CIMA - C2 Fundamentals of Financial Accounting
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140 9: Non-current assets – depreciation, revaluation and disposal ⏐ Part B Accounting systems and accounts preparation
Question
Revaluation method of depreciation
A machine is revalued at the end of the financial year at $240,000. At the end of the previous financial year, it had been
valued at $250,000. Historical cost was $280,000. What is the charge for deprecation of this asset under the revaluation
method in the income statement?
A $40,000
B $30,000
C $10,000
D $20,000
Answer
C Over the course of the year the machine's value has dropped from $250,000 to $240,000 ($10,000).
2.4 A fall in the value of a non-current asset (impairment)
When the
'
market
'
value of a non-current asset falls to below its net book value, and the fall in value is expected to be
permanent, the asset is written down to its new market value. The charge in the income statement for the impairment in
the value of the asset during the accounting period is:
$
Net book value at the beginning of the period
X
Less: new value
(X
)
Equals: the charge for the impairment in the asset's value in the period.
X
However, if the asset has been previously revalued, then the impairment should be charged to the revaluation reserve.
Impairment in this case is different to the revaluation method of depreciation. A review for impairment is usually only
carried out every 2 or 3 years. It is not a method of depreciation.
2.5 Example: fall in asset value
A business purchased a leasehold property on 1 January 20X1 at a cost of $100,000. The lease has a 20 year life. After 5
years
'
use, on 1 January 20X6, the leasehold is now worth only $60,000 and the reduction is permanent.
Solution
Before the asset is reduced in value, the annual depreciation charge is:
years20
$100,000
= $5,000 per annum (= 5% of $100,000)
After 5 years, the accumulated depreciation is $25,000 and the net book value $75,000, which is $15,000 more than the
new asset value. This $15,000 is written off in year 5, so that the total charge in year 5 is
$
Net book value of the leasehold after 4 years ($100,000 – 20,000)
80,000
Revised asset value at end of year 5
60,000
Charge against profit in year 5
20,000
Assessment
focus point
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Part B Accounting systems and accounts preparation ⏐ 9: Non-current assets – depreciation, revaluation and disposal 141
An alternative method of calculation is
$
Normal' depreciation charge per annum
5,000
Further fall in value, from net book value at end of year 5 to revised value
15,000
Charge against profit in year 5
20,000
The leasehold has a further 15 years to run and its value is now $60,000. From year 6 to year 20, the annual charge for
depreciation will be
years15
$60,000
= $4,000 per annum
Question
Land and buildings
PS acquired its premises on 1 January 20X4 at a cost of
Buildings $140,000
Land $60,000
The depreciation policy of the company is to write off assets having a finite life over their estimated useful life, using the
straight-line method and assuming a nil residual value. Buildings are deemed to have a useful life of 25 years.
On 1 January 20X9 the buildings and land were revalued at:
Buildings $200,000
Land $100,000
Required
Calculate the following.
(i) The net book value of land and buildings at 31 December 20X8
(ii) The net book value of land and buildings at 31 December 20X9
(iii) The capital reserve at 31 December 20X9
Answer
(i)
Valuation of land and buildings at 31 December 20X8
$
Buildings (a finite life asset)
140,000
Depreciation
$140,000
÷ 25 years = $5,600 pa
$5,600
× 5 years
28,000
112,000
Land (an infinite asset)
60,000
172,000
(ii)
Valuation of land and buildings at 31 December 20X9
$
Buildings at valuation
200,000
Depreciation
$200,000
÷ 20 years
(10,000
)
190,000
Land
100,000
290,000
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142 9: Non-current assets – depreciation, revaluation and disposal ⏐ Part B Accounting systems and accounts preparation
(iii) Revaluation reserve
$
Buildings at valuation on 1 January 20X9
200,000
Land at valuation on 1 January 20X9
100,000
300,000
Less book value at 31 December 20X8
(172,000
)
Revaluation reserve
128,000
2.6 Statement of other comprehensive income
As revaluation gains are not yet realised, they do not go through the income statement. Instead, they go to a separate
statement of other comprehensive income. This statement, together with the income statement, forms the statement of
comprehensive income
. We will look at this in detail when dealing with limited liability companies, later in this Text.
However, here is the statement of other comprehensive income for PS (Question: Land and buildings above).
PS
STATEMENT OF OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20X9
20X9
20X8
$
$
Profit for the year
125,000
120,000
Gains on property revaluation
128,000
–
Total comprehensive income for the year
253,000
120,000
The revaluation gains are then taken to revaluation reserve via the statement of changes in equity. Again this is dealt with
in detail in the chapter on limited liability companies, but here is an extract to show you the entries.
