Chapter 8

chapter

8Non Current Assets

Chapter learning objectives

Upon completion of this chapter you will be able to:l Explain and illustrate the ledger entries to record the

acquisition of non-current assetsl Define and explain the purpose of depreciationl Explain the straight line, reducing balance and sum of digits

methods of depreciation and make necessary calculationsl Explain and illustrate how depreciation expense and

accumulated depreciation are recorded in ledger accountsl Explain and illustrate how depreciation is presented in the

income statement and balance sheetl Explain the relevance of consistency and subjectivity in

accounting for depreciationl Make the necessary adjustments if changes are made in the

estimated useful life / residual value of a non current assetl Explain and illustrate the ledger entries to record the disposal

of non current assets for cashl Explain and illustrate the ledger entries to record the disposal

of non-current assets through part exchangel Explain and illustrate the inclusion of profits or losses on

disposal in the income statementl Explain and record the revaluation of a non-current asset in

ledger accounts and in the balance sheetl Explain the impact of a revaluation on accounting for

depreciation and disposal of a non-current assetl Explain and illustrate how non-current asset balances and

movements are disclosed in company financial statements

133

Non Current Assets

134 KAPLAN PUBLISHING

NON-CURRENTASSETS

MEASURE COSTPURCHASE

DISPOSE OF

RECORD PURCHASE

USE WITHINBUSINESS

APPRECIATES IN VALUE

DEPRECIATE

STRAIGHTLINE

REDUCING BALANCE

SUM OF DIGITS

REVALUERECORD

REVALUATION

RECORDDEPRECIATION

CHARGE

CASH DISPOSAL

PARTEXCHANGE

RECORD DISPOSAL

1. Acquisition of a Non-current Asset

l The cost of a non-current asset is any amount incurred toacquire the asset and bring it into working condition:

Includes ExcludesCapital expenditure such as Revenue expenditure such asl Purchase price l Repairsl Delivery costs l Renewalsl Legal fees l Repaintingl Subsequent expenditure

which enhances the asset

l The correct double entry to record the purchase is:

Dr Non-current asset XCr Bank / Cash / Payables X

l A separate cost account should be kept for each categoryof non-current asset eg motor vehicles, fixtures and fittings

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KAPLAN PUBLISHING 135

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Acquisition of a Non-current assetF Butcher, a used car salesman, acquired new premises atthe start of 20X5. He incurred the following costs during thefollowing financial year (ended 31st December 20X5):

$Purchase price 500,000Legal costs relating to purchase 21,750(including $20,000 stamp duty)Cost of adapting premises to be showroom 12,000Window cleaning contract (for 1 year) 1,200Repairing roof damage caused by 3,000tornado on Christmas Day 20X4

What amount should be capitalised as the cost of Land andBuildings in F Butcher's balance sheet at 31st December20X5?

Illustration 1

Non Current Assets


SolutionThe cost of Land and Buildings is: $Purchase price 500,000Legal costs including stamp duty 21,750Cost of adapting premises 12,000Roof repairs 3,000

––––––––––536,750

Note: l Window cleaning is an ongoing cost and therefore

cannot be capitalisedl The cost of repairing the roof can be capitalised as the

damage was a pre-existing condition at purchase.

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Acquisition of a non current asset

Bilbo Baggins started business providing limousine taxiservices on 1st January 20X5. In the year to 31stDecember he incurred the following costs:

$office premises 250,000legal fees associated with purchase of office 10,000cost of materials & labour to paint office in 300Bilbo's favourite colour, purple3 Mercedes E series estate cars 116,000number plates for cars 210delivery charge for cars 180road licence fee for cars 480drivers' wages for first year of operation 60,000blank taxi receipts printed with Bilbo 450Baggins' business name and number

What amounts should be capitalised as 'Land and Buildings'and 'Motor Vehicles'?

