Purchased on 1 st April 1996 for Rs. 31,500 was disposed of for Rs. 36,000 Some old Machine having book value of Rs 10,000 on 1 st Apri11997 was sold for Rs. 4,000 Prepare plant and machinery account for four years ending 31 March 2001. A.2 Date 1-4-97 1-4-98 1-7-98 Plant & Machinery Account (At WDV) Particular b/d b/d Cash Rs. 460,000 377,914 30,000 Date 1-9-97 31-3-98 31-3 99 Particular Disposal a/c Depreciation c/d Depreciation (W-1) (W-2) Rs. 14,433 67,653 377,914 62,593 Page 13 of 35
  14. Payable b/d 1-4-99 b/d 1-4-2000 WORKINGS: (W-1) WDV of Asset Destroyed: Period 1-5-95 - 31-3-96 1-4-96 - 31-3-97 1-4-97 - 1-9-97 1-4-96 - 31-3-97 1-4-97 - 31-3-98 1-4-98 - 31-3-99 1-4-99 - 31-8-99 1-4-97 - 31-3-98 22,500 52,500 367,821 296,205 31-8-99 31-3- 2000 1-11- 2000 31-3- 2001 21,000 x 15% x 11/12 18,112 x 15% 15,395 x 15% x 5/12 (W-2) Depreciation for the year ended 31-3-98: (460,000 - 15,395) x 15% = Add: Depreciation of destroyed machine = (W-3) Depreciation for the year ended 31-3-99: 377,914 x = 52,500 x x 9/12 = (W-4) Disposal of Machine on 31-8-1999: Purchase on 1-4-96 for Rs. 31,500 Period 31,500 x 15% 26,775 x 15% 22,759 x 15% 19,345 x 15% x 5/12 (W-5) Depreciation for the year ended 31-3-2000: (367,821- 19,345) x 15% = Depreciation on disposed asset (W-6) Disposal of Machine on 1-11-2000: Book Value on 14-97 = Rs. 10,000 Period Depreciation 10,000 x 15% c/d Disposal A/c Depreciation A/c c/d Disposal Depreciation c/d Depreciation 2,888 2,717 962 66,691 962 56,687 5 966 62 593 Depreciation 4,725 4,016 3,414 1,209 52,271 1 209 1,500 367,821 18,136 53,480 296,205 5,604 44,047 246,554 WDV 18,112 15,395 14,433 WDV 26,775 22,759 19,345 18,136 WDV 8,500 Page 14 of 35
  15. 1-4-98 - 31-3-99 1-4-99 - 31-3-2000 1-4-2000 - 1-11-2000 8,500 x 7,225 x 15% 6,141 x 15 ,/12 1,275 1,084 537 43,510 537 7,225 6,141 5,604 (W-7) Depreciation for the year ended 31-3-2001: (296,205 - 6,141) x = Add: Depreciation on disposal Q. 3 A trading organisation charges depreciation on its plant and machinery on a reducing balance method @ 15% per annum. On 1 July 2011, the net book value in the ledger stood at Rs. 5,660,000. Movements in the plant and machinery account during the two years ended 30 June 2013 were as follows: ate 1 October 2011 1 December 2011 1 February 2012 O November 2012 Required: articulars new machine costing Rs. 80,000 was purchased. A sum of Rs. 30,000 was aid on the same date and the balance was paid on 31 March 2012. machine that was purchased for Rs. 200,000 and installed at a cost ofRs. 10,000 on 1 August 2009 was fully destroyed in an accident. ome old machinery (book value on 1 July 2011 Rs. 20,000) was sold for Rs. ,ooo. machine imported on 1 July 2010 was disposed of for Rs. 63,000. The alue of machine was Rs. 70,000 whereas import levies amounted to Rs. ,ooo. Prepare the plant and machinery account for the years ended 30 June 2012 and 2013. (19) A.3 -7-11 Balance b/d -10-11 Bank/creditors -7-12 Balance b/d Workings: Loss due to Accident: ostof urchases Plant & Machinery A/c Rs. 80,000 5 740 000 4,734,137 4 734 137 -12-11 1-02-12 0-6-12 0-6-12 0-11-12 0-6-13 0-6-13 Disposal account Disposal account De . Ex ense Balance d Disposal account De . Ex ense Balance d De reciation for 11 months in 2009 Book value at 30-06-2010 -2010 Rs. 144,334 18,250 843 279 4 734 137 5 740 000 50,800 705 380 3,977 957 4 734 137 210,000 28 875 181 125 Page 15 of 35
