2022 06 Depreciation
2022 06 Depreciation
2022 06 Depreciation
DEPRECIATION
SPOTLIGHT
plant and equipment’.
Property, plant and equipment are tangible items that are expected to be used during more than one
accounting period and are held:
for use in the production or supply of goods or services,
for rental to others, or
for administrative purposes
sale are classified as inventory. The same goes for real estate businesses. Their offices are non-current assets
but the houses they sell are inventory.
As a practical expedient, immaterial items are not recognised as non-current assets even if they meet the
definition criteria, for example, staplers and calculators etc.
Example 01:
Complete the following table by stating whether the items listed below can be recognised as
property, plant and equipment and reason if they cannot be so recognised:
Items ANSWER
Small tools and spare parts No. These are immaterial items
Standby generator expected to be used for 7 Yes.
years
An office building. Yes.
A trademark No. This is intangible non-current asset.
An office printer. Yes, unless immaterial.
A plot of land held for resale No. This is inventory.
A factory including building and machinery. Yes.
A bus for pick-and-drop of staff members. Yes.
A generator given to another entity on rent Yes.
MEASUREMENT AT COST
The concept of distinguishing capital expenditure from revenue expenditures is important here. Capital
expenditure is expenditure made to acquire or improve long term assets that are used by the business.
Revenue expenditure is expenditure on day-to-day operating expenses, for example, repair and maintenance
expenses or salaries.
A non-current asset is initially measured at its cost which comprises:
its purchase price, including import duties and non-refundable purchase taxes, after deducting
trade discounts and rebates.
any costs directly attributable to bringing the asset to the location and condition necessary for it to
be capable of operating in the manner intended by management.
Rs.000
Cost of machinery 46,000
Cost of delivery 900
Cost of 12-month warranty on the machinery 1,600
Total amount payable 48,500
In addition, the entity incurred Rs.3.4 million in making modifications to its factory so that the
heavy machinery could be installed. What should be the cost of the machinery in the entity’s
machinery account?
ANSWER
SUBSEQUENT EXPENDITURE
Subsequent expenditure relating to non-current assets, after their initial acquisition, should be capitalised (i.e.
added to cost of the asset) if it meets the criteria for recognising an asset.
Size of expenditure
A capital expenditure tends to involve larger monetary amounts than revenue expenditures. However, certain
quite large expenditures can still be classified as revenue expenditures, as long they are directly associated
with sales transactions or are period costs.
Rs.000
Costs of initial adaptation of the building 12,000
Legal costs relating to the purchase 2,500
Monthly cleaning contract 3,400
Cost of air conditioning unit necessary for machinery to be used 2,800
Cost of machinery 12,300
What amount should appear as the cost of premises in the entity’s statement of financial
position as on 31 March 2015?
ANSWER
RELEVANT TERMINNOLOGY
Depreciable amount = Cost – residual value
The residual value of an asset is the estimated amount that an entity would currently obtain from disposal of
the asset, after deducting the estimated costs of disposal, if the asset were already of the age and in the
condition expected at the end of its useful life.
Useful life is:
a) the period over which an asset is expected to be available for use by an entity; or
b) the number of production or similar units expected to be obtained from the asset by an entity.
Accumulated Depreciation is the depreciation charged to date (cumulative) on a non-current asset. This is
contra asset account.
Carrying amount (also called net book value or written down value) is the amount at which an asset is
presented in statement of financial position.
Carrying amount = Cost – accumulated depreciation
Example 04:
An asset costs Rs. 100,000 and can be easily used for ten years. The management of the
business entity intends to use the asset for six years at which point expected residual value will
be Rs. 40,000 (at current prices).
Required:
What is depreciable amount and useful life of above asset?
ANSWER
Depreciable amount = Rs. 100,000 – 40,000 = Rs. 60,000
Useful life is six years as intended by the management of the entity.
In this method, the depreciable amount is charged in equal amounts to each reporting period over the expected
useful life of the asset.
Cost−Residual value
Depreciation=
Usefullife
Alternatively , depreciation=Cost × Rate
Depreciable amount
Rate=
Cost × Usefullife
Example 05:
Plant bought on 1 January 2021 for Rs. 100,000 with expected useful life of 5 years and residual
value of Rs. 10,000. The entity year ends on 31 December.
Required:
Using straight line method, calculate the amount of annual depreciation and carrying amount
along with accumulated depreciation for the year 2021 to 2025.
