chapter 3 depreciation of non-current assets 非流動資產折舊 3.1...

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Chapter 3 Depreciation of non-current assets (非流動資產折舊)

3.1 Introduction Under accrual accounting, the allocation of the cost of a non-current asset (非流動資產) over the periods in which the asset is

used is known as depreciation (折舊). Non-current assets include tangible non-current assets (有形的非流動資產) and intangible

non-current assets (無形的非流動資產). Depreciation applies to tangible non-current assets only because the causes of

depreciation are physical wear and tear (有形損耗), obsolescence (陳舊過時), inadequacy (不足), passage of time (不合時),

depletion (消耗) and so on.

3.2 Capital expenditure vs. revenue expenditure (資本支出 vs.收益支出) Under cash accounting (現金制會計), all expenditures in a period would be wholly written off as expenses in that period. Under

accrual accounting (應計制會計), there are two types of expenditures: capital expenditure (資本支出) and revenue expenditure

(收益支出), and their accounting treatments are different.

3.2.1 Capital expenditure (資本支出) Capital expenditure is expenditure that generates (帶來) long-term benefits (長期利益) for an entity (企業個體). It usually refers

to the money spent on:

purchase or production of non-current assets (購買或生產非流動資產)

extension or improvement to existing non-current assets (擴大或改良現有的非流動資產)

Capital expenditure on the purchase of a non-current asset should include its purchase price (買價) and any directly attributable

costs (直接應佔成本) incurred to bring the asset to the location and condition for its intended use. For examples:

Purchase price of an office premise (辦公物業的買價)

Cost of building an extension to an existing factory (擴建工廠的成本)

Cost of upgrading an existing computer system (提升現有電腦系統的成本)

Freight and installation cost of a newly purchased machine (運送和安裝新置機器的成本)

Example 1

On 1 January 2009, Firm C purchased a machine for $30,000 and paid freight charges of $1,200, an installation cost of $600 and an

annual maintenance fee of $1,000. Find the costs incurred on the machine are to be capitalized?

Capital expenditure = 30,000 + $1,200 + $600 = $3,180

The annual maintenance fee does not meet the criterion of capitalization and thus should not be capitalized.

Class work 1

On 1 January 2009, Firm C purchased a factory for $80,000 and paid legal charges of $3,000, an installation cost of $8,000 and an

annual insurance premium of $2,000. Which of the costs incurred on the machine are to be capitalized?

Capital expenditure = 80,000 + $3,000 + $8,000 = $91,000

The annual premium does not meet the criterion of capitalization and thus should not be capitalized.

The double entry for capital expenditure when they are incurred is:

Dr Non-current asset account Cr Cash/Bank/Creditor’s account

However, capital expenditure should not be wholly written off as an expense at the end of the accounting period. Instead, it should be expensed over a number of periods. This will be explained in Section 3.5.

Example 2

On 1 Jan 2008, K Wong paid $8,500 by cheque for a van to be used in his business. He also paid $1,500 in cash for carriage, $1,000

for the annual maintenance fee and $800 for annual insurance. Show the entries for capital expenditure.

Van 2008 $ 2008 $ Jan 1 Bank 8,500 Dec 31 Balance c/f 10,000 “ 1 Cash – Carriage 1,500

10,000 10,000

Name : _________________

Serial No: _____

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Class work 2

On 1 Jan 2010, K Wong paid $64,000 in cash for a machine to be used in his business. He also paid $1,000 by cheque for carriage, $5,000 in cash for installation on 15 Jan 2010 and $3,000 for the annual maintenance. Show the entries for capital expenditure.

Machine

2010 $ 2010 $

Jan 1 Cash 64,000 Dec 31 Balance c/f 70,000

“ 1 Bank – Carriage 1,000

“ 15 Cash – Installation 5,000

70,000 70,000

3.2.2 Revenue expenditure (收益支出) Revenue expenditure is expenditure that generates short-term benefits (帶來短期利益) only. It usually refers to the money

spent on the day-to-day operations (日常運作) of an entity and provides benefits that will be consumed (耗盡) in the current

period (該年度內). For examples: Office rent (辦公室租金), Wages and salaries (工資及薪金), Repairs and maintenance (維修及

保養), Petrol (汽油費) for a delivery van and so on.

The double entry for revenue expenditure when they are incurred is:

Dr Expense account

Cr Cash/Bank/Creditor’s account

Revenue expenditure should be wholly written off as an expense at the end of the accounting period. The double entry is:

Dr Profit and loss account

Cr Expense account

Class work 3

1. For K Yung’s trading business, classify the following into capital expenditure and revenue expenditure: (a) Cost of rebuilding a warehouse wall which has fallen down revenue expenditure

(b) Building an extension to the warehouse capital expenditure

(c) Painting the extension to the warehouse when it was first built capital expenditure

(d) Repainting the extension to the warehouse three years after it was built revenue expenditure

(e) Carriage costs on bricks used for building the warehouse extension capital expenditure

(f) Carriage costs on purchases of goods revenue expenditure

(g) Legal costs on the mortgage loan taken out to build the warehouse extension capital expenditure

(h) Annual fire insurance premium on the warehouse revenue expenditure 2. For a food store owner, H Wang, classify the following into capital expenditure and revenue expenditure: (a) Repairs to a meat slicer revenue expenditure

(b) Cost of new tyres bought for a delivery van revenue expenditure

(c) Cost of an additional shop counter capital expenditure

(d) Repainting the store revenue expenditure

(e) Fitting partitions in the store capital expenditure

(f) Roof repairs revenue expenditure

(g) Installing theft detection equipment capital expenditure

(h) Wages of store assistants revenue expenditure

(i) Carriage on goods returned revenue expenditure

(j) Cost of a new cash register capital expenditure

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3. J Wong had calculated the net profit of his business for the year ended as $210,160. It was later found that:

(i) Purchase of a van costing $15,500 had been debited to the motor expenses account.

(ii) Rent of $20,000 had been debited to the building account.

Required:

Calculate the correct figure of net profit for the year, taking (i) and (ii) into account

Statement of Corrected Net Profit $

Net profit before corrections 210,160

Add Motor expenses overstated (i) 15,500

225,660

Less Rent understated (ii) (20,000)

Corrected net profit 205,660

4. T Tang had drawn up the financial statements of her business for the year ended 31 December 2008. It was later found that:

(i) The cost of newly acquired office equipment, $3,110, had been debited to the purchases account.

(ii) Motor repairs, $290, had been debited to the motor vehicles account.

(iii) Repayment of a loan, $5,000, had been debited to the loan interest account.

The net profit had been calculated as $28,910

Required:

Calculate the correct figure of net profit for the year, taking (i) and (iii) into account

T Tang Revised Net Profit for the year ended 31 December 2008

$ $


Add Purchases overstated (i) 3,110

Loan interest overstated (iii) 5,000 8,110

37,020

Less Motor repairs understated (ii) (290)

Revised net profit 36,730

5. S Pang had calculated the net profit of his business for the year ended 30 June 2009 as $77,270. It was later found that:

(i) Repairs to fixtures for $750 had been debited to the fixtures account.

