FIA FFA/ACCA F3
Financial Accounting
For exams from February 2014
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Key to icons
Syllabus
Real world example
Technical content
Local example
Question to consider
Diagram
Answer
Key concept
Past exam question
Tackling the exam
Answer to past exam
question
Summary
Case study
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Syllabus
A
The context and purpose of financial reporting
B
The qualitative characteristics of financial information
C
The use of double entry and accounting systems
D
Recording transactions and events
E
Preparing a trial balance
F
Preparing basic financial statements
G
Preparing simple consolidated financial statements
H
Interpretation of financial statements
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Exam format
Exam format
35 questions for 2 marks each
70
2 questions for 15 marks each
30
Total
Two hour exam – all questions are compulsory.
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100
Tackling multiple choice questions 1
The MCQs in your exam contain four possible answers, you
have to choose the option that best answers the question.
• The three incorrect options are called distractors, these
are included to test your understanding of the syllabus.
• The following slides detail how best to avoid the common
pitfalls that most students fall into.
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Tackling multiple choice questions 2
Steps to follow when attempting MCQs:
Step 1: Skim read all MCQs and identify what appear to be
the easier questions.
Step 2: Attempt each question:
• Start with the easier questions
• Read the question thoroughly
• Try to work out the answer before looking at the options
OR you may prefer to look at the options at the beginning
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Tackling multiple choice questions 3
Step 3: Read the four options and see if one matches your
own answer.
Be careful with numerical questions as the distractors are
designed to match answers that incorporate common errors.
Check your calculation is correct.
Have you followed the requirement exactly?
Have you included every stage calculation?
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Tackling multiple choice questions 4
Step 4: What to do if your answer does not match the
options?
• Re-read the question to ensure that you understand it and
are answering the requirement
• Eliminate any obviously wrong answers
• Consider which of the remaining answers is the most likely
to be correct and select the option
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Tackling multiple choice questions 5
Step 5: If you are still unsure make a note and continue to
the next question
Step 6: Revisit unanswered questions. When you come back
to a question after a break you often find you are able to
answer it correctly straight away.
If you are still unsure have a guess. You are not penalised
for incorrect answers, so never leave a question
unanswered!
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Tackling multiple choice questions 6
After extensive question practice and revision of MCQs you
may find that you recognise a question when you sit the
exam.
Be aware that the detail and/or requirement may be different.
If the question seems familiar read the requirement and
options carefully – do not assume that it is identical.
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Chapter 8
Inventory
• Cost of goods sold
• Accounting for opening and closing
inventories
• Counting inventories
• Valuing inventories
• IAS 2
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Syllabus learning outcomes 1
• Recognise the need for adjustments for inventory in
preparing financial statements.
• Record opening and closing inventory.
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Syllabus learning outcomes 2
• Identify the alternative methods of valuing inventory.
• Understand and apply the IASB requirements for valuing
inventories.
• Recognise which costs should be included in valuing
inventories.
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Syllabus learning outcomes 3
• Calculate the value of closing inventory using 'first in, first
out' and 'average cost'.
• Understand the use of continuous and period end
inventory records.
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Syllabus learning outcomes 4
• Understand the impact of accounting concepts on the
valuation of inventory.
• Identify the impact of inventory valuation methods on profit
and on assets.
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Overview
Accounting adjustments
Inventory
Valuation
Cost
Net realisable value
Methods of estimating cost
FIFO
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AVCO
Effects on profit
Cost of goods sold 1
• Formula for the cost of goods sold
$
Opening inventory value
X
Add: purchases (or production costs)
X
X
Less: closing inventory value
(X)
Cost of goods sold
X
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Cost of goods sold 2
Carriage inwards
• Cost paid by purchaser of having goods transported to his
business
• Added to cost of purchases
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Cost of goods sold 3
Carriage outwards
• Cost to the seller, paid by the seller, of having goods
transported to customer
• Is a selling and distribution expense
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Accounting for opening and closing inventories 1
Entries during the year
• During the year, purchases are recorded by the following
entry.
DEBIT
Purchases
$ amount bought
CREDIT
Cash or payables
$ amount bought
• The inventory account is not touched at all.