ANSWER
100,000−10,000
Rate= =18 %
100,000× 5 years
Example 06:
An item of equipment costs Rs. 1,260,000. It has an expected useful life of six years and an
expected residual value of Rs. 240,000. Using the straight-line method of depreciation, what is
the annual depreciation charge and what will be the carrying amount of the asset after four
years?
ANSWER
Annual depreciation charge = Rs. (1,260,000 – 240,000) / 6 years = Rs. 170,000
Rs.
Asset at cost 1,260,000
Less: Accumulated depreciation Rs. 170,000 x 4 years (680,000)
580,000
Example 07:
PRC 4: INTRODUCTION TO ACCOUNTING CHAPTER 6: DEPRECIATION
The financial year of an entity is 1st January to 31st December. A non-current asset was
purchased on 1st May for Rs. 60,000. Its expected useful life is five years and its expected
residual value is zero. It is depreciated by the straight-line method.
Required:
What will be the charge for depreciation in the year of acquisition if a proportion of a full year’s
depreciation is charged, according to the period for which the asset has been held?
ANSWER
Depreciation in year 1 = Rs. (60,000 – 0) / 5 years’ x 8/12 = Rs. 8,000
Residual value
Rate=1−
√
number of years
Cost
Depreciation=Net book value × Rate
Example 08:
Plant bought on 1 January 2021 for Rs. 100,000 with expected useful life of 5 years and residual
value of Rs. 10,000. The entity year ends on 31 December.
Required:
Using reducing balance method, calculate the amount of annual depreciation and carrying
amount along with accumulated depreciation for the year 2021 to 2025.
ANSWER
10,000
Rate=1−
√
5
100,000
=36.9 %
Example 09:
A non-current asset cost Rs. 64,000. It is depreciated by the reducing balance method, at the
rate of 25% each year. What is the annual depreciation charge in Year 1, Year 2 and Year 3?
ANSWER
Rs.
CHAPTER 6: DEPRECIATION PRC 4: INTRODUCTION TO ACCOUNTING
Cost−Residual value
Rate=
Usefule life∈units
Example 10:
Plant bought on 1 January 2021 for Rs. 100,000 with expected useful life of 5 years and residual
value of Rs. 10,000 and the plant can be used to produce 7500 units over its life. The entity
year ends on 31 December.
Actual production of units has been 1500 units, 1800 units, 1200 units, 2000 units and 1000
units from year 2021 to 2025 respectively.
Required:
Using sum of unit method, calculate the amount of annual depreciation and carrying amount
along with accumulated depreciation for the year 2021 to 2025.
ANSWER
100,000−10,000
Rate= =Rs . 12 per unit
7500 units
In this method, depreciation is calculated by multiplying the depreciable amount by a fraction where
numerator is the remaining life of the asset at the start of the period and the denominator is the sum of all the
years’ useful life at the start of ownership. This method results in step-wise lower depreciation in later years of
useful life.
Remaining years
Depreciation=Depreciable amount ×
∑ of year s' digits
Sum of years’ digits may also be calculated using the following formula:
n(n+1)
¿
2
CHAPTER 6: DEPRECIATION PRC 4: INTRODUCTION TO ACCOUNTING
Example 11:
Plant bought on 1 January 2021 for Rs. 100,000 with expected useful life of 5 years and residual
value of Rs. 10,000. The entity year ends on 31 December.
Required:
Using sum of digits method, calculate the amount of annual depreciation and carrying amount
along with accumulated depreciation for the year 2021 to 2025.
ANSWER
n(n+1) 5 (5+1)
∑ of digits= 2
=
2
=15
Example 12:
A motor vehicle cost Rs.400,000. It has an expected residual value after 5 years of Rs.40,000. If
the sum of the digits method of depreciation is used, what will be the carrying amount of the
asset at the end of Year 2?
ANSWER
Sum of digits = 5 + 4 + 3 + 2 + 1 = 15
Rs.
Cost of asset 400,000
Year 1 Depreciation (400,000 – 40,000) x 5/15 (120,000)
Carrying amount at the end of year 1 280,000
Year 2 Depreciation (400,000 – 40,000) x 4/15 (96,000)
Carrying amount at the end of year 2 184,000
Commencement of depreciation
Depreciation must be charged from the date the asset is available for use. This may be earlier than the date it is
actually brought into use.
PRC 4: INTRODUCTION TO ACCOUNTING CHAPTER 6: DEPRECIATION
End of depreciation
The depreciation is no more charged when the asset is derecognized or disposed of.