Test your understanding 1 [answer on p163]

2. Depreciation

l IAS 16 defines depreciation as 'the measure of the cost orrevalued amount of the economic benefits of the tangiblenon-current asset that has been consumed during theperiod'

l In simple terms, depreciation is a mechanism to reflect thewearing out of a non-current asset

l Depreciation matches the cost of a non-current asset tothe revenues generated by that asset over its useful life

l This is achieved by recording a depreciation charge eachyear, the effect of which is twofold ('the dual effect')l Reduce the balance sheet value of the non-current

asset by cumulative depreciation to reflect the wearing out

l Record the depreciation charge as an expense in theincome statement to match to the revenue generated bythe non-current asset

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Solution

Land and Buildings$

–––––––––

Motor vehicles$

–––––––––

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3. Methods of Calculating Depreciation

Straight Line method

Depreciation charge = Cost - Residual Value–––––––––––––––––––––––––––

Useful life

Or X% x costResidual Value: the estimated disposal value of the assetat the end of its useful life

Useful Life: the estimated number of years that thebusiness will use the asset for

Reducing Balance Method

Depreciation charge = X % x Net Book Value (NBV)

Net Book Value: original cost of the non-current asset lessaccumulated depreciation on the asset to date

Non Current Assets


STRAIGHT LINEREDUCINGBALANCE

SUM OF DIGITS

Depreciationcharge is the sameeach year and so

assumes benefit isconsumed evenly

A reducing amountof depreciation ischarged each yearand so assumesmore benefit is

consumed inearlier years

A variation on thereducing balance

method which alsoresults in a

reducing amount ofdepreciation each

year

Useful for assetswhich provide

equal benefit eachyear eg machinery

Useful for assets which provide morebenefit in earlier years eg cars, IT

equipment

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Sum Of Digits Method

Depreciation charge = X x (Cost - residual value)Y

X : Year 1 = estimated useful life (n)Year 2 = estimated useful life (n) - 1Year 3 = estimated useful life (n) - 2 and so on

Y: constant each year and calculated as n(n+1)–––––––––

2Assets bought / sold in the period

If a non-current asset is bought or sold in the period, there aretwo ways in which the depreciation could be accounted for:l Provide a full year's depreciation in the year of acquisition

and none in the year of disposall Monthly or Pro Rata depreciation , based on the exact

number of months that the asset has been owned

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Methods of calculating depreciation - straight line

Ronaldo, a builder, bought a new cement mixer on 1stJanuary 20X5. It cost $3,800 and he estimates that he willuse it for 15 years after which he will be able to sell it for ascrap value of $50.

What is the depreciation charge for the year ended 31stDecember 20X5?

SolutionDepreciation charge = Cost - Residual Value

–––––––––––––––––––––––––Useful life

= $3,800 - $50 –––––––––––––––

15 yrs= $250 per annum

Illustration 2

Methods of calculating depreciation - reducing balance

Dev, a trader purchased an item of plant for $1,000 on 1August 20X1 which he depreciates on the reducing balanceat 20% per annum. What is the depreciation charge for eachof the first five years if the accounting year end is 31 July?

Illustration 3

Non Current Assets


SolutionYear Depreciation charge Depreciation Cumulative

% x NBV charge depreciation$ $

1 20% x $1,000 200 2002 20% x $(1,000 - 200) 160 3603 20% x $(1,000 - 360) 128 4884 20% x $(1,000 - 488) 102 5905 20% x $(1,000 - 590) 82 672

Methods of calculating depreciation - Sum of DigitsSharmini bought a new computer for her consultancybusiness costing $4,200 on 1 January 20X4. She estimatesthat she will be able to sell it second hand after four yearsfor $200. She uses the sum of digits method to allocatedepreciation. What is the depreciation charge for each ofthe four years ended 31 December 20X4 , X5, X6, X7?

SolutionDepreciation charge = X/Y x (cost - residual value)Y = n(n+1) = 4 x 5 = 10

–––––– ––––––2 2

20X4: 4/10 x $4,000 = $1,60020X5: 3/10 x $4,000 = $1,20020X6: 2/10 x $4,000 = $80020X7: 1/10 x $4,000 = $400

Illustration 4

calculation of depreciationKaren has been running a successful nursery school 'LittleMonkeys' since 20X1. She bought the following assets asthe nursery grew:l A new oven for the nursery kitchen at a cost of $2,000

(purchased 1 December 20X4)l A mini bus to take the children on trips for $18,000

(purchased 1 June 20X4)


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She depreciates the oven at 10% straight line and the minibus at 25% reducing balance. A full year's depreciation ischarged in the year of purchase and none in the year ofdisposal

What is the total depreciation charge for the years ended 31October 20X5 and 20X6?

