CHAPTER 11

TANGIBLE NON CURRENT ASSET

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FA 2

D RECORDING TRANSACTIONS AND EVENTS

4. Tangible non-current assets and depreciation

a) Define non-current assets. [K]
b) Recognise the difference between current and non-current assets. [K]
c) Explain the difference between capital and revenue items. [K]
d) Classify expenditure as capital or revenue expenditure. [S]
e) Explain the impact of misclassification of capital expenditure as revenue
expenditure and vice versa on the statement of profit or loss and the statement of
financial position. [K]
f) Prepare journal and ledger entries to record the acquisition and disposal of
non-current assets (including part exchange). [S]
g) Calculate and record profits or losses on disposal of non-current assets in the
statement of profit or loss including part exchange transactions and scrapping of
assets. [S]
h) Explain the purpose of depreciation. [K]
i) Calculate the charge for depreciation using straight line and reducing balance
methods. [S]

j) Identify the circumstances where different methods of calculating depreciation

would be appropriate.[K]
k) Illustrate how depreciation expense and accumulated depreciation are recorded
in ledger accounts.[S]
l) Explain the purpose and function of an asset register.[K]
m) Prepare the non-current asset register accounting for all or part of the
following: [S]
(i) Acquisition including authorization

(ii) Part exchange and cash non-current asset purchases

(iii) Depreciation
n) Identify and resolve any discrepancies relating to the accounting records for
non-current assets. [S]
o) Report non-current assets and depreciation in the final accounts. [S]

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F3

D RECORDING TRANSACTIONS AND EVENTS

4. Tangible non-current assets

a) Define non-current assets. [K]
b) Recognise the difference between current and non-current assets. [K]
c) Explain the difference between capital and revenue items. [K]
d) Classify expenditure as capital or revenue expenditure. [S]
e) Prepare ledger entries to record the acquisition and disposal of non-current
assets. [S]

f) Calculate and record profits or losses on disposal of non-current assets in the

statement of profit or loss including part exchange transactions.[S]
g) Record the revaluation of a non-current asset in ledger accounts, the statement
of profit or loss and other comprehensive income and in the statement of financial
position.[S]
h) Calculate the profit or loss on disposal of a revalued asset.[S]
i) Illustrate how non-current asset balances and movements are disclosed in
financial statements.[S]
j) Explain the purpose and function of an asset register.[K]
5. Depreciation
a) Understand and explain the purpose of depreciation.[K]
b) Calculate the charge for depreciation using straight line and reducing balance
methods.[S]
c) Identify the circumstances where different methods of depreciation would be
appropriate.[K]
d) Illustrate how depreciation expense and accumulated depreciation are recorded
in ledger accounts.[S]
e) Calculate depreciation on a revalued noncurrent asset including the transfer of
excess depreciation between the revaluation surplus and retained earnings.[S]
f) Calculate the adjustments to depreciation necessary if changes are made in the
estimated useful life and/or residual value of a noncurrent asset.[S]
g) Record depreciation in the statement of profit or loss and statement of
financial position.[S]

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 1. Non- Current and Current Asset

Non-current asset is asset that is held in business to earn profit by using it and
normally held in business for more than one year. E.g. land, building, plant etc

Current asset is cash or any other asset that will be converted into cash within a
short period of time (usually within 1 year)

Expenditure on non-current asset is called capital expenditure and is record on

SOFP.

Normal expenses are called revenue expenditure and is record on SPL. E.g. rent,
salary, depreciation etc.

2. Effect of misclassification of capital and revenue expenditure

If we treat capital expenditure as revenue expenditure or vice versa then profit,

expense & asset will misstate.

Expense Profit Asset

1. CE treated as RE INCREASE DECREASE DECREASE

2. RE treated as CE DECREASE INCREASE INCREASE

3. Recording the purchase of NCA

When businesses purchase a NCA by cash its one asset increase another decrease.
The journal is as follows

Non-Current Asset A Dr

Bank A Cr

When a business purchases a NCA on credit its asset increase and liability also
increase. The journal is as follows

Non-Current Asset A Dr

Payable L Cr

Your Task 1

Write the journal for following purchase

a) Purchase land valued $5,000 paying by cheque.

b) Purchase furniture of $3,000 from Zanib & Co on credit.
c) Purchase motor vehicle of $1,500 from P Motors on credit.
d) Purchase fixture of $2,000 paying by bank transfer.
e) Bought machine from Pilu & Co on credit of $4,000.

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 4. Cost of NCA

Non- current asset recorded in its account initially at cost. Cost includes
following

Purchase price

Less: Trade discount

Add: Delivery and handling cost

Add: Professional fee (e.g. architect, lawyer fees)

Add: Site preparation

Add: Asset removing or dismantle cost.

Add: Any other cost directly related to bring the asset to its present condition
or location for intended use.

If at a later date any improvement is made it is added to the cost of asset.

5. Depreciation and accumulated depreciation

Depreciation is the allocation of the cost of a non-current asset over its life.
So, if we purchase an asset for $2,000 and it has 5 years of life then the per
year depreciation is ($2,000/5) = $400. It is an expense.