(ii) Payment of loan interest, $540, had been debited to the loan account.

(iii) The cost of a newly acquired car hi-fi system, $3,790, had been debited to the motor expenses account.

Required:

Calculate the correct figure of net profit for the year, taking (i) and (iii) into account

S Pang Corrected Net Profit for the year ended 30 June 2009

$ $


Add Motor expenses overstated (iii) 3,790

81,060

Less Repairs to fixtures understated (i) 750

Loan interest understated (ii) 540 (1,290)

Revised net profit 79,770

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HKCEE (2007, 2) (Depreciation)

(A) Nelson Company traded-in a used machine for an advanced model in April 2007. The old machine had a net book value of $12,000 and a trade-in value of $10,000. Nelson Company paid the following expenditures for the new machine during April 2007: (i) Cash of $55,000 for the exchange.

(ii) $5,000 for a training course for workers on the operation of the new machine.

(iii) $4,000 for the delivery of the new machine.

(iv) $1,000 for insurance during transportation of the new machine.

(v) $8,000 for a specially made steel case to house the new machine.

(vi) $2,000 for the installation of the new machine.

(vii) Repair cost of $3,800 for accidental damage during installation.

(viii) $1,200 for the lubricants to be used with the machine during its first year of operation. You are required to:

Prepare for Nelson Company a statement to calculate the cost of the new machine.

(B) After preparing its final accounts for the year ended 31 March 2007, Babel Company found that the following transactions had been omitted from the books. For each of the omissions, state the change (increase / decrease / no change) in the net profit for the year and the working capital as at the year end after the omission has been corrected.

Net profit for

the year ended 31 March 2007

Working capital as at 31 March

2007 Example:

After expenses at 31 March 2006 were paid by the proprietor from his own bank account

No change Increase

(a) A motor vehicle was sold on credit at a profit ? ?

(b) A short-term bank loan, together with the accrued interest on the loan, was repaid. ? ?

(c) Goods were purchased by cash for resale. These goods were sold on credit at a loss. ? ?

(d) A customer settled his account. The amount received was used to pay a creditor and the electricity expenses of the proprietor’s residence.

? ?

(a)

Cost of the new machine $

Acquisition cost ($10,000 + $55,000) 65,000

Delivery charges 4,000

Insurance 1,000

Steel case 8,000

Installation cost 2,000

80,000 (b)

Net profit for the year ended 31 March 2007 Working capital as at 31 March 2007 (a) Increase Increase (b) No change No change (c) Decrease Decrease (d) No change Decrease

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Amount of depreciation charged per period = life useful Estimated

valueresidual EstimatedCost

= (Cost – Estimated residual value) x Fixed depreciation rate

%100life useful Estimated

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3.3 Objective of charging depreciation (計算折舊的目的) A non-current asset provides long-term benefits (帶來長期利益) and therefore its cost should not be wholly rocognised (它的成

本不應全數當作) as an expense (費用) in the period of acquisition (購置期內). Instead, it should be allocated over its useful life

(使用年限內分攤). Under the matching concept (配比概念), the amount allocated (分攤的金額) to each accounting period

(depreciation charges (折舊額)) should be matched (相配) with the amount of benefits generated (帶來的收益) in the period.

Matching concept means that the expenses recognized in each period (每個會計期確認的費用) have to be matched with (相配)

the revenues that they generate in the same period (同期內所帶來的收益).

It is often impossible to tell how long a non-current asset will last (非流動資產將持續多久) and how much of the asset is used

up (有多少資產耗盡) in any period. Therefore, depreciation has to be estimated (估計).

3.4 Commonly used depreciation methods There are three common methods of calculating depreciation charges: straight-line method (直線法)

reducing-balance method (餘額遞減法)

usage-based method (按使用量計算法)

3.4.1 Straight-line method (直線法) Under straight-line method, the cost of non-current asset is written off evenly (平均註銷) as depreciation over its estimated

useful life (估計使用年限).

where the fixed depreciation rate (固定折舊率) is calculate as:

The estimated residual value (估計剩餘價值) (disposal value (變賣價值), scrap value (殘值) or salvage value (殘值)) refers to

the amount that can be received when as asset is sold at the end of its useful life. The cost of an asset less its estimated residual

value (資產的成本減其估計剩餘價值) is known as the depreciable cost (折舊成本) (depreciable amount of the asset). Fixed

depreciation rate (固定折舊率) is the rate of finding depreciation charge (計算折舊費用率) for the year.

Example 3 Class work 4 Suppose Firm A bought a lorry for $16,000 on 1 January

2009 and adopted the straight-line method of depreciation.

If the lorry was estimated to have a useful life of four years

and residual value of $1,000, find the amount of

depreciation charged in each of the four years.

Suppose Firm A bought a machine for $28,000 on 1 January

2009 and adopted the straight-line method of depreciation.

If the machine was estimated to have a useful life of six

years and residual value of $4,000, find the amount of

depreciation charged in each of the six years.

Depreciation charges = ($16,000 $1,000) ÷ 4 Depreciation charges = ($28,000 $4,000) ÷ 6

= $3,750 = $4,000

or or

Depreciation rate = 0.25 x 100% Depreciation rate = (1/6) x 100%

= 25% = 16.7%

Depreciation charges = ($16,000 $1,000) x 25%

= $3,750 Depreciation charges = ($28,000 $4,000) x 16.7%

= $4,000

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Amount of depreciation charged in each period = (Cost – Depreciation already charged) x Fixed depreciation rate

3.4.2 Reducing-balance method (餘額遞減法) Reducing-balance method is a depreciation method by which the cost of a non-current asset (資產的成本) is written off as

depreciation at a diminishing rate over its estimated useful life (在估計使用年限內，按一個遞減速率註銷折舊額). This means

that the depreciation expense gets smaller each period (每期的折舊額會逐漸減少).

The amount of cost of a non-current asset (資產的成本) less (減去) the depreciation already charged (已計折舊) (i.e.,

accumulated depreciation (累計折舊)) is known as the net book value (帳面淨值) (NBV = Cost – Accumulated depreciation) or

carrying amount (帳面金額) of that non-current asset. The net book value of a non-current asset should equal the estimated

residual value (估計剩餘價值) at the end of its useful life.

Example 4 Suppose firm A bought a lorry for $16,000 and adopted the reducing-balance method of depreciation. If the lorry to be

depreciated at 50% per annum, find the amount of depreciation charged and NBV in each of the four years.

Year Depreciation charge for the year Accumulated depreciation at year end NBV

2009 $16,000 x 50% = $8,000 $8,000 $8,000

2010 ($16,000 $8,000) x 50% = $4,000 $12,000 $4,000

2011 ($16,000 $12,000) x 50% = $2,000 $14,000 $2,000

2012 ($16,000 $14,000) x 50% = $1,000 $15,000 $1,000

Class work 5

1. A piece of equipment was purchased for $12,500 and installing with $2,000. If the equipment was to be depreciated at 20% per

annum using the reducing balance method, find the amount of depreciation charged and NBV in each of the four years.