Example 13:
An office property cost Rs. 5 million, of which the land value is Rs. 2 million and the cost of the
building is Rs. 3 million. The building has an estimated life of 50 years. What is the annual
depreciation charge on the property, using the straight-line method?
ANSWER
Rs. 3,000,000 / 50 years = Rs. 60,000
Land is not depreciated.
Example 14:
An entity constructed a building for its own use. The building was completed on 1 July 2008 and
occupied on 1 September 2008. The entity used the building for a long time but then due to
expansion in its business it decided on 1 July 2015 to shift to new rented premises. The entity
shifted to new premises on 1 August 2015 and disposed of the old building on 31 December
2015.
Required:
Identify the date from which depreciation should be commenced and date when depreciation
charge should cease.
ANSWER
Commencement of depreciation: 1 July 2008 (when asset became available for use)
Cessation of depreciation: 31 December 2015 (when asset is disposed of)
Non-current asset
Balance b/d XXX
Bank (new additions) XXX Balance c/d (SFP) XXX
XXX XXX
Balance b/d XXX
Accumulated depreciation
Balance b/d XX
Balance c/d (SFP) XX Depreciation expense XX
XX XX
Balance b/d XX
Depreciation expense
Accumulated dep. XX Profit or loss XX
XX XX
Example 17:
An item of equipment cost Rs. 40,000 at the beginning of Year 1. It has an expected life of 5
years. The annual depreciation charge is Rs. 8,000. Prepare relevant ledger accounts for Years 1
and 2 and extracts of financial statement for each period.
ANSWER
Equipment
Y 01 Bank (new additions) 40,000
Balance c/d 40,000
40,00 40,000
0
Y 02 Balance b/d 40,000
Balance c/d 40,000
40,00 40,000
0
Accumulated depreciation
Y 01 Depreciation expense 8,000
Balance c/d 8,000
8,000 8,000
Y 02 Balance b/d 8,000
Balance c/d 16,000 Depreciation expense 8,000
16,000 16,000
Depreciation Expense
Y 01 Depreciation expense 8,000
Profit or loss 8,000
8,000 8,000
Y 02 Depreciation expense 8,000
Profit or loss 8,000
8,000 8,000
Example 18:
Maturin bought a machine for Rs. 10,000 on 1 January 2012. He estimates a useful life of 8 years
and a residual value of Rs.800. Depreciation is to be calculated on a straight-line basis.
Required:
a) Write up for 2012 and 2013 the
Machinery account
Accumulated depreciation account
Depreciation expense account.
b) Show how the machine would be presented in the statement of financial positions as at
31 December 2012 and 31 December 2013.
ANSWER
Part a
Machinery
Date Particulars Rs. Date Particulars Rs.
2012 2012
1 Jan Bank 10,000 31 Dec Balance c/d 10,000
10,000 10,000
2013 2013
1 Jan Balance b/d 10,000 31 Dec Balance c/d
10,000 10,000
Accumulated Depreciation
Date Particulars Rs. Date Particulars Rs.
2012 2012
31 Dec Balance c/d 1,150 31 Dec Depreciation 1,150
1,150 1,150
2013 2013
1 Jan Balance b/d 1,150
31 Dec Balance c/d 2,300 31 Dec Depreciation 1,150
2,300 2,300
Depreciation expense
Date Particulars Rs. Date Particulars Rs.
2012 2012
31 Dec Acc. Dep 1,150 31 Dec P&L 1,150
1,150 1,150
2013 2013
31 Dec Acc. Dep 1,150 31 Dec P&L 1,150
1,150 1,150
PRC 4: INTRODUCTION TO ACCOUNTING CHAPTER 6: DEPRECIATION
2013 2012
Non-current assets Rs. Rs.
Machinery at cost 10,000 10,000
Acc. Depreciation (2,300) (1,150)
7,700 8,850
CHAPTER 6: DEPRECIATION PRC 4: INTRODUCTION TO ACCOUNTING
4. COMPREHENSIVE EXAMPLES
Example 19:
Since he commenced business on 1 January 2010 Sophie has purchased for cash the following
three machines:
Year of purchase Cost Rs. Rate of depreciation
Machine 1 2010 4,200 25%
Machine 2 2011 5,000 30%
Machine 3 2012 3,500 35%
Sophie’s policy is to charge a full year’s depreciation in the year of purchase irrespective of the
date of purchase. The reducing balance method is used to calculate depreciation.
Accounts are prepared to 31 December each year.
Required:
a) Prepare the machinery account and accumulated depreciation account showing the
charge to the depreciation account for each year.
b) Show the relevant statement of financial position extracts for each year.
