Chapter 3
Depreciation of Non-current Assets
QUESTION 1
(A)
State which class of expenditure (revenue/capital) each of the following items belongs to.
(5 marks)
$
(i)
Rent and rates
8,400
(ii)
Costs of installing a new control room
58,000
(iii) Wages for installing a new control room
7,000
(iv)
Electricity and water charges
13,000
(v)
Legal fees incurred in the acquisition of new premises
4,800
(vi)
Repairs to existing machines
7,800
(vii) Costs of training staff to operate machinery which was
installed a year ago
(B)
49,000
(viii) Painting the outside of a new building
28,000
(ix)
Repainting the outside of a building after five years of use
19,000
(x)
Transport costs of machinery purchased
400
Mr Poon, a sole trader, is about to prepare his final accounts. As his bookkeeper, you need to adjust the
figures shown in certain accounts.
His financial year ended on 31 December 2011. On that date, certain accounts had the following
balances:
$
Rent revenue
42,000 (Cr)
Electricity
4,200 (Dr)
Advertising
4,500 (Dr)
Wages
224,800 (Dr)
You have ascertained the following information relating to the above accounts:
(i)
Rent revenue — the tenant owed $10,500 for rent outstanding as at 31 December 2011.
(ii)
Electricity — the amount accrued as at 31 December 2011 was $410.
(iii) Advertising — included in the advertising account was a payment of $2,800 for posters to be
used in the next financial year.
(iv)
Wages — the amount accrued as at 31 December 2011 was $58,000.
Required:
(a)
Open the above accounts, enter the balances given, deal with the accruals or prepayments as
necessary and show the transfers to the profit and loss account.
(b)
(6 marks)
Show how the balances in the above accounts (if any) would appear in the balance sheet of Mr
Poon as at 31 December 2011.
NSS BAFS: Frank Wood’s Financial Accounting 1
Question Bank
(2 marks)
40
© Pearson Education Asia Limited 2010
Answer:
(A)
Capital expenditure: (ii), (iii), (v), (viii), (x)
Revenue expenditure: (i), (iv), (vi), (vii), (ix)
(0.5 marks for each answer)
(B)
(a)
2011
Dec 31
(i)
Rent Revenue
$ 2011
52,500 Dec 31 Balance b/f
" 31 Accrued c/f
52,500
Profit and loss
$
42,000
10,500
52,500
0.5 0.5
0.5
(ii)
2011
Dec 31
" 31
Electricity
$ 2011
4,200 Dec 31 Profit and loss
410
4,610
Balance b/f
Accrued c/f
$
4,610
0.5 0.5
0.5
4,610
(iii)
2011
Dec 31
Advertising
$ 2011
4,500 Dec 31 Profit and loss
" 31 Prepaid c/f
4,500
Balance b/f
$
1,700
2,800
4,500
0.5 0.5
0.5
(iv)
2011
Dec 31
" 31
Wages
$ 2011
224,800 Dec 31 Profit and loss
58,000
282,800
Balance b/f
Accrued c/f
$
282,800
0.5 0.5
0.5
282,800
(b)
Mr Poon
Balance Sheet as at 31 December 2011 (extract)
Current assets
Prepayments
Accrued revenue
$
2,800
10,500
Current liabilities
Accruals ($410 + $58,000)
NSS BAFS: Frank Wood’s Financial Accounting 1
Question Bank
$
13,300
0.5
0.5
58,410
41
© Pearson Education Asia Limited 2010
1
QUESTION 2
Kean Enterprise started business on 1 January 2010. The following transactions were related to subsequent
years:
Purchases of non-current assets:
Machinery
2010 Jan
2011 Mar
2012 Sept
1
1
1
(No. 1)
(No. 2)
Motor vehicles
$
15,000
46,000
—
61,000
(No. 1)
(No. 2)
$
20,000
—
25,000
45,000
It is the firm’s policy to depreciate its machinery at 10% per annum on a reducing-balance basis and motor
vehicles at 25% per annum on cost.
On 31 December 2012, machinery (No. 1) was sold for $9,500. A full year’s depreciation is to be charged in
the year of acquisition and none in the year of disposal.
