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Chapter 3 Non-current assets and depreciation

1. Classifying expenditures

Expenditures Category Examples

Something that is used up within the period Expense Electricity, Salary
Something that is sold within the period Expense Purchases
Something that will last for more than one period Asset Vehicle
Expenditure for the owner’s personal use Drawings Drawings

2. Current assets
An asset which will be converted into money or consumed within next 12 months.
Eg: Stock, Receivables, Bank, Cash, Prepayment

3. Non-Current assets
An asset which will is purchased for use.
Eg: Premises, Motor vehicles, Equipment

Intangible asset is an asset that is not physical in nature.

Eg : Goodwill, patents, trademarks, and copyrights

Tangle asset is an asset that can be physically touched.

Eg: Premises, Motor vehicles, Equipment

4. Impact of classifying Capital expenditure and Revenue expenditure

Capital expenditure = Non-current asset
Revenue expenditure = Expense

If capital expenditure is wrongly treated as revenue expenditure;

Asset---------------------------------------------- expense
Therefore, expense is too high (overstated)  profit is too low
Asset is too low (understated)

Eg: Bought a car and wrongly posted to motor vehicle expense account

Impact: Profit understated

Non-current asset understated

If revenue expenditure is wrongly treated as capital expenditure;

Eg: Paid for car repairs and wrongly posted to motor vehicle account

Impact: Profit overstated

Non-current asset overstated
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5. The cost of non-current assets

Including:
Purchase price
Delivery and handling
Construction costs
Installation and assembly costs
Professional fees (architects, engineers, etc)
Interest and finance during construction

1. Happen only during purchase time NOT during selling time

2. Happen only one time and must be during purchase time
3. The purpose is to get the asset ready for use

6. Asset Register

An asset register is a collection of individual memorandum records, relating to the details

of each asset.

Asset register

Asset Description Location Suppli Purchase Useful Depn Cost Residual Acc Depn CV Date of Disposal
number er date life method value Depn bl/d for year Disposal proceeds
ref
001334 Mix Fact 1 IS Ltd 4/11/04 6 RB RM12,500 RM 500 RM3,387 RM911 RM8,202
Machine

Question

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

Plant and equipment RM55,700

Delivery RM 1,500
Maintenance change RM 5,570
Total RM62,770

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

a RM57,200
b. RM58,200
c. RM59,200
d. RM60,200
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7. Depreciation
Depreciation is a measure of the cost of economic benefits of the non-current asset that have
been consumed during the period.
8. Factors to cause depreciation
Use – thing gets worn out after use
Passing of time – eg. A ten-year lease of property expires when the ten years have passed
Obsolescence – things become obsolete due to technology and market changes
Depletion – eg. The extraction of material from a quarry

9. Straight Line Depreciation

Cost – residual value
useful life

= Annual depreciation

Annual depreciation = Cost of asset * depreciation rate %

Activity 1
An asset has a cost of RM 14,000, an estimated life of five years and a residual value of $ 4,000 at the
end of that life. Calculate the depreciation using straight line method.

Cost – residual value

useful life Annual depreciation
=
$14,000 – $4,000
= 5 years

= $ 2,000

10. Reducing Balance Depreciation

Annual depreciation = (Cost – Accumulated Depreciation b/d) * %

= Carrying value b/d * %
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Activity 2
An asset has a cost of RM 20,000, an estimated life of five years and a residual value of RM 1,985 at
the end of that life. Calculate the depreciation using reducing balance method at the rate of 37% for
four years.

Year Depreciation Carrying value

Carrying value * % Cost – Accumulated Depn
1 (RM20,000-0) *37% = RM 7,400 RM20,000-RM7,400 = RM12,600

2 (RM12,600) *37% = RM 4,662 RM20,000-RM12,062 = RM7,938

3 (RM7,938) *37% = RM 2,937 RM20,000-RM14,997 = RM5,001

4 (RM5,001) *37% = RM 1,850 RM20,000-RM16,847 = RM3,153

11. Full year’s depreciation in the year of purchase, no depreciation in the year of disposal
 A full year’s depreciation will be charged for the year, even if the asset was purchased
on 30 December.
 No depreciation is charged in the year that the asset is sold or scrapped.

Activity 3
An asset is purchased on 1 October 20x1 for RM10,000 and sold on 30 September 20x5. Depreciation
is calculated using straight line method at 20% on cost.
The accounting year end is 31 December.
Calculate the depreciation charges for 20x1 to 20x5 inclusive, assuming that a full year’s
depreciation is charged in the year of purchase and none in the year of disposal.