The more we will use the asset the value of asset will decrease. In other word,
depreciation reduces the asset value.

Double entry for depreciation

Depreciation E Dr

Accumulated Depreciation A Cr

The balance of accumulated depreciation will be deducted from the value of asset.
As the asset become older the balance in the accumulated depreciation account will
rise and value of asset will fall.

So if asset cost is $2,000 and life is 5 years, depreciation will be $400 each
year. But the accumulated depreciation will be $400 in first year, ($400+$400) =
$800 in second year, ($800+$400) = $1,200 in third year & so on. The value of
asset will be ($2,000 - $400) = $1,600 in first year, ($2,000 - $800) = $1,200 in
second year, ($2,000 -$1,200) = $800 in third year & so on.

Depreciation can be calculated in several ways. Two main methods are explained
below. Before that we need to understand following

Useful life- The period the asset will be used in business.

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Residual/Scrap value- The estimated price that could be received by selling the
asset at the end of its useful life.

Carrying value/Net book value- (Cost – Accumulated Depreciation)

Asset that has infinite life is not depreciate e.g. land.

5.1 Straight line depreciation

Asset that will be used evenly throughout its useful life is depreciated using
straight line basis.

Annual Depreciation = (Cost – Residual Value) / Useful life

It can also calculate using percentage. The depreciation percentage will be given
in question.

Annual depreciation = Cost * Depreciation %

Disposal = Sale of asset.

Illustration 1

A business purchased an asset on 1.1.2016 for $6,000. It has residual value of

$1,000 & useful life of 5 years.

Annual Depreciation = ($6,000 - $1,000)/5

= $1,000

Illustration 2

A business purchased an asset on 1.1.2015 for $24,000. It has scrap value of

$4,000. The depreciation rate is 20%.

Annual Depreciation = ($20,000 - $4,000) * 20%

= $3,200

Your Task 2

Alfa & Co purchased following asset on 1.1.2016.

a) Building valued $80,000, useful life is 20 years.

b) Furniture costing $20,000, the scrap value after 5 year useful life is
$5,000.
c) Fixture valued $15,000, the residual value of $3,000 could be received. The
depreciation rate is 15%

Required:

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 a) Calculate depreciation of each asset using straight line basis for first
four year?
b) Write journal for depreciation for first four year?
c) Calculate accumulated depreciation for each asset from year 2016 – 2019?
d) Calculate carrying value for each asset from year 2016 – 2019?
e) Calculate total depreciation for each year?
f) Calculate total net book value of asset in each year?

5.2 Reducing balance depreciation

Asset that is use mostly in earlier of its life than later is depreciated in
reducing balance basis. In this case, depreciation is reduced each year from first
year. Depreciation is calculated as follows

Annual Depreciation = Carrying / Net Book value * Depreciation percentage.

Illustration 3

A business purchased an asset on 1.1.2014 for $25,000. It has scrap value of

$5,000. The depreciation rate is 25%.

First year

As it is the first year so there is no accumulated depreciation so CV and cost is

equal.

Annual Depreciation = $25,000 * 25%

= $6,250

Second year

At the beginning of second year the accumulated depreciation is $6,250. So CV is

($25,000 - $6,250) = $18,750.

Annual Depreciation = $18,750 * 25%

= $4,687

Third year

At the beginning of third year the accumulated depreciation is ($6,250 + $4,687) =

$10,937. So CV is ($25,000 - $10,937) = $14,063.

Annual Depreciation = $14,063 * 25%

= $3,516

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Fourth year

At the beginning of fourth year the accumulated depreciation is ($6,250 + $4,687 +

$3,516) = $14,453. So CV is ($25,000 - $14,453) = $10,547.

Annual Depreciation = $10,547 * 25%

= $2,637

Use the following format. It will help you to find out correct answer easily.

Illustration 4

A business purchased an asset on 1.1.2014 for $30,000. It has scrap value of

$5,000. The depreciation rate is 20%.

YEAR CV b/d DEP AD CV c/d

2014 30,000 * 20% 6,000 6,000 24,000

2015 24,000 * 20% 4,800 + 6,000 10,800 19.200

2016 19,200 * 20% 3,840 + 10,800 14,640 15,360

2017 15,360 * 20% 3,072 + 14,640 17,712 12,288

Your Task 3

Zamzam and Co purchased following asset on 1.1.2015.

a) Two motor vehicles costing each $7,000. The estimated scrap value is $500
each. The depreciation rate is 25%.
b) Machine valued $25,000. Depreciation rate is 35%.
c) Plant valued $18,000. Depreciation rate is 20%
d) Office equipment valued $16,000. Depreciation rate is 15%

Required:

a) Calculate depreciation of each asset using reducing balance basis for first
four year?
b) Write journal for depreciation for first four year?
c) Calculate accumulated depreciation for each asset from year 2015 – 2018?
d) Calculate carrying value for each asset from year 2015 – 2018?
e) Calculate total depreciation for each year?
f) Calculate total net book value of asset in each year?