Year Depreciation charge for the year Accumulated depreciation at year end NBV

Year 1 $14,500 x 20% = $2,900 $2,900 $11,600

Year 2 ($14,500 $2,900) x 20% = $2,320 $5,220 $9,280

Year 3 ($14,500 $5,220) x 20% = $1,856 $7,076 $7,424

Year 4 ($14,500 $7,076) x 20% = $1,484.8 $8560.8 $5939.2

2. A machine has an estimated useful life of five years. The depreciation charge for the first two years was calculated as follows:

Year Reducing-balance method

(50% per annum)

2010 $32,000

2011 $16,000

Calculate the cost of the machine and its estimated residual value.

Cost of the machine = $32,000 ÷ 50%

= $64,000

Estimated residual value = $64,000 $32,000 $16,000 $8,000 $4,000 $2,000

= $2,000

ValueBook Net

1. A piece of equipment was purchased for $12,500 and installing with $2,000. If the equipment was to be depreciated at 20% per

annum using the reducing balance method,

(a) Find the cost of the equipment

(b) Find the cost of the depreciated non-current assets.

(c) Find the amount of depreciation charged and NBV in each of the four years.

(a) Cost of the equipment = $12,500 + $2,000 = $14,500

(b) Cost of the depreciated = $12,500

(c)

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3. J Ho started a business on 1 January 2006 and prepares financial statements for his business on 31 December each year.

The following non-current assets were purchased during the first three years:

1 January 2006 Bought motor vehicles for $160,000 and machinery for $75,000.

1 January 2007 Bought machinery for $45,000.

1 January 2008 Bought motor vehicles for $120,000.

All the above motor vehicles and machinery were still in use on 31 December 2008. J Ho had been using the reducing-balance

method of depreciation on both types of assets at annual rates of 25% for motor vehicles and 20% for machinery.

However, the accountant advised J Ho that the usual method of depreciation used in the industry was the straight-line method,

assuming a useful life of four years for motor vehicles and six years for machinery, and treating the residual value as zero.

To comply with the industry norm, J Ho decided to recalculate its net profit using the straight-line method.

The original net profit figures were as follows:

$

2006 114,500

2007 138,490

2008 127,140

Required: Show the revised net profit figures.

Answer:

Motor vehicles Machinery

Reducing-balance Straight-line Reducing-balance Straight-line

25% 25%

2006 $ $ $ $

Annual depreciation 40,000 (W1) 40,000 (W2) 15,000 (W3) 12,500 (W4)

2007

Annual depreciation 30,000 (W5) 40,000 21,000 (W6) 20,000 (W7)

2008

Annual depreciation 52,500 (W8) 70,000 (W9) 16,800 (W10) 20,000

Workings:

W1 : ($160,000 × 25%) W2: ($160,000 ÷ 4) W3: ($75,000 × 20%) W4: ($75,000 ÷ 6)

W5 : [($160,000− $40,000) × 25%+ W6: ,*($75,000 − $15,000) + $45,000] × 20%}

W7: [$12,500 + ($45,000 ÷ 6)] W8: ,*($160,000 − $40,000 − $30,000)+ $120,000] × 25%}

W9: [$40,000 + ($120,000 ÷ 4)] W10: *($75,000 − $15,000 − $21,000) × 20%+

Reducing-balance Straight-line Change in depreciation

Year 2006 $40,000 + $15,000 = $55,000 $40,000 + $12,500 = $52,500 $2,500

Year 2007 $30,000 + $21,000 = $51,000 $40,000 + $20,000 = $60,000 +$9,000

Year 2008 $52,500 + $16,800 = $69,300 $70,000 + $20,000 = $90,000 +$20,700

Recalculation of Net Profit

2006 2007 2008

$ $ $

Original net profit 114,500 138,490 127,140

Add Decrease in depreciation 2,500

Less Increase in depreciation (9,000) (20,700)

Recalculated net profit 117,000 129,490 106,440

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Amount of depreciation charged in each period = (Cost – Estimated residual value)Depreciation rate

Depreciation rate = periods theallin output estimated Total

periodeach in output Actual

3.4.3 Usage-based method (按使用量計算法) Usage-based method (production output method, units-of-output method or units-of-production method) is a depreciation

method by which the cost of a non-current asset is written off as depreciation at a rate equal to the usage of that asset (資產使用

量) over its estimated useful life.

The depreciation rate is usually calculated as:

The depreciation rate can be fixed or variable, depending on the output produced in each period. It is suitable for a machine.

Example 5 Firm A purchased a machine for $12,000 during the year ended 13 December 2009. The machine was estimated to have a useful

life of five years, a residual value of $2,000 and would produce 200,000 units of output. Using the units-of-production method,

find the amount of depreciation charged on the machine in each of the five years.

Year Units of output Depreciation charge for the year

2009 60,000 ($12,000 $2,000) x (60,000/200,000) = $3,000

2010 50,000 $10,000 x (50,000/200,000)= $2,500

2011 30,000 $10,000 x (30,000/200,000)= $1,500

2012 40,000 $10,000 x (40,000/200,000)= $2,000

2013 20,000 $10,000 x (20,000/200,000)= $1,000

200,000

Class work 6 1. J Lau, a manufacturer, has purchased a machine for $80,000. It has an estimated life of five years and a scrap value of $10,000.

Find the amount of depreciation charged on the machine using usage-based method in each of the five years.

Year Units of output Depreciation charge for the year

1 40,000 ($80,000 $10,000) x (40,000/250,000) = $11,200

2 40,000 $70,000 x (40,000/250,000)= $11,200

3 10,000 $70,000 x (10,000/250,000)= $2,800

4 10,000 $70,000 x (10,000/250,000)= $2,800

5 50,000 $70,000 x (50,000/250,000)= $14,000

250,000

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3.5 Accounting entries for depreciation (折舊所需的會計分錄) Two separate accounts (兩個獨立帳戶), called depreciation account (折舊帳戶) and accumulated depreciation account,

provision for depreciation account (累計折舊帳戶), would be opened to record the depreciation charged (折舊費用) for an

accounting period and the accumulated depreciation (累計折舊) respectively. The depreciation account (depreciation expense

account, depreciation charges account) is an expense account (費用帳戶). Its balance (其餘額) will be transferred (轉到) to the

profit and loss account at the end of an accounting period. The accumulated depreciation account is actually a contra-asset account (資產對銷帳戶) and is used together with the non-current asset account (與非流動資產帳戶一起使用) in order to

determine (以確定) the NBV of non-current assets (非流動資產的帳面淨值). Each class of non-current assets should have its

own depreciation account and accumulated depreciation account. The double entries for depreciation are as follows: 1 Record the depreciation charged for an accounting period: Dr Depreciation account Cr Accumulated depreciation account 2 Transfer the total of depreciation charged to the profit and loss account at the end of the accounting period: Dr Profit and loss account Cr Depreciation account The balance of the accumulated depreciation account would be deducted (扣除) from the cost of the non-current assets (非流動

資產的成本) in the balance sheet at the end of the period to arrive at the NBV.