Required:
Prepare the following accounts for the year ended 31 December 2012:
(a)
Machinery
(b)
Motor vehicles
(c)
Accumulated Depreciation: Machinery
(d)
Accumulated Depreciation: Motor vehicles
(e)
Machinery disposals
(9 marks)
Answer:
(a)
Machinery
$ 2012
61,000 Dec 31
"
31
61,000
2012
Jan 1 Balance b/f
Machinery disposal (No. 1)
Balance c/f
$
15,000 0.5 0.5
0.5
46,000
61,000
(b)
Motor Vehicles
$ 2012
20,000 Dec 31
25,000
45,000
2012
Jan 1 Balance b/f
Sept 1 Bank (No. 2)
$
45,000 0.5 0.5
Balance c/f
0.5
45,000
(c)
2012
Dec 31 Machinery disposal
" 31 Balance c/f
Accumulated Depreciation: Machinery
$ 2012
2,850 Jan
1 Balance b/f (W1)
8,740 Dec 31 Depreciation: Machinery (W3)
11,590
NSS BAFS: Frank Wood’s Financial Accounting 1
Question Bank
42
$
7,450 0.5 1
4,140 0.5 0.5
11,590
© Pearson Education Asia Limited 2010
(d)
2012
Dec 31 Balance c/f
Accumulated Depreciation: Motor Vehicles
$ 2012
21,250 Jan
1 Balance b/f (W2)
Dec 31 Depreciation: Motor vehicles (W4)
21,250
$
10,000 0.5 0.5
0.5
11,250
21,250
(e)
2012
Dec 31 Machinery (No. 1)
Machinery Disposals
$ 2012
15,000 Dec 31 Accumulated depreciation:
Machinery
"
31 Bank
"
31 Profit and loss —
Loss on disposal
15,000
$
0.5
2,850
9,500
0.5
0.5
2,650
15,000
0.5
Workings:
(W1) $15,000  10% + {[$15,000 – ($15,000  10%)]  10%}
$46,000  10%
=
=
$
2,850
4,600
7,450
(W2) $20,000  25%  2 years
=
10,000
(W3) $41,400  10%
=
4,140
(W4) $45,000  25%
=
11,250
QUESTION 3
Bee Co, a trading firm, purchased a photocopier (No. 1) from overseas. Payment for the invoice price of
$50,000 was from the bank account. The photocopier was delivered on 30 November 2009 after the purchase
price, plus import duty and transport costs amounting to $5,000 and $1,200, respectively, had been paid.
Installation was completed on 1 December 2009 at a further cost of $3,800.
The firm estimated that the photocopier would have a useful life of five years and a scrap value of 10% of the
cost price. The financial year ends on 31 December each year and depreciation is to be charged on a
straight-line basis. On 1 March 2011, due to the unsatisfactory performance of the photocopier, it was traded
in for a new one (No. 2) at a price of $40,000. The trade-in value was $30,000. The depreciation method used
for the new photocopier was the same as the old one.
The accounting policy of the firm is to charge a full year’s depreciation in the year of purchase and no
depreciation in the year of disposal.
NSS BAFS: Frank Wood’s Financial Accounting 1
Question Bank
43
© Pearson Education Asia Limited 2010
Required:
Prepare the following accounts to record the above:
(a)
Photocopiers
(4.5 marks)
(b)
Accumulated depreciation: Photocopiers
(4.5 marks)
(c)
Disposal: Photocopiers
(2 marks)
Answer:
(a)
Photocopiers
$ 2009
60,000 Dec 31 Balance c/f
2009
Dec 1 Bank ($50,000 + $5,000 + $1,200
+ $3,800)
2010
Jan 1 Balance b/f
2011
Jan 1 Balance b/f
Mar 1 Disposal: Photocopiers
(trade-in value)
" 1 Bank
60,000
60,000
$
60,000 0.5 0.5
2010
Dec 31 Balance c/f
2011
Mar 1 Disposal: Photocopiers
Dec 31 Balance c/f
30,000
10,000
100,000
60,000 0.5 0.5
60,000 0.5 0.5
0.5
40,000
0.5
0.5
100,000
(b)
Accumulated Depreciation: Photocopiers
$ 2009
10,800 Dec 31 Depreciation [($60,000 – $6,000) ÷ 5]
2010
21,600 Jan 1 Balance b/f
Dec 31 Depreciation
21,600
2011
2011
Mar 1 Disposal: Photocopiers (No. 1)
21,600 Jan 1 Balance b/f
Dec 31 Balance c/f
7,200 Dec 31 Depreciation [($40,000 – $4,000) ÷ 5]
28,800
2009
Dec 31 Balance c/f
2010
Dec 31 Balance c/f
$
10,800 0.5 0.5
10,800 0.5 0.5
0.5
10,800
21,600
21,600 0.5 0.5
7,200 0.5 0.5
28,800
(c)
2011
Mar 1 Photocopiers (No. 1)
Disposal: Photocopiers
$ 2011
60,000 Mar 1 Accumulated depreciation:
Photocopiers (No. 1)
" 1 Photocopiers (No. 2)
Dec 31 Profit and loss — Loss on disposal
60,000
NSS BAFS: Frank Wood’s Financial Accounting 1
Question Bank
44
$
0.5
21,600
30,000
8,400
60,000
0.5
0.5
0.5
© Pearson Education Asia Limited 2010
QUESTION 4
Wing Fung Hong is a grocery retailer. The income statement was prepared by a part-time bookkeeper who
did not possess sufficient accounting knowledge. The business owner is now seeking your advice on how to
correct the following income statement.