Solution

Oven 20X5 20X6$ $

Mini Bus

–––––– ––––––Total depreciation charge

Calculation of depreciationThe following information relates to Bangers & Smash, a carrepair business:

Machine 1 Machine 2

Cost $12,000 $8,000

Purchase date 1 August 20X5 1 October 20X6

Depreciation method 20% straight 10% reducingline pro rata balance pro rata

What is the total depreciation charge for the years ended31st December 20X5, X6 and X7?


4. Accounting for Depreciation

Whichever method is used to calculate depreciation, theaccounting remains the same:

Dr Depreciation expense (IS) XCr Accumulated Depreciation(B/S) X

l The depreciation expense account is an income statementaccount and therefore is not cumulative.

l The accumulated depreciation account is a balance sheetaccount and as the name suggests is cumulative ie reflectsall depreciation to date

l On the balance sheet it is shown as a reduction againstthe cost of non-current assets:

$Cost XAccumulated depreciation (X)

–––Net book value X

Non Current Assets


Solution

Machine 1 $ $

Machine 2

Total Depreciation charge

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Accounting for depreciationSanta runs a large toy shop in Windsor. In the year ended31 August 20X5, she bought the following fixed assets:l A new cash register for $5,000. This was purchased on

1 December 20X4, in time for the Christmas rush, andwas to be depreciated at 10% straight line;

l A new delivery van, purchased on 31 March 20X5, at acost of $22,000. The van is to be depreciated at 15%reducing balance.

Santa charges depreciation on a monthly basis.l What is the depreciation charge for the year ended 31st

August 20X5?l Show the balance sheet presentation at that date

Solution

Cash register Depreciation charge: 10% x $5,000 x 9/12= $375

Delivery Van Depreciation charge: 15% x $22,000 x 5/12= $1,375

Balance sheet extract at 31 August 20X5Cash register Delivery Van

$ $Cost 5,000 22,000Accumulated Depreciation (375) (1,375)

–––––––––––––––––––––––––––Net Book Value 4,625 20,625

Illustration 5

Accounting for depreciationDolly's Dailys, a domestic cleaning business, bought a newfixed asset on 1 January 20X5, costing $12,200. Itdepreciates similar assets at 20% straight line.

Show the accounting entries for the acquisition of the assetand depreciation for the years ending 31 December X5, X6& X7 using ledger accounts.

Illustration 6

Non Current Assets


Solution Non current asset cost

$ $1.1.X5 New asset 12,200 balance c/f 12,200

–––––––– ––––––––12,200 12,200

–––––––– ––––––––Balance b/f 12,200

Depreciation charge$ $

X5 accumulated 2,440 Income statement 2,440depreciation –––––––– ––––––––



Accumulated depreciation$ $

Balance c/f 2,440 X5 depreciation 2,440–––––––– charge ––––––––

2,440 2,440–––––––– ––––––––

Balance b/f 2,440Balance c/f 4,880 X6 depreciation 2,440

–––––––– charge ––––––––4,880 4,880

–––––––– ––––––––Balance b/f 4,880

Balance c/f 7,320 X7 depreciation 2,440–––––––– charge ––––––––

7,320 7,320–––––––– ––––––––

Balance b/f 7,320

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accounting for depreciationCoco acquired 2 fixed assets for cash on 1 August 20X5 foruse in her party organising business:l A 25 year lease on a shop for £200,000l A chocolate fountain for £4,000

The fountain is to be depreciated at 25% per annum usingthe reducing balance method.

A full year of depreciation is charged in the year ofacquisition and none in the year of disposal.

Show the ledger account entries for these assets for theyears ending 31 October 20X5, X6 and X7

SolutionLeases (cost)

$ $

––––––––– –––––––––

––––––––– –––––––––

Fixtures and fittings (cost)$ $

––––––––– –––––––––

––––––––– –––––––––


––––––––– –––––––––

––––––––– –––––––––

––––––––– –––––––––


Non Current Assets


Accumulated depreciation (leases)$ $

––––––––– –––––––––

––––––––– –––––––––

––––––––– –––––––––

––––––––– –––––––––

Accumulated depreciation (fixtures and fittings)$ $

––––––––– –––––––––

––––––––– –––––––––

––––––––– –––––––––

––––––––– –––––––––

––––––––– –––––––––

––––––––– –––––––––

Annual depreciation workings:

5. Consistency and Subjectivity whenAccounting for Depreciation

The following are all based on estimates made by themanagement of a business:l Depreciation methodl Residual valuel Useful life

Different estimates would result in varying levels ofdepreciation and so profits.

