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Notes and Exercises

HKDSE BAFS

(Elective) Financial Accounting


Topic 3: Depreciation of Non-current Assets

(Elective) Financial Accounting


Topic 3: Depreciation of Non-current Assets (Notes and Exercises)
A. Capital expenditure vs. revenue expenditure (Notes)
Fill in the blanks with the following words.
periods
operations

expense
extension

current
purchase

Capital expenditures is expenditure that generates long-term / short-term benefits for an


entity. It usually refers to the money spent on
a
_______________ or production of non-current assets, and
b
_______________ or improvement to existing non-current assets.

a
b

Capital expenditure adds / does not add value to non-current assets.


It should not be wholly written off as an _______________ in the period in which it is
incurred. Instead, it should be expensed over a number of _______________.

a
b

Revenue expenditure is expenditure that generates long-term / short-term benefits.


It usually refers to the money spent on the day-to-day _______________ of an entity
and provides benefits that will be consumed in the _______________ period.
It adds / does not add to the value of a non-current asset and should be wholly written
off as an expense in the period in which it is incurred.

The double entry for capital expenditure is:


Dr Non-current asset / Expense account
Cr Cash or Bank or Creditors account
The double entry for revenue expenditure is:
Dr Non-current asset / Expense account
Cr Cash or Bank or Creditors account

Page 1 of 17

Notes and Exercises


HKDSE BAFS

(Elective) Financial Accounting


Topic 3: Depreciation of Non-current Assets

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Notes and Exercises


HKDSE BAFS

(Elective) Financial Accounting


Topic 3: Depreciation of Non-current Assets

B. Depreciation of non-current assets (Notes)


Fill in the blanks with the following words.
portion
profit and loss

useful
cost

matching
benefits

Depreciation is the systematic allocation of the _______________ of a tangible non-current


asset over its _______________ life.

In each accounting period, a _______________ of the cost of the asset is written off
(charged to the _______________ account) as depreciation charges.
According to the _______________ concept, the amount allocated to each accounting
period (as depreciation charges) should be matched with the amount of _______________
generated in that period (which usually refers to the usage of the asset during that period).

Accounting entries for depreciation


a
Record the depreciation charged for an accounting period
Dr Depreciation / Accumulated depreciation account
Cr Depreciation / Accumulated depreciation account
b

Transfer the total of depreciation charged to the profit and loss account at the end of
the accounting period
Dr Depreciation / Profit and loss account
Cr Depreciation / Profit and loss account

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Notes and Exercises


HKDSE BAFS

(Elective) Financial Accounting


Topic 3: Depreciation of Non-current Assets

C. Commonly used depreciation methods (Notes)


Fill in the blanks with the following words.
usage-based
usage

straight-line
evenly

diminishing
reducing balance

produced
constant

a
Straight-line method: a depreciation method by which the cost of a non-current asset is
written off _______________ as depreciation over its estimated useful life.
b
Under this method, the amount of depreciation charged in each period is
_______________.

Reducing-balance method: a depreciation method by which the cost of a non-current


asset is written off as depreciation at a _______________ rate over its estimated
useful life.

Under this method, the amount of depreciation charged in each period is


_______________.

Usage-based method: a depreciation method by which the cost of a non-current asset


is written off as depreciation at a rate equal to the _______________ of that asset over
its estimated useful life.
Under this method, the depreciation rate can be fixed or variable, depending on the
output _______________ in each period.

There are many depreciation methods in use in the business world.


The _______________ and the _______________ methods are the more popular ones, but
they are not appropriate in some cases.

The _______________ method is most appropriate for coal mines or oil wells, as
depreciation is directly related to the extraction of materials.

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Notes and Exercises


HKDSE BAFS

(Elective) Financial Accounting


Topic 3: Depreciation of Non-current Assets

D. Disposal of non-current assets (Notes)


Fill in the blanks with the following words.
profit

loss

damaged

sold

Disposal can happen if the asset is _______________, _______________ or lost in an


accident. In these situations, a separate disposal account would be opened to record the
disposal of non-current assets.

Adjustments needed when a non-current asset is disposed of


a Cash received is greater than the assets written down value = _________ on disposal.
This should be debited / credited to the profit and loss account.
b Cash received is less than the assets written down value = ___________ on disposal.
This should be debited / credited to the profit and loss account.
c Sometimes, an old non-current asset is traded in for a new one. The trade-in allowance
should be debited / credited to the disposal account.

Double entry records for the disposal of a non-current asset


a Transfer the cost of the asset to the disposal account
Dr Disposal / Non-current asset account
Cr Disposal / Non-current asset account
b Transfer the accumulated depreciation on the asset to the disposal account
Dr Disposal / Accumulated depreciation account
Cr Disposal / Accumulated depreciation account
c Record the proceeds from disposal
Dr Disposal / Cash or bank or debtors account
Cr Disposal / Cash or bank or debtors account
d

Transfer the profit or loss on disposal to the profit and loss account at the end of the
accounting period.
(i) Profit on disposal
Dr Disposal / Profit and loss account
Cr Disposal / Profit and loss account
(ii) Loss on disposal
Dr Disposal / Profit and loss account
Cr Disposal / Profit and loss account
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Notes and Exercises


HKDSE BAFS

(Elective) Financial Accounting


Topic 3: Depreciation of Non-current Assets

Topic 3: Depreciation of Non-current Assets (Exercises)


1.