  16. De reciation for the ear 2010-11 Book value at 30-06-2011 De reciation for five months u to 1- - 153,956 - 20,000] x 12-2011 153 956 x x 5 12 DV Disposal of old plant and machinery: DV as on 1-7-2011 De reciation for seven months u to 1-02-2012 DV De ion for the ended June 2012 De reciation on addition 80 000 x 15% x 9 12 De reciation on deletion due to accident De reciation on dis osal of old lant and machine Depreciation on opening assets still available (5,660,000 15% otal depreciation Dis of im ant and machin Cost of urchases De reciation for the ear 2010-11 Book value at 30-06-2011 De reciation for the ear 2011-12 Book value at 30-06-2012 De reciation for five months u to 30-11- WDV ion for the ended June 2013 2012 De reciation on dis osal of im rted lant and machine Depreciation on opening assets still available (4,734,137 - otal depreciation 54,187] x 15% Q-4 Following is the extract from the Balance Sheet of Tayab Limited as on 31.12 27 169 153,956 9,622 144,334 20 000 1 750 18 250 9 000 9 622 1 750 822 907 843 279 75,000 11,250 63 750 9,563 54 187 3 387 50 800 3 387 701 993 705 380 Rupees Fixed Assets (at cost) Less: Accumulated depreciation Net Book Value During the year 2004: (i) Additions in fixed assets was (ii) Loss on sale of old fixed assets was (in) Depreciation provided for the year was Required: 2004 684,500 249, 750 434,750 2003 518,000 277,500 240,500 481,000 92,500 138,750 Determine the amount of sale proceeds received on the disposal of fixed assets during the year 2004. Page 16 of 35
  17. b/d Additions Disposal (Bal. Fig) c/d Asset Fixed Assets (at Cost) Rs. 518,000 Disposal (Bal. Figure) 481,000 c/d 999,000 Accumulated De ciation Account Rs, 166,500 b/d 249,750 Depreciation 416,250 Dis osal Account Rs, 314,500 Accumulated Depreciation Loss on sale (given) cash (Bal. Fig) 314,500 Rs. 314,500 684,500 999,000 Rs, 277,500 138,750 416,250 Rs, 166,500 92,500 55,500 314,500 So amount of sale proceeds received on disposal of fixed assets during the year 2004 were Rs. 55.500. Page 17 of 35
  18. DEPRICIATION PRACTICE OUESTIONS Ouestion-l (C. W) Mr. Baber provided you with following information: Machinery Vehicle Following are the additions made during the year: Machinery Vehicle Vehicle Cost as on 1.1.2009 600,000 700,000 Accumulated Depreciation as on 1.1.2009 250,000 90,000 Date of Purchæse 1.3.2009 1.5.2009 1.6.2009 Rate S.L 20% cost 90,000 80,000 1 oo,ooo Required: Prepare machinery A/C and vehicle A/C (cost and accumulated depreciation) for December 31, 2009 and December 31, 2010. Ouestion-2 (H.W) Mr. Black has provided you with following information: Plant and Machinery Furniture Vehicle Cost as on 1.1.2001 600,000 700,000 800,000 Following are the additions made in year ended December 31, 2001. Plant and Machinery Furniture Vehicle Required: Accumulated Depreciation as on 1.1.2001 200,000 130,000 170,000 Date 1.1.2001 1.6.2001 1.9.2001 Rate S.L 20% 25% Cost 60,000 80,000 70,000 Prepare Assets Accounts and Accumulated Depreciation A/C for year ended December 31 , 2001 only. Ouestion-3 A Gill, purchased a notebook PC on 1.1.2005 for Rs. 2,600.1t has an estimated life of four years and a scrap value of Rs. 200. He is not certain whether he should use the straight line or the reducing balance basis for the purpose of calculating depreciation on the computer. Required: You are required to calculate the depreciation (to the nearest Rs.) using both methods, showing clearly the balance remaining in the computer account at the end of each of the four years under each method. (Assume that 45 per cent per annum is to be used for the reducing balance method). Ouestion-4 Mr. Taimoor has started the business on January l, 2009 of manufacturing cars. He hms disclosed the following data for first three years of his business operations which relates to additions in fixed assets: Date of Purchase Year end December 31, 2009 1.1.2009 Asset-I Asset-2 1.7.2009 Year end December 31, 2010 Asset-3 1.4.2010 Year end December 31, 2011 1.7.2011 Asset-4 cost 30,000 10,000 50,000 60,000 Page 18 of 35