Wing Fung Hong
Income Statement for the year ended 31 December 2010
$
Sales
Less Cost of goods sold:
Opening inventory
Add Purchases
297,000
180,300
477,300
(132,600 )
Less Closing inventory
Gross profit
Less Expenses:
Salaries and wages
Electricity
Carriage inwards
Discounts received
Printing and stationery
Drawings
Commissions
Depreciation: Plant and machinery
Van expenses
Net profit
(i)
25,000
3,600
6,700
2,500
4,600
3,200
24,000
21,250
13,000
$
500,000
(344,700 )
155,300
(103,850 )
51,450
25% of the commissions were commissions received from a wholesaler for selling a new brand of
drinks.
(ii)
40% of the carriage inwards was related to the cost of delivering goods to customers.
(iii) 60% of the discounts received were actually discounts granted to the customers of Wing Fung Hong.
(iv)
Included in the electricity was a $500 deposit paid to the utility company.
(v)
Plant and machinery should be charged using the reducing-balance method at 25% per annum.
However, depreciation had been calculated using the straight-line method at the same percentage for
the year ended 31 December 2010. Wing Fung Hong purchased its plant and machinery on 1 July 2007
at a cost of $85,000.
(vi)
A second-hand van was bought on 1 Jan 2010 at a cost of $13,000. This was treated as van expenses.
The owner expected the van to be used in the business for five years. Depreciation should be
calculated on a straight-line basis.
Required:
Prepare for Wing Fung Hong a corrected income statement for the year ended 31 December 2010. (10 marks)
NSS BAFS: Frank Wood’s Financial Accounting 1
Question Bank
45
© Pearson Education Asia Limited 2010
Answer:
Wing Fung Hong
Corrected Income Statement for the year ended 31 December 2010
$
Sales
Less Cost of goods sold:
Opening inventory
Add Purchases
Carriage inwards [$6,700  (1 – 40%)]
297,000
180,300
4,020
481,320
(132,600 )
Less Closing inventory
Gross profit
Add Other revenues:
Commissions revenue ($24,000  25%)
Discounts received [$2,500  (1 – 60%)]
$
500,000
0.5
0.5
0.5
0.5
(348,720 ) 0.5 0.5
0.5
151,280
6,000
1,000
158,280
Less Expenses:
Salaries and wages
Electricity ($3,600 – $500)
Carriage outwards ($6,700  40%)
Discounts allowed ($2,500  60%)
Printing and stationery
Commissions [$24,000  (1 – 25%)]
Depreciation: Plant and machinery (Workings)
Vans ($13,000  20%)
Net profit
25,000
3,100
2,680
1,500
4,600
18,000
10,459
2,600
0.5
0.5
0.5
0.5
0.5
0.5
0.5
0.5
1
(67,939 ) 0.5 0.5
0.5
90,341
Workings:
$
85,000
Plant and machinery, at cost
6
Less
Depreciation — 31 December 2007 ($85,000  25%  12)
Less
Depreciation — 31 December 2008
Less
Depreciation — 31 December 2009
(10,625 )
74,375
(18,594 )
55,781
(13,945 )
41,836
(10,459 )
31,377
Less Depreciation — 31 December 2010
Net book value as at 31 December 2010
QUESTION 5
Future Co commenced business on 1 January 2008. The firm purchased equipment for production and motor
vehicles to deliver goods to customers. Depreciation is provided for both assets each year on 31 December.
Equipment is to be depreciated using the straight-line method with a five-year estimated useful life and
residual value of 15% on cost. Motor vehicles are to be depreciated at 25% per annum on a reducing-balance
basis.
NSS BAFS: Frank Wood’s Financial Accounting 1
Question Bank
46
© Pearson Education Asia Limited 2010
Information on the equipment and motor vehicles is as follows:
Equipment
EQ1
EQ2
EQ3
Date of acquisition
1/1/2008
Cost
$150,000
$100,000
$85,000
Date of disposal
30/9/2009
—
—
Amount received
$105,000
—
—
MV1
MV2
MV3
MV4
Date of acquisition
1/1/2008
31/8/08
30/9/2009
31/3/2010
Cost
$100,000
$120,000
$80,000
$95,000
Date of disposal
—
30/4/2010
—
—
Amount received
—
$70,000
—
—
Motor vehicle
30/6/2008 31/10/2009
The accounting policy of the firm is to charge a full year’s depreciation if the asset is purchased in the first
half of the year, and no depreciation if the asset is purchased in the second half of the year. For disposal of
assets, no depreciation should be charged if they are sold in the first half of a year; a full year’s depreciation
should be charged if they are sold in the second half of a year.