Annual depreciation = Cost of asset * depreciation rate %

= RM 10,000* 20%
= RM 2,000
Depreciation Year 1 Year 2 Year 3 Year 4 Year 5
Charge RM2,000 RM2,000 RM2,000 RM2,000 None
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Activity 4
A machinery is purchased for $10,000 with a useful life of five years. There is no residual value. Show
the accounting entries relating to straight line depreciation for the first year.
Depreciation = $10,000 -0
5 years
= $2,000 per annum

Depreciation
Acc
Depreciatio Statement of profit or $2,00
Year 1 n $2,000 Year 1 loss 0

Accumulated Depreciation
$2,00
Year 1 Balance c/d $2,000 Year 1 Depreciation 0
$2,00
$2,000 0
$2,00
Year 2 Balance b/d 0

Statement of financial position as at…….Year 1

Non-current assets Cost Accumulated Carrying

depreciation value
$ $ $
Property, plant and equipment 10,000 2,000 8,000

Statement of profit or loss for the year ended……………..

Sales xx
Cost sales (x)
Gross profit xx
Expenses
Depreciation 2,000
etc xxx xx
Net profit xx
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Activity 5
A car is purchased for $16,000 and will be sold in five years’ time for $1,000. Show the entries in
the T accounts to record the purchase of the car and straight line depreciation over its useful life.

Pro-rata or full year’s depreciation is charged in the year of purchase and none in the year of
disposal.

Depreciation = Cost – Residual value

Useful life
$16,000-$1,000
5 years
= $3,000 per annum

Accumulated Depreciation
$ $
Balance
c/d 3,000.00 Depreciation year 1 3,000.00
3,000.00 3,000.00
Bal b/d 6,000.00 Balance b/d year 2 3,000.00
Depreciation year 2 3,000.00
6,000.00 6,000.00
Bal b/d 9,000.00 Balance b/d year 3 6,000.00
Depreciation year 3 3,000.00
9,000.00 9,000.00
Bal b/d 12,000.00 Balance b/d year 4 9,000.00
Depreciation year 4 3,000.00
12,000.00 12,000.00
Bal b/d 15,000.00 Balance b/d year 5 12,000.00
Depreciation year 5 3,000.00
15,000.00 15,000.00
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Depreciation
$ $
Statement of
Depreciation year 1 3,000.00 profit or loss 3,000.00
Statement of
Depreciation year 2 3,000.00 profit or loss 3,000.00
Statement of
Depreciation year 3 3,000.00 profit or loss 3,000.00
Statement of
Depreciation year 4 3,000.00 profit or loss 3,000.00
Statement of
Depreciation year 5 3,000.00 profit or loss 3,000.00

12. Disposal of non-current assets

Disposal
Machine cost $10,000 Accumulated depreciation $3,000
Profit on disposal $ 1,000 Bank $8,000
$11,000 $11,000

Journal entries
Dr Disposal $10,000 Cr Machine $10,000
Dr Accumulated Depreciation $3,000 Cr Disposal $3,000
Dr Bank $8,000 Cr Disposal $8,000
Dr Disposal $1,000 Cr Statement of profit or loss $1,000

Activity 6
On 1 January 20x1 Zenith bought a car costing $39,000. It was expected to have a five years life and a
residual value of $4,000. The car was sold for $12,300 during 20x4.
Straight line of depreciation method was applied.

Prepare the T accounts to record the disposal of the asset.

Depreciation = ($39,000-$4,000)/5 years

= $7,000 per year

Accumulated depreciation = $7,000 * 4 years

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= $28,000

Disposal
Car cost $39,000 Accumulated depreciation $28,000
Profit of Disposal $1,300 Bank $12,300

$40,300 $40,300

Car
Balance b/d $39,000 Disposal $39,000
$39,000 $39,000

Accumulated depreciation
Disposal $28,000 Balance b/d $28,000
$28,000 $28,000
Depn= ($39,000-$4,000)/5 years = $7,000
Acc Depn for 20x1,20x2,20x3,20x4
=$28,000

Bank
Disposal $12,300

Journal entries
Dr Disposal $39,000 Cr Car $39,000
Dr Accumulated Depreciation $28,000 Cr Disposal $28,000
Dr Bank $12,300 Cr Disposal $12,300
Cr Disposal $1,300 Dr Statement of profit or loss $1,300
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13. Disposal and Part-exchange (Trade-In)

Disposal
Machine cost $10,000 Accumulated depreciation $3,000
Profit on disposal $ 1,000 Part-exchange (selling price) $8,000
$11,000 $11,000

Journal entries
Dr Disposal $10,000 Cr Machine $10,000
Dr Accumulated Depreciation $3,000 Cr Disposal $3,000
Dr Machine $8,000 Cr Disposal $8,000
Dr Machine $2,000 Cr Bank $2,000
Dr Disposal $1,000 Cr Statement of profit or loss $1,000

Activity 7
Hammer is to buy a new motor van, which has a list price of $9,000.
The new van is to replace a van which cost $7,500 four years ago, and has accumulated depreciation
of $6,000 on it.
Hammer will pay the motor van dealer $7,000 for new van and therefore the part exchange value is
($9,000-$7,000) $2,000.