  19. Method is WDV for depreciation and rate is 10%. Requirement: Prepare relevant accounts for years ended December 31, 2009, 2010 and 2011.1 Refer Practice Question No. 18 Ouestion-S (C. W) Mr. Wasif has informed you that following balances are appearing on l. 1.2013 in his books of accounts: Building Cost 400,000 Following is the detail of additions during the year ended December 31, 2013: Accumulated Depreciation 150,000 Cost 300,000 100,000 Building — Defence Building - Green Town Method for depreciation is WDV and rate is 20%. Requirement: Prepare relevant accounts for year ended December 31, 2013. Question-6 (H.W) Date of Purchæse 1.3.2013 1.8.2013 Mr. Ali has informed you that following balances are appearing on I. 1.2013 in his books of accounts: Machinery a/c Cost 600,000 Following is the detail of additions during the year ended December 31, 2013: Cutter machine Molding machine Method for depreciation is WDV and rate is 20%. Requirement: Date of Purchase 1.3.2013 1.8.2013 Accumulated Depreciation 300,000 Cost 500,000 250,000 Prepare msset account and accumulated depreciation account for year ended December 31 , 2013. Ouestion-7 (H.W) Mr. Faiq has informed you that following balances are appearing on I. 1.2009 in his books of accounts: Machinery a/c Cost 600,000 Following is the detail of additions during the year ended December 31, 2009: Machinery B Machinery C Method for depreciation is WDV and rate is 30%. Requirement: Prepare relevant accounts for year ended December 3 1, 2009 Ouestion-8 (C. W) Mr. Nasir has disclosed the following data: Furniture — book value Date of Purchase 1.3.2009 1.5.2009 Following transactions took place during the year ended December 31, 2009. Accumulated Depreciation 200,000 Cost 10,000 70,000 1.1.2009 25,000 Page 19 of 35
  20. Additions 60,000 90,000 Required: Prepare A/C. Rate of depreciation is 20% W.D.V. Ouestion-9 (C. W) Mr. Sannan has provided you with following information: Building Detail of addition for year ended Dec. 31, 2007 on February 01, 2007 on April 01, 2007 (ii) Depreciation rate is 10% on diminishing balance method. Prepare building account for the year ended December 31, 2007. Question-IO Date of purchase 1.3.2009 1.6.2009 Book value 1.1.07 1,500,000 400,000 650,000 ABC Ltd. has a building A/c having book value of Rs. 700,000 on 1.1.2011. The depreciation is directly credited to asset a/c and no separate accumulated depreciation account is maintained. During the year ended 31.12.2011, following transaction took place: Additions of Rs. 80,000 took place on 1.3.2011. Required: Prepare relevant accounts mssuming that rate is 30% WDV. SOLUTIONS Answer-I Dr. 1.1.09 1.3.09 1.1.10 31.12.09 31.12.10 b/d cash b/d cid c/d Machi 600,000 90,000 690,000 Accumulated 317,500 386,500 a/c 31.1209 31.12.10 . a/c (Machin 1.1.09 31.12.09 1.1.10 31.12.10 Depreciation Machinery — 2009 On opening assets On addition Depreciation Machinery — 2010 On opening assets 1.1.09 1.5.09 1.6.09 b/d cash cash (600,000 x 10%) (90,000 x x 10/12) (690,000 x 10%) Vehicle a/c 700,000 80,000 100,000 31.12.09 c/d c/d b/d Depreciation Exp b/d Depreciation Exp c/d cr. 690,000 690,000 Cr. 250,000 67,500 317,500 69,000 60,000 7,500 67,500 69,000 cr. 880,000 Page 20 of 35