Required:
(a)
Prepare the following accounts for the years ended 31 December 2008, 2009 and 2010:
(i)
Equipment
(ii)
Motor vehicles
(iii) Accumulated depreciation: Equipment
(iv)
Accumulated depreciation: Motor vehicles
(v)
Disposal: Equipment
(vi)
Disposal: Motor vehicles
(23 marks)
On 1 January 2011, Future Co found that it was more suitable to use the reducing-balance method at 20% for
equipment. The company is considering changing the depreciation basis of equipment in order to give a more
accurate view of the business.
Net profit for Future Co for the past three years is as follows:
$
2008
369,000
2009
372,000
2010
354,000
NSS BAFS: Frank Wood’s Financial Accounting 1
Question Bank
47
© Pearson Education Asia Limited 2010
Required:
(b)
Calculate the effect on the depreciation charge on equipment for each of the three years ended
31 December 2008, 2009 and 2010, if the reducing-balance method was adopted.
(c)
(3 marks)
Show the effects on the net profit if the method of calculating depreciation on equipment was changed
from a straight-line basis to a reducing-balance basis.
(5 marks)
(Calculations to the nearest dollar)
Answer:
(a)
Calculations:
Depreciation charge on equipment per annum on a straight-line basis:
EQ1 : [$150,000 – ($150,000 × 15%)] ÷ 5 = $25,500
EQ2 : [$100,000 – ($100,000 × 15%)] ÷ 5 = $17,000
EQ3 : [$85,000 – ($85,000 × 15%)] ÷ 5 = $14,450
(i)
2008
Jan 1
Jun 30
Bank (EQ1)
Bank (EQ2)
2009
Jan 1
Oct 31
Balance b/f
Bank (EQ3)
2010
Jan 1
Balance b/f
Equipment
$
2008
150,000
Dec 31
100,000
250,000
2009
250,000
Sept 30
85,000
Dec 31
335,000
2010
185,000
Dec 31
$
250,000 0.5 0.5
Balance c/f
0.5
250,000
Disposal: Equipment (EQ1)
Balance c/f
150,000 0.5 0.5
185,000 0.5 0.5
335,000
Balance c/f
185,000 0.5 0.5
Balance c/f
$
220,000 0.5 0.5
(ii)
2008
Jan 1
Aug 31
2009
Jan 1
Sept 30
2010
Jan 1
Mar 31
Bank (MV1)
Bank (MV2)
Balance b/f
Bank (MV3)
Balance b/f
Bank (MV4)
Motor Vehicles
$
2008
100,000
Dec 31
120,000
220,000
2009
220,000
Dec 31
80,000
300,000
2010
300,000
Apr 30
95,000
Dec 31
395,000
NSS BAFS: Frank Wood’s Financial Accounting 1
Question Bank
48
0.5
220,000
Balance c/f
300,000 0.5 0.5
0.5
300,000
Disposal: Motor vehicles (MV2)
Balance c/f
120,000 0.5 0.5
275,000 0.5 0.5
395,000
© Pearson Education Asia Limited 2010
(iii)
Accumulated Depreciation: Equipment
$
2008
Balance c/f
42,500
Dec 31 Depreciation: Equipment
($25,500 + $17,000)
2009
Disposal of equipment (EQ1)
51,000
Jan 1 Balance b/f
Balance c/f
34,000
Dec 31 Depreciation: Equipment
85,000
($25,500 + $17,000)
2010
Balance c/f
65,450
Jan 1 Balance b/f
Dec 31 Depreciation: Equipment
65,450
($17,000 + $14,450)
2008
Dec 31
2009
Sept 30
Dec 31
2010
Dec 31
$
42,500 0.5 0.5
42,500 0.5 0.5
42,500 0.5 0.5
85,000
34,000 0.5 0.5
0.5
31,450
65,450
(iv)
Accumulated Depreciation: Motor Vehicles
$
2008
Balance c/d
25,000
Dec 31 Depreciation: Motor vehicles (W1)
2009
Balance c/d
73,750
Jan 1 Balance b/d
Dec 31 Depreciation: Motor vehicles (W2)
73,750
2010
Disposal of motor vehicle (MV2) 30,000
Jan 1 Balance b/d
Balance c/f
101,563
Dec 31 Depreciation: Motor vehicles (W3)
131,563
2008
Dec 31
2009
Dec 31
2010
Apr 30
Dec 31
$
25,000 0.5 0.5
25,000 0.5 0.5
0.5
48,750
73,750
73,750 0.5 0.5
57,813 0.5 1
131,563
Workings:
(W1)
Depreciation on motor vehicle for 2008:
MV1
(W2)
$100,000 × 25% = $25,000
Depreciation on motor vehicle for 2009:
MV1
($100,000 – $25,000) × 25% = $18,750
MV2
$120,000 × 25% = $30,000
Depreciation for 2009 = $18,750 + $30,000 = $48,750
(W3)
Depreciation on motor vehicle for 2010:
MV1
($100,000 – $25,000 – $18,750) × 25% = $14,063
MV3
$80,000 × 25% = $20,000
MV4
$95,000 × 25% = $23,750
Depreciation for 2010 = $14,063 + $20,000 + $23,750 = $57,813
(v)
2009
Sept 30
Dec 31
Disposal: Equipment
$
2009
$
Equipment (EQ1)
150,000
Sept 30 Accumulated depreciation: Equipment 51,000 0.5 0.5
Profit and loss — Profit on disposal
6,000
" 30 Bank
105,000 0.5 0.5
156,000
156,000
NSS BAFS: Frank Wood’s Financial Accounting 1
Question Bank
49
© Pearson Education Asia Limited 2010
(vi)
2010
Apr 30
Disposal: Motor Vehicles