It can be argued that these subjective areas could thereforeresult in manipulation of the accounts by management.

In order to reduce the scope for such manipulation andincrease consistency of treatment, IAS 16 Property, Plant andEquipment requires the following:l depreciation method should be reviewed at each year end

and changed if the method used no longer reflects thepattern of use of the asset

l residual value and useful life should be reviewed at eachyear end and changed if expectations differ from previousestimates

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Changes to the useful life / residual value of an assetAlfie purchased a non-current asset for $100,000 on 1January 20X2 and started depreciating it over five years.Residual value was taken as $10,000.

At 1 January 20X3 a review of asset lives was undertakenand the remaining useful life was estimated at eight years.Residual value was nil.

Calculate the depreciation charge for the year ended 31December 20X3 and subsequent years.

Illustration 7

Non Current Assets


Solution

Initial depreciation = $100,000 - $10,000charge p.a. ––––––––––––––––––––––

5 years= $18,000

Net book value at = $100,000 - ($18,000 x 1yrs)date of change

= $82,000

New depreciation = $82,000 - nilcharge ––––––––––––––––

8 years= $10,250

Changes to useful life / residual value of an assetAlberto bought a wood burning oven for his pizza restaurantfor $30,000 on 1 January 20X0. At that time he believedthat the oven's useful life would be 20 years after which itwould have no value.

On 1 January 20X3, Alberto revises his estimations: he nowbelieves that he will use the oven in the business foranother 12 years after which he will be able to sell it secondhand for $1,500.

What is the depreciation charge for the year ended 31December 20X3?

Solution


6. Disposal of Non-current Assets

Profit / Loss on disposalAn accounting profit or loss will arise on the disposal of a non-current asset:

A DISPOSALS T account is required when recording thedisposal of a non-current asset. This is an income statementaccount which reflects any profit or loss on disposal.

Disposal for cash consideration

three step process:

1. Remove the original cost of the non-current asset from the'non-current asset' account.

Dr Disposals original costCr NC Assets original cost

2. Remove accumulated depreciation on the non-currentasset from the 'accumulated depreciation' account

Dr Acc'd Dep'n acc'd dep'nCr Disposals acc'd dep'n

3. Record the cash proceedsDr Cash proceedsCr Disposals proceeds

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Proceeds(cash or part > Net Book Value Profitdisposal allowance) at disposal date

Proceeds(cash or part < Net Book Value Lossdisposal allowance) at disposal date

Proceeds(cash or part = Net Book Value Neither profitdisposal allowance) at disposal date nor loss

The balance on the disposals T account is the profit or loss ondisposal:

DisposalsOriginal cost X Accumulated X

depreciationProceeds X

Loss on disposal ß Profit on disposal ß–– ––X X–– ––

Non Current Assets


Disposal of non current assetsEddie runs a haulage business, and owns 6 articulatedlorries. On 1 April 20X5 he disposes of 1 of the lorries for$5,000 cash. Each lorry originally cost $45,000 on 1January 20X1, when Eddie started business and has beendepreciated at 20% per annum on the straight line basis. Afull year's depreciation is charged in the year of acquisitionand none in the year of disposal.

What are the accounting entries to reflect the disposal?Show the ledger entries for the year ended 31 December20X5

Solution

1. Remove the original cost of the non current asset Dr Disposals $45,000Cr Motor Vehicles $45,000

2. Remove accumulated depreciation on the non currentassetDr Accumulated depreciation $36,000Cr Disposals $36,000

Working:$45,000 x 20% x 4 years = $36,000

3. Record proceeds:Dr cash $5,000Cr Disposals $5,000

Illustration 8

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Motor vehicles$ $

1.1.X5 balance b/f(6 x $45,000) 270,000 Disposals 45,000

Balance c/f 225,000–––––––––– ––––––––––

225,000 225,000–––––––––– ––––––––––

Balance b/f 225,000


1.1.X5 balance b/f 216,000(6 x $36,000)