  21. 1.1.10 31.12.09 31.12.10 Answer-2 Dr. 1.1.01 1.101 Dep. Exp 31.12.01 Depreciation: 1.1.01 1.601 Dep. Exp 31.12.01 Depreciation: 1.1.01 1.901 Dep. Exp 31.12.01 Depreciation . b/d cid c/d 2009 2010 b/d cash c/d 880,000 31.12.10 Accumulated De . a/c 1.1.09 252,334 31.12.09 1.1.10 428,334 31.12.10 (700,000 x 20%) c/d b/d Depreciation Exp b/d Depreciation Exp On opening On addition On opening (80,000 x 20% x 8/12) + (100,000 x 20% x 7/12) (880,000 x 20%) Plant and Machine 600,000 60,000 - At Cost 31.12.01 c/d Accumulated eciation - Plant and Machine On opening mssets On addition b/d cash 1.1.01 31.12.01 332,000 (600,000 x 20%) (60,000 x 20%) Furniture — A/C 700,000 80,000 31.12.01 b/d c/d Accumulated 204,667 reciation — Furniture 1.1.01 31.12.01 b/d c/d On opening assets On addition (700,000 x 10%) (80,000 x x 7/12) b/d cash c/d On opening On addition Vehicle a/c 800,000 70,000 31.12.01 c/d Accumulated D reciation — Vehicle a/c 1.1.01 31.12.01 375,833 b/d (800,000 x 25%) (70,000 x 25% x 4/12) 880,000 cr. 90,000 162,334 252,334 176,000 140,000 22,334 162,334 176,000 cr. 660,000 cr. 200,000 132,000 120,000 12,000 132,000 cr. 780,000 cr. 130,000 74,667 70,000 4,667 74,667 cr. 870,000 cr. 170,000 205,833 200,000 5,833 205,833 Page 21 of 35
  22. Answer-3 Calculation of depreciation (Using straight line method) cost Depreciation (2005) (2,600 - 200) / 4 WDV Depreciation (2006) (2,600 - 200) / 4 WDV Depreciation (2007) (2,600 - 200) / 4 WDV Depreciation (2008) (2,600 - 200) / 4 WDV (31.12.2008) Calculation of depreciation (Using write down value method) cost Depreciation (2005) WDV Depreciation (2006) WDV Depreciation (2007) WDV Depreciation (2008) WDV (31.12.2008) Answ r-4 Asset A/c 1.1.10 1 1.11 1.1.09 1.1.09 1.7.09 1.1.10 1.4.10 1.1.11 1.7.11 31.12.09 31.12.10 31.12.12 b/d cash cash b/d cash b/d cash c/d c/d c/d 30,000 10,000 40,000 50,000 90,000 60,000 31.12.09 31.12.10 31.12.11 Accumulated De 1.1.09 3,500 10,900 21,810 c/d c/d cid iation b/d Depreciation expense b/d Depreciation expense b/d Depreciation expense Calculation for Depreciation Depreciation for 2009 On additions Depreciation for 2010 On opening assets On additions Depreciation for 2011 On opening assets On additions (30,000 x 10%) + (10,000 x x 6/12) (40,000 - 3,500) x (50,000 x x 9/12) (90,000 - 10,900) x (60,000 x x 6/12) 2,600 (600) 2,000 (600) 1,400 (600) 800 (600) 200 2,600 (1,170) 1,430 786 (354) 432 (194) 238 cr. 40,000 90,000 150,000 cr. 3,500 3,500 7,400 10,900 10,910 3,500 3,650 3,750 7,400 7,910 3,000 10,910 Page 22 of 35
  23. Answer-S Furniture — Book value Dr. 1.1.13 1.3.13 1.8.13 b/d cash cash Buildin a/c 400,000 300,000 100,000 31.12.13 c/d Accumulated D reciation 31.12.13 c/d Calculation for Dem•eciation On opening assets On additions during the year Answer-6 1.1.13 258,333 (400,000 - 150,000) x 20% b/d Depreciation expense 1.1.13 1.3.13 1.8.13 b/d cash cash (300,000 x 20% x 10/12) + (100,000 x 20% x 5/12) Asset a/c 600,000 500,000 250,000 31.12.13 cid Accumulated D reciation 31.12.13 cid Calculation for Dem•eciation - On opening assets - On additions Answer-7 1.1.13 464,167 (600,000 - 300,000) x 20% b/d Depreciation expense 1.1.09 1.3.09 1.5.09 b/d cash cash (500,000 x 20% x 10/12) + (250,000 x 20% x 5/1/2) Machine a/c 600,000 10,000 70,000 31.12.09 cid Accumulated D reciation 1.1.09 b/d 31.12.09 cid Calculation for Depreciation expense 336,500 Depreciation expense - On opening assets - On additions Answer-8 (600,000 - 200,000) x 30% (10,000 x 30% x 10/12) + (70,000 x 30% x 8/12) 1.1.09 1.3.09 1.6.09 b/d cash cash Depreciation expense Opening assets On addition 25,000 60,000 90,000 25,000 x 20% Depreciation c/d (60,000 x 20% x 10/12) + (90,000 x 20% x 7/12) cr. 800,000 cr. 150,000 108,333 50,000 58,333 108,333 cr. 1,350,000 Cr. 300,000 164,167 60,000 104,167 164,167 cr. 680,000 Cr. 200,000 136,500 120,000 16,500 136,500 cr. 25,500 149,500 5,000 20,500 25,500 Page 23 of 35
  24. Answer-9 1.2 1.4 Dr. b/d cash cash Buildin 400,000 -BV 650,000 Depreciation Expense(W-1) c/d workin s (W-l) Depreciation Expense On opening assets (l x 10%) on addition (400,000 x x 11/12) + (650,000 x x 9/12) Answer-IO Dr. 1.1.11 1.3.11 b/d cash Depreciation expense Opening assets On addition Buildin A/c-at BV 700,000 80,000 Depreciation c/d (bal.) (700,000 x 30%) (80,000 x 30% x 10/12) cr. 235,417 2,314,583 150,000 85,417 235,417 cr. 230,000 550,000 210,000 20,000 230,000 Page 24 of 35
