CIMA CO2 Official Learning System - Fundamentals of Financial Accounting
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ACCOUNTING FOR NON-CURRENT ASSETS
REVISION QUESTIONS C2
170
Question 5
Your organisation maintains a non-current asset register that contained the following
details at 1 April 20X7:
Cost at 1 April 20X7 ($)
Accumulated depreciation at 1
April 20X7 ($)
Land 120,000 Nil
Buildings 80,000 18,000
Plant
Machine A 60,000 27,000
Machine B 40,000 24,000
Machine C 26,000 11,700
Machine D 18,000 13,500
Offi ce equipment
Computer 20,000 7,200
Scanner 1,000 600
Printers (2) 600 250
Small tools 1,200 300
Buildings are depreciated at 2.5 per cent per annum on cost. The cost of small tools is esti-
mated annually, the value at 31 March 20X8 being $800. Plant is depreciated at 7.5 per cent
per annum on cost, and offi ce equipment is depreciated at 7.5 per cent per annum on cost.
During the year ended 31 March 20X8, the following transactions occurred:
(i) Machine E was purchased by cheque for $17,000.
(ii) Machine C was sold for $13,000 to A Jones, on credit.
(iii) The computer memory was upgraded by the manufacturer at a cost of $2,000.
(iv) The scanner was repaired at a cost of $300.
(v) Machine F was purchased by cheque for $42,300 including sales tax at 17.5 per
cent. The purchase price included delivery and installation of $1,200 plus sales tax,
and a 1-year maintenance contract of $2,000 plus sales tax.
(vi) The total on the non-current asset register at 1 April 20X7 was compared with the
ledger accounts, and it was discovered that one of the printers had been passed to a
supplier in part-payment of his debt during December 20X6, but had never been
removed from the non-current asset register. The cost of the printer was $400 and
depreciation of $200 had been charged up to 1 April 20X6.
Notes :
1. Ignore sales tax on all items except for those in transaction (v).
2. The organisation’s policy is to charge a full year’s depreciation in the year of purchase.
ACCOUNTING FOR NON-CURRENT ASSETS
171
FUNDAMENTALS OF FINANCIAL ACCOUNTING
Requirements
(a) Insert the fi gures in the non-current asset accounts (at cost) and the accumulated
depreciation accounts for each of the above categories of non-current asset, commenc-
ing with the totals in the non-current asset register on 1 April 20X7. Make entries for
additions, disposals, adjustments and depreciation for the year ended 31 March 20X8.
Ledger Accounts
Land at cost
$
Buildings at cost
$
Plant at cost
$ $
Offi ce equipment at cost
$ $
Small tools at cost
$
Buildings accumulated depreciation
$ $
ACCOUNTING FOR NON-CURRENT ASSETS
REVISION QUESTIONS C2
172
Plant accumulated depreciation
$ $
Offi ce equipment accumulated depreciation
$ $
Small tools accumulated depreciation
$ $
(b) Insert the fi gures in the non-current asset disposals account for the year ended 31
March 20X8.
Disposal of non-current assets
$ $
(c) Describe the information that could be held on a non-current asset register.
1. ________________
2. ________________
3. ________________
4. ________________
5. ________________
6. ________________
7. ________________
8. ________________
9. ________________
ACCOUNTING FOR NON-CURRENT ASSETS
173
FUNDAMENTALS OF FINANCIAL ACCOUNTING
10. ________________
11. ________________
12. ________________
Question 6
(a) Depreciation is the systematic _____ of the cost of an asset, less its _______, over its
________. The purpose of depreciation is to ___ the cost of a non-current asset over
its _________ and thus match the ___ of an asset in a period with the ____________.
It is an example of the application of the ___ convention.
(b) A transport company started business on 1 January 20X7 and purchased truck A for
$80,000. Truck A was destroyed in a road accident on 1 March 20X8 and the insur-
ance company paid out $60,000 to the transport company.
On 1 April 20X8, truck B was purchased for $90,000.
On 1 July 20X8, car C was purchased for $20,000.
On 1 August 20X9, car C was traded in for car D, which cost $25,000, less a part-
exchange allowance on car C of $15,000.
The depreciation policy of the company is:
●
depreciate trucks at 40 per cent each year on a reducing-balance basis;
●
depreciate cars at 25 per cent each year using a straight-line basis;
●
assume a residual value for cars of 10 per cent of the original cost;
●
if a vehicle is owned for part of a year, calculate depreciation according to the number of
months for which the vehicle is owned.
The year end of the company is 31 December.
Including entries for each relevant year, and working to the nearest $, write up the fol-
lowing accounts using the ledger accounts provided.