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Accounting for opening and closing inventories 2
Entries at year-end
• The first thing to do is to transfer the purchases account
balance to the statement of profit or loss:
DEBIT
Statement of profit or loss
$ total purchases
CREDIT
Purchases
$ total purchases
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Accounting for opening and closing inventories 3
• The balance on the inventory account is still the opening
inventory balance. This must also be transferred to the
statement of profit or loss:
DEBIT
Statement of profit or loss
$ opening inventory
CREDIT
Inventory
$ opening inventory
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Accounting for opening and closing inventories 4
• The exact reverse entry is made for the closing inventory
(which will be next year’s opening inventory):
DEBIT
Inventory
$ closing inventory
CREDIT
Statement of profit or loss
$ closing inventory
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Counting inventories 1
Counting inventories
• In order to make the entry for the closing inventory, we
need to know what is held at the year-end. We find this out
not from the accounting records, but by going into the
warehouse and actually counting the boxes on the
shelves.
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Counting inventories 2
• Some businesses keep detailed records of inventory
coming in and going out, so as not to have to count
everything on the last day of the year. These records are
not part of the double entry system.
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Valuing inventories 1
Valuation
Inventories must be valued at the lower of:
• Cost
• Net realisable value (NRV)
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Valuing inventories 2
Cost
Can use per IAS 2:
• FIFO (First In Last Out)
• Average cost
• LIFO (Last In First Out) is not permitted
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Valuing inventories 3
NRV
Expected selling price
X
Less: costs to get items ready for sale
(X)
selling costs
(X)
X
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Valuing inventories 4
• Inventory forms a major part of the assets of some
companies.
• So the value placed on the inventory can make a big
difference to the profit or loss reported.
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Valuing inventories in China
• In the 3rd quarter of 2012, the Youngor Group Co had
inventory valued at CNY 24 billion.
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IAS 2
IAS 2
• Inventories should be measured at the lower of cost and
net realisable value – the comparison between the two
should ideally be made separately for each item
• Cost is the cost incurred in the normal course of business
in bringing the product to its present location and
condition, including production overheads and costs of
conversion
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IAS 2 (cont’d)
IAS 2
• Inventory can include raw materials, work in progress,
finished goods, goods purchased for resale
• FIFO and average cost are allowed
• LIFO is not allowed
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IAS 2 (cont’d)
Inventories are assets:
• Held for sale in the ordinary course of business
• In the process of production for such sale; or
• In the form of materials or supplies to be consumed in the
production process or in the rendering of services
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IAS 2 (cont’d)
Net realisable value is the estimated selling price:
• In the ordinary course of business less the estimated costs
of completion and the estimated costs necessary to make
the sale
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Tackling the exam
Understanding IAS 2 is a very important and you will be
expected to apply it in the exam.
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Lecture example 1
According to IAS 2: Inventories, which of the following
should not be included in determining the cost of the
inventories of an entity?
(1) Labour costs
(2) Transport costs to deliver goods to customers
(3) Administrative overheads
(4) Depreciation on factory machine
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Lecture example 1 (cont’d)
A
All four items
B
1 only
C
2 and 3 only
D
2, 3, and 4 only
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Answer to lecture example 1
C
Transport costs to deliver goods to customers are an
example of carriage outwards and should not be included.
Administrative overheads do not relate to production and
cannot therefore be included.
The depreciation of the factory machine is a production
overhead and should be included.
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Lecture example 2
Jessie is trying to value her inventory. She has the
following information available:
$
Selling price
35
Costs incurred to date
20
Cost of work to complete item
12
Selling costs per item
1
Required
What is the net realisable value of Jessie's inventory?