5.3 Full year depreciation in the year of purchase and none in the year of disposal

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If we purchase or disposed as asset in the middle of a year, it would not be fair
to charge full year depreciation in that year. But proportioning depreciation is
time consuming process.

So there is simple way, charge full year depreciation in the year asset is
purchased & none in the year asset is disposed, even though purchase or disposal
takes place in the middle of the year.

Illustration 5

A business purchased an asset on 1.10.2014 for $30,000. It has scrap value of

$5,000. Useful life of the asset is 5 years. The asset is sold on 30.9.2017. It is
business policy to charge full year depreciation in the year of purchase and none
in the year of disposal.

Annual Depreciation = ($30,000 - $5,000)/5

= $5,000

We used the asset 3 months in 2014 but the full $5,000 will charge as
depreciation.

In 2015, 2016 the asset used full year so the full $5,000 will charge as
depreciation.

In 2017 after 9 months use the asset was disposed. We will charge no depreciation
in this year.

Your Task 7

Abrar & co purchase and disposed following asset.

a) 1.1.2014 purchased a motor vehicle for $8,000. Depreciation is 25% RB

basis. It was sold on 31.8.2017 for $1,200.
b) 1.5.2014 purchase furniture for $15,000. Depreciation is 15% SL basis. It
was sold on 31.5.2018 for $3,200.
c) 1.7.2015 purchased a plant for $12,000. Depreciation is 20% RB basis. It
was sold on 28.2.2019 for $4,500.
d) 1.1.2016 purchased a machine for $18,000. Depreciation is 10% SL basis. It
was sold on 30.11.2019 for $8,000.

Required:

a) Calculate depreciation of each asset for purchase to disposal year (assume

it is business policy to charge full year depreciation in the year of
purchase and none in the year of disposal)?
b) Write journal for depreciation for each year?
c) Calculate accumulated depreciation for each asset for all relevant year?
d) Calculate carrying value for each asset for all relevant year?
e) Calculate total depreciation for each year?
f) Calculate total net book value of asset in each year?

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5.4 Pro-rata depreciation

If acquisition or disposal occurs in the middle of year, there is another way of

charging depreciation. It is called pro-rata basis. It is also known as proportion
basis or monthly basis.

In this system, in acquisition and disposal year the annual depreciation is

proportionate for the number of months the asset was used.

Illustration 6

A business purchased an asset on 1.10.2014 for $30,000. It has scrap value of

$5,000. Useful life of the asset is 5 years. The asset is sold on 30.9.2017. It is
business policy to charge depreciation on monthly basis.

Annual Depreciation = ($30,000 - $5,000)/5

= $5,000

In 2014 the asset used for 3 months so depreciation charge in SPL will be ($5,000
*3/12) = $1,250.

In 2015, 2016 the asset used full year so the full $5,000 will charge as
depreciation.

In 2017 after 9 months use the asset was disposed. So depreciation charge in SPL
will be ($5,000 *9/12) = $3,750.

Your Task 8

Jafor & co purchase and disposed following asset.

a) 1.1.2014 purchased a motor vehicle for $8,000. Depreciation is 25% RB

basis. It was sold on 31.8.2017 for $1,200.
b) 1.5.2014 purchase furniture for $15,000. Depreciation is 15% SL basis. It
was sold on 31.5.2018 for $3,200.
c) 1.7.2015 purchased a plant for $12,000. Depreciation is 20% RB basis. It
was sold on 28.2.2019 for $4,500.
d) 1.1.2016 purchased a machine for $18,000. Depreciation is 10% SL basis. It
was sold on 30.11.2019 for $8,000.

Required:

a) Calculate depreciation of each asset for purchase to disposal year (assume

it is business policy to charge depreciation on monthly basis)?
b) Write journal for depreciation for each year?
c) Calculate accumulated depreciation for each asset for all relevant year?
d) Calculate carrying value for each asset for all relevant year?
e) Calculate total depreciation for each year?
f) Calculate total net book value of asset in each year?

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 6. Reporting asset and depreciation in financial statement

Asset is recorded in the SOFP at its carrying value on SOFP date.

Depreciation is recorded in SPL as an expense.

Illustration 7

Samir & Co purchased a machine on 1.10.2014 for $30,000. It has scrap value of
$5,000. Useful life of the machine is 5 years. It is business policy to charge
full year depreciation in the year of purchase and none in the year of disposal.