PS
STATEMENT OF CHANGES IN EQUITY (EXTRACT)
FOR THE YEAR ENDED 31 DECEMBER 20X9
Revaluation reserve
Retained earnings
Total
$
$
$
Bal at 1 January 20X9
50,000
120,000
170,000
Total comprehensive income for the year
128,000
125,000
253,000
Bal at 31 December 20X9
178,000
245,000
423,000
3 Non-current asset disposals
When a non-current asset is sold, there is likely to be a profit or loss on disposal. This is the difference between the net
sale price of the asset and its net book value at the time of disposal.
3.1 The disposal of non-current assets
Non-current assets are not purchased by a business with the intention of reselling them in the normal course of trade.
However, they may be sold either when their useful life is over or before then. A non-current asset could be sold early if
it is no longer needed for the trade.
FA
S
T F
O
RWAR
D
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Part B Accounting systems and accounts preparation ⏐ 9: Non-current assets – depreciation, revaluation and disposal 143
When non-current assets are sold, there will be a profit or loss on disposal. These gains or losses are reported in the
income statement of the business (and not in the trading account). They are commonly referred to as
'profit on disposal
of non-current assets
' or 'loss on disposal'.
The profit or loss on the disposal of a non-current asset is the difference between:
•
Net book value of the asset at the time of sale, and
• Net
sale price (the price minus any costs of making the sale)
A profit is made when the sale price exceeds the NBV, and vice versa for a loss.
3.2 Example: disposal of a non-current asset
A business purchased a non-current asset on 1 January 20X1 for $25,000, with an estimated life of six years and an
estimated residual value of $7,000. The asset was sold after three years on 1 January 20X4, for $17,500.
What was the profit or loss on disposal, assuming that the business uses the straight line method for depreciation?
Solution
Annual depreciation =
years6
7,000)$(25,000
−
= $3,000 per annum
$
Cost of asset
25,000
Less accumulated depreciation (three years)
9,000
Net book value at date of disposal
16,000
Sale price
17,500
Profit on disposal
1,500
This profit will be shown in the income statement as other income added to the gross profit brought down from the
trading account.
Question
Profit/loss on disposal
A business purchased a machine on 1 July 20X1 for $35,000. The machine had an estimated residual value of $3,000
and a life of eight years. The machine was sold for $18,600 on 31 December 20X4, the last day of the accounting year.
The business incurred dismantling costs and transformation costs of $1,200.
The business uses the straight line method of depreciation. What was the profit or loss on disposal of the machine?
Answer
Annual depreciation
years8
3,000) - $(35,000
= $4,000 per annum
It is assumed that in 20X1 only one-half year's depreciation was charged, because the asset was purchased six months
into the year.
Key term
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144 9: Non-current assets – depreciation, revaluation and disposal ⏐ Part B Accounting systems and accounts preparation
$
$
Non-current asset at cost
35,000
Depreciation in 20X1 (6 months)
2,000
20X2, 20X3 and 20X4
12,000
Accumulated depreciation
14,000
Net book value at date of disposal
21,000
Sale price
18,600
Costs incurred in making the sale
(1,200
)
Net sale price
17,400
Loss on disposal
(3,600
)
This capital loss will be shown as an expense in the income statement of the business.
3.3 The disposal of non-current assets: ledger accounting entries
The disposal of non-current assets is recorded in a disposal of non-current assets account.
(a) The following items appear in the disposal of non-current assets account.
• Cost (or revalued amount of the asset)
• Accumulated depreciation up to the date of sale
• Sale price of the asset
(b) The ledger accounting entries are as follows.
(i) DEBIT Disposal of non-current asset account
CREDIT Non-current asset account
with the cost of the asset disposed of.
(ii) DEBIT Provision for depreciation account
CREDIT Disposal of non-current asset account
with the accumulated depreciation on the asset as at the date of sale.
(iii) DEBIT Receivable account or cash book
CREDIT Disposal of non-current asset account
with the sale price of the asset.
(iv) The balance on the disposal account is the profit or loss on disposal and the corresponding double
entry is recorded in the income statement.
3.4 Example: disposal of assets: ledger accounting entries
A business has machinery costing $110,000. Depreciation is provided at 20% per annum straight line. The total provision
now stands at $70,000. The business sells for $19,000 a machine which it purchased exactly two years ago for $30,000.