Example 6 Using example 1, the depreciation charged on the lorry for the years ended 31 December 2009, 2010 and 2011 as shown below:

Depreciation: Lorries

2009 $ 2009 $ Dec 31 Accumulated depreciation 3,750 Dec 31 Profit and lost 3,750

2010 2010 Dec 31 Accumulated depreciation 3,750 Dec 31 Profit and lost 3,750

2011 2011 Dec 31 Accumulated depreciation 3,750 Dec 31 Profit and lost 3,750

Accumulated Depreciation: Lorries

2009 $ 2009 $ Dec 31 Balance c/f 3,750 Dec 31 Depreciation 3,750

2010 2010 Dec 31 Balance c/f 7,500 Jan 1 Balance b/f 3,750 Dec 31 Depreciation 3,750

7,500 7,500

2011 2011 Dec 31 Balance c/f 11,250 Jan 1 Balance b/f 7,500 Dec 31 Depreciation 3,750

11,250 11,250

Income Statement for the year ended 31 December (extract) 2009 2010 2011 $ $ $ Expenses: Depreciation: Lorries 3,750 3,750 3,750

Balance Sheets as at 31 December (extract) 2009 2010 2011 $ $ $ Non-Current assets Lorries at cost 16,000 16,000 16,000 Less Accumulated depreciation (3,750) (7,500) (11,250)

12,250 8,500 4,750 After depreciation, the net profit and the net book value of the non-current assets would become lower. The double entries for depreciation are sometimes simplified as follows: Dr Profit and loss account Cr Accumulated depreciation account

NBV of the non-current assets as at the end of each financial year.

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Class work 7 1. On 1 January 2005, a car was purchased for $64,000. It will be kept in use of five years with an estimated disposal value of

$2,000.

(a) Calculate the amount of depreciation for each of the five years using the straight-line method.

(b) Prepare the necessary journal entries for the depreciation of first year and show the entries for depreciation in the ledger

and journal, the income statement and the balance sheet for the first 3 years.

(a) Depreciation charges = ($64,000 $2,000) ÷ 5 = 12,400

(b)

Journal

Date Details Dr Cr

2005 $ $

Dec 31 Depreciation: Car 12,400

Accumulated depreciation Car 12,400

Depreciation: Car

2005 $ 2005 $

Dec 31 Accumulated depreciation 12,400 Dec 31 Profit and lost 12,400

2006 2006


2007 2007


Accumulated Depreciation: Car

2005 $ 2005 $

Dec 31 Balance c/f 12,400 Dec 31 Depreciation 12,400

2006 2006

Dec 31 Balance c/f 24,800 Jan 1 Balance b/f 12,400

Dec 31 Depreciation 12,400

24,800 24,800

2007 2007



37,200 37,200

Income Statement for the year ended 31 December (extract)

2005 2006 2007

$ $ $

Expenses:

Depreciation: Car 12,400 12,400 12,400

Balance Sheets as at 31 December (extract)

2005 2006 2007

$ $ $

Non-Current assets

Car at cost 64,000 64,000 64,000

Less Accumulated depreciation (12,400) (24,800) (37,200)

51,600 39,200 26,800

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3.6 Disposal of non-current assets (非流動資產變賣) An entity may dispose (變賣) of a non-current asset before it reaches the end of its estimated useful life. This could happen if the

asset is damaged or lost (損壞或遺失). In these situations, a separate account (獨立帳戶) called disposal (變賣帳戶) would be

opened to record the disposal of non-current assets.

The double entries for disposal of a non-current asset are: 1 Transfer the cost of the asset to the disposal account (把資產的成本轉到變賣帳戶):

Dr Disposal account Cr Non-current asset account 2 Transfer the accumulated depreciation on the asset to the disposal account (把資產的累計折舊轉到變賣帳戶):

Dr Accumulated depreciation account Cr Disposal account 3 Record the proceeds from disposal (if any) (記錄變賣收入 (如適用)):

Dr Cash/Bank/Debtor’s account Cr Disposal account 4 Transfer the profit/loss on disposal to the profit and loss account at the end of the accounting period (在會計期末把變賣損

益轉到損益帳戶). The profit/loss on disposal is the different between the net book value and the proceeds from disposal.

(a) Profit on disposal Dr Disposal account Cr Profit and loss account (b) Loss on disposal Dr Profit and loss account Cr Disposal account

Example 7 Using example 5, suppose the lorry was sold for $4,500 cash on 1 January 2011, the entries for disposal account as shown below:

General Ledger

Disposal: Lorries

2011 $ 2011 $ Jan 1 Lorries 16,000 Jan 1 Accumulated depreciation 7,500 “ 1 Cash 4,500 Dec 31 Profit and loss – Loss on disposal 4,000

16,000 16,000

Lorries

2011 $ 2011 $ Jan 1 Balance b/f 16,000 Jan 1 Disposal: Lorries 16,000

Accumulated Depreciation: Lorries

2011 2011 Jan 1 Disposal: Lorries 7,500 Jan 1 Balance b/f 7,500

Cash

2011 $ Jan 1 Disposal: Lorries 4,500

Profit and loss

2011 Dec 31 Disposal: Lorries 4,000

Income Statement for the year ended 31 March 2011 (extract) $ Expenses: Disposal: Lorries – Loss on disposal 4,000

Balance Sheets as at 31 March 2011 (extract) $ Non-Current assets Lorries at cost ---

12

Class work 8 1. On 1 April 2006, the first day of the financial year, T Young paid $9,500 in cash for a computer in his business. He also paid

$500 for installation and $1,000 for the annual maintenance fee. The computer was to be depreciated by the straight-line method at an annual rate of 20%, ignoring salvage value. On 31 March 2009, the computer was sold for $4,250 in cash. Prepare the journal entries to record the disposal of the computer and show the entries in the following account:

Journal

Date Details Dr Cr

2009 $ $ Mar 31 Accumulated depreciation Computers ($10,000 x 20% x 2) 4,000

Cash 4,250

Profit and loss – Loss on disposal of computers 1,750

Computers 10,000

Computers

2006 $ 2007 $

Apr 1 Cash 9,500 Mar 31 Balance c/f 10,000

“ 1 Cash – Installation cost 500

10,000 10,000

2007 2008

Apr 1 Balance b/f 10,000 Mar 31 Balance c/f 10,000

2008 2009

Apr 1 Balance b/f 10,000 Mar 31 Disposal: Computers 10,000

Accumulated Depreciation: Computers

2007 $ 2007 $

Mar 31 Balance c/f 2,000 Mar 31 Depreciation ($10,000 x 20%) 2,000

2008 2007

Mar 31 Balance c/f 4,000 Apr 1 Balance b/f 2,000

2008

Mar 31 Depreciation ($10,000 x 20%) 2,000

4,000 4,000

2009 2008

Mar 31 Disposal: Computers 4,000 Apr 1 Balance b/f 4,000

Disposal: Computers

2009 $ 2009 $

Mar 31 Computers 10,000 Mar 31 Accumulated depreciation 4,000

“ 31 Cash 4,250

“ 31 Profit and loss – Loss on disposal 1,750

10,000 10,000

Income Statement for the year ended 31 March (extract)

2007 2008 2009

$ $ $

Expenses: Depreciation: Computers 2,000 2,000 ---

Computer disposal – Loss on disposal --- --- 1,750

Balance Sheets as at 31 March (extract)

2007 2008 2009

$ $ $

Non-Current assets Computers at cost 10,000 10,000 ---

Less Accumulated depreciation (2,000) (4,000) ---

8,000 6,000 ---

13

2. K Wong commenced business as a computer services consultant five years ago on 1 January 2004. Computers were purchased

as follows:

Computer Date of purchase Purchases cost

No.1 1 January 2004 $32,500

No.2 31 August 2004 $35,000

No.3 7 May 2006 $48,000

No.4 10 June 2007 $42,500

No.5 11 October 2008 $40,000

There were no computer disposals up to 31 December 2008. The financial year end is 31 December, and the depreciation

policy is as follows:

(i) Use the straight-line depreciation method, assuming a zero residual value and a useful life of five years.