1.1.2014

Asset purchase journal

Machine A Dr 30,000

Bank A Cr 30,000

Annual Depreciation = ($30,000 - $5,000)/5

= $5,000

31.12.2014

Depreciation journal

Depreciation E Dr 5,000

Accumulated Depreciation A Cr 5,000

Carrying value is

Cost 30,000

Less: Accumulated Depreciation (5,000)

Carrying Value 25,000

Samir & Co

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Statement of Profit & Loss for the year ended 31.12.2014

Sales X

Cost of Sales; (X)

Gross Profit X

Less; Expenses

Discount Allowed (X)

Depreciation (5,000)

Net Profit (5,000)

Statement of Financial Position as at 31.12.2017

Asset $ $

Non-Current asset

Land and building x

Machine 25,000

Investment x 25,000

Current asset

Inventory x

Receivable x

Bank x

Cash x x

Total Asset 25,000

Equity

Share capital 25,000

Retained Earnings x 25,000

Non-current liability

Bank loan x x

Current liability

Trade payable x

Bank overdraft x x

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Total Equity & Liabilities 25,000

7. Disposal

When an asset sold its cost and accumulated depreciation need to remove from the
accounts. Also disposal account needs to open to calculate profit or loss on
disposal. Profit/loss on disposal is the difference between disposal proceed and
carrying value. The journal will be as follows

Asset Cost A/C Cr (Total value of asset cost)

Disposal A/C Dr (Total value of asset cost)

Asset Accumulated Depreciation Dr (Total AD of asset)

Disposal Account Cr (Total AD of asset)

Cash Dr (Amount as which asset is sold)

Disposal Account Cr (Amount as which asset is sold)

If there is profit on disposal the journal is

Disposal Account Dr (Amount of profit)

SPL Cr (Amount of profit)

If there is loss on disposal the journal is

Disposal Account Cr (Amount of loss)

SPL Dr (Amount of loss)

Illustration 8

On 31.12.2017 the machine cost account and accumulated depreciation account has
balance of $160,000 & $70,000 respectively. On that date a machine sold for
$2,500. It has cost of $8,000 and accumulated depreciation of $6,000.

Carrying value of asset at the date of disposal = $8,000 – $6,000

= $2,000

Profit on disposal = $2,500 - $2,000

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 = $500

Journal will be as follows

Asset Cost A/C Cr 8,000

Disposal A/C Dr 8,000

Asset Accumulated Depreciation Dr 6,000

Disposal Account Cr 6,000

Cash Dr 2,500

Disposal Account Cr 2,500

Disposal Account Dr 500

SPL Cr 500

The ledger will be as follows

Machine Cost Account

Balance B/D 160,000 Disposal Account 8,000

Balance C/D 152,000

160,000 160,000

Machine Accumulated Depreciation Account

Disposal Account 6,000 Balance B/D 70,000

Balance C/D 64,000

70,000 70,000

Machine Disposal Account

Machine Cost 8,000 Machine Accumulated Dep Account 6,000

SPL 500 Bank Account 2,500

8,500 8,500

8. Part exchange

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Sometime a business may exchange an old asset with new one. Partial value of new
asset is paid by cash and remaining by giving old asset. E.g. A business buys an
asset for $8,000 by paying $5,000 cash and an old asset. So the part exchange
value of old asset will be $($8,000 - $5,000) = $3,000.

So the disposal procedure for old asset will same like cash disposal. Only
difference is instead of debited cash account we will debit new asset cost account
with part exchange value.

Illustration 9

On 31.12.2017 the machine cost account and accumulated depreciation account has
balance of $190,000 & $120,000 respectively. On that date a machine exchange for
new machine. The value of new machine was $35,000 & cash paid was $27,000. It has
cost of $38,000 and accumulated depreciation of $26,000.

Part exchange value is = $35,000 - $27,000

= $8,000

Carrying value of asset at the date of disposal = $38,000 – $26,000

= $12,000

Loss on disposal = $8,000 - $12,000 = ($4,000)

For disposal Journal will be as follows

Asset Cost A/C Cr 38,000

Disposal A/C Dr 38,000

Asset Accumulated Depreciation Dr 26,000

Disposal Account Cr 26,000

Asset Cost A/C Dr 8,000

Disposal Account Cr 8,000

Disposal Account Cr 4,000

SPL Dr 4,000

Journal for new asset purchase

Asset cost account Dr 27,000

Cash Cr 27,000

The ledger will be as follows

Machine Cost Account

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Balance B/D 190,000 Disposal Account 38,000

Disposal Account 8,000

Cash Account 27,000 Balance C/D 187,000

225,000 225,000

Machine Accumulated Depreciation Account

Disposal Account 26,000 Balance B/D 120,000

Balance C/D 94,000

120,000 120,000

Machine Disposal Account

Machine Cost 38,000 Machine Accumulated Dep Account 26,000

Asset Cost Account 8,000

SPL 4,000

38,000 38,000

9. Recording profit or loss on disposal in SPL

Profit on disposal is added with gross profit & loss on disposal is recorded under
the expenses heading.

Statement of Profit & Loss for the year ended 31.12.2014

Sales X

Cost of Sales; (X)

Gross Profit X

Less; Expenses

Discount Allowed (X)

Loss on disposal (4,000)

Net Profit (4,000)

Statement of Financial Position as at 31.12.2017

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Asset $ $

Non-Current asset

Land and building x

Machine ($187,000 - $94,000) 93,000

Investment x 93,000

Current asset

Inventory x

Receivable x

Bank x

Cash x x

Total Asset 93,000

Equity

Share capital 93,000

Retained Earnings x 93,000

Non-current liability

Bank loan x x

Current liability

Trade payable x

Bank overdraft x x

Total Equity & Liabilities 93,000

Your Task 4

A non-current asset was purchased on 1 June Year 1 for $216,000. Its expected
life was 8 years and its expected residual value was $24,000. The asset is
depreciated by the straight-line method. The financial year is from 1 January to 31
December. The asset was sold on 1 September Year 4 for $163,000. Disposal costs were
$1,000. It is the company policy to charge a proportionate amount of depreciation
in the year of acquisition and in the year of disposal, in accordance with the
number of months for which the asset was held. What was the gain or loss on disposal
& write up the ledger accounts?