Disposals 36,000Balance c/f 180,000

–––––––––– ––––––––––180,000 180,000

–––––––––– ––––––––––Balance b/f 180,000

Disposals$ $

Motor vehicle cost 45,000 Accumulated depreciation 36,000Cash proceeds 5,000Loss (ß) 4,000

–––––––––– ––––––––––45,000 45,000

–––––––––– ––––––––––

Accounting for the disposal of a non current asset for cashPercy Throwerp runs a landscape gardening business. On 1February 20X2, he purchased a sit on lawnmower costing$3,000. He depreciates it at 10% straight line on a monthlybasis. A few years later he decides to replace it with onewith an enclosed cabin for when it rains. He sells thelawnmower to an old friend Alan Titchmuck for $2,000 on 31July 20X5.

How much is charged to Percy's Income Statement inrespect of the asset for the year ended 31 December 20X5?


Non Current Assets


During 20X5, he will part exchange his old Ice cream vanfor a new one. Details of the 2 vans are as follows:

Solution

1. Dr Cr

2. Dr Cr

Depreciation working:

3. Dr Cr

Disposals$ $

–––––– ––––––

–––––– ––––––

The charge to the Income Statement for the year ended31 December 20X5 is:

£Depreciation charge for the yearProfit/Loss on disposal

7. Disposal through a Part ExchangeAgreement

A part exchange agreement arises where an old asset isprovided in part payment for a new one, the balance of the newasset being paid in cash.

The procedure to record the transaction is very similar to thethree step process seen for a cash disposal. There is howevera fourth step:1 Remove the original cost of the non-current asset from the

'non current asset' account. Dr Disposals original costCr NC Assets original cost

2 Remove accumulated depreciation on the non-currentasset from the 'accumulated depreciation' account

Dr Acc'd Dep'n acc'd dep'nCr Disposals acc'd dep'n

3 Record the part exchange allowance (PEA) as proceedsDr NC Assets PEACr Disposals PEA

4 Record the cash paid for the new assetDr NC Assets cashCr cash cash

Again, the balance on the disposals T account is the profit orloss on disposal:

DisposalsOriginal cost X Accumulated

depreciation XPart exchangeallowance X

Profit on disposal ß Loss on disposal ß–– ––X X–– ––

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Disposal of non current assetsZebedee runs a business selling ice creams on the seafrontand prepares accounts to a 31 December year end.

Illustration 9

Non Current Assets


Old Van New VanPurchase date 1 January 20X0 1 June 20X0Total cost $15,000 $23,000Depreciation method 10% straight line 10% straight lineAccumulated $7,500depreciation to 1 January 20X5Part exchange $6,400allowance agreedShow the ledger entries to record the transaction in the yearended 31 December 20X5, assuming that Zebedee chargesa full year of depreciation in the year of acquisition andnone in the year of disposal.

SolutionMotor Vehicle cost

$ $Balance b/f 15,000 Disposal 15,000New VanPart exchange 6,400allowance Cash ($23,000 - $6,400) 16,600 Balance c/f 23,000

–––––––– ––––––––38,000 38,000

–––––––– ––––––––Balance b/f 23,000

Motor Vehicle Accumulated depreciation$ $

Disposal 7,500 Balance b/f 7,500Balance c/f 2,300 Depreciation charge 2,300

–––––––– ––––––––9,800 9,800

–––––––– ––––––––Balance b/f 2,300

Disposals$ $

Motor vehicle cost 15,000 MV accumulated 7,500depreciationPart Exchange allowance 6,400Loss on disposal (ß) 1,100

–––––––– ––––––––15,000 15,000

–––––––– ––––––––

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MV accumulated 2,300depreciation

Depreciation charge working:

10% x $23,000 = $2,300

Accounting for the disposal of a non current assetthrough part exchangeBindi Bobbin runs a business altering and repairing clothes.When she started business on 1 January 20X2, she boughta Soopastitch II sewing machine for $2500. She depreciatessewing machines using the straight line method at a rate of20% per annum, and she charges a full year of depreciationin the year of acquisition and none in the year of disposal.

The business has now grown such that she needs a fastermachine, and she will upgrade to the Soopastitch V duringDecember 20X5. The Soopastitch salesman has offeredher a part exchange deal as follows:

Part exchange allowance for Soopastitch II $750

Balance to be paid in cash for Soopastitch V $4,850

Show the ledger entries for the year ended 31 December20X5 to reflect this transaction.