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Answer to lecture example 2
Net realisable value is:
$
Estimated selling price
35
Less: costs of completion
(12)
Less: selling costs
(1)
22
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Lecture example 3
On 1 January 20X7 a company held 200 units of finished
goods valued at $10 each. During January the following
transactions took place:
Date
Units purchased
Cost per unit
10 January
300
$10.85
20 January
350
$11.50
25 January
250
$13.00
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Lecture example 3 (cont’d)
Sales during January were as follows:
Date
Units purchased
Cost per unit
14 January
280
$18.00
21 January
400
$18.00
28 January
80
$18.00
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Lecture example 3 (cont’d)
Required
Determine the valuation of closing inventories and cost of
sales using:
(a)
FIFO
(b)
Weighted average cost
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Answer to lecture example 3
(a) Closing inventories (FIFO)
Purchases
Opening
inventories
Sales
14 Jan
21 Jan
26 Jan
10 Jan
20 Jan
25 Jan
200
300
350
250
(200)
(80)
(220)
(180)
(80)
90
@ $11.50
= $1,035
250
@ $13.00
= $3,250
Nil
Nil
$4,285
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Answer to lecture example 3 (cont’d)
Cost of sales (FIFO)
$
Opening inventories (200 × $10)
Purchases
2,000
10,530
12,530
Less: closing inventories
(4,285)
8,245
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Answer to lecture example 3 (cont’d)
(b) Closing inventories and cost of sales (AVCO)
Units
Cost
$
Average
Unit Cost
$
Total
Cost
$
1.1.X2
b/f
200
10.00
2,000
10.1.X2
Purchase
300
500
10.85
3,255
5,255
14.1.X2
Sales
20.1.X2
Purchase
21.1.X2
Sales
25.1.X2
Purchase
28.1.X2
Sale
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(W1) 10.51
(280)
220
350
570
10.51
11.50
(W2) 11.12
(400)
170
250
420
(80)
340
11.12
13.00
(W3) 12.24
12.24
(2,943)
2,312
Cost of
Sales
$
2,943
4,025
6,337
(4,448)
1,889
4,448
3,250
5,139
(979)
4,160
979
8,370
Answer to lecture example 3 (cont’d)
(W1)
$5,255/500 = $10.51
(W2)
$6,337/570 = $11.12
(W3)
$5,139/420 = $12.24
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Chapter summary 1
1 Introduction
 Inventories can be a significant figure in an entity’s
accounts and will impact both the profit figure and the net
asset position. It is important therefore that it is recorded
correctly.
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Chapter summary 2
2 Accounting adjustment
 As seen in chapter 6 the statement of profit or loss
matches the sales revenue earned in a period with the
cost of sales incurred to generate that revenue. There
are therefore two inventory adjustments: the opening
inventory adjustment and the closing inventory
adjustment.
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Chapter summary 3
3 Valuation
 Inventories should be valued at the lower of cost and
net realisable value.
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Chapter summary 4
4 Cost
 The cost of inventory includes the cost of purchase,
costs of conversion and any other costs necessary
to bring the inventory to its present location and
condition.
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Chapter summary 5
5 Net realisable value (NRV)
 Net realisable value is the estimated selling price less
the costs to completion and any selling and
distribution costs.
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Chapter summary 6
6 Theoretical methods of estimating cost
 Methods available to estimate the cost of inventories are
first in, first out (FIFO) and average cost. Under FIFO
the inventories held at the year end are the most recent
purchases but under average cost the cost of all
inventories purchased during the year is weighted to
produce an average figure.
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Chapter summary 7
7 Valuation effects on profit
 In times of rising prices, using FIFO will mean the
financial statements show higher inventory values and
higher profits.
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Chapter 9
• Capital and revenue expenditure
• IAS 16
Tangible non current
assets
• Depreciation
• Non-current asset disposals
• Revaluations
• Disclosure
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Syllabus learning outcomes 1
• Define non-current assets and recognise the difference
between current and non-current assets.
• Explain the difference between capital and revenue items
and classify expenditure accordingly.
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Syllabus learning outcomes 2
• Prepare ledger entries to record the acquisition, disposal,
depreciation and accumulated depreciation of noncurrent
assets.
• Calculate and record profits or losses on disposal of noncurrent assets in the statement of profit or loss.
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Syllabus learning outcomes 3
• Record the revaluation of a non-current asset and
calculate its subsequent depreciation and profit or loss on
disposal.
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Syllabus learning outcomes 4
• Illustrate how non-current asset balances and movements
are disclosed in company financial statements.
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Syllabus learning outcomes 5
• Explain the purpose and function of an asset register.