Your Task 5

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A motor vehicle cost $80,000 two years ago. It has been depreciated by the
reducing balance method at 25% each year. It has now been disposed of for
$41,000. Disposal costs were $200. The balance on the motor vehicles account
before the disposal was $720,000 and the balance on the accumulated depreciation
of motor vehicles account was $250,000.
Required Show the book-keeping entries to record the disposal.

Your Task 6
A company has several motor cars that are accounted for as non-current assets. As
at 1 January Year 2, the cost of the cars was $120,000 and the
accumulated depreciation was $64,000. During January the company bought a new car
costing $31,000 and was given a part- exchange allowance against an old car that
was sold of $8,000. This car being sold originally cost $28,000 and its accumulated
depreciation is $18,000.
Required
(a) Calculate the gain or loss on disposal of the old car
(b) Show how the purchase of the new car and the disposal of the old
car will be recorded in the ledger accounts.

Your Task 7
A company owns a building which was purchased three years ago for $1
million.The building has been depreciated by $60,000. It is now to be re-
valued to $2 million. Show the book-keeping entries to record the revaluation.

Your Task 8

Diana & co purchased a non-current asset on 1 January 2001 for $20,000. It had an
estimated life of six years & estimated residual value of $8,000. The asset was
sold after 3 years on 1 January 2004 to another trader who purchased it for
$17,500. What was the profit or loss on disposal assuming that the business uses
the straight line method for depreciation?

Your Task 9

On 1 July 2001 Bill Inc purchased a machine for $35,000. The machine had an
estimated residual value of $3,000 & a life of 8 years. The machine sold for
$18,600 on 31 December 2004, the last day of the accounting year of the business.
To sell the machine, the business had to incur dismantling costs & the costs of
transporting the machine to the buyer’s premises. These cost amounted to $1,200.
Assuming that the business uses the straight-line method of depreciation, what was
the profit or loss on disposal of the machine?

10. Revaluation

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IAS 16 Property Plant and Equipment set out the rules for treating non-current
asset. It states that non-current asset can be valued using two models:

Cost Model- It states that asset should be valued in SOFP at Cost less Accumulated
Depreciation. In the above we already have seen the example of cost model.

Revaluation Model- It states that asset should be valued in SOFP at Revalued

Amount less Accumulated Depreciation. Normally at the end of each year we will
look the fair value of asset and adjust the book value. It is called revaluation.

If revalued amount is higher than book value then there is revaluation gain. If
revalued amount is lower than book value then there is revaluation loss. The gain
or loss belongs to owner of the business. Revaluation gain or loss does not go to
SPL it goes to OCI Other Comprehensive Income. OCI resides just below the SPL.

In the SOFP the revaluation gain or loss is recorded in revaluation reserve

account. It is an equity account.

After the revaluation the revalued amount and carrying value becomes equal. So
always remember when you revalue an asset reduce the balance of the accumulated
depreciation to $0.

That means you have to calculate the accumulated depreciation up to the date of
revaluation and the debit the full amount in the accumulated depreciation to make
the balance nil.

For revaluation gain the journal will be as follows

Asset Cost Account Dr (Revalued Amount - Cost)

Revaluation Reserve Account Cr (Revalued Amount - Cost)

Asset Accumulated Depreciation A/C Dr (Total amount of AD of the asset)

Revaluation Reserve Account Cr (Total amount of AD of the asset)

Illustration 10

Bekar & Co purchased a piece of land on 1.1.2014 for $20,000. On 31.12.2016 it is

revalued at $25,000.

The journal will be

Land Account Dr (25,000 – 20,000) 5,000

Revaluation reserve Cr (25,000 – 20,000) 5,000

Land Cost Account

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Balance B/D 20,000

Revaluation Reserve 5,000 Balance C/D 25,000

25,000 25,000

Revaluation Reserve Account

Land 5,000

Balance C/D 5,000

5,000 5,000

Illustration 11

Kaplan Co purchased a plant on 1.1.2010 for $30,000. It has 20 years useful life
with no residual value. On 1.1.2018 the asset is revalued to $35,000.

Annual depreciation = $30,000 / 20

= $1,500

As eight years has been purchased after purchase so the balance in accumulated
depreciation account will be $1,500 * 8 = $12,000.