  25. FIXED ASSETS AND DEPRECIATION ICAP OUESTIONS OUESTION-I The cost of a machine purchased by S. Yaseer Trading Company (Private) Limited on 1st April, 1992 is Rs. 750,000. It is estimated that the machine will have a Rs. 30,000 trade-in value at the end of its service life. Its life is estimated at 6 years. Its working hours are estimated at 25,000, its production is estimated at 400,000 units. During 1992, the machine was operated for 4200 hours and produced 80,000 units. Compute the depreciation on the machine for 1992 by: (b) (c) (10) Service hours method; The productive-output method; and The sum of the year's digits method (October 1993, CA Inter - 111 OUESTION-2 A business purchased a machine costing Rs. 1,120,000 on April 01, 2002. The machine can be used for a total of 20,000 hours over an estimated life of 48 months. At the end of that time the machine is expected to have a trade in value of Rs. 112,000. The financial year of the business ends on December 31 st each year. It is expected that the machine will be used for: 4,000 hours during the financial year ending December 31, 2002. 5,000 hours during the financial year ending December 31, 2003. 5,000 hours during the financial year ending December 31, 2004. 5,000 hours during the financial year ending December 31, 2005. 1,000 hours during the financial year ending December 31 , 2006. Required: Calculate the annual depreciation charges on the machine on each of the following bases for each of the financial years ending on December 31, 2002, 2003, 2004, 2005 and 2006: (i) the straight line method applied on monthly basis and (ii) the usage method. (04) (Autumn 2002, Q # 8) OUESTION-3 'A' company maintains its fixed assets at cost. Depreciation provision accounts, one for each type of asset, are in use. Machinery is to be depreciated at the rate of 12-1/2 percent per annum, and fixtures at the rate of 10 per cent per annum, using the reducing balance method. The following transactions in assets have taken place: 1985 1986 1 January 1 July I October 1 December Bought machinery Bought fixtures Bought machinery Bought fixtures Rs. 640, Fixtures Rs. 100. Rs. 200. Rs. 720. Rs. 200. The financial year end of the business is 31st December, You are to show: (a) The machinery account. (b) The fixtures account. (c) The two separate provision for depreciation accounts (means accumulated depreciation account). (d) The fixed assets section of the Balance-sheet at the end of each year for the years ended 31st December, 1985 & 1986. (12) (March 1989, CA Inter -11) Page 25 of 35
  26. OUESTION-4 In the accounts of King Kong Limited the schedule of fixed assets for the year ended May 31, 1996 appeared as follows: Particular E ui ment cost 830 Rs in '000' Accumulated De reciation 292 During the year to May 31, 1997 the following changes in fixed assets occurred: 2. New equipment was purchased for Rs. 175,000 and Rs. 200,000 on October l, 1996 and December l, 1996 respectively. 3. The Company's Policy is to depreciate assets on straight line bmsis. The rate of depreciation for equipment is 10%. Required: Prepare: Prepare msset a/c and accumulated depreciation a/c of equipment. (7) (April 1997, FE-II QUESTIONS The following information is available in respect of fixed assets of MJ Enterprises (MJE): (i) (ii) (iii) The opening balances of cost and accumulated depreciation of fixed assets as on January l, 2009 were Rs. 100,000 and Rs. 33,000 respectively. MJE provides for depreciation on the cost of assets at the rate of 10% per annum using the straight line basis. Depreciation is calculated on a monthly basis. On October l, 2009 MJE transferred