Show the relevant ledger entries.
}
ie net book value
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Part B Accounting systems and accounts preparation ⏐ 9: Non-current assets – depreciation, revaluation and disposal 145
Solution
PLANT AND MACHINERY ACCOUNT
$
$
Balance b/d
110,000
Plant disposals account
30,000
Balance c/d
80,000
110,000
110,000
Balance b/d
80,000
PLANT AND MACHINERY DEPRECIATION PROVISION
$
$
Plant disposals (20% of $30,000 for
2 years)
12,000
Balance b/d
70,000
Balance c/d
58,000
70,000
70,000
Balance b/d
58,000
PLANT DISPOSALS
$
$
Plant and machinery account
30,000
Depreciation provision
12,000
I/S (profit on sale)
1,000
Cash
19,000
31,000
31,000
Check:
$
Asset at cost
30,000
Accumulated depreciation at time of sale
12,000
Net book value at time of sale
18,000
Sale price
19,000
Profit on sale
1,000
3.5 Example continued: part exchange
Taking the example above, assume that the machine was exchanged for a new machine costing $60,000. $19,000 is the
trade-in received for the old machine. Now what are the relevant ledger account entries?
Solution
PLANT AND MACHINERY ACCOUNT
$
$
Balance b/d
110,000
Plant disposal
30,000
Cash (60,000 – 19,000)
41,000
Balance c/d
140,000
Plant disposals
19,000
170,000
170,000
Balance b/d
140,000
The new asset is recorded in the non-current asset account at cost $(41,000 + 19,000) = $60,000.
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146 9: Non-current assets – depreciation, revaluation and disposal ⏐ Part B Accounting systems and accounts preparation
PLANT AND MACHINERY DEPRECIATION PROVISION
$
$
Plant disposals (20% of $30,000 for
2 years)
12,000
Balance b/d
70,000
Balance c/d
58,000
70,000
70,000
Balance b/d
58,000
PLANT DISPOSALS
$
$
Plant and machinery
30,000
Depreciation provision
12,000
Profit transferred to I/S
1,000
Plant and machinery
19,000
31,000
31,000
On disposal of non-current assets
(a) DEBIT Disposal account
CREDIT Non-current asset account
(b) DEBIT Provision for depreciation account
CREDIT Disposals account
(c) DEBIT Cash (if money)
Non-current asset (if part exchange)
CREDIT Disposals account
The balance on the disposals account is transferred to the income statement.
Question
Ledger accounts for disposal
A business purchased two widget-making machines on 1 January 20X5 at a cost of $15,000 each. Each had an
estimated life of five years and a nil residual value. The straight line method of depreciation is used.
Owing to an unforeseen slump in market demand for widgets, one widget-making machine was sold (on credit) for
$8,000 on 31 March 20X7.
Later in the year, it was decided to abandon production of widgets altogether, and the second machine was sold on 1
December 20X7 for $2,500 cash.
Prepare the machinery account, provision for depreciation of machinery account and disposal of machinery account for
the accounting year to 31 December 20X7.
}
original cost of the asset
}
depreciation charged to date
}
sales value
Assessment
focus point
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Part B Accounting systems and accounts preparation ⏐ 9: Non-current assets – depreciation, revaluation and disposal 147
Answer
MACHINERY ACCOUNT
$
$
20X7
20X7
1 Jan
Balance b/f
30,000
31 Mar
Disposal of machinery
15,000
1 Dec
Disposal of machinery
15,000
30,000
30,000
PROVISION FOR DEPRECIATION OF MACHINERY
$
$
20X7
20X7
31 Mar
Disposal of
machinery*
6,750
1 Jan
Balance b/f (W1)
12,000
1 Dec
Disposal of
machinery**
8,750
31 Dec
I/S***
3,500
15,500
15,500
* Depreciation at date of disposal ($3,000 × 2 + $750)
** Depreciation at date of disposal ($3,000
× 2 + $2,750)
*** Depreciation charge for the year ($750 + $2,750) (W2)
DISPOSAL OF MACHINERY
20X7
$
20X7
$
31 Mar
Machinery
15,000
31 Mar
Receivable account (sale
price)
8,000
31 Mar
Provision of depreciation
6,750
1 Dec
Machinery
15,000
1 Dec
Cash (sale price)
2,500
1 Dec
Provision of depreciation
8,750
31 Dec
I/S (loss on disposal)
4,000
30,000
30,000
You should be able to calculate that there was a loss on the first disposal of $250, and on the second disposal of $3,750,
giving a total loss of $4,000.