(ii) Charge a full year’s depreciation in the year of purchase on any computer bought in the first half of a financial year.

(iii) Charge no depreciation in the year of purchase on any computer bought in the second half of a financial year.

Required:

(a) Calculate the net book value of computers that would appear in the balance sheet as at 31 December 2008.

(b) K Wong wanted to replace computer No.3 in early 2009. Show the journal entries to record the disposal of the computer

if it was sold on 1 January 2009 for $16,250 in cash.

Answer:

(a)

Depreciation per year

Cost 2004 2005 2006 2007 2008 Total NBV

$ $ $ $ $ $ $ $

Computer No. 1 32,500 6,500 6,500 6,500 6,500 6,500 32,500 —

Computer No. 2 35,000 — 7,000 7,000 7,000 7,000 28,000 7,000

Computer No. 3 48,000 — — 9,600 9,600 9,600 28,800 19,200

Computer No. 4 42,500 — — — 8,500 8,500 17,000 25,500

Computer No. 5 40,000 — — — — — — 40,000

198,000 6,500 13,500 23,100 31,600 31,600 106,300 91,700

(b)

Journal

Date Details Dr Cr

2009 $ $

Jan 1 Accumulated depreciation: Computers ($9,600 × 3) 28,800

Cash 16,250

Profit and loss – Loss on disposal of computers No. 3 2,950

Computers No.3 48,000

14

3. Valor Company acquired a machine on 1 January 2002. The machine has an estimated useful life of five years. The depreciation

charge for the first three years was calculated for this machine using two different depreciation methods as follows:

Year Straight-line method Reducing-balance method

(5 years) (50% per annum)

2002 $12,400 $32,000

2003 $12,400 $16,000

2004 $12,400 $8,000

(a) Calculate the cost of the machine and its estimated residual value.

(b) Prepare journal entries to record the disposal of the machine based on the straight-line method, assuming that the

machine was sold on 30 September 2005 for $36,000 on credit. (Narrations are not required.)

(a) Cost of the machine = $32,000 ÷ 50% = $64,000

Estimated residual value of the machine = $64,000 $12,400 x 5 = $2,000

(b)

The Journal

Date Details Dr Cr

2005

Sept 30 Accumulated depreciation machinery ($12,400 x 3 + $12,400 x 9/12) 46,500

Debtor 36,000

Profit and loss – Profit on disposal of machinery 18,500

Machinery 64,000

4. The financial year of Wingding Company ends on 31 December. In 2007, the company bought a machine at a cost of $58,000 and paid a deposit of $8,000 on 1 April 2007. The machine was delivered and installed on 1 July 2007. An accident occurred on the same day and repair charges amounting to $2,000 were paid. The company settled the balance of the machine price on 1 October 2007.

The machine was estimated to have a useful life of four years and scrap value of $4,000. It is the company’s policy to depreciate its fixed assets on a straight-line basis.

The machine had a major breakdown in early 2008 and was disposed of on 30 April 2008 for $25,000. Prepare the necessary journal entries to record the above. (Note: Narrations are not required.)

The Journal

Date Details Dr Cr

2007 $ $

Apr 1 Deposit machine 8,000

Bank 8,000

Jul 1 Machinery 58,000

Creditor 50,000

Deposit machine 8,000

Jul 1 Repair expenses 2,000

Bank 2,000

Oct 1 Creditor 50,000

Bank 50,000

Dec 31 Depreciation expenses [($58,000 $4,000)÷4] x 1/2 6,750

Accumulated depreciation machinery 6,750

2008

Apr 30 Depreciation expenses [($58,000 $4,000)÷4] x 4/12 4,500

Accumulated depreciation machinery 4,500

Accumulated depreciation machinery ($6,750 + $4,500) 11,250

Bank 25,000

Profit and loss - Loss on disposal of machinery 21,750

Machinery 58,000

15

5. Firm C bought Machine No. 1 for $10,000 cash on 1 January 2008 and Machine No. 2 for $12,000 cash on 1 October 2009.

Machine No. 1 was later sold for $7,200 cash on 30 June 2010. The firm’s financial year ends on 31 December. Its policy of

charging depreciation is as follows:

(i) Depreciation is calculated at 10% per annum on the cost of machinery.

(ii) A full year’s depreciation is charged in the year of purchase, while no depreciation is charged in the year of disposal.

(a) Find the amount of depreciation charged on the machines in each of the years.

Year Calculation Amount

Machine No. 1 2008 $10,000 x 10% $1,000

2009 $10,000 x 10% $1,000

Machine No. 2 2009 $12,000 x 10% $1,200

2010 $12,000 x 10% $1,200

(b) Show the relevant ledger accounts and the financial statements for the year ended 31 December 2010.

General Ledger

Machinery

2010 $ 2010 $

Jan 1 Balance b/f 22,000 Jun 30 Disposal: Machinery (No. 1) 10,000

Dec 31 Balance c/f 12,000

22,000 22,000

Depreciation: Machinery

2010 $ 2010 $

Dec 31 Accumulated depreciation (No. 2) 1,200 Dec 31 Profit and loss 1,200

Accumulated Depreciation: Machinery

2010 $ 2010 $

Jun 30 Disposal: Machinery (No. 1) 2,000 Jan 1 Balance b/f 3,200

Dec 31 Balance c/f 2,400 Dec 31 Depreciation: Machinery (No. 2) 1,200

4,400 4,400

Disposal: Machinery

2010 $ 2010 $

Jun 30 Machinery (No. 1) 10,000 Jun 30 Accumulated depreciation (No. 1) 2,000

“ 30 Cash 7,200

Dec 31 Profit and loss – Loss on disposal 800

10,000 10,000

Income Statement for the year ended 31 December 2010(extract)

$

Expenses:

Depreciation: Machinery (No. 2) 1,200

Machinery disposal (No. 1) – Loss on disposal 800

Balance Sheets as at 31 December 2010 (extract)

$

Non-Current assets

Machinery at cost (No. 2) 12,000

Less Accumulated depreciation (No. 2) (2,400)

9,600

16

6. Using the same complicated examples but the depreciation policy was changed as follows:

(i) Depreciation is calculated at 10% per annum on the cost of machinery.