to its factory an asset which had been included in its trading stock and which bore a price label of Rs. 15,400 in the showroom. MJE makes a gross profit of 40% of cost, on sale of such mssets. Required: Prepare the following ledger accounts for the year ended December 31, 2009: Fixed assets (b) Accumulated depreciation (04) Answer-I (Spring 2010, Q#2} SOLUTIONS Cost - Residual Value x Hours in current year (b) Service hour method Depreciation expense Depreciation-1992 Productive output method Depreciation expense Depreciation-1992 (750,000 - 30,000) cost - Residual Value (750,000-30,000) cost - Residual Value (750,000-30,000) Total hours expected x 4,200 120,960 25,000 144,000 Sum of year's digit method Depreciation expense Depreciation-1992 x x 21 Units in current year Total units expected 80-000 - 400,000 6 205,714 Page 26 of 35
  27. Answer-2 (a) (i) Calculation of depreciation expense using straight line method Depreciation expense Depreciation - 2002 (April - December) Depreciation - 2003 Depreciation - 2004 Depreciation - 2005 Depreciation - 2006 (January - March) cost - Residual Value Useful life (1.120.000-112.000) 4 (1.120.000-112.000) 4 4 (1, 120.000-112,000) 4 (1.120.000-112.000) 4 x x x x x x _9 12 12 12 12 12 12 12 3 12 No. of months in use 12 189,000 252,000 252,000 252,000 63,000 (ii) Calculation of depreciation expense using usage method Depreciation expense Total expected hours Cost - Residual Value x Hours in current year Total hours expected = 4,000 + 5,000 + 5,000 + 5,000 + 1,000 20,000 Depreciation 201,600 Depreciation 252,000 Depreciation 252,000 Depreciation 252,000 50,400 Answer-3 1/1/1985 1/1/1986 1/10/1986 (b) 1/1/1985 1/7/1985 1/1/1986 1/12/1986 31/12/1985 31/12/1986 - 2002 - 2003 - 2004 - 2005 cash b/d cash cash cash b/d cash cid c/d x x x x 4.000 20,000 20,000 5.000 20,000 5 000 20,000 LOOU_ 20,000 Machine account 31/12/1985 720 31/12/1986 Fixture account 100 200 31/12/1985 300 200 31/12/1986 Accumulated de 80 c/d c/d c/d c/d iation-Machi 1/1/1985 31/12/1985 1/1/1986 173 31/12/1986 b/d Depreciation expense (640x12.5%) b/d Depreciation expense (W-l) cr. 1,360 cr. 300 500 cr. 80 80 93 Page 27 of 35
  28. Accumulated depreciation- Fixture 31/12/1985 31/12/1986 cid c/d 1/1/1985 20 31/12/1985 1/1/1986 50 31/12/1986 b/d Depreciation expense (W-2) b/d Depreciation expense (W-2) (W-l) Depreciation expense-machinery On opening assets On additions (640-80) x 12.5% (720 x 12.5% x 3/12) (W-2) Depreciation expense-fixture For 1985 On additions For 1986 On opening assets On additions (100 x x x 6/12) (300-20) x (200 x x 1/12) cr. 20 20 30 70 23 93 20 28 2 30 (d) Balance sheet extracts for 1985 Machinery Less: Accumulated depreciation Fixture Less: Accumulated depreciation Balance sheet extracts for 1986 Machinery Less: Accumulated depreciation Fixture Less: Accumulated depreciation Answer-4 Dr. 01.05.96 01.10.96 01.12.96 31.05.97 b/d cash cash c/d (bal.) (W-l) Depreciation Expense On Opening On additions x6/12) Answer-S a) Dr. b/d Stock (15,400/140x100) ui ment a/c 830,000 175,000 200,000 3105.97 c/d(bal.) Accumulated D reciation a/c 01.05.96 b/d Depreciation (W-l) 396,667 (830,000 x 10%) (175,000 x x 8/12) + (200,000 x Fixed assets 100,000 11,000 c/d 11 1,000 (80) 560 300 (20) 280 1,360 (173) 1,187 500 (50) 450 1 637 cr. 1,205,000 cr. 292,000 104,667 83,000 21,667 104,667 cr. 111,000 111,000 Page 28 of 35
  29. b) Dr. c/d Accumulated D b/d iation Depreciation for the year (W-l) 43,275 43,275 (W-l) Depreciation calculation for the year Depreciation on opening assets Opening assets Depreciation on additions Asset transferred from stock cr. 33,000 10,275 43,275 10,000 275 10,275 Page 29 of 35