Motor vehicles at cost
20X7 $ 20X7 $
20X8 20X8
Jan. Balance b/d
Dec. Balance c/d
20X9 20X9
Jan. Balance b/d
Dec. Balance c/d
ACCOUNTING FOR NON-CURRENT ASSETS
REVISION QUESTIONS C2
174
Accumulated depreciation on motor vehicles
20X7 $ 20X7 $
Dec. Balance c/d Dec. Depreciation charge – Income statement
20X8 20X8
Jan. Balance b/d
Dec. Balance c/d
Dec. Depreciation charge – Income statement
20X9 20X9
Jan. Balance b/d
Dec. Balance c/d
Dec. Depreciation charge – Income statement
Disposal of motor vehicles
20X8 $ 20X8 $
20X9 20X9
ACCOUNTING FOR NON-CURRENT ASSETS
175
FUNDAMENTALS OF FINANCIAL ACCOUNTING
Workings: Depreciation
Year acquired Truck A Truck B Car C Car D Total ($)
20X7 20X8 20X8 20X9
($) ($) ($) ($)
80,000 90,000 20,000 25,000
Depreciation charge 20X7
Depreciation charge 20X8
Written back on disposal
Depreciation charge 20X9
Written back on disposal
Balances c/d
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177
Solution 1
1.1 Answer: (D)
The carrying amount of the disposed asset needs to be deducted from the non-
current asset register. The asset was sold for $1,250 less than its carrying amount,
thus its carrying amount must have been $4,000 $1,250 $5,250.
The balance can be calculated as follows:
$
Balance on the register 67,460
Less: carrying amount of the disposed asset (5,250)
62,210
1.2 The profi t or loss on disposal is the difference between the carrying amount at the
time of disposal and the disposal proceeds. An excess of disposal proceeds over car-
rying amount indicates a profi t on disposal, while an excess of carrying amount over
disposal proceeds indicates a loss on disposal.
The annual depreciation on the machine is calculated as:
Cost residual value
Useful life years
5 000 1 000
4
1 000
,,
, per year
Depreciation by 31 December 20X3 would be 3
$1,000 $3,000, therefore the
carrying amount of the machine at the date of disposal would be $2,000. Disposal
proceeds were $1,600, therefore there was a loss on disposal of $400.
1.3 Answer: (A)
The difference between the two records is $10,000, therefore the disposed asset must
have had a carrying amount of this amount. B and D are clearly wrong, and C would
produce a carrying amount of $20,000.
Solutions to Revision
Questions
6
ACCOUNTING FOR NON-CURRENT ASSETS
SOLUTIONS TO REVISION QUESTIONS C2
178
1.4 Answer: (A)
There is insuffi cient information to calculate the proceeds or the length of
ownership.
1.5
$
$9,000 0.7 0.7 0.7 3,087 (carrying amount)
Proceeds of sale (3,000)
Loss on disposal 87
1.6 Answer: (B)
Depreciation never provides a fund for the replacement of the asset, nor does it aim
to show assets at their fair values.
1.7
$
$5,000 0.8 0.8 0.8 2,560 (carrying amount)
Receipt (2,200)
Loss on disposal 360
1.8 Answer: (D)
Depreciation is not connected with the putting aside of money for the replacement
of the asset, nor does it aim to show assets at their fair values. The charging of
depreciation ensures that profi ts are not overstated.
1.9 Answer: (D)
Non-current assets should, except in certain circumstances, be depreciated over
their expected useful life. Answer A would almost never be appropriate. Assets are
rarely valued at their expected selling price – if this is more than their cost, this
would be imprudent, and if less than cost would contravene the ‘ going concern ’
convention, which is discussed in a later chapter. The method of depreciation is
irrelevant.
1.10 Answer: (D)
(A), (B) and (C) are all correct, in most situations.
1.11
$
Cost of machine 80,000
Installation 5,000
Training 2,000
Testing 1,000
88,000
ACCOUNTING FOR NON-CURRENT ASSETS
179
FUNDAMENTALS OF FINANCIAL ACCOUNTING
1.12
$
Cost 10,000
20X0 Depreciation (2,500)
7,500
20X1 Depreciation (1,875)
5,625
20X2 Depreciation (1,406)
4,219
20X3 Part-exchange (5,000)
Profi t 781
1.13
$ $
Carrying amount at 1 August 20X0 200,000
Less : depreciation (20,000)
Proceeds 25,000
Loss 5,000
Therefore carrying amount (30,000)
150,000
1.14 Answer: (D)
1.15
$
Cost 12,000
20X1 Depreciation (2,400)
9,600
20X2 Depreciation (2,400)
7,200
20X3 Depreciation (2,400)
4,800
Proceeds on disposal (5,000)
Profi t 200
1.16 Graph A Reducing-balance method of depreciation. Graph B Straight-line method
of depreciation.
1.17 Answer: (D)