Workings
1 At 1 January 20X7, accumulated depreciation on the machines will be 2 machines × 2 years ×
5
$15,000
per
machine pa = $12,000, or $6,000 per machine
2 Monthly depreciation is
12
$3,000
= $250 per machine per month. Therefore the machine disposed of on 31 March
has 3 months' depreciation ($750) and the 1 December disposal has 11 months' depreciation ($2,750).
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148 9: Non-current assets – depreciation, revaluation and disposal ⏐ Part B Accounting systems and accounts preparation
4 The non-current assets register
Most organisations keep a non-current asset register. This is a listing of all non-current assets owned by the
organisation. This must be kept up to date.
The
non-current assets register is a listing of all non-current assets owned by the organisation, broken down perhaps
by department, location or asset type.
A non-current assets register is maintained primarily for internal purposes. It shows an organisation's investment in
capital equipment. A fixed asset register is also part of the
internal control system.
4.1 Data kept in a non-current assets register
Details likely to be kept about each non-current asset are:
• The internal reference number (for physical identification purposes)
• Manufacturer's serial number (for maintenance purposes)
• Description of asset
• Location of asset
• Department which 'owns' asset
• Purchase date (for calculation of depreciation)
• Cost
• Depreciation method and estimated useful life (for calculation of depreciation)
• Net book value (or written down value)
The following events give rise to entries in a non-current asset register.
• Purchase of an asset
• Sale of an asset
• Loss or destruction of an asset
• Transfer of assets between departments
• Revision of estimated useful life of an asset
• Scrapping of an asset
• Revaluation of an asset
'Outputs' from a non-current assets register include the following.
• Reconciliations of NBV to the nominal ledger
• Depreciation charges posted to the nominal ledger
• Physical verification/audit purposes
4.2 Control
Discrepancies between the non-current assets register and the physical assets or the nominal ledger must be
investigated.
It is important, for external reporting (ie the audit) and for internal purposes, that there are controls over non-current
assets.
Key term
FA
S
T F
O
RWAR
D
FA
S
T F
O
RWAR
D
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Part B Accounting systems and accounts preparation ⏐ 9: Non-current assets – depreciation, revaluation and disposal 149
(a) Purchase of non-current assets must be authorised and must only be made by a responsible official. The
purchaser should obtain several quotations. The person authorising the expenditure should not be the
person using the asset.
(b) Procedures should exist and be enforced for
disposal of non-current assets to ensure that the sales
proceeds are not misappropriated.
(c) The non-current assets register must reconcile with the non-current asset and provision for depreciation
accounts in the nominal ledger.
(d) The non-current assets register must reconcile with the physical presence of capital items.
4.2.1 The non-current assets register and the nominal ledger
The non-current assets register is not part of the double entry and is there for memorandum and control purposes. It
must be reconciled to the nominal ledger to make sure that all additions, disposals and depreciation charges have been
posted. For example, the total of all the
'cost' figures in the register for motor vehicles should equal the balance on the
'motor vehicles cost' account in the nominal ledger. The same goes for accumulated depreciation.
4.2.2 The non-current assets register and the physical assets
It is possible that the non-current assets register may not reconcile with the non-current assets actually present because:
• An asset has been stolen or damaged, which has not been noticed or recorded
• Excessive wear and tear or obsolescence has not been recorded
• New assets not yet recorded in the register because it has not been kept up to date
• Errors made in entering details in the register
• Improvement and modifications have not been recorded in the register
It is important that the company physically inspects all the items in the non-current assets register and keeps the non-
current assets register up to date.
The nature of the inspection will vary between organisations. A large company could inspect 25% of assets by value
each year, aiming to cover all categories every five years. A small company may inspect all its non-current assets very
quickly, although this
'inspection' may not be formally recorded.
4.2.3 Dealing with discrepancies
As mentioned above, some assets may require an adjustment in their expected life due to excessive wear and tear or
damage. The proper person must authorise any change to estimates of the life of an asset. The accounts department will
need a copy of the authorised changes to make the right adjustments in the journal, the register and the ledger.
When discrepancies are discovered, it may be possible to resolve them by updating the non-current assets register
and/or nominal ledger. It may not be possible for the person who discovers the discrepancy to resolve it himself. For
example, if a non-current asset has to be revalued downwards due to wear and tear or obsolescence, it should be
authorised by his superior.
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