ANSWER
Part (a):
Machinery
Date Particulars Rs. Date Particulars Rs.
2010 2010
20 Jan Bank 4,200 31 Dec Balance c/d 4,200
4,200 4,200
2011 2011
1 Jan Balance b/d 4,200
17 Apr Bank 5,000 31 Dec Balance c/d 9,200
9,200 9,200
2012 2012
1 Jan Balance b/d 9,200
11 July Bank 3,500 31 Dec Balance c/d 12,700
12,700 12,700
Accumulated Depreciation
Date Particulars Rs. Date Particulars Rs.
2010 2010
31 Dec Balance c/d 1,050 31 Dec Depreciation- (W1) 1,050
1,050 1,050
2011 2011
1 Jan Balance b/d 1,050
31 Dec Balance c/d 3,337 31 Dec Depreciation- (W1) 2,287
3,337 3,337
2012 2012
1 Jan Balance b/d 3,337
31 Dec Balance c/d 6,203 31 Dec Depreciation- (W1) 2,866
6,203 6,203
PRC 4: INTRODUCTION TO ACCOUNTING CHAPTER 6: DEPRECIATION
CHAPTER 6: DEPRECIATION PRC 4: INTRODUCTION TO ACCOUNTING
Part (b)
W1 – Depreciation Rs.
Year 2010
Machine 1 Rs.4, 200 x 25% = 1,050
1,050
Year 2011
Machine 1 Rs.4,200 – 1,050 = Rs.3,150 x 25% = 787
Machine 2 Rs.5,000 x 30% = 1,500
2,287
Year 2012
Machine 1 Rs. 3,150 – 787 = Rs.2,363 x 25% = 591
Machine 2 Rs.5000 – 1,500 = Rs.3,500 x 30% = 1,050
Machine 3 Rs.3,500 x 35% = 1,225
2,866
Example 20:
Diana leases out German sports cars. She started business on 1 January 2010 and has decided
to depreciate the cars on a straight line basis at 25% per annum on cost at the year-end. During
the years 2010 to 2013 the following purchases took place.
2010 Acquired 20 Porsche 924 Turbos at a cost of Rs.18,600,000 each
2011 Purchased 6 Porsches for a total cost of Rs.108,600,000.
2012 Purchased a further two cars costing Rs.19,800,000 each.
2013 Purchased 15 cars for Rs.21,000,000 each.
Required:
Prepare a vehicle account, an accumulated depreciation account and a depreciation account for
the years 2010 to 2013. Diana prepares accounts to 31 December each year.
ANSWER
Vehicle
Date Particulars Rs.000 Date Particulars Rs.000
2010 2010
Bank 372,000 31 Dec Balance c/d 372,000
372,000 372,000
2011 2011
1 Jan Balance b/d 372,000
Bank 108,600 31 Dec Balance c/d 480,600
480,600 480,600
PRC 4: INTRODUCTION TO ACCOUNTING CHAPTER 6: DEPRECIATION
Vehicle
2012 2012
1 Jan Balance b/d 480,600
Bank 39,600 31 Dec Balance c/d 520,200
520,200 520,200
2013 2013
1 Jan Balance b/d 520,200
Bank 315,000 31 Dec Balance c/d 835, 200
835,200 835,200
Accumulated Depreciation
Date Particulars Rs.000 Date Particulars Rs.000
2010 2010
31 Dec Balance c/d 93,000 31 Dec Depreciation- (W) 93,000
93,000 93,000
2011 2011
1 Jan Balance b/d 93,000
31 Dec Balance c/d 213,150 31 Dec Depreciation- (W) 120,150
213,150 213,150
2012 2012
1 Jan Balance b/d 213,150
31 Dec Balance c/d 343,200 31 Dec Depreciation- (W) 130,050
343,200 343,200
2013 2013
1 Jan Balance b/d 343,200
31 Dec Balance c/d 552,000 31 Dec Depreciation- (W) 208,800
552,000 552,000
Depreciation expense
Date Particulars Rs.000 Date Particulars Rs.000
2010 2012
31 Dec Acc. Dep 93,000 31 Dec P & L 93,000
93,000 93,000
2011 2013
31 Dec Acc. Dep 120,150 31 Dec P & L 120,150
120,150 120,150
2012 2013
31 Dec Acc. Dep 130,050 31 Dec P & L 130,050
130,050 130,050
2013 2013
31 Dec Acc. Dep 208,800 31 Dec P & L 208,800
208,800 208,800
Working (W)
Year Calculation Depreciation
2010 372,000 x 25% 93,000
2011 480,600 x 25% 120,150
2012 520,200 x 25% 130,050
2013 835,200 x 25% 208,800
CHAPTER 6: DEPRECIATION PRC 4: INTRODUCTION TO ACCOUNTING
Example 21:
An entity started business on 1 January 2023, the financial year end being 31 December.
