Chapter 3 (10) – Non-current assets, depreciation and impairment

Example: Accumulating depreciation on a non-current asset (Refer to 3 Calculating

depreciation, pg 295)

A company purchases a new machine with the list price of the machine of £30,000; delivery cost
at £150. The company had deposited £10,000, amount to be paid at £20,000. The machine is
expected to have useful life of 5 years and residual value of £8,0000. Calculate the total amount
to be depreciated and annual depreciation expense (straight line method) to be charged in respect
of the new machine.

Depreciation Accumulated Cost of the Carrying

charge for the depreciation at asset amount at end
year end of year of year
£ £ £ £
At beginning of
its life
Year 1
Year 2
…

Example: Depreciation (Refer to 3.3 The reducing balance method of depreciation, pg 298)

A car bought for a business cost of £20,000 plus import tax at 10% and VAT at 20%. It is
expected to be used for 5 years and then to be sold for £2,200, inclusive VAT 10%. Work out the
depreciation to charged to each 12-month reporting period under:

(1) The straight line method

(2) The reducing balance method at the rate of 25%

Example: Change in depreciation method (Refer to 3.5 Reviewing and changing the
depreciation method, pg 298)

Stephanie Co purchased an asset for £200,000 on 1.1.X1. It had an estimated useful life of 5
years, and it was depreciated using reducing balance method at the rate of 40%. On 1.1.X2 it was
decided to change the depreciation method to straight line. The was no change to the useful life
and the residual value is expected to be £1,000. Calculate the depreciation amounts charge to
statement of profit or loss during the asset’s life.

Example: Accounting for depreciation (Refer to 4. Accounting for depreciation, pg 300)

Anne started her business on 1 May 20X6. Anne purchased an equipment on credit for £20,000.
The equipment is expected to have 3 years of useful life and residual value is at £2,000. Using
the straight line method of depreciation, the non-current asset account, accumulated depreciation
account and statement of profit or loss (extract) and statement of financial position (extract)
would be as follows, for each of the next 4 reporting periods ending 31 December 20X6, 20X7,
20X8 and 20X9.

Example: Accounting for part-exchange disposal (Refer to 6.3 Accounting for disposals of
non-current assets given in part-exchange)

A business trades in an asset that cost £45,000 three years ago for a new asset that costs £60,000.
The business also transferred £30,000 to settle the acquisition. Assets are depreciated on the
straight line basis over five years. What are the relevant ledger account entries?

Example: Non-current assets and the initial trial balance (Refer to 6.4 The initial trial balance
and non-current assets)

Sofia’s initial trial balance as at 31 December 20X3 is as follows:

Ledger balance Debit (£) Credit (£)

Current assets 92,300

Capital at 1.1.X3 110,000

Freehold land and buildings – cost at 1.1.X3 120,000

Freehold land and buildings – accumulated depreciation at 1.1.X3 18,000

Plant and equipment – cost at 1.1.X3 50,000

Plant and equipment – accumulated depreciation at 1.1.X3 21,000

Motor vehicles – cost at 1.1.X3 28,000

Motor vehicles – accumulated depreciation at 1.1.X3 17,600

Current liabilities 16,000

Expenses 6,400

Purchases 63,200
Ledger balance Debit (£) Credit (£)

Sales 222,000

Drawings 43,700

Suspense 1,000

(1) On 1 January 20X3, Sofia sold a piece of equipment that had cost £12,000 and on which
£1,800 depreciation had been charged. The asset was sold for £9,000 by bank transfer.
The entry made was to debit the cash at bank and credit the suspense account.
(2) On 1 January 20X3, Sofia traded in a van that had cost £10,000 and on which £6,000
depreciation had been charged. The dealer accepted it in part exchange for a new van
costing £15,500. Sofia paid £10,000 by bank transfer. The entry recorded was to credit
the bank account and debit the suspense account.
(3) Depreciation for the year ended 31 December 20X3 is to be charged as follows:
• Freehold building: £6,000
• Plant and equipment: £5,500
• Motor vehicles: £7,200
Requirements:

(a) Prepare year end journals as at 31 December 20X3 in respect of these matters.
(b) Prepare the final trial balance after taking account of the adjustments.

Example: Development costs (Refer to 8.2 Internally generated intangible assets (development
costs))

Orion Ltd is a biotech company that has been developing a new diagnostic test. The financial
accountant of Orion Ltd has determined that of the £5,500,000 spent on the development in the
year to 31 December 20X6, £1,000,000 should be written off as an expense in the period and the
remainder can be capitalised. The capitalised development costs should be amortised over the
expected production period of 5 years, with amortisation commencing on 1 July 20X6.

Requirement

Prepare the journal entries required to record the development expenditure and amortisation for
the year ended 31 December 20X6.
MCQs:

1. On 1 January 20X2, Felix Ltd bought new offices for £300,000 and incurred the following
costs during the year:

• Legal fees for purchase: £3,600

• Architects’ fees for adaptation: £9,000

• New desks and chairs: £5,200

• Annual cleaning contract: £1,200

Requirement
What amount should appear as the cost of premises in the statement of financial position at 31
December 20X2?

A. £300,000
B. £312,600
C. £313,800
D. £319,000

2. Delta Ltd purchased equipment on 1 April 20X0 for £20,000. Depreciation is charged monthly
at 15% straight line. On 1 April 20X3, the company switched to 15% reducing balance. What is
the depreciation charge for the year ended 31 March 20X4?

A. £3,000

B. £1,912

C. £1,740

D. £1,650

3. A machine costing £100,000 was purchased on 1 July 20X3 and depreciated at 20% reducing
balance. On 30 June 20X6 it was sold for £40,000. What was the loss on disposal?

A. £18,000
B. £14,000

C. £8,800

D. £11,200
4. Equipment was purchased on 1 January 20X5 for £120,000 and depreciated at 25% reducing
balance. On 31 December 20X6, an impairment review showed the recoverable amount was
£60,000. At what amount should the equipment be shown at 31 December 20X6?

A. £90,000

B. £60,000

C. £67,500

D. £75,000

5. A machine purchased for £24,000 on 1 January 20X1 was depreciated at 10% straight line (no
residual value). At 31 December 20X3, remaining useful life was reassessed to 5 more years.
What is the depreciation charge for 20X4?

A. £2,000

B. £1,680

C. £3,360
D. £2,400

6. Machine A: Cost £100,000, sold for £60,000, gain £10,000

Machine B: Cost £80,000, sold for £45,000, loss £5,000

What was the total carrying amount of both machines at disposal?

A. £110,000

B. £100,000
C. £120,000

D. £125,000

7. On 1 July 20X1, Tempo Ltd bought an asset for £40,000, residual value £4,000, life 8 years
(straight line). At 1 July 20X4, the life was revised to 5 years remaining and no residual value. At
the same date, recoverable amount was £18,000. What is the total depreciation and impairment
charge for year ended 30 June 20X5?
A. £8,100
B. £12,100

C. £9,600

D. £10,000