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Syllabus learning outcomes 6
• Understand and explain the purpose of depreciation.
• Calculate the charge for depreciation using the straight
line and reducing methods, identifying when each is
appropriate.
• Calculate the adjustments to depreciation necessary if
changes are made in the estimated useful life and/or
residual value of a non-current asset.
• Record depreciation in the statement of profit or loss and
statement of financial position.
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Overview
Capital versus revenue
expenditure
Cost
Tangible non-current
assets
Revaluations
Straight line
method
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Depreciation
Disposals
Reducing balance
method
Capital and revenue expenditure 1
What is capital expenditure?
• Capital expenditure results in the acquisition of noncurrent assets, or an increase in their earning capacity.
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Capital and revenue expenditure 2
What is revenue expenditure?
• Revenue expenditure is incurred for the purpose of trade
or to maintain the existing earning capacity of the noncurrent assets.
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Tackling the exam
It is highly likely that some questions in your exam will focus
on the distinction between capital and revenue expenditure.
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IAS 16
IAS 16
• Initial measurement – at cost
• Components of cost
— Purchase price (incl import duties, excl trade discount,
recoverable sales tax)
— Initial estimate of dismantling and restoration costs
— Directly attributable costs, eg site preparation, delivery
and handling costs installation, assembly costs, testing
and professional fees
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Tackling the exam
Exam focus point:
Only staff costs arising directly from the construction or acquisition of the
asset can be capitalised as part of the cost of the asset.
The costs of training staff to use a new asset cannot be capitalised
because it is not probable that economic benefits will be generated from
training the staff as we can’t guarantee that those staff will stay and use
the asset. The costs of training staff should be expensed.
Watch out for this in your exam!
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IAS 16 (cont’d)
• Subsequent expenditure
— added to carrying amount if improves condition
beyond previous performance
• Repairs and maintenance costs are expensed.
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Specimen exam question
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Specimen exam answer
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Depreciation 1
Depreciation – accruals concept
• Is a process of spreading the original cost of a non-current
asset over the accounting periods in which its benefit will
be felt
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Depreciation 2
Two methods
• Straight line
dep’n =
co st – R V
u se fu l life
• Reducing balance
dep’n = cost × RB%
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Depreciation 3
• The double entry for depreciation is as follows:
DEBIT
Depreciation expense (SPL)
CREDIT
Accumulated depreciation (SOFP)
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Depreciation 4
Change in expected life
• If after a period of an asset’s life it is realised that the
original useful life has been changed, then the
depreciation charge needs to be adjusted.
• The revised charge from that date becomes:
CV at revised date
Remaining useful life
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Tackling the exam
Exam focus point:
If an exam question gives you the purchase date of a noncurrent asset which is part way through an accounting
period, you should generally assume that depreciation
should be calculated in this way as a ‘part year’ amount,
unless the question states otherwise.
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Non-current asset disposals 1
Disposal
• On disposal of an asset a profit or loss will arise
depending on whether disposal proceeds are greater or
less than the carrying value of the asset.
• If proceeds > CV = profit
• If proceeds < CV = loss
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Non-current asset disposals 2
Double entry for a disposal
• Eliminate cost
DEBIT
Disposals
CREDIT
Non-current assets
• Eliminate accumulated depreciation
DEBIT
Provision for depreciation
CREDIT
Disposals
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Non-current asset disposals 3
• Account for sales proceeds
DEBIT
Cash
CREDIT
Disposals
or if part exchange deal
DEBIT
Non-current assets
CREDIT
Disposals
with part exchange value
• Transfer balance on disposals account to the statement of
profit or loss
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Revaluations 1
IAS 16 allows a choice between
• Keeping asset at cost
• Revaluing to fair value
Fair value may give fairer view on business.
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Revaluations 2
Accounting for a revaluation
A revaluation is recorded as follows:
DEBIT
Non-current asset
(revalued amount less original cost)
DEBIT
Accumulated depreciation
(total depreciation to date)
CREDIT
Revaluation surplus
(revalued amount less carrying value)
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Disclosure
Disclosure
With regard to disclosure, a proforma non-current asset note is shown here.