  30. Answer Extra questions Question = (300,000 - 0) x 0.3012 (a) (b) (c) (d) Cost of an asset is Rs. 600,000 and its residual value after the end of its useful life is Rs. 100,000. The useful life is 5 years. You are required to calculate the depreciation expenses for all the five years on straight line method. Cost of an asset is Rs. 300,000 and its residual value after the end of its useful life is Rs. 50,000. The useful life is 5 years. You are required to calculate the depreciation expense for all the five years on diminishing balance method. Cost of an asset is Rs. 300,000 and its residual value after the end of its useful life is Rs. 60,000. The useful life is 4 years. You are required to calculate the depreciation expense for all the four years on sum-of-years' digit method. Cost of a machine is Rs. 100,000 and its residual value after the end of its useful life is Rs. 20,000. The anticipated total production of machine is 5,000 units. You are required to calculate the depreciation expense for the first year if machine is produced 2,000 units in the first year. (a) (b) (c) Rate of depreciation Depreciable amount Annual depreciation Rate Depreciation Year -1 Depreciation Year -2 Depreciation Year -3 Depreciation Year -4 Depreciation Year -5 Depreciation Sum of years' digits Depreciation Year-I Depreciation = l/useful life x 100 1/5 x 100 = Cost of asset — residual value = 600,000 - 100,000 = 500,000 = 500,000 x = 100,000 = 1-0.6988 = 0.3012 = Book value x Rat of depreciation = 90,360 = (300,000 - 90,360) x 0.3012 = 63,144 = (300,000 - 153,504) x 0.3012 125 = (300,000 - 197,629) x 0.3012 = 30,834 = (300,000 - 228,463) x 0.3012 = 21,547 = n(n + 1)/2 = 10 = (digit of current year/sum of years digits) x (cost — residual value) = 4/10 x (300,000 - 60,000) Page 30 of 35
  31. Year-2 Depreciation Year-3 Depreciation Year-4 Depreciation = 96,000 = 3/10 x (300,000 - 60,000) = 72,000 = 2/10 x (300,000 - 60,000) = 48,000 = 1/10 x (300,000 - 60,000) = 24,000 (d) Depreciation rate per unit = (Cost — Residual Value)/ Anticipated total production = (100,000 - = 16 per unit 2,000 x 16 = 320,000 Question No. 1 Ishtiaq purchased a machine on 1-1-2000 for Rs. 320,000 and paid custom duty and freight of Rs. 160,000. Rs. 120,000 was incurred on erection of machine. Another machine of Rs. 200,000 was purchased on 1 July 2000. On 1 January 2001 a portion of first machine (value 1/3rd) got out of order and was sold for Rs. 69,600. Another machine was purchased to replace the same for Rs. 100,000. Depreciation is to be calculated @ 20% on straight line basis. Required: Prepare machinery account at WDV for the year ended 31 December 2000 and 31 December 2001. Question No. 2 Qaiser and Co. whose books are closed on 31 December purchased a machine for Rs. 300,000 on 1 January 2006. Additional Machinery was acquired for Rs. 100,000 on 1 July 2006. Machinery which was purchased for Rs. 100,000 on 1 July 2006 was sold for Rs. 60,000 on 30 June 2008. Required: Prepare Machinery Account and Accumulated Depreciation Account for all years up to the year ending 31 December 2008 taking into account depreciation at 10% p.a. on straight line basis. Also prepare disposal Account of Machine. Answer No. 1 Machinery Account Rupees Date I-Jan-oo I-Jul-OO 1 Jan OO 1 Jan OO Particulars Balance b/d Particulars Balance b/d Bank 600,000 200,000 800,000 31 -Dec 31- Dec Machinery Account Rupees Date 660,000 1-Jan-Ol 31 -Dec- 100,000 760,000 Particulars Depreciation (600,000 20%) Balance c/d Particulars Disposa (W-I) Depreciation (W-2) Balance cid Workings: w-l 600,000 x 1/3 200,000 x Rupees 140,000 660,000 800,000 Rupees 160,000 140,000 460,000 760,000 200,000 (40,000) Page 31 of 35