The machinery bought was:
2023 1 January 1 machine costing Rs. 1,400
2024 1 July 2 machines costing Rs. 600 each
1 October 1 machine costing Rs. 1,000
2026 1 April 1 machine costing Rs. 400
Depreciation is over ten years, using the straight line method, machines being depreciated for
the proportion of the year that they are owned.
Required:
i. The machinery account.
ii. The provision for depreciation account.
iii. The statement of financial position extracts
for each of the years 2023, 2024, 2025, 2026.
ANSWER
Machinery Account (i)
Date Particulars Rs. Date Particulars Rs.
01.01.23 Bank 1,400 31.12.23 Balance c/d 1,400
1,400 1,400
01.01.24 Balance b/d 1,400
01.07.24 Bank 1,200
01.10.24 Bank 1,000 31.12.24 Balance c/d 3,600
3,600 3,600
01.01.25 Balance b/d 3,600
31.12.25 Balance c/d 3,600
3,600 3,600
01.01.26 Balance b/d 3,600
01.04.26 Bank 400 31.12.26 Balance c/d 4,000
4,000 4,000
725 725
01.01.26 Balance b/d 725
31.12.2 Balance c/d 1,115 31.12.26 Depreciation (W) 390
6
1,115 1,115
Depreciation (workings)
202 Rs. 1,400 x 10% x 12/12 Rs. 140
3
202 Rs. 1,400 x 10% x 12/12 + Rs. 12,00 x 10% x 6/12 + Rs. 1,000 x 10% x Rs. 225
4 3/12
202 Rs. 3,600 x 10% x 12/12 Rs. 360
5
202 Rs. 3,600 x 10% x 12/12 + Rs. 400 x 10% x 9/12 Rs. 390
6
Example 22:
Sajid Limited (SL) purchased a plant on 1 January 2011 for Rs. 34,000 with expected life of 5
years and residual value of Rs. 4,000 at the end of its useful life. The entity uses reducing
balance method for depreciation of plant.
SL purchased another plant on 1 Apr 2012 for Rs. 51,000 with expected life of 5 years and
residual value of Rs. 6,000 at the end of its useful life.
SL purchased its third plant on 1 July 2013 for Rs. 68,000 with expected useful life of 5 years
and residual value of Rs. 8,000 at the end of its useful life.
Required:
Prepare “Plant Account” and “Accumulated depreciation Account” for the year 2011 to 2013.
ANSWER
Plant account
34,000 34,000
85,000 85,000
153,000 153,000
ANSWER
Year ended 31-Dec-13 31-Dec-14 31-Dec-15
Statement of profit or loss --------------- Amount in Rs. --------------
Depreciation
[9,441,000(W-1)-175,000]×2,000/12,000 1,544,333
[9,441,000(W-1)-175,000]×3,200/12,000 2,470,934
[7,178,733(W-2)-350,000]×1,400/8,000 1,195,028
Maintenance cost (528,000/3) 176,000 176,000 176,000
Administration expenses (Staff training) 351,000 - -
02. Which of the following are items of property, plant and equipment?
(i) Standby generator expected to be used for seven years
(ii) A plot of land held for resale
(iii) A bus for pick-and-drop of staff members
(iv) A generator for rental to others
(a) (i) to (iv) all
(b) (i), (ii) and (iii) only
(c) (i), (iii) and (iv) only
(d) (ii), (iii) and (iv) only
04. A building contractor decides to construct an office building to be occupied by his own staff.
Which TWO of the following costs incurred by the building contractor cannot be included as a part
of the cost of the office building?
(a) Cement, iron, sand and crushed stone bought for construction
(b) A proportion of the contractor’s general administration costs
(c) Hire of plant and machinery for use on the office building site
(d) Additional design work caused by initial design errors
05. Alpha Trading Limited (ATL) used its own staff, assisted by contractors when required, to
construct a new warehouse for its own use.
Identify the costs listed below that cannot be capitalized.