Plant cost account Dr (35,000 – 30,000)5,000

Revaluation reserve account Cr (35,000 – 30,000)5,000

Plant accumulated depreciation account Dr 12,000

Revaluation reserve account Cr 12,000

Plant Cost Account

Balance B/D 30,000

Revaluation reserve 5,000 Balance C/D 35,000

35,000 35,000

Plant Accumulated Depreciation Account

Revaluation reserve 12,000 Balance B/D 12,000

Balance C/D 0

12,000 12,000

Revaluation reserve Account

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 Plant Account 5,000
Balance C/d 17,000 Plant Accumulated Dep Account 12,000

17,000 17,000

11. Depreciation on revalued asset

After revaluation the depreciation is calculated on revalued amount.

Annual Depreciation = Revalued Amount / Remaining useful life.

Remaining useful life is total asset life less the asset life already passed up to
the date of revaluation.

If the asset is revalued at the beginning of the year then depreciation is

calculated on revalued amount.

If the asset is revalued at the end of the year then depreciation is calculated on
original amount.

If asset is revalued in the middle of year then before revaluation date the
depreciation is calculated on original amount & pro-rated and then calculated on
revalued amount & pro-rated, then both depreciation should be add together to get
annual depreciation.

Illustration 12

Kaplan Co purchased a plant on 1.1.2010 for $30,000. It has 20 years useful life
with no residual value. On 1.1.2018 the asset is revalued to $35,000.

Depreciation for 2018 will be

$35,000 / (20-8) = $2,917

As asset is revalued at the beginning of the year so depreciation will be

calculated on revalued amount.

Illustration 13

Kaplan Co purchased a plant on 1.1.2010 for $30,000. It has 20 years useful life
with no residual value. On 31.12.2018 the asset is revalued to $35,000.

Depreciation for 2018 will be

$30,000 / 20 = $1,500

As asset is revalued at the end of the year so depreciation will be calculated on

original amount.

Illustration 14

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Kaplan Co purchased a plant on 1.1.2010 for $30,000. It has 20 years useful life
with no residual value. On 30.6.2018 the asset is revalued to $35,000.

Depreciation for 2018 will be

$30,000 / 20 = $1,500 *(6/12) $750

$35,000 / (20-8.5) = $4,118 * (6/12) $2,059

Total depreciation expenses for 2018 is $2,809

12. Transfer from revaluation reserve to retained earnings

Gain on revaluation is unreal gain. This is called unrealized gain in formal way.
Because we just increased the asset value so the gain arose but we did not
actually gain anything. Amount recorded in revaluation reserve account is
unrealized gain. Amount recorded in retained earning account is realize
gain/income.

The revaluation gain becomes realize when either we use the asset or disposed the
asset. When the gain realizes it needs to transfer from revaluation reserve
account to retained earning account.

This is done using following journal

Dr Revaluation Reserve (Excess Depreciation)

Cr Retained Earnings (Excess Depreciation)

Excess Depreciation = Annual depreciation on revalued amount – Annual depreciation

on old amount.

Remember you will only do this if question tell you to do so.

Illustration 15

Kaplan Co purchased a plant on 1.1.2010 for $30,000. It has 20 years useful life
with no residual value. On 1.1.2018 the asset is revalued to $35,000. It is
business policy to transfer the excess depreciation.

New Depreciation $35,000 / (20-8) = $2,917

Original Depreciation $30,000 / 20 = $1,500

Journal for transfer is

Revaluation reserve Dr (2,917 – 1,500) 1,417

Retained earnings Cr (2,917 – 1,500) 1,417

DISPOSAL OF REVALUED ASSET

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When a revalued asset is disposed, all journals are same like normal journal. Only
additional thing you have to do is to transfer the balance of revaluation reserve
account to the retained earning account.

Dr Revaluation Reserve (Total balance of revaluation reserve account)

Cr Retained Earnings (Total balance of revaluation reserve account)

Your Task 10

Jahangir plc purchased following asset on 1.1.2015

Land for $30,000.

Building for $40,000. Depreciation is 7% on cost.

Plant for $25,000. Depreciation is 15% of carrying value.

Motor vehicle for $18,000. Depreciation is 20% of carrying value.

At 1.1.2018 all asset has been revalued. The new value of the asset was as follows

Land $38,000.

Building $42,000

Plant $30,000

Motor vehicle $20,000

Required:

a) For all assets prepare journal for revaluation?

b) Record the effect of revaluation in each relevant ledger account? (for each
asset keep separate revaluation reserve account)
c) Calculate depreciation for each asset for 2018 & record them in ledger
account?
d) Find out the carrying value of each asset at 31.12.2018?

Your Task 11

On 1.9.2014 a business purchase a plant for $50,000. Business policy is to charge

depreciation 10 on cost on monthly basis. On 1.5.2018 the business revalued the
plant to $60,000. It is the business policy to transfer the excess depreciation
from revaluation reserve to retained earnings account at the end of each year.

Required:

a) Show the journal and ledger entries for revaluation?

b) Calculate depreciation for 2018?
c) Prepare SOFP at 31.12.2018?

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 d) Suppose the asset is sold on 1.8.2019 for $59,000, record the journal and
ledger entries?

13. Change in estimates

The useful life, residual value or depreciation rate all are the estimate of
organization’s management. Estimates can be wrong. So they may change in any year
according to the new information.

If there is any change in estimate the new depreciation will be calculate on

revised estimate figure.