Total
$ 000
Cost or valuation
At January 20X7
Revaluation surplus
Additions in year
Disposals in year
At 31 December 20X7
Depreciation
At 1 January 20X7
Charge for year
Eliminated on disposals
At 31 December 20X7
Carrying value
At 31 December 20X7
At 1 January 20X7
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Land and
buildings
$ 000
Plan and
equipment
$ 000
160
20
50
(45)
185
100
20
30
(15)
135
60
20
(30)
50
30
7
(3)
34
20
5
25
10
2
(3)
9
110
80
41
50
151
130
Tackling the exam 1
Exam focus point:
There was a question on revaluations in the December 2012
exam. This asked for the depreciation charge and balance
on the revaluation reserve at the end of the financial year,
following a revaluation at the beginning of the year.
The examiner commented that this was one of the questions
with the lowest pass rates that session. Students correctly
calculated the balance on the revaluation reserve but failed
to identify the correct depreciation charge for the year.
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Tackling the exam 2
As the revaluation took place at the beginning of the year, a
whole year’s depreciation had to be calculated using the
revalued amount over the remaining useful economic life.
The remaining useful life needed to be calculated by working
out the original depreciation charge and comparing this to
the accumulated depreciation brought forward to find out
how long the asset had been held.
Students who answered the question wrongly had used the
original useful economic life rather than the remaining useful
economic life figure.
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Lecture example 1
Required
What examples of tangible non-current assets can you
identify?
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Answer to lecture example 1
• Examples include:
(a) Land and buildings
(b) Plant and equipment
(c) Motor vehicles
(d) Furniture and fittings, computers
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Lecture example 2
On 10 December 20X7 an entity bought a machine.
The breakdown on the invoice showed:
$
Cost of machine
20,000
Delivery costs
200
One-year maintenance contract
900
21,100
Further installation costs of $500 were also incurred.
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Lecture example 2 (cont’d)
Required
At what amount should the machine be capitalised in the
entity's records?
A
$20,000
B $20,700
C $20,200
D $21,600
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Answer to lecture example 2
B
The cost capitalised should include the purchase price
($20,000) plus all directly attributable costs (delivery and
installation).
The cost of the maintenance contract should be shown as
an expense in the statement of profit or loss.
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Lecture example 3
A business buys a machine for $2,500. It is expected to
have a useful life of three years after which time it will
have a scrap value of $250.
Required
(a) Calculate the annual depreciation charge.
(b) Calculate the cost, accumulated depreciation and net
book value (NBV) for each year of the asset's life.
Note: NBV = cost – accumulated depreciation to date.
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Answer to lecture example 3
Straight line method:
Depreciation charge=
2,500 ─ 250
3 years
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= $750 per
annum
Answer to lecture example 3 (cont’d)
Year
1
2
3
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Cost
Accumulated
depreciation
NBV
2,500
750
1,750
2,500
1,500
1,000
2,500
2,250
250
Answer to lecture example 3 (cont’d)
Graphical representation
NBV
$
2,500
250
0
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3
Year
Lecture example 4
A business buys a machine costing $6,000. The depreciation
rate is 40% on a reducing balance basis.
Required
Calculate depreciation expense, accumulated depreciation
and net book value of the asset for the first three years.
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Answer to lecture example 4
Year
1
2
3
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Dep’n
rate
Dep’n
expense
Acc’d
dep’n
NBV
40%
2,400
2,400
3,600
40%
1,440
3,840
2,160
40%
864
4,704
1,296
Answer to lecture example 4 (cont’d)
Graphical representation
NBV
$
6,000
3,600
2,160
1,296
1
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2
3
4
5
Year
Lecture example 5
Required
Using the information in Lecture example 3, show:
(a) The journal entry which would have been written at
the end of the first year.
(b) The treatment of depreciation for all years in the
relevant ledger accounts.
(c) The relevant statement of profit or loss and statement
of financial position extracts for each year.