SolutionSewing machine cost

$ $

––––––– –––––––

––––––– –––––––


8. Revaluation of Non-current Assets

l Some non-current assets such as land and buildings rise invalue over time. Businesses may choose to reflect thecurrent value of the asset in their balance sheet. This isknown as revaluing the asset.

l The difference between the net book value of the assetand the revalued amount (normally a gain) is recorded in arevaluation reserve in the balance sheet.

l This gain is not recorded in the income statement becauseit is unrealised i.e. it is not realised in the form of cash

Non Current Assets


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Sewing machine accumulated depreciation$ $

––––––– –––––––

––––––– –––––––

Disposals$ $

––––––– –––––––

––––––– –––––––Depreciation charge

$ $

––––––– –––––––

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Revaluation of non-current assetsVittorio owns land which originally cost $250,000. Nodepreciation has been charged on the land in accordancewith IAS16. Vittorio wishes to revalue the land to reflect itscurrent market value, which he has been advised is$600,000.

What is the double entry to record this revaluation?

SolutionThe land is currently held at cost of $250,000. This needsto be uplifted by $350,000 to reflect the new valuation of$600,000. Therefore the double entry required is:

Dr Land cost $350,000Cr Revaluation reserve $350,000

Illustration 10

Revaluation of non-current assetsHamish runs a kilt making business in Scotland. He hasrun the business for many years from a building whichoriginally cost $300,000 and on which $100,000 totaldepreciation has been charged to date. Hamish wishes torevalue the building to $750,000.

What is the double entry required to record the revaluation?

SolutionThe current balances in the accounts are:Building cost $300,000Accumulated Depreciation $100,000

l The building cost account needs to be uplifted by$450,000 to $750,000.

l On revaluation, the accumulated depreciation accountis cleared out

Therefore the double entry required is:Dr Building cost $450,000Dr Accumulated Depreciation $100,000Cr Revaluation Reserve $550,000The gain of $550,000 reflects the difference between the netbook value pre revaluation of $200,000 and the revaluedamount of $750,000.

Illustration 11

9. Depreciation and Disposal of a RevaluedAsset

Depreciation of a revalued assetl When a non-current asset has been revalued, the charge

for depreciation should be based on the revalued amountand the remaining useful life of the asset.

Non Current Assets


Revaluation of Non-current assetsMax owns a fishfinger factory. The premises werepurchased on 1 January 20X1 for $450,000 anddepreciation charged at 2% per annum straight line.

Max now wishes to revalue the factory premises to$800,000 on 1 January 20X7 to reflect the market value.

Show the ledger entries required to record this revaluation.

SolutionFactory cost

$ $

––––––––– –––––––––

––––––––– –––––––––


––––––––– –––––––––

––––––––– –––––––––

Revaluation reserve$ $

––––––––– –––––––––

––––––––– –––––––––


Disposal of a revalued assetl The disposal of a revalued asset is recorded as already

seen.l There is, however, an extra step: As the revaluation gain

has now been realised, the balance on the revaluationreserve should be transferred to accumulated profits

Dr Revaluation Reserve XCr Accumulated profits X

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Depreciation of a revalued assetSpartacus United football club's balance sheet at 31December 20X7 includes the following information:

$Stadium cost 1,500,000Depreciation 450,000

–––––––––––1,050,000

Depreciation has been provided at 2% on the straight linebasis.

The stadium is revalued on 30 June 20X8 to $1,380,000.There is no change in its remaining estimated future usefullife.

What is the depreciation charge for the year ended 31December 20X8?

SolutionDepreciation must continue to be charged on the originalcost until the date of revaluation. Thereafter it is charged onthe revalued amount:

Illustration 12

Non Current Assets


$15,000

20,000

––––––35,000

Note that this is part ofthe depreciation clearedout on revaluation and sois not part of theaccumulated depreciationbalance at the year end

This amount will form theaccumulated depreciationat the year end

2% x $1,500,000 x 6/12

1,380,000 x 6/12–––––––––34.5yrs

First half of 20X

Second halfof 20X8

Totaldepreciation

charge for 20X8

Disposal of a revalued assetTiger Trees owns and runs a golf club. Some years agoTiger purchased land next to the existing course with theintention of creating a smaller 9 hole course. The cost ofthe land was $260,000. Tiger hasn't yet built the additionalcourse but has revalued this land to $600,000. He has nowdecided that building the new course is uneconomical andhas found a buyer who is willing to pay $695,000 for theland.