$
2010
$
0.5
120,000
Apr 30 Accumulated depreciation:
0.5
30,000
Motor vehicles
0.5
" 30 Bank
70,000
0.5
Dec 31 Profit and loss — Loss on disposal 20,000
120,000
120,000
Motor vehicles (MV2)
(b)
Year
2008
2009
2010
Effect on Equipment’s Depreciation
Depreciation calculated on the reducing-balance basis of 20% per annum
EQ1
EQ2
EQ3
$150,000 × 20%
$100,000 × 20%
—
= $30,000
= $20,000
($150,000 – $30,000) × ($100,000 – $20,000) ×
—
20% = $24,000
20% = $16,000
$85,000 × 20%
($100,000 – $20,000 –
—
$16,000) × 20% = $12,800 = $17,000
Total
$
Original Difference
$
$
50,000
42,500
+7,500
1
40,000
42,500
–2,500
1
29,800
31,450
–1,650
1
(c)
Recalculation of Net Profit
2008
$
369,000
—
—
369,000
(7,500 )
361,500
Original net profit
Add Decrease in depreciation
Increase in profit on disposal (W4)
Less Increase in depreciation
Recalculated net profit
2009
$
372,000
2,500
3,000
377,500
—
377,500
2010
$
354,000
1,650
—
355,650
—
355,650
0.5 0.5 0.5
0.5 0.5
0.5
0.5
0.5 0.5 0.5
Workings:
(W4) Effect on the profit or loss on disposal of equipment:
Accumulated depreciation (EQ1)
Amount received on disposal
Less Cost of equipment
Profit on disposal using the reducing-balance method
Less Original profit using the straight-line method
Increase in profit on disposal
NSS BAFS: Frank Wood’s Financial Accounting 1
Question Bank
50
$
54,000
105,000
$
159,000
(150,000 )
9,000
(6,000 )
3,000
© Pearson Education Asia Limited 2010
QUESTION 6
Sesame Enterprise is a toy manufacturer. The firm uses several lorries to deliver toys to its customers.
Lorries are depreciated on a straight-line basis over their estimated useful life of five years, with a residual
value of 10% of cost. A proportion of a year’s depreciation is charge against the acquisition or disposal of
trucks during a year, as shown below:
Proportion of the yearly depreciation
Acquired during the year
Jan – Apr
May – Aug
Sept – Dec
100%
50%
Nil
Nil
50%
100%
Disposed of during the year
The following information is available:
Lorry No.
Acquisition date
Cost
Disposal date
Amount received
L1
3 Mar 2009
$60,000
29 May 2010
$33,000
L2
1 Oct 2009
$54,000
30 Nov 2010
$38,000
L3
25 Jun 2010
$48,000
—
—
All acquisitions and disposals were by cheque.
Required:
Prepare the following accounts for the years ended 31 December 2009 and 2010:
(a)
Lorries
(4 marks)
(b)
Accumulated Depreciation: Lorries
(3.5 marks)
(c)
Lorry Disposals
(3.5 marks)
Answer:
(a)
2009
Mar 3
Oct
1
2010
Jan
1
Jun 25
Bank (L1)
Bank (L2)
Balance b/f
Bank (L3)
Lorries
$
2009
60,000
Dec
54,000
114,000
2010
114,000
May
48,000
Nov
Dec
162,000
NSS BAFS: Frank Wood’s Financial Accounting 1
Question Bank
51
31
$
114,000 0.5 0.5
Balance c/f
0.5
114,000
29
30
31
Lorry disposals (L1)
Lorry disposals (L2)
Balance c/f
60,000 0.5 0.5
54,000 0.5 0.5
0.5
48,000
162,000
© Pearson Education Asia Limited 2010
(b)
2009
Dec
2010
May
Nov
Dec
31
Balance c/f
29
30
31
Lorry disposals (L1)
Lorry disposals (L2)
Balance c/f
Accumulated Depreciation: Lorries
$
2009
10,800
Dec 31 Depreciation: Lorries (W1)
2010
16,200
Jan
1 Balance b/f
9,720
Dec 31 Depreciation: Lorries (W2)
4,320
30,240
$
10,800 0.5 0.5
10,800 0.5 0.5
19,440 0.5 0.5
0.5
30,240
Workings:
(W1) Calculation of depreciation for the year ended 31 December 2009:
L1: $60,000 × 90% ÷ 5 = $10,800
(W2) Calculation of depreciation for the year ended 31 December 2010:
L1: ($60,000 × 90% ÷ 5) × 50% = $5,400
L2: $54,000 × 90% ÷ 5 = $9,720
L3: ($48,000 × 90% ÷ 5) × 50% = $4,320
Total amount: $5,400 + $9,720 + $4,320 = $19,440
(c)
2010
May 29
Nov 30
Lorry Disposals
$
2010
60,000
May 29
54,000
"
29
Nov 30
Lorries (L1)
Lorries (L2)
"
Dec
30
31
$
Accumulated depreciation:
Lorries (L1)
Bank (L1)
Accumulated depreciation:
Lorries (L2)
Bank (L2)
Profit and loss —
Loss on disposal
114,000
0.5
16,200 0.5 0.5
0.5
33,000
9,720
38,000
0.5
0.5
17,080
114,000
0.5
QUESTION 7
Tammy Yiu’s business purchased equipment on 1 January 2010 for $4,000,000.The price included shipping
expenses of $20,000, installation costs of $30,000 and a two-year maintenance contract at a cost of $60,000.