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Answer to lecture example 5
(a)
Journal entry
Depreciation expense
Accumulated depreciation
Debit
Credit
$
$
750
750
Being annual depreciation charged on machine
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Answer to lecture example 5 (cont’d)
(b) Accounting for depreciation:
Machine (SOFP)
$
Cash
Bal b/d
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$
2,500 Bal c/d
2,500
2,500
2,500
2,500
Answer to lecture example 5 (cont’d)
Depreciation expense (SPL)
$
Year 1 Accumulated dep’n
Year 2 Accumulated dep’n
Year 3 Accumulated dep’n
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750 Year 1 SPL
750 Year 2 SPL
750 Year 3 SPL
$
750
750
750
Answer to lecture example 5 (cont’d)
Accumulated depreciation (SOFP)
$
Bal c/d
Bal c/d
Bal c/d
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750 Year 1 Depreciation expense
1,500 Year 2 Bal b/d
Depreciation expense
1,500
2,250
Year 3 Bal b/d
2,250
Depreciation expense
$
750
750
750
1,500
1,500
750
2,250
Answer to lecture example 5 (cont’d)
Statement of profit or loss (extracts):
Year 1
Year 2
$
$
Year 3
$
Expenses
Depreciation
750
750
750
Statement of financial position (extracts):
Cost
Accumulated
Depreciation
$
Net Book
Value
$
$
(Year 1) Machine
2,500
(750)
1,750
(Year 2) Machine
2,500
(1,500)
1,000
(Year 3) Machine
2,500
(2,250)
250
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Lecture example 6
The machine costing $6,000 in Lecture example 4 is sold
in year 3 for $3,000. No depreciation is charged in the year
of disposal.
Required
(a) Calculate the profit or loss on disposal of the machine.
(b) Complete the ledger accounts to show how the
disposal would be accounted for.
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Answer to lecture example 6
(a)
$
Sales proceeds
NBV at end of year 2
3,000
(2,160)
840
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Answer to lecture example 6 (cont’d)
(b)
Machine (SOFP)
$
6,000
Bal b/d
(a) Disposal account
$
6,000
Accumulated depreciation (SOFP)
(b) Disposal account
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$
3,840
Bal b/d
$
3,840
Answer to lecture example 6 (cont’d)
Disposal account (SPL)
(a) Machine
Balance = profit
on disposal (SPL)
$
6,000
840
(b) Accumulated dep’n
6,840
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(c) Cash
$
3,000
3,840
6,840
Lecture example 7
Assume in Lecture example 6 that instead of cash
proceeds of $3,000, there is a part exchange allowance of
$3,000 on a replacement machine costing $10,000.
Required
(a) Calculate the profit or loss on disposal of the machine.
(b) Calculate the amount of cash paid for the new
machine.
(c) Complete the ledger accounts to show both the
disposal and the acquisition.
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Answer to lecture example 7
(a) The profit on disposal is still $840, the only difference is
that the proceeds were not received in cash, but in the
form of a part exchange allowance.
(b) Cash paid for the new machine is $7,000 ($10,000 –
$3,000)
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Answer to lecture example 7 (cont’d)
Old machine (SOFP)
$
6,000
Bal b/d
(a) Disposal account
$
6,000
Accumulated depreciation (SOFP)
(b) Disposal account
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$
3,840
Bal b/d
$
3,840
Answer to lecture example 7 (cont’d)
New machine (SOFP)
$
(c) Disposal account 3,000
Cash
7,000
10,000
Bal b/d
10,000
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Bal c/d
$
10,000
10,000
Answer to lecture example 7 (cont’d)
Disposal account (SPL)
(a) Machine
Profit disposal (SPL)
$
6,000 (c) New machine (part
840
exchange)
6,840 (b) Accumulated
depreciation
$
3,000
3,840
6,840
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Lecture example 8
A building costing $100,000 on which depreciation of
$20,000 has been charged is to be revalued to $150,000.
Required
(a) Show the double entry to record the revaluation and
make the postings to the ledger accounts.
(b) What would be the depreciation charge for the year if
the building has a remaining useful life of 40 years?