(ii) Depreciation is charged on a monthly basis.

(a) Find the amount of depreciation charged on the machines in each of the years.


Machine No. 1 2008 $10,000 x 10% $1,000

2009 $10,000 x 10% $1,000

2010 $10,000 x 10% x (6/12) $500

Machine No. 2 2009 $12,000 x 10% x (3/12) $300

2010 $12,000 x 10% $1,200

(b) Show the relevant ledger accounts and the financial statements for the year ended 31 December 2010.

General Ledger

Machinery

2010 $ 2010 $

Jan 1 Balance b/f 22,000 Jun 30 Disposal: Machinery (No. 1) 10,000


22,000 22,000

Depreciation: Machinery

2010 $ 2010 $

Jun 30 Accumulated depreciation (No. 1) 500 Dec 31 Profit and loss 1,700

Dec 31 Accumulated depreciation (No. 2) 1,200

1,700 1,700

Accumulated Depreciation: Machinery

2010 $ 2010 $

Jun 30 Disposal: Machinery (No. 1) 2,500 Jan 1 Balance b/f 2,300

Dec 31 Balance c/f 1,500 Jun 30 Depreciation: Machinery (No. 1) 500

Dec 31 Depreciation: Machinery (No. 2) 1,200

4,000 4,000

Disposal: Machinery

2010 $ 2010 $

Jun 30 Machinery (No. 1) 10,000 Jun 30 Accumulated depreciation (No. 1) 2,500

“ 30 Cash 7,200

Dec 31 Profit and loss – Loss on disposal 300

10,000 10,000

Income Statement for the year ended 31 December 2010(extract)

$

Expenses:

Depreciation: Machinery 1,700

Machinery disposal (No. 1) – Loss on disposal 300

Balance Sheets as at 31 December 2010 (extract)

$

Non-Current assets

Machinery at cost (No. 2) 12,000

Less Accumulated depreciation (No. 2) (1,500)

10,500

17

7. Firm D bought two vans, Van No. 1 for $80,000 and Van No. 2 for $50,000, both on 1 January 2007. It bought Van No. 3 for $90,000 on 1 July 2008. On 30 September 2009, Van No. 1 was sold for $45,000. All the transactions were settled by cheque.

Monthly depreciation was to be charged at an annual rate of 20% on a reducing-balance basis. The firm’s financial year ends on 31 December.

(a) Find the amount of depreciation charged on the vans from 2007 to 2009.


Van (No. 1) 2007 $80,000 x 20% $16,000

2008 $64,000 x 20% $12,800

2009 $51,200 x 20% x (9/12) $7,680

Van (No. 2) 2007 $50,000 x 20% $10,000

2008 $40,000 x 20% $8,000

2009 $32,000 x 20% $6,400

Van (No. 3) 2008 $90,000 x 20% x (6/12) $9,000

2009 $81,000 x 20% $16,200 (b) Show the relevant ledger accounts and the financial statements for the year ended 31 December 2010.

Vans

2007 $ 2007 $

Jan 1 Bank (No. 1) 80,000 Dec 31 Balance c/f 130,000

“ 1 Bank (No. 2) 50,000

130,000 130,000

2008 $ 2008 $

Jan 1 Balance b/f 130,000 Dec 31 Balance c/f 220,000

Jul 1 Bank (No. 3) 90,000

220,000 220,000

2009 $ 2009 $

Jan 1 Balance b/f 220,000 Sep 30 Disposal: Vans (No. 1) 80,000


220,000 220,000

Depreciation: Vans

2007 $ 2007 $



26,000 26,000

2008 $ 2008 $




29,800 29,800

2009 $ 2009 $

Sep 30 Accumulated depreciation (No. 1) 7,680 Dec 31 Profit and loss 30,280



30,280 30,280

or

Depreciation: Vans

2007 $ 2007 $

Dec 31 Accumulated depreciation 26,000 Dec 31 Profit and loss 26,000

2008 $ 2008 $

Dec 31 Accumulated depreciation 29,800 Dec 31 Profit and loss 29,800

2009 $ 2009 $

Sep 30 Accumulated depreciation (No. 1) 7,680 Dec 31 Profit and loss 30,280

Dec 31 Accumulated depreciation (No. 2 $3) 22,600

30,280 30,280

18

Accumulated Depreciation: Vans

2007 $ 2007 $

Dec 31 Balance c/f 26,000 Dec 31 Depreciation: Vans (No. 1) 16,000

Dec 31 Depreciation: Vans (No. 2) 10,000

26,000 26,000

2008 $ 2008 $





55,800 55,800

2009 $ 2009 $

Sep 30 Disposal: Vans(No. 1) 36,480 Jan 1 Balance b/f 55,800

Dec 31 Balance c/f 49,600 Sep 30 Depreciation (No. 1) 7,680

Dec 31 Depreciation (No. 2) 6,400

Dec 31 Depreciation (No. 3) 16,200

86,080 86,080

or

Accumulated Depreciation: Vans

2007 $ 2007 $

Dec 31 Balance c/f 26,000 Dec 31 Depreciation 26,000

2008 $ 2008 $



55,800 55,800

2009 $ 2009 $

Sep 30 Disposal (No. 1) 36,480 Jan 1 Balance b/f 55,800

Dec 31 Balance c/f 49,600 Sep 30 Depreciation (No. 1) 7,680

Dec 31 Depreciation (No. 2 & 3) 22,600

86,080 86,080

Disposal: Vans

2009 $ 2009 $

Sep 30 Vans (No. 1) 80,000 Sep 30 Accumulated depreciation (No. 1) 36,480

Dec 31 Profit and loss – Profit on disposal 1,480 “ 30 Bank 45,000

81,480 81,480

Income Statement for the year ended 31 December (extract)

2007 2008 2009

$ $ $

Other Revenues:

Profit on disposal of vans --- --- 1,480

Expenses:

Depreciation: Vans 2,600 29,800 30,280

Balance Sheets as at 31 December (extract)

2007 2008 2009

$ $ $

Non-Current assets

Vans at cost 130,000 220,000 140,000

Less Accumulated depreciation (26,000) (55,800) (49,600)

104,000 164,200 90,400

19

8 Fat Tat Ltd started its toy manufacturing business on 1 July 2003. The following machines were purchased during the two years

ended 30 June 2005:

Purchase date Cost 1 July 2003 Machine (No. 1) $400,000 1 March 2004 Machine (No. 2) $600,000 1 May 2005 Machine (No. 3) $540,000

The company sold machine (No. 1) for $100,000 on 1 June 2005. It is the company’s policy to calculate depreciation at 40% per

annum on a reducing balance basis with a proportionate charge in the years of acquisition or disposal.