The equipment had an expected life of four years and a residual value of $500,000. The depreciation policy
is to calculate depreciation at 40% per annum on a reducing-balance basis.
Required:
(a)
Calculate the net book value of the equipment at the end of four years.
(4.5 marks)
(b)
Assuming the company chose to use the straight-line depreciation method, calculate the depreciation
charges on the equipment over the four years, and show the net book value of the equipment at the end
of four years.
(c)
(4.5 marks)
Which of the two methods would give a lower net profit figure when Tammy prepared an income
statement for the year ended 31 December 2010?
NSS BAFS: Frank Wood’s Financial Accounting 1
Question Bank
52
(1 mark)
© Pearson Education Asia Limited 2010
Answer:
Workings:
Calculation of the cost of the equipment:
Purchase price
Less Maintenance cost
$
4,000,000
(60,000 )
3,940,000
Note: The shipping expenses and installation costs should be included in the cost of the equipment as those
costs were capital expenditure.
(a)
Calculation of the annual depreciation charge on equipment using the reducing-balance method:
$
3,940,000
(1,576,000 )
2,364,000
(945,600 )
1,418,400
(567,360 )
851,040
(340,416 )
510,624
2010
Equipment at cost, 31 December 2010 (Workings)
Less Depreciation ($3,940,000 × 40%)
2011
Equipment at net book value, 31 December 2010
Less Depreciation ($2,364,000 × 40%)
2012
Equipment at net book value, 31 December 2011
Less Depreciation ($1,418,400 × 40%)
2013
Equipment at net book value, 31 December 2012
Less Depreciation ($851,040 × 40%)
Equipment at net book value, 31 December 2013
(b)
0.5
0.5
0.5
0.5
0.5
0.5
0.5
0.5
0.5
Calculation of the annual depreciation charge on equipment using the straight-line method:
($3,940,000 – $500,000) ÷ 4 = $860,000
$
3,940,000
(860,000 )
3,080,000
(860,000 )
2,220,000
(860,000 )
1,360,000
(860,000 )
500,000
2010
Equipment at cost, 31 December 2010
Less Depreciation
2011
Equipment at net book value, 31 December 2010
Less Depreciation
2012
Equipment at net book value, 31 December 2011
Less Depreciation
2013
Equipment at net book value, 31 December 2012
Less Depreciation
Equipment at net book value, 31 December 2013
(c)
0.5
0.5
0.5
0.5
0.5
0.5
0.5
0.5
0.5
The business would show a lower net profit figure for the year ended 31 December 2010 when the
reducing-balance method was used. This is because $1,576,000 would be charged as depreciation
under this method, as against the $860,000 charged under the straight-line method.
(1 mark)
QUESTION 8
The following is an extract of the balance sheet of Simon Chan’s business as at 31 March 2010:
Accumulated
Net book
Cost
depreciation
value
$
$
$
Furniture and fittings
282,000
184,800
97,200
Motor vehicles
930,720
581,700
349,020
Non-current assets
NSS BAFS: Frank Wood’s Financial Accounting 1
Question Bank
53
© Pearson Education Asia Limited 2010
The firm’s policy is to depreciate furniture and fittings on a straight-line basis and motor vehicles on a
reducing-balance basis. A full year’s depreciation is to be provided in the year of acquisition, while no
depreciation is to be provided in the year of disposal.