Prepare the T accounts to record the disposal of the asset.

Disposal
Van cost $7,500 Accumulated depreciation $ 6,000
Profit on disposal $ 500 Part-exchange $ 2,000
$ 8,000 $ 8,000

Van
Balance b/d $7,500 Disposal $7,500
Part-exchange $2,000
Bank $7,000 Balance c/d $9,000
$16,500 $16,500
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Accumulated depreciation
Disposal $6,000 Balance b/d $6,000
$6,000 $6,000

Bank
Van (new) $7,000

Journal entries
Dr Disposal $7,500 Cr Van $7,500 (cost of old asset)
Dr Accumulated Depreciation $6,000 Cr Disposal $6,000 (acc depn for old asset)
Dr Van $2,000 Cr Disposal $2,000 (exchange the old asset for new asset)
Dr Van $7,000 Cr Bank $7,000 (pay for the new asset)
Dr Statement of profit or loss $500 Cr Disposal $500

1. Andrew’s business has the following equipment:

Equipment at cost $84,000
Accumulated depreciation at 1 Jan $24,000
Carrying value $60,000

Andrew depreciates his equipment over six years by straight line method. What will be the charge for
depreciation?

Answer:
$84,000/6 = $14,000

2. Andrew’s business also has the following motor vehicles:

Motor vehicle at cost $100,000
Accumulated depreciation at 1 Jan $45,000
Carrying value $55,000

Andrew depreciates his motor vehicles at 20% on a reducing balance basis. What will be the charge
for depreciation?

Answer:
$55,000 * 20% = $11,000
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3. Tom has a motor vehicle that cost $15,000 three years ago. Accumulated depreciation is $9,000. Tom
sells the vehicle for $10,000.

What profit or loss on the disposal?

Answer:
Disposal
Motor cost $15,000 Accumulated depreciation $ 9,000
Profit on disposal $ 4,000 Bank (selling price) $10,000
$19,000 $19,000

The profit is $4000

4. LIGHT Engineering
Light Engineering owns a number of vehicles:
Manager’s car was purchased for $17,000 on 1 June 20x3.
Salesman’s car was purchased for $12,500 on 1 August 20x4.
Van as purchased for $19,400 on 2 February 20x5.

On September 20x5, the salesman’s car was sold for $7,600 and was not replaced.
The business uses the straight line method of depreciation for its vehicles, making a full year’s charge
in the year of purchase and no charge in the year of sale. All vehicles have an estimated life of four
years and a residual value of 10% of their original cost.

Prepare the T accounts from 20x3 to 20x5.

Answer:
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Motor vehicles
20x3 20x3
1 June Cash at bank $17,000 31 Dec Balance c/d $17,000

20x4
1 Jan Balance b/d $17,000 20x4
1 Aug Cash at bank $12,500 31 Dec Balance c/d $29,500
$29,500 $29,500
20x5 20x5
1 Jan Balance b/d $29,500 Disposal $12,500
2 Feb Cash at bank $19,400 31 Dec Balance c/d $36,400
$48,900 $48,900
20x6
1 Jan Balance b/d $36,400

Accumulated depreciation
20x3 20x3
31 Dec Balance c/d $3,825 31 Dec Depreciation $3,825
(17,000-1700)/4

20x4 20x4
1 Jan Balance b/d $3,825
31 Dec Balance c/d $10,463 31 Dec Depreciation $6,638
$10,436 (29500-2950)/4 $10,436

20x5 20x5
05 Sept Disposal $2,813 1 Jan Balance b/d $10,463
(12500-1250)/4
31 Dec Balance c/d $15,840 31 Dec Depreciation $8,190
$10,436 (36400-3640)/4 $10,436

20x6
1 Jan Balance b/d $10,463

Disposal
20x5 20x5
05 Sept Motor vehicle $12,500 05 Sept Accumulated
depreciation $2,813
Bank $7,600
31 Dec Statement of P/L $2,087
$12,500 $12,500
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