When estimate will be changed all calculation should be done on carrying value at
the date of estimate changed not on original cost.

Illustration 16

Kaplan Co purchased a plant on 1.1.2010 for $30,000. It has 20 years useful life
with no residual value. On 1.1.2018 useful life revised to 15 year.

Carrying value at the date of change in estimate is

$30,000 – (30,000/20*8) = $18,000

Remaining useful life is (15-8) 7 years.

New annual depreciation is $18,000 / 7 = $2,571

Illustration 17

Kaplan Co purchased a plant on 1.1.2010 for $30,000. It has 20 years useful life &
$5,000 residual value. On 1.1.2018 useful life revised to 15 year & Residual value
changed to $6,000.

Old annual depreciation = ($30,000 – $5,000)/20 = $1,250

Carrying value at the date of change in estimate is

$30,000 – ($1,250 * 8) = $20,000

Remaining useful life is (15-8) 7 years.

New annual depreciation is ($20,000 - $6,000) / 7 = $2,000

Illustration 18

Kaplan Co purchased a plant on 1.1.2010 for $30,000. Depreciation is calculated 5%

on cost. On 1.1.2018 depreciation rate is revised to 8% a year.

Old annual depreciation = $30,000 * 5% = $1,500

Carrying value at the date of change in estimate is

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$30,000 – ($1,500 * 8) = $18,000

New annual depreciation is $18,000 * 8% = $1,440

Illustration 19

Kaplan Co purchased a plant on 1.1.2010 for $30,000. Depreciation is calculated 5%

on cost. On 1.1.2018 depreciation method is revised to reducing balance basis 10%
a year. Calculate depreciation for year ended 2019?

Old annual depreciation = $30,000 * 5% = $1,500

Carrying value at the date of change in estimate is

$30,000 – ($1,500 * 8) = $18,000

Depreciation for 2018 is $18,000 * 10% = $1,800

Depreciation for 2019 is ($18,000 - $1,800) * 10% = $1,620

Your Task 12

Betal Co purchase a machine for $14,000 on 1.8.2016. The useful life of machine is
10 years and residual value is $4,000. On 1.1.2018 change the estimate and the
remaining useful life is 6 years and revised residual value is $5,000. It is
business policy to charge depreciation proportionate basis and straight line
method. Calculate the depreciation for 2018?

Your Task 13

Betal Co purchase a machine for $26,000 on 1.8.2016. The useful life of machine is
10 years and residual value is $4,000. On 1.1.2018 change the estimate and the
remaining useful life is 5 years and no change in residual value. Calculate the
depreciation for 2018 if depreciation method is straight line basis and business
policy to charge full year depreciation in the year of purchase and none in the
year of disposal?

Your Task 14

Betal Co purchase a machine for $26,000 on 1.8.2016. The useful life of machine is
10 years and residual value is $4,000. On 1.1.2018 change the depreciation method
from straight line to reducing balance basis and the rate is 25%. Calculate the
depreciation for 2018 & 2019 if depreciation method is straight line basis and
business policy to charge full year depreciation in the year of purchase and none
in the year of disposal?

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 14. Asset register

Normally for each class of asset there is an account in ledger. E.g. for all land
and building there is one land and building account in ledger, for all plant there
is one plant account in ledger etc. Also ledger account only contain purchase date
& value of the asset. Lots of other information about the asset cannot be obtained
from the ledger account.

To solve this problem business maintains separate asset register. Asset register
contain details of each individual asset and update annually. Information kept in
asset register is as follows

Date of asset purchase, Details of asset, Location of asset held, Asset number,
Supplier from which the asset is purchased, Purchase cost of asset, Depreciation
method, Depreciation rate, Residual value, Current year depreciation, Total
accumulated depreciation, Carrying value, Date of disposal, Disposal proceed

The above information is recorded in the column. Every asset has a raw in the
asset register. Each year depreciation, accumulated depreciation, carrying value
etc are updated for each asset in asset register.

When asset is sold the disposal proceeds and disposal date is recorded. If the
asset is part exchanged then the part exchange value and date is recorded in the
disposal proceeds column.

A format of asset register is given below

Da Ass Deta Loca Supp Dep Use Resi De Co Dep A C Disp Disp
te et ils tion lier Met ful dual p st Curr D V osal osal
Num Name hod Lif Valu Ra ent Date Proc
ber e e te Year eed

15. Difference between records

Periodically business should match the total value of asset register with general
ledger. If there is any difference between two that means there is any mistake in
records either in asset register or in ledger. Business should find the mistake
and correct it.

Also periodically business should done asset taking. Asset taking is the process
of counting the asset and match with the records.

For asset taking a list of all asset in the asset register should be prepared.
This should mention where the asset is located and the asset number. If the asset
is find out then a tick sign should be given in the asset and in the list beside
the asset number. This process is done for all assets. End of this process two
problem may arise.

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There will be some asset in the list which did not found in their location, it
means either they are changed from the location or they are stolen or they are
sold but not recorded in the register.