Prepare the following accounts for the two years ended 30 June 2005:

(a) Machines account

(b) Provision for depreciation on machines account

(c) Machines disposal account

Answer: (a)

Machines

2003 $ 2004 $

Jul 1 Bank (No. 1) 400,000 Jun 30 Balance c/f 1,000,000

2004

Mar 1 Bank (No. 2) 600,000

1,000,000 1,000,000

2004 2005

Jul 1 Balance b/f 1,000,000 Jun 1 Disposal (No. 1) 400,000

2005 “ 30 Balance c/f 1,140,000

May 1 Bank (No. 3) 540,000

1,540,000 1,540,000

(b)

Provision for Depreciation on Machines Account

2004 $ 2004 $

Jun 30 Balance c/f 240,000 Jun 30 Profit and loss (W1) 240,000

2005 2004

Jun 1 Disposal (No. 1) (W3) 248,000 Jul 1 Balance b/f 240,000

“ 30 Balance c/f 324,000 2005

Jun 30 Profit and loss (W2) 332,000

572,000 572,000

Workings:

W1: [($400,000 × 40%) + ($600,000 × 40% × 4/12)] = 240,000

W2: [($400,000 - $160,000) × 40% × 11/12 + ($600,000 - $80,000) × 40% + ($540,000 × 40% × 2/12)] = 332,000

W3: [($400,000 × 40%) + ($400,000 - $160,000) × 40% × 11/12] = 248,000

(c)

Disposal: Machines

2005 $ 2005 $

Jun 1 Machine (No. 1) 400,000 Jun 1 Provision for depreciation on

machines (No. 1) 248,000

“ 1 Bank 100,000

“ 30 Profit and loss – Loss on disposal 52,000

400,000 400,000

20

9.

Trial Balance as at 31 March 2010 Dr Cr $ $ Sales 108,300 Purchases 78,000 Returns 2,400 Inventory 17,000 Wages and salaries 8,800 Rent 9,600 Miscellaneous expenses 520 Office equipment 15,000 Furniture and fittings 12,000 Accumulated depreciation: Office equipment* 3,000 Accumulated depreciation: Furniture and fittings* 3,600 Accounts receivable and payable 4,780 5,080 Allowance for doubtful accounts 320 Capital 30,000 Drawings 4,000 Bank 3,000

152,700 152,700 Note that the balance of accumulated depreciation accounts shown in the trial balance refer to depreciation charges up to 31 March 2009. No depreciation had been charged for the year ended 31 March 2010. Additional information: 1. Inventory as at 31 March 2010 was valued at $19,000 2. Accrued wages amounted to $1,200. 3. Prepaid rent amounted to $1,600. 4. A bad debt of $280 was to be written off. 5. An allowance of 4% was to be made for doubtful accounts. 6. A full year’s depreciation was to be charged in the year of acquisition, while no depreciation was to be charged in the year of

disposal. Depreciation was to be charged on the following basis: Office equipment – 20% per annum on cost. Furniture and fittings – 30% per annum on net book value

7. An item of office equipment that was bought for $2,000 in May 2007 was scrapped for zero value on 30 September 2009. No entry had been made for this.

(a) Make the entries for the disposal of the office equipment

Disposal: Office Equipment 2009 $ 2009 $

Sep 30 Office equipment 2,000 Sep 30 Accumulated depreciation

($2,000 x 20% x 2) 800

2010

Mar 31 Profit and loss – Loss on disposal 1,200

2,000 2,000

Office Equipment

2009 $ 2009 $

Apr 1 Balance b/f 15,000 Sep 30 Disposal: Office Equipment 2,000

2010

Mar 31 Balance c/f 13,000

15,000 15,000

The balance of office equipment at 31 March 2010 = $1,3000 (b) Find the amount of depreciation charged on the office equipment during the year 2010.

Depreciation charge for the office equipment = ($15,000 $2,000) x 20% = 2,600 (c) Find the accumulated depreciation of the office equipment at 31 March 2010.

Accumulated depreciation of the office equipment = $3,000 $800 + $2,600 = $4,800

21

(d) Find the accumulated depreciation of the furniture and fittings at 31 March 2010.

Accumulated depreciation of the furniture and fittings = $3,600 + ($1,2000 $3600) x 30% = $6,120 (e) Prepare an income statement and a balance sheet after adjusting for accruals, prepayments, bad debts allowance for

doubtful accounts and depreciation.

Income Statement for the year ended 31 March 2010

$ $ $

Sales 108,300

Less Cost of goods sold:

Opening inventory 17,000

Add Purchases 78,000

Less Returns outwards (2,400) 75,600

92,600

Less Closing inventory (19,000) (73,600)

Gross profit 34,700

Add Other revenues:

Decrease in allowance for doubtful accounts

{$320 – [($4,780 -$280) x 4%]} 140

34,840

Less Expenses:

Wages and salaries ($8,800 + $1,200) 10,000

Rent ($9,600 $1,600) 8,000

Miscellaneous expenses 520

Bad debts 280

Depreciation: Office equipment [($15,000 $3,000) x 20%] 2,600

Furniture and fittings [($12,000 $3,600) x 30%] 2,520

Loss on disposal of office equipment 1,200 (25,120)

Net profit 9,720

Balance sheet as at 31 March 2010

$ $ $

Accumulated

Non-current assets Cost depreciation Net book value

Office equipment at cost 13,000 4,800 8,200

Furniture and fittings 12,000 6,120 5,880

25,000 10,920 14,080

Current assets

Inventory 19,000

Accounts receivable ($4,780 $280) 4,500

Less Allowance for doubtful accounts ($4,780 $280) x 4% (180) 4,320

Prepaid expenses 1,600

Bank 3,000

27,920

Less Current liabilities

Accounts payable 5,080

Accrued expenses 1,200 (6,280)

Net current assets 21,640

35,720

Capital

Balance as at 1 April 2009 30,000

Add Net profit for the year 9,720

39,720

Less Drawings (4,000)

35,720

22

10.

Trial Balance as at 30 June 2009 Dr Cr $ $ Capital 112,500 Carriage on purchases 4,550 Carriage on sales 1,750 Machinery 15,000 Furniture and fittings 10,000 Motor vehicles 21,250 Sales and purchases 339,000 538,250 Wages and salaries 127,500 Rent and rates 16,000 Lighting and heating 12,000 Vehicle running costs 7,500 Repairs and maintenance 9,200 Telephone expenses 13,800 General office expenses 12,950 Accounts receivable and payable 65,500 46,100 Accumulated depreciation: Motor vehicles 8,500 Machinery 7,500 Furniture and fittings 5,000 Drawings 31,425 Bank 10,175 Cash 500 Inventory as at 1 July 2008 17,500 Returns 7,000 4,750

722,600 722,600

Additional information as at 30 June 2009: (i) Inventory in hand was valued at $23,000. (ii) Depreciation was to be charged as follows: Motor vehicles: 40% per annum on a reducing-balance basis Machinery: 25% per annum on a straight-line basis Furniture and fittings: 25% per annum on a straight-line basis (iii) Accrued telephone expenses amounted to $1,875. (iv) Prepaid rent amounted to $4,000. (v) An allowance for doubtful accounts was to be created at 3% of the accounts receivable balance. (a) Find the allowance for doubtful accounts.

Allowance for doubtful accounts = $65,500 x 3% = 1,965 (b) Find the amount of depreciation charged during the year 2009.