SolutionLand cost$ $

Balance b/f 600,000 Disposal 600,000––––––––– –––––––––

Disposal$ $

Land cost 600,000 Proceeds 695,000B profit on disposal 95,000

––––––––– –––––––––

Illustration 13

10.Disclosure of Non-current Asset Balancesin Company Financial Statements

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Disposal 340,000 Balance b/f 340,000––––––––– –––––––––

Accumulated profits$ $

Revaluation 340,000reserve

Balance c/f 340,000––––––––– –––––––––340,000 340,000––––––––– –––––––––

Balance b/f 340,000

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Balance Sheet

Aggregate net bookvalueof non-currentassets disclosed on

the face of thebalance sheet

Income Statement

Depreciation chargeincluded within

relevant expensecategories

Notes to theAccounts

• Disclosure ofdepreciationmethods and ratesused

• Non-current assetsdisclosure

• Details ofrevaulations

Chapter Summary

Non Current Assets


RECORD PURCHASEDr Non Current asset

Cr Cash/bank/payable

RECORD

REVALUATIONDr NC Assets

Dr Accumulated Dep'n

Cr Revaluation Reserve

RECORD CHARGEDr Dep'n expense

Cr Accumulated Dep'n

RECORD

DISPOSALDr Disposal

Cr NC Asset

Dr Accumulated Dep'n

Cr Disposal

Dr Cash (NC Asset)

Cr Disposal

(Dr NC Asset

Cr Cash)

CASHDISPOSAL

PARTEXCHANGE

MEASURECOSTCapital

expenditureto buy asset

and bringinto working

condition

DEPRECIATE

STRAIGHT LINE COST – RV

----------------------------------UL

REDUCING

BALANCEX% x NBV

SUM OF

DIGITSX/Y x COST

REVALUE

DISPOSE OF

PURCHASE

USE WITHINBUSINESS

APPRECIATES IN VALUE

Test your understanding solutions

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Test your understanding 1

Solution

Oven 20X5 20X6$ $

£2,000 x 10% 200 200

Mini Bus20X4 : 25% x $18,000 = $4,50020X5: 25% x $(18,000 - 4,500) = $3,375 3,37520X6: 25% x $(18,000 - 7,875) = $2,531 2,531

–––––– ––––––Total depreciation charge 3,575 2,731


Land and Buildings$

Office premises 250,000Legal fees 10,000

–––––––––260,000

l the cost of the purple paint does not form part of thecost of the office and so should not be capitalised.Instead it should be taken to the income statement as arevenue expense.

Motor vehicles$

3 Mercedes E series 116,000Number plates 210Delivery charges 180

–––––––––116,390

l the number plates are one off charges which forms partof the purchase price of any car

l the road license fee, drivers' wages and receipts areongoing expenses, incurred every year. They cannotbe capitalised, but should be taken to the incomestatement as expenses.

Non Current Assets


Solution

Machine 1 $ $20X5: 20% x $12,000 x 5/12 = 1,00020X6: 20% x $12,000 = 2,40020X7: 20% x $12,000 = 2,400

Machine 220X6: 10% x $8,000 x 3/12 = 20020X7: 10% x $(8,000 - 200) = 780

Total Depreciation charge20X5: 1,00020X6: $2,400 + $200 2,60020X7: $2,400 + $780 3,180


Leases (cost)$ $

1.8.X5 cash 200,000 Balance c/f 200,000––––––––– –––––––––200,000 200,000––––––––– –––––––––

Balance b/f 200,000

Fixtures and fittings (cost)$ $

1.8.X5 cash 4,000 Balance c/f 4,000––––––––– –––––––––

4,000 4,000––––––––– –––––––––

Balance b/f 4,000


X5 accumulated 9,000 Income statement 9,000depreciation ––––––––– –––––––––X6 accumulated 8,750 Income statement 8,750depreciation ––––––––– –––––––––X7 accumulated 8,563 Income statement 8,563depreciation ––––––––– –––––––––


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Accumulated depreciation (leases)$ $