Another thing is, some asset will be found physically but there will be no record
in the asset register. In this case business should identify why they are not
recorded and then record them in the register.

16. Disclosure of NCA

According to IAS 16 the movement of NCA should be disclose in the note of the
financial statement. The format is as follows

Land & Plant & Motor Fixture Office Total

Building Machinery Vehicle & Equipment
Fittings

Cost
Opening balance A B C D E F
Purchase G H I J K L
Revaluation M N O P Q R
Disposal (S) (T) (U) (V) (W) (X)
Closing balance Y Z AA AB AC AD
Accumulated
Depreciation
Opening balance AE AF AG AH AI AJ
Depreciation AK AL AM AN AO AP
Revaluation (AQ) (AR) (AS) (AT) (AU) (AV)
Disposal (AW) (AX) (AY) (AZ) (BA) (BB)
Closing balance BC BD BE BF BG BH
Carrying Value
Beginning of the year A-AE=BI B-AF=BJ C-AG=BK D-AH=BL E-AI=BM F-AJ=
BN
Ending of the year Y-BC=BO Z-BD=BP AA-BE= AB-BF= AC-BM=BS AD-BH
BQ BR =BT

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Exam Style Question 1

Norman is entering information into the non-current asset register.

Which of the following items of information will be used when carrying out a
verification of the physical presence of non-current assets?

(1) Supplier

(2) Location

(3) Description

(4) Cost

A 1 and 2

B 1 and 3

C 2 and 3

D 3 and 4

Exam Style Question 2

What is the purpose of charging depreciation?

A To allocate the cost of a non-current asset over the accounting periods expected
to benefit from its use

B To ensure that funds are available for the eventual replacement of the non-
current asset

C To reduce the cost of a non-current asset in the statement of financial position

D To reflect the falling realisable value of an asset

Exam Style Question 3

Alan purchased a machine on 1 March 20X1 for $12,000. He incurred additional costs
for transportation of $1,300 and installation of $2,000. Shortly after he started
to use the machine, it broke down and the repairs of the machine cost $600. Alan
charges depreciation at 10% per annum on straight line basis with a full year’s
charge in the year of acquisition.

What is the correct net book value of the machine at the yearend date of 31
December 20X1?

A $10,800

B $13,770

C $14,370

D $15,300

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Exam Style Question 4

Fred purchased a new van. The new van cost $9,000 and Fred paid a cheque for
$2,500 to the dealer. In addition, the dealer accepted an old van in part
exchange. The old van had been bought three years ago for $11,600 and had been
depreciated by $6,750.

What is the profit or loss on disposal of the old van?

A $1,650 loss

B $1,650 profit

C $6,500 loss

D $6,500 profit

Exam Style Question 5

Lance is entering an invoice in the purchase day book. The invoice shows the
following costs:

Water treatment equipment $39,800

Delivery $1,100

Maintenance charge $3,980

Sales tax $7,854

Invoice total $52,734

What is the total value of capital expenditure on the invoice?

A $39,800

B $40,900

C $44,880

D $52,734

Exam Style Question 6

A company’s statement of profit or loss for the year ended 31 December 20X5
showed a net profit of $83,600. It was later found that $18,000 paid for the
purchase of a motor van had been debited to the motor expenses account.

It is the company’s policy to depreciate motor vans at 25% per year on the
straight-line basis, with a full year’s charge in the year of acquisition.

What would the net profit be after adjusting for this error?

A $106,100

B $70,100

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C $97,100

D $101,600

Exam Style Question 7

A company’s motor vehicles cost account at 30 June 20X6 is as follows:

Motor vehicles – cost

$ $

Balance b/f 35,800 Disposal 12,000

Additions 12,950 Balance c/f 36,750

––––––– –––––––

48,750 48,750

––––––– –––––––

What opening balance should be included in the following period’s trial balance
for Motor vehicles – cost at 1 July 20X6?

A $36,750 Dr

B $48,750 Dr

C $36,750 Cr

D $48,750 Cr

Exam Style Question 8

The plant and machinery account (at cost) of a business for the year ended 31
December 20X5 was as follows:

Plant and machinery – cost

20X5 $ 20X5 $

1 Jan Balance b/f 240,000 31 Mar Transfer to disposal account 60,000

30 Jun Cash purchase of plant 160,000 31 Dec Balance c/f 340,000

–––––––– ––––––––

400,000 400,000

–––––––– ––––––––

The company’s policy is to charge depreciation at 20% per year on the straight-
line basis, with proportionate depreciation in the years of purchase and disposal.

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What should be the depreciation charge for the year ended 31 December 20X5?

A $68,000

B $64,000

C $61,000

D $55,000

Exam Style Question 9

Gareth, a sales tax registered trader purchased a computer for use in his
business. The invoice for the computer showed the following costs related to the
purchase:

Computer 890

Additional memory 95

Delivery 10

Installation 20

Maintenance (1 year) 25

––––––

1,040

Sales tax (17·5%) 182

––––––

Total 1,222

––––––

How much should Gareth capitalize as a non-current asset in relation to the

purchase?

A $1,193

B $1,040

C $1,222

D $1,015

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