(a) Clearance of the site prior to commencement of construction
(b) Professional surveyor fees for managing the construction work
CHAPTER 6: DEPRECIATION PRC 4: INTRODUCTION TO ACCOUNTING
(c) ATL’s own staff wages for time spent working on construction
(d) A proportion of ATL’s administration costs, based on staff time spent
06. Which TWO of the following items should be capitalised within the initial carrying amount of an
item of plant?
(a) Cost of transporting the plant to the factory
(b) Cost of installing a new power supply required to operate the plant
(c) A deduction to reflect the estimated residual value
(d) Cost of a three-year maintenance agreement
07. An entity purchased some heavy machinery. The invoice for the machinery showed the following
items:
Rs.000
Cost of machinery 46,000
Cost of delivery 900
Cost of 12-month warranty on the machinery 1,600
Total amount payable 48,500
In addition, the entity incurred Rs.3.4 million in making modifications to its factory so that the
heavy machinery could be installed.
What should be the cost of the machinery in the entity’s machinery account in the ledger?
(a) Rs. 48,500,000
(b) Rs. 46,900,000
(c) Rs. 46,000,000
(d) Rs. 50,300,000
08. A business acquired new premises at a cost of Rs.400 million on 1 January 2015. In the period to
the year end of 31 March 2015 the following further costs were incurred.
Rs.000
Costs of initial adaptation of the building 12,000
Legal costs relating to the purchase 2,500
Monthly cleaning contract 3,400
Air conditioning unit necessary for machinery to be 2,800
used
Cost of machinery 12,300
What amount should appear as the cost of premises in the entity’s statement of financial position
at 31 March 2015?
(a) Rs. 414,500,000
(b) Rs. 412,000,000
(c) Rs. 425,800,000
(d) Rs. 417,800,000
PRC 4: INTRODUCTION TO ACCOUNTING CHAPTER 6: DEPRECIATION
09. An entity has built a new factory incurring the following costs:
Rs. '000
Land 1,200
Materials 2,400
Labour 3,000
Architect's fees 25
Surveyor's fees 15
Site overheads 300
Apportioned administrative overheads 150
Testing of fire alarms 10
Business rates for first year 12
7,112
What will be the total amount capitalised in respect of the factory?
(a) Rs. 6,112,000
(b) Rs. 6,950,000
(c) Rs. 7,112,000
(d) Rs. 7,100,000
10. On 1 March 2018 Mercury Limited (ML) acquired a machine from Plant under the following
terms:
Rs. 000
List price of machine 82,000
Import duty 1,500
Delivery fees 2,050
Electrical installation costs 9,500
Pre-production testing 4,900
Purchase of a five-year maintenance contract with Plant 7,000
In addition to the above information ML was granted a trade discount of 10% on the initial list
price of the asset and a settlement discount of 5% on remaining amount if payment for the
machine was received within one month of purchase. ML expected and paid for the plant on 25
March 2018.
On what amount, the plant should be initially measured on acquisition?
11. Construction of Venice Limited’s new store began on 1 April 2019. The following costs were
incurred on the construction:
Rs. 000
Freehold land 4,500
Architect fees 620
Site preparation 1,650
Materials 7,800
Direct labour costs 11,200
Legal fees 2,400
General overheads 940
The store was completed on 1 January 2020.
Calculate the amount to be included as property, plant and equipment in respect of the new store
(a) Rs. 28,170,000
(b) Rs. 29,110,000
(c) Rs. 25,770,000
(d) Rs. 23,670,000
12. On 1 March 2010 Earth Limited (EL) purchased an upgrade package from Sun Limited at a cost of
Rs. 18 million for the machine it originally purchased in 2008. The upgrade took a total of two
days where new components were added to the machine. EL agreed to purchase the package as
the new components would lead to a reduction in production time per unit of 15%. This will
enable EL to increase production without the need to purchase a new machine.
What is appropriate accounting treatment?
(a) EL should expense this additional expenditure
(b) EL should capitalise this additional expenditure in the cost of existing plant
(c) EL should capitalise the 15% of Rs. 18 million in the cost of existing plant
(d) None of the above is appropriate treatment
13. A machine price was Rs.1, 000,000 and was carried through a truck. The truck’s fares were Rs.
20,000. The engineers charged Rs. 45,000 for the installation.
The cost of the machine is?
(a) Rs.1,000,000
(b) Rs.1,020,000
(c) Rs.1,045,000
(d) Rs.1,065,000
PRC 4: INTRODUCTION TO ACCOUNTING CHAPTER 6: DEPRECIATION
16. Which of the following is not capitalised as a directly attributable cost of a machine?
(a) Site preparation
(b) Initial testing cost
(c) Carriage inwards for fuel for the machinery
(d) Installation and assembly costs
17. An entity just received civil work bill from their contractor of Rs. 580,000 for construction of a
new guard room and repair of sewerage system. It is estimated that 15% of total bill relates to
repair work. What amount should be capitalised and/or charged as an expense?