The annual depreciation rates are as follows:
Furniture and fittings
10%
Motor vehicles
20%
During the year ended 31 March 2011, the following transactions took place with regard to non-current
assets:
(i)
New furniture costing $20,000 was purchased by cheque on 1 January 2011. Freight charges of $3,000
and installation costs of $4,200 were incurred in connection with the furniture purchased. The cost of
the annual maintenance contract for the furniture was $5,040.
(ii)
As at 31 March 2011, furniture purchased for $19,200 during the year ended 31 March 2000 was still
in use.
(iii) On 1 January 2011, a car which was purchased in December 2007 at a cost of $150,000 was traded in
for a lorry costing $284,000. The trade-in allowance was $90,000. The remaining sum was settled by
cheque.
(iv)
On 3 March 2011, a lorry costing $48,000, purchased on 1 April 2008, was scrapped and a cheque of
$22,000 was received on disposal.
You are required to write up the following accounts for the year ended 31 March 2011:
(a)
Furniture and fittings
(1.5 marks)
(b)
Accumulated depreciation: Furniture and fittings
(1.5 marks)
(c)
Motor vehicles
(d)
Accumulated depreciation: Motor vehicles
(2.5 marks)
(e)
Disposals: Motor vehicles
(3.5 marks)
(3 marks)
Answer:
(a)
2010
Apr 1 Balance b/f
2011
Jan 1 Bank ($20,000 + $3,000 + $4,200)
Furniture and Fittings
$ 2011
282,000 Mar 31 Balance c/f
NSS BAFS: Frank Wood’s Financial Accounting 1
Question Bank
27,200
309,200
$
309,200 0.5 0.5
0.5
309,200
54
© Pearson Education Asia Limited 2010
(b)
2011
Mar 31 Balance c/f
Accumulated Depreciation: Furniture and Fittings
$ 2010
$
213,800 Apr 1 Balance b/f
184,800 0.5 0.5
2011
Mar 31 Depreciation
0.5
[($309,200 – $19,200) × 10%] 29,000
213,800
213,800
(c)
2010
Apr 1 Balance b/f
2011
Jan 1 Disposals: Motor vehicles —
Trade-in value
" 1 Bank
Motor Vehicles
$
2011
930,720
Jan
1
Mar 3
" 31
90,000
158,000
1,178,720
Disposals: Motor vehicles
Disposals: Motor vehicles
Balance c/f
$
150,000 0.5 0.5
0.5
48,000
0.5
980,720
0.5
0.5
1,178,720
(d)
Accumulated Depreciation: Motor Vehicles
2011
$
2010
Jan 1 Disposals: Motor vehicles (W1)
73,200
Apr 1 Balance b/f
Mar 3 Disposals: Motor vehicles (W2)
17,280
2011
Mar 31 Balance c/f
589,120
Mar 31 Depreciation (W3)
679,600
$
581,700 0.5 0.5
0.5
97,900 0.5 0.5
679,600
(e)
2011
Jan 1 Motor vehicles
Mar 3 Motor vehicles
Mar 31 Profit and loss —
Profit on disposal
Disposals: Motor Vehicles
$
2011
150,000
Jan
1 Accumulated depreciation:
48,000
Motor vehicles
Jan
1 Motor vehicles —
4,480
Trade-in value
Mar 3 Accumulated depreciation:
Motor vehicles
Mar 3 Bank
202,480
$
0.5
73,200 0.5 0.5
90,000 0.5 0.5
17,280
22,000
202,480
0.5
0.5
Workings:
(W1) ($150,000  20%) + ($150,000  80%  20%) + ($150,000  80%  80%  20%)
(W2) ($48,000  20%) + ($48,000  80%  20%)
(W3) [$980,720 – ($581,700 – $73,200 – $17,280)] × 20%
NSS BAFS: Frank Wood’s Financial Accounting 1
Question Bank
55
© Pearson Education Asia Limited 2010
QUESTION 9
Raymond Construction Co purchased a cement mixer on 1 January 2011. The relevant information is as
follows:
Purchase price
$300,000
Estimated residual value
$25,000
Estimated useful life
10 years
Estimated total output
30,000 tonnes
The cement mixer was operated in 2011 for a total of 6,000 tonnes.
Required:
Compute the depreciation charge for the year ended 31 December 2011 using the following methods, and
state which method gives the highest depreciation figure:
(a)
Straight-line method
(2 marks)
(b)
Units-of-production method
(2 marks)
(c)
Reducing-balance method
(3 marks)
Answer:
(a)
Depreciation charge for the year ended 31 December 2011 under the straight-line method:
($300,000 – $25,000) ÷ 10 = $27,500
(b)
(2 marks)
Depreciation charge for the year ended 31 December 2011 under the units-of-production method:
($300,000 – $25,000) × 6,000 ÷ 30,000 = $55,000
(c)
(2 marks)
Annual depreciation rate under the reducing-balance method:
1 
n

s / c  100 %
where s = estimated residual value
c = cost
n = estimated useful life
1
10

25,000 / 300,000 100%
= 22.00% (rounded to two decimal points)
Depreciation charge for the year ended 31 December 2011 under the reducing-balance method:
= $300,000 × 22.00%
= $66,000
(2 marks)
Of the three methods, the reducing-balance method gives the highest depreciation figure for the year ended