  32. (600,000 x 2/3) = 400,000 x 200,000 x 100,000 x Machinery Answer No. 2 Disposal Account 160,000 Cash / bank Loss (IIS) 160,000 (a) Machinery Account I-Jan-06 I-Jan-06 I-Jul-06 I-Jan-06 I-Jan-06 Particulars Balance b/d Bank Bank Particulars Balance b/d Particulars Balance b/d Particulars Balance cid Particulars Balance cid Particulars Disposal (5+10+5) R upees Date 100,000 31.12.06 400,000 Machinery Account Rupees Date 400,000 31.1206 400,000 Machinery Account R upees Date 400,000 3Cklun-08 31.1206 400,000 Particulars Balance c/d Particulars Balance c/d Particulars Disposal Balance c/d (b) Accumulated Depreciation Account Ru pees Date 35,000 35,000 Particulars Balance b/d Depreciation (W-I) Accumulated Depreciation Account Rupees Date 75,000 75,000 Particulars Balance b/d Depreciation (400k x 10%) Accumulated Depreciation Account Ru pees Date 20,000 Particulars Balance b/d Depreciation 160,000 80,000 40,000 20,000 140,000 69,600 90,400 160,000 Rupees 400,000 400,000 Rupees 400,000 400,000 Rupees 100,000 300,000 400,000 Rupees 35,000 35,000 Rupees 35,000 40,000 75,000 Rupees 75,000 Page 32 of 35
  33. Balance cid Machinery go,ooo 110,ooo (c) Disposal Account 100,000 Cash Accumulated depreciation (5+10+5) Loss on disposal (IIS) 100,000 35,000 110,000 60,000 20,000 20,000 100,000 Page 33 of 35
  34. Test Question The following information relating to the non-current assets of sole trader B. Martin as at 1 January 2009 is available: Premises Premises at cost 1 January 2009 Accumulated depreciation premises 1 January 2009 Delivery vans Delivery van A at cost (purchased 1 April 2007) During the year to 31 December 2009 the following occurred: Premises 540,000 113,400 40,000 Due to increased demand, B. Martin built an extension to his premises. The following costs were incurred: Site preparation Rs. 20,500 Building materials Rs. 79,000 Contract labour (used in the construction of the build) Rs. 61 ,OOO Architect and legal fees incurred Rs. 17,000 The extension was finished and brought into use on 1 July 2009. The new extension is to be depreciated in line with the existing building at 2% per annum using diminishing balance method. Residual value of new and old premises is 10% of cost. Delivery Vans 4 delivery vans costing Rs. 30,000 each are purchased at end of each quarter for the year ended 31 December 2009. Delivery vans are depreciated by 20% per annum on a straight line basis. You are required to prepare the following T accounts for the year ended 31 December 2009: (a) Premises: Cost Account. (b) Premises: Accumulated Depreciation Account. (c) Delivery van: Cost Account. (d) Delivery van: Accumulated Depreciation Account. Answer 1-1-09 1-7-09 31-12-09 1-1-09 31-3-09 30-6-09 30-6-09 b/d Addition ON-I) Premises: Cost Account 540,000 177,500 31-12-09 cid b/d Cash Cash Cash Premises: Accumulated Depreciation Account 1-1-09 123 , 707 31-12-09 Depreciation Expense A/c (W-2) Delivery Van: Cost Account 40,000 30,000 30,000 30,000 3 Marks 2 Marks 3 Marks 3 Marks 717,500 113,400 10,307 Page 34 of 35
  35. 31-12-09 31-12-09 Workings: Cash c/d 30,000 31-12-09 cid Delivery Van: Accumulated Depreciation 1-1-09 b/d 31-12-09 Depreciation Expense (W- 4) 31 ,ooo (1) (2) (4) New Extension Cost Site preparation Material Contract labour Architect and legal fees Depreciation expense of premises for the year ended 31-12-09 On Opening assets On Addition (540,000 - 113,400) x 2% (177,500 x x 6/12) Calculation of opening accumulated depreciation of delivery van 40,000 x = Rs. 8,000 40,000 x x 9/12 = Rs. 6,000 Depreciation expense of delivery vans for the year ended 31-12-09 On Opening assets (40,000 x 20%) On addition (30,000 x x 9/12) + (30,000 x x 6/12) + (30,000 x x 3/12) 160,000 14,000 17 ,ooo 20,500 79,000 61 ,ooo 17 ,ooo 177,500 8,532 1 ,775 10,307 14,000 8,000 9,000 17 ,ooo Page 35 of 35

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