(a) Capitalise Rs. 580,000
(b) Expense Rs. 580,000
(c) Capitalise Rs. 493,000 and Expense Rs. 87,000
(d) Expense Rs. 493,000 and Capitalise Rs. 87,000
18. On 22nd February an equipment was purchased for Rs. 800,000. It was delivered immediately. The
entity paid Rs. 500,000 immediately and remaining are to be paid on 4th March.
What journal entry should be recorded on 22nd February?
(a) Debit Equipment Rs. 800,000; Credit Bank Rs. 500,000; Credit Advance Rs. 300,000
(b) Debit Equipment Rs. 800,000; Credit Payables Rs. 500,000; Credit Bank Rs. 300,000
(c) Debit Equipment Rs. 800,000; Credit Bank Rs. 500,000; Credit Payables Rs. 300,000
(d) Debit Equipment Rs. 800,000; Credit Advance Rs. 500,000; Credit Payables Rs. 300,000
19. On 22nd February an equipment was ordered for Rs. 800,000 by paying 20% advance. It was
delivered on 4th March when the entity paid 50% of amount due and promised remaining to be
paid on 25th April.
What journal entry should be recorded on 4th March?
CHAPTER 6: DEPRECIATION PRC 4: INTRODUCTION TO ACCOUNTING
(a) Debit Equipment Rs. 800,000; Credit Advance Rs. 160,000 & Bank Rs. 400,000 & Payables
Rs. 240,000
(b) Debit Equipment Rs. 800,000; Credit Advance Rs. 160,000 & Bank Rs. 740,000
(c) Debit Equipment Rs. 800,000; Credit Advance Rs. 160,000 & Bank Rs. 320,000 & Payables
Rs. 320,000
(d) Debit Equipment Rs. 800,000; Credit Advance Rs. 160,000 & Payables Rs. 640,000
20. On 22nd February an equipment was ordered for Rs. 800,000 by paying 20% advance. It was
delivered on 4th March when the entity paid 50% of total bill and promised remaining to be paid
on 25th April.
What journal entry should be recorded on 4th March?
(a) Debit Equipment Rs. 800,000; Credit Advance Rs. 160,000 & Bank Rs. 400,000 & Payables
Rs. 240,000
(b) Debit Equipment Rs. 800,000; Credit Advance Rs. 160,000 & Bank Rs. 740,000
(c) Debit Equipment Rs. 800,000; Credit Advance Rs. 160,000 & Bank Rs. 320,000 & Payables
Rs. 320,000
(d) Debit Equipment Rs. 800,000; Credit Advance Rs. 160,000 & Payables Rs. 640,000
23. What is the net amount an entity expects to obtain for an asset at the end of its useful life?
(a) Residual value
(b) Depreciated value
(c) Present value
(d) Fair value
24. Huge Ltd. purchases the machine for Rs.6 million. It has an estimated salvage value of Rs.1 million
and a useful life of five years.
What is the depreciation charged for the year under the straight line method?
PRC 4: INTRODUCTION TO ACCOUNTING CHAPTER 6: DEPRECIATION
(a) Rs.1,200,000
(b) Rs.1,000,000
(c) Rs.800,000
(d) None of the above
25. Small Limited purchased a machine for Rs. 8 million. It has an estimated residual value of Rs. 1.5
million and useful life of seven years. Calculate depreciation percentage (to be applied to cost)
under straight line method.
(a) 7%
(b) 12.7%
(c) 11.6%
(d) 7.11%
26. An item of plant was purchased on 1 April 2008 for Rs. 2,000,000 and is being depreciated at 25%
on a reducing balance basis. What would be its residual value after its useful life of 5 years?
(a) Rs. 632,809
(b) Rs. NIL
(c) Rs. 474,609
(d) Rs. 400,000
27. Small Ltd. purchases the equipment for Rs. 600,000. It has an estimated salvage value of Rs.
100,000 and a useful life of five years.
What is the book value of equipment under the reducing balance method at the end of its useful
life?
(a) Rs.163,840
(b) Rs.165,000
(c) Rs.120,000
(d) Rs.100,000
28. Small Limited purchased a machine for Rs. 8 million. It has an estimated residual value of Rs. 1.5
million and useful life of seven years. Calculate depreciation percentage (to be applied to cost)
under reducing balance method.