Depreciation charge for the Machinery = $15,000 x 25% = 3,750

Depreciation charge for the Furniture and fittings = $10,000 x 25% = 2,500

Depreciation charge for the Motor vehicles =($21,250 $8,500) x 40% = 5,100 (c) Find the accumulated depreciation as at 31 June 2009.

Accumulated depreciation of the Machinery = $7,500 + $3,750 = $11,250 Accumulated depreciation of the Furniture and fittings = $5,000 + $2,500 = $7,500 Accumulated depreciation of the Motor vehicles = $8,500 + $5,100 = $13,600

(d) Prepare an income statement and a balance sheet after adjusting for accruals, prepayments, bad debts allowance for

doubtful accounts and depreciation.

23

Income Statement for the year ended 30 June 2009

$ $ $

Sales 538,250

Less Returns inwards (7,000)

531,250




Carriage inwards 4,550

Less Returns outwards (4,750) 338,800

356,300


Gross profit 197,950

Less Expenses:

Carriage outwards 1,750

Wages and salaries 127,500

Rent and rates ($16,000 $4,000) 12,000

Lighting and heating 12,000

Vehicle running costs 7,500

Repairs and maintenance 9,200

Telephone expenses ($13,800 + $1,875) 15,675

General office expenses 12,950

Depreciation: Machinery ($15,000 x 25%) 3,750

Furniture and fittings ($15,000 x 25%) 2,500

Motor vehicles ($21,250 $8,500) x 40% 5,100

Allowance for doubtful accounts ($65,500 x 3%) 1,965 (211,890)

Net loss (13,940)

Balance sheet as at 30 June 2009

$ $ $

Accumulated

Non-current assets Cost depreciation Net book value

Machinery 15,000 11,250 3,750

Furniture and fittings 10,000 7,500 2,500

Motor vehicles 21,250 13,600 7,650

46,250 32,350 13,900

Current assets

Inventory 23,000

Accounts receivable 65,500

Less Allowance for doubtful accounts (1,965) 63,535

Prepaid expenses 4,000

Bank 10,175

Cash 500

101,210

Less Current liabilities

Accounts payable 46,100

Accrued expenses 1,875 (47,975)

Net current assets 53,235

67,135

Capital

Balance as at 1 July 2008 112,500

Less Net loss for the year (13,940)

98,560

Less Drawings (31,425)

67,135

24

11.

Trial Balance as at 31 March 2009 Dr Cr $ $ Capital 67,500 Drawings 18,750 Cash in hand 2,500 Bank overdraft 26,750 Motor vehicles (net) 20,000 Allowance for doubtful accounts 1,500 Sundry expenses 1,620 Inventory 40,000 Accounts receivable and payable 46,130 30,000 Rent and rates 12,000 Insurance 3,250 Wages and salaries 29,750 Office equipment: As at 1 April 2008 ($7,500 net), purchased on 1 October 2008 (cost $2,500) 10,000 Purchases and sales 122,500 182,500 Discounts 4,750 3,000

311,250 311,250

Additional information as at 30 June 2009: (i) Inventory as at 31 March 2009 amounted to $42,500. (ii) Depreciate office equipment and motor vehicles at 10% and 20% per annum, respectively, on a reducing-balance basis. (iii) A debtor who owed $1,130 died during the year. He was insolvent and his debt was to be written off. (iv) Make an allowance for doubtful accounts at 5% of accounts receivable. (v) Interest of $4,380 due on 31 March 2009 had not been received. (vi) Accrued wages as at 31 March 2009 amounted to $2,750. (vii) Prepaid rates as at 31 March 2009 amounted to $1,000

Income Statement for the year ended 31 March 2009

$ $

Sales 182,500





Gross profit 62,500

Add Other revenues:

Discount received 3,000

Interest received 4,380 7,380

69,880

Less Expenses:

Sundry expenses 1,620

Rent and rates ($12,000 $1,000) 11,000

Insurance 3,250

Wages and salaries ($29,750 + $2,750) 32,500

Discount allowed 4,750

Bad debts 1,130

Increase in allowance for doubtful accounts {[($46,130 $1,130) x 5%] $1,500} 750

Depreciation: Office equipment ($7,500 x 10%) + ($2500 x 10% x 6/12) 875

Motor vehicles ($20,000 x 20%) 4,000 (56,875)

Net profit 10,005

25

Trade-in of non-current assets (非流動資產的易新) In trade-in transaction (易新交易), the trade-in value (易新價值) of the old asset (舊資產) would be deducted from the cost

price of the new asset (新資產的售價) and only the balance (餘額) would be paid. The entries to record the payment for the new

asset with the trade-in allowance deducted from the cost price are:

1 Transfer the cost of the asset to the disposal account: Dr Disposal account Cr Non-current asset account 2 Transfer the accumulated depreciation on the asset to the disposal account: Dr Accumulated depreciation account Cr Disposal account 3 Record the trade-in allowance from disposal account to non-current asset account Dr Non-current asset account Cr Disposal account

Example 8 A piece of old furniture has a cost of $5,000 and its accumulated depreciation is $4,000 at 31 December 2006. Suppose on 1

January 2007, we trade in the piece of furniture for a new one at a cost of $6,000 and a trade-in allowance of $500, and the

balance was paid by cheque.

Office Furniture

2007 $ 2007 $ Jan 1 Balance b/f 5,000 Jan 1 Disposal: Office Furniture 5,000 Jan 1 Bank ($6,000 $500) 5,500 Dec 31 Balance c/f 6,000

Jan 1 Office furniture disposal: Trade-in allowance 500

11,000 11,000

Office Furniture Disposal

2007 $ 2007 $ Jan 1 Office Furniture 5,000 Jan 1 Accumulated depreciation 4,000 “ 1 Office Furniture: Trade-in allowance 500 Dec 31 Profit and loss – Loss on disposal 500

5,000 5,000

Class work 9 Suppose Firm A bought a lorry for $16,000 on 1 January 2009 and adopted the straight-line method of depreciation. The lorry was

estimated to have a useful life of four years and residual value of $1,000. Suppose we trade in the lorry for a new one at a cost of

$14,500 and the trade-in value of the old lorry was $4,500 on 1 January 2011, and the balance was paid by cash.

(a) Find the accumulated depreciation of the lorry as at 1 January 2011

Accumulated depreciation =[ ($16,000 - $1,000) ÷ 4] x 2 = 7,500 (b)

Lorries

2011 $ 2011 $

Jan 1 Balance b/f 16,000 Jan 1 Disposal: Lorries 16,000

Jan 1 Cash ($14,500 - $4,500) 10,000 Dec 31 Balance c/f 14,500

Jan 1 Lorries Disposal: Trade-in allowance 4,500

30,500 30,500

Lorries Disposal

2011 $ 2011 $

Jan 1 Lorries 16,000 Jan 1 Accumulated depreciation 7,500

“ 1 Lorries: Trade-in allowance 4,500

Dec 31 Profit and loss – Loss on disposal 4,000

16,000 16,000

chapter 3 depreciation of non-current assets 非流動資產折舊 3.1...

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