31 December 2011.
NSS BAFS: Frank Wood’s Financial Accounting 1
Question Bank
(1 mark)
56
© Pearson Education Asia Limited 2010
QUESTION 10
The following trial balance was extracted from the books of Venus Wong’s business on 31 March 2010:
Venus Wong
Trial Balance as at 31 March 2010
Dr
$
Capital, 1 April 2009
Drawings
Furniture and fittings, at cost
Motor vehicles, at cost
Accumulated depreciation, 1 April 2009
— Furniture and fittings
— Motor vehicles
Accounts receivable
Accounts payable
Inventory, 1 April 2009
10% loan (repayable in 2012)
Cash at bank
Allowance for doubtful accounts, 1 April 2009
Sales
Purchases
Loan interest
Carriage inwards
Carriage outwards
Returns inwards
Returns outwards
Rent
Salaries
Selling and distribution expenses
Cr
$
1,279,760
21,560
1,650,000
550,000
469,700
129,800
401,000
265,320
29,051
220,000
366,619
5,940
3,249,730
1,888,260
16,500
6,600
2,500
22,000
9,900
250,000
200,065
225,995
5,630,150
5,630,150
Additional information:
(i)
Inventory as at 31 March 2010 was valued at $35,800.
(ii)
Carriage inwards of $500 was to be accrued and prepaid rent amounted to $16,800.
(iii) 10% of the rent expenses were used for Venus’s private purposes.
(iv)
Accounts receivable amounting to $3,000 were to be written off and the allowance for doubtful
accounts was to be maintained at 3% of accounts receivable.
(v)
Depreciation was to be charged as follows:
Furniture and fittings: 10% on net book value
Motor vehicles: 20% on cost
Required:
Prepare an income statement for Venus Wong for the year ended 31 March 2010 and a balance sheet as at
that date (vertical style).
NSS BAFS: Frank Wood’s Financial Accounting 1
Question Bank
(21 marks)
57
© Pearson Education Asia Limited 2010
Answer:
Venus Wong
Income Statement for the year ended 31 March 2010
$
$
Sales
Less Returns inwards
Less
Cost of goods sold:
Opening inventory
Add Purchases
Carriage inwards ($6,600 + $500)
Less
$
3,249,730
(22,000 )
3,227,730
0.5
0.5
29,051
1,888,260
7,100
1,895,360
(9,900 )
Returns outwards
Less Closing inventory
Gross profit
Less Expenses:
Rent [($250,000 – $16,800) × 90%]
Salaries
Carriage outwards
Selling and distribution expenses
Bad debts
Loan interest ($220,000 × 10%)
Increase in allowance for doubtful accounts
{[($401,060 – $3,000) × 3%] – $5,940}
Depreciation:
Furniture and fittings [($1,650,000  $469,700) × 10%]
Motor vehicles ($550,000 × 20%)
Net profit
0.5
0.5
0.5
1,885,460
1,914,511
(35,800 )
0.5
0.5
(1,878,711 )
1,349,019
0.5 0.5
0.5
209,880
200,065
2,500
225,995
3,000
22,000
0.5
0.5
0.5
0.5
0.5
0.5
6,000
0.5
118,030
110,000
0.5
(897,470 )
451,549
0.5 0.5
0.5
Venus Wong
Balance Sheet as at 31 March 2010
$
Non-current assets
Furniture and fittings
Motor vehicles
Cost
1,650,000
550,000
2,200,000
Current assets
Inventory
Accounts receivable ($401,000 – $3,000)
Less Allowance for doubtful accounts
Prepaid expenses
Bank
398,000
(11,940 )
Less Current liabilities
Accounts payable
Accrued expenses [$500 + ($22,000  $16,500)]
Net current assets
265,320
6,000
Drawings {$21,560 + [($250,000 – $16,800) × 10%]}
Non-current liabilities
10% loan
NSS BAFS: Frank Wood’s Financial Accounting 1
Question Bank
$
Net book
value
1,062,270 0.5 0.5 0.5
310,200 0.5 0.5 0.5
0.5
1,372,470
35,800
Financed by:
Capital
Balance as at 1 April 2009
Add Net profit for the year
Less
$
Accumulated
depreciation
587,730
239,800
827,530
58
0.5
0.5
0.5
0.5
0.5
386,060
16,800
366,619
805,279
0.5
0.5
(271,320 )
533,959
1,906,429
0.5
0.5
1,279,760
451,549
1,731,309
(44,880)
1,686,429
0.5
0.5
220,000
1,906,429
0.5
0.5
0.5
© Pearson Education Asia Limited 2010