Kean Enterprise started business on 1 January 2010. The following transactions were
related to subsequent years:
Purchases of non-current assets:
Machinery
2010 Jan 1
2011 Mar 1
2012 Sept 1

(No. 1)
(No. 2)

Motor vehicles

$
$
15,000 (No. 1) 20,000
46,000

(No. 2) 25,000
61,000

45,000

It is the firms 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 years 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
Answer:

2012

2012

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Notes and Exercises


HKDSE BAFS

(Elective) Financial Accounting


Topic 3: Depreciation of Non-current Assets

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Notes and Exercises


HKDSE BAFS
(b)

(Elective) Financial Accounting


Topic 3: Depreciation of Non-current Assets

Motor vehicles

Answer:

2012

(c)

2012

2012

Accumulated Depreciation: Machinery

Answer:

2012

(d)

Accumulated Depreciation: Motor vehicles

Answer:

2012

2012

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Notes and Exercises


HKDSE BAFS

(e)

(Elective) Financial Accounting


Topic 3: Depreciation of Non-current Assets

Machinery disposals

Answer:

2012

2012

Workings:
$
(W1) $__________ ____% + {[$__________ ($__________ ____%)] ____%} =
$__________ ____%
=

(W2) $__________ ____% ____ years

(W3) $__________ ____%

(W4) $__________ ____%

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Notes and Exercises


HKDSE BAFS
2.

(Elective) Financial Accounting


Topic 3: Depreciation of Non-current Assets

State which class of expenditure (revenue/capital) each of the following items belongs to.
$
(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
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

Capital expenditure:
Revenue expenditure:

_______________________________
_______________________________

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.

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Notes and Exercises


HKDSE BAFS

(Elective) Financial Accounting


Topic 3: Depreciation of Non-current Assets

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.
Answer:
(i)

2011

(ii)

2011

(iii)

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Notes and Exercises


HKDSE BAFS

(Elective) Financial Accounting


Topic 3: Depreciation of Non-current Assets

(iv)

2011

$ 2011

(b)

Show how the balances in the above accounts (if any) would appear in the balance
sheet of Mr Poon as at 31 December 2011.

Answer:
__________________________
___________________________ as at ______________________ (extract)
Current assets

Current liabilities
($_____________ + $_____________)

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Notes and Exercises


HKDSE BAFS
3.

(Elective) Financial Accounting


Topic 3: Depreciation of Non-current Assets

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 years depreciation in the year of
purchase and no depreciation in the year of disposal.
Required:
Prepare the following accounts to record the above:
(a) Photocopiers

_____________________
2009
Dec

2009

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Notes and Exercises


HKDSE BAFS

(Elective) Financial Accounting


Topic 3: Depreciation of Non-current Assets

(b) Accumulated depreciation: Photocopiers


_____________________
2009

2009
Dec

(c) Disposal: Photocopiers

_____________________
2011
Mar

2011

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Notes and Exercises


HKDSE BAFS
4.

(Elective) Financial Accounting


Topic 3: Depreciation of Non-current Assets

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
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

297,000
180,300
477,300
(132,600)

(ii)
(iii)
(iv)
(v)

(vi)

(344,700 )
155,300

25,000
3,600
6,700
2,500
4,600
3,200
24,000
21,250
13,000

Net profit
(i)

$
500,000

(103,850 )
51,450

25% of the commissions were commissions received from a wholesaler for selling a
new brand of drinks.
40% of the carriage inwards was related to the cost of delivering goods to customers.
60% of the discounts received were actually discounts granted to the customers of
Wing Fung Hong.
Included in the electricity was a $500 deposit paid to the utility company.
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.
A second-hand van was bought on 1 Jan 2010 at a cost of $13,000.
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Notes and Exercises


HKDSE BAFS

(Elective) Financial Accounting


Topic 3: Depreciation of Non-current Assets

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.
__________________________
Corrected Income Statement for the __________________ ___________________
$

___________________________
Less
_______________________________:
________________________
Add ___________________
____________________ [$__________ (_____________)]
Less ___________________
_______________________________
Add

Other revenues:
_________________________ ($____________ ______%)
____________________ [$_________ (_____________%)]

Less

Expenses:
_________________ ($______________ $____________)
__________________________ ($6,700 ______%)
__________________________ ($2,500 ______%)
__________________________
__________________________ [$24,000 (______________%)]
Depreciation: Plant and machinery (Workings)
Vans ($____________ ______%)

________________________

Workings:
$
__________________________, at ___________
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Notes and Exercises


HKDSE BAFS

(Elective) Financial Accounting


Topic 3: Depreciation of Non-current Assets

Less Depreciation _______________________


($__________ ______% )
Less Depreciation _______________________
Less Depreciation _______________________
Less Depreciation _______________________
Net book value as at _______________________

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