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Answer to lecture example 8
(a) The double entry is
$
$
Dr Non-current asset – building (150 – 100) 50,000
Dr Accumulated depreciation – building
Cr Revaluation reserve (β)
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20,000
70,000
Answer to lecture example 8 (cont’d)
Building (SOFP)
$
Bal b/d
Revaluation reserve
100,000
50,000 Bal c/d
150,000
150,000
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$
150,000
150,000
Answer to lecture example 8 (cont’d)
Accumulated depreciation (SOFP)
$
Revaluation reserve
$
20,000 Bal b/d
20,000
Revaluation reserve (SOFP)
$
$
Building
Revaluation reserve
70,000 Accumulated
depreciation
20,000
70,000
70,000
Bal b/d
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50,000
70,000
Answer to lecture example 8 (cont’d)
(b) Depreciation charge is
$150,000 / 40 years = $3,750
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Lecture example 9
1.1.X1 Asset cost $40,000
Estimated useful life five years
No residual value
1.1.X3 Total useful life revised to four years.
Required
Calculate the depreciation charge, accumulated
depreciation and NBV for each year of the asset's life
(year end 31 December).
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Answer to lecture example 9
Review of useful life:
Year
Depreciation Accumulated
charge
depreciation
$
$
NBV
$
20X1
40,000/5
=
8,000
8,000
32,000
20X2
40,000/5
=
8,000
16,000
24,000
20X3
24,000/2
=
12,000
28,000
12,000
20X4
24,000/2
=
12,000
40,000
40,000
0
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Lecture example 10
1.1.X1
Asset cost $40,000
Residual value $1,500
Useful life five years
Depreciation: 25% reducing balance
1.1.X3
Change depreciation method to straight line
Required
Calculate the depreciation charge, accumulated
depreciation and NBV for each year of the asset’s life
(year ended 31 December).
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Answer to lecture example 10
Change in method of depreciation:
Dep’n Accumulated
charge depreciation
$
$
NBV
$
20X1
40,000 × 25%
10,000
10,000
30,000
20X2
30,000 × 25%
7,500
17,500
22,500
20X3
(22,500-1,500)/3
7,000
24,500
15,500
20X4
7,000
31,500
8,500
20X5
7,000
38,500
38,500
1,500
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Chapter summary 1
1 Introduction
 Expenditure on non-current assets is often significant
and it is important therefore that it is accounted for
appropriately.
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Chapter summary 2
2 Non-current assets
 Capital expenditure results in a non-current asset
being shown on the statement of financial position.
Revenue expenditure, such as repairs and maintenance,
is shown as an expense in the statement of profit or loss.
 Tangible non-current assets should initially be recorded
at cost. This includes the purchase price of the item
plus any directly attributable costs to bring the item
to its intended location and ready to use.
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Chapter summary 3
3 Depreciation
 Depreciation is an expense charged in relation to the
asset each year to reflect the using up of the asset. Land
usually has an unlimited useful life and so is not
depreciated.
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Chapter summary 4
4 Methods of depreciation
 Depreciation is usually calculated on a straight line or
reducing balance basis.
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Chapter summary 5
5 Straight line method
 This method is suitable for assets which are used up
evenly during their life time. The depreciation expense is
the same each year.
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Chapter summary 6
6 Reducing balance method
 This method is suitable for assets which generate more
revenue in the earlier years of their life. The depreciation
expense is higher in the initial years.
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Chapter summary 7
7 Accounting for depreciation
 Depreciation is recorded by way of a journal entry. The
expense is recorded as a debit entry and reduces profit.
The credit is made to the accumulated depreciation
account and reduces the carrying value of the asset in
the statement of financial position.
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Chapter summary 8
8 Disposal of non-current assets
 On disposal of a non-current asset the sales proceeds
are compared to the net book value of the asset in order
to calculate the profit or loss on disposal. Where an
asset is given in part exchange for another asset, the
part exchange allowance takes the place of the sales
proceeds.
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Chapter summary 9
9 Revaluations
 An entity may choose to revalue its assets rather than
hold them at cost – this is a choice of accounting
policy. Where an entity revalues, it must revalue all
assets in the same class and the depreciation charge
is based on the revalued amount.
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Chapter summary 10
10 Depreciation revisited
 If an entity changes the method of depreciation used
from straight line to reducing balance (or vice versa) or
revises the useful life of an asset it should write off the
asset’s net book value using the revised method or
useful life.
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