(a) 21.27%
(b) 22.63%
(c) 23.45%
(d) 24.55%
29. Under which of the following methods of depreciation the expense may be zero in the period in
which asset is not used at all?
CHAPTER 6: DEPRECIATION PRC 4: INTRODUCTION TO ACCOUNTING
30. An aeroplane engine was acquired for Rs. 75 million and has life of 48000 flying hours. The plane
was flown 1800 hours during the year. What amount of depreciation should be charged in profit
or loss?
(a) Rs. 2,812.5
(b) Rs. 2,500,000
(c) Rs. 2,500
(d) Rs. 2,812,500
31. A motor vehicle cost Rs. 400,000. It has an expected residual value after 5 years of Rs. 40,000.
If the sum of the digits method of depreciation is used, what will be the carrying amount of the
asset at the end of Year 2?
(a) Rs. 96,000
(b) Rs. 120,000
(c) Rs. 280,000
(d) Rs. 184,000
32. Medium Ltd. purchases the car for Rs. 2,200,000. It has an estimated salvage value of Rs. 200,000
and a useful life of five years.
What is the depreciation charge for the first year under the sum-of-the-year digit method?
(a) Rs. 400,000
(b) Rs. 555,555
(c) Rs. 666,667
(d) None of the above
33. Normal Limited purchased premises for Rs. 16 million with no salvage value and useful life of 45
years.
What is the depreciation charge for the fourth year under the sum-of-the-year digit method?
(a) Rs. 4,692,754
(b) Rs. 6,492,754
(c) Rs. 7,544,926
(d) Rs. 5,744,926
34. Hunza Limited acquired a new office building on 1 October 2014. Its initial carrying amount
consisted of:
PRC 4: INTRODUCTION TO ACCOUNTING CHAPTER 6: DEPRECIATION
Rs. 000
Land 2,000
Building structure 10,000
Air conditioning system 4,000
16,000
The estimated lives of the building structure and air conditioning system are 25 years and 10
years respectively.
When the air conditioning system is due for replacement, it is estimated that the old system will
be dismantled and sold for Rs. 500,000.
Depreciation is time-apportioned where appropriate.
At what amount will the non-current assets be shown in Hunza Limited’s statement of financial
position as at 31 March 2015?
(a) Rs. 15,625,000
(b) Rs. 15,250,000
(c) Rs. 15,585,000
(d) Rs. 15,600,000
35. An entity purchases land with an office building. The building has a useful life of 20 years. How
should the land be depreciated?
(a) Depreciate over 20 years
(b) Depreciate over useful life of the land
(c) Do not depreciate the land
(d) None of these
37. Tom Limited runs a sports equipment manufacturing business with a year end of 31 December
2019. On 1 April 2019, Tom Limited acquired a delivery truck at a cost of Rs. 4,800,000. The
expected life of the truck is 8 years and residual value is expected to be nil. What is depreciation
charge for 2019 on straight line basis?
(a) Rs. 600,000
(b) Rs. 800,000
(c) Rs. 450,000
(d) Rs. 500,000
38. An entity which makes up its accounts annually to 31 December provides for depreciation of its
CHAPTER 6: DEPRECIATION PRC 4: INTRODUCTION TO ACCOUNTING
machinery at the rate of 10% per annum using the straight line method.
On 31 December 2016, the machinery consisted of three items purchased as under:
On 1 January 2014 Machine A Cost Rs. 3,000,000
On 1 April 2015 Machine B Cost Rs. 2,000,000
On 1 July 2016 Machine C Cost Rs. 4,000,000
What would be depreciation charge for the year 2016?
(a) Rs. 600,000
(b) Rs. 628,000
(c) Rs. 700,000
(d) Rs. 900,000
39. An entity which makes up its accounts annually to 31 December provides for depreciation of its
machinery at the rate of 10% per annum using the reducing balance method.
On 31 December 2016, the machinery consisted of three items purchased as under:
On 1 January 2014 Machine A Cost Rs. 3,000,000
On 1 April 2015 Machine B Cost Rs. 2,000,000
On 1 July 2016 Machine C Cost Rs. 4,000,000
What would be depreciation charge for the year 2016?
(a) Rs. 600,000
(b) Rs. 628,000
(c) Rs. 700,000
(d) Rs. 900,000
40. An entity which makes up its accounts annually to 31 December provided for depreciation of its
equipment at the rate of 10% per annum using the reducing balance method since it was bought
on 1 