Balance c/f 8,000 X5 depreciation 8,000––––––––– charge –––––––––

8,000 8,000––––––––– –––––––––

Balance b/f 8,000Balance c/f 16,000 X6 depreciation 8,000

––––––––– charge –––––––––16,000 16,000

––––––––– Balance b/f 16,000Balance c/f 24,000 X7 depreciation 8,000

––––––––– charge –––––––––24,000 24,000

Balance b/f 24,000

Accumulated depreciation (fixtures and fittings)$ $

Balance c/f 1,000 X5 depreciation 1,000––––––––– charge –––––––––

1,000 1,000––––––––– –––––––––

Balance b/f 1,000

Balance c/f 1,750 X6 depreciation 750––––––––– charge –––––––––

1,750 1,750––––––––– –––––––––

Balance b/f 1,750Balance c/f 2,313 X7 depreciation 563

––––––––– charge –––––––––2,313 2,313

––––––––– –––––––––Balance b/f 2,313

Annual depreciation workings:

Note, details of the depreciation method and rate for thelease are not given in the question. We are however toldthat the lease term is 25 years. This suggests that it wouldbe appropriate to use the straight line method with a UEL of25 years.

Non Current Assets


20X5 Lease: $200,000 / 25 years = 8,000Fountain: $4,000 x 25% = 1,000

–––––––––9,000

20X6 Lease: $200,000 / 25 years = 8,000Fountain: $3,000 x 25% = 750

–––––––––8,750

20X7 Lease: $200,000 / 25 years = 8,000Fountain: $2,250 x 25% = 563

–––––––––8,563

SolutionInitial depreciation charge = $30,000 = $1,500

––––––––––––20 years

Net Book Value at date of change = $30,000 - ($1,500 x 3yrs)

= $25,500

New depreciation charge = $25,500 - $1,500––––––––––––––––––

12 years

= $2,000 p.a.


Solution

1. Dr Disposals $3,000Cr Fixtures and Fittings Cost $3,000

2. Dr Accumulated depreciation $1,050Cr Disposals $1,050


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Depreciation working:

X2 10 % x 3,000 x 11/12 = 275X3 10% x 3,000 = 300X4 10% x 3,000 = 300X5 10% x 3,000 x 7/12 = 175

–––––1050

3. Dr cash $2,000Cr Disposals $2,000

Disposals$ $

31.7.X5 Fixtures and 3,000 Accumulated 1,050Fittings cost depreciationProfit on disposal (ß) 50 Cash proceeds 2,000

–––––– ––––––3,050 3,050–––––– ––––––

The charge to the Income Statement for the year ended31 December 20X5 is:

£Depreciation charge for the year 175Profit/Loss on disposal (50)

Note: As depreciation is charged monthly, it is necessary tocharge an amount to the income statement for the period 1January 20X5 to the disposal date 31 July 20X5

Non Current Assets


Sewing machine cost$ $

Balance b/f 2,500 Disposal 2,500New assetPart exchange 750allowanceCash 4,850 Balance c/f 5,600

––––––– –––––––8,100 8,100

––––––– –––––––Balance b/f 5,600

Sewing machine accumulated depreciation$ $

Disposal 1,500 Balance b/f 1,500

Balance c/f 1,120 Depreciation 1,120charge X5

––––––– –––––––2,620 2,620

––––––– –––––––Balance b/f 1,120

Depreciation b/f working:

$2,500 x 20% x 3 years = $1,500

Disposals$ $

Sewing machine cost 2,500 SM accumulated 1,500depreciationPart Exchange 750allowanceLoss on disposal (ß) 250

––––––– –––––––2,500 2,500

––––––– –––––––Depreciation charge

$ $SM accumulated 1,120 Income Statement 1,120depreciation ––––––– –––––––

Depreciation charge working:$5,600 x 20% = $1,120


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Factory cost$ $

Balance b/f 450,000Revaluation 350,000 Balance c/f 800,000

––––––––– –––––––––800,000 800,000––––––––– –––––––––800,000


Revaluation 54,000 Balance b/f 54,000(2% x $450,000

––––––––– x 6yrs) –––––––––54,000 54,000

––––––––– –––––––––


Factory cost 350,000Balance c/f 404,000 Accumulated 54,000

––––––––– depreciation –––––––––404,000 404,000––––––––– –––––––––

Balance b/f 404,000


Non Current Assets


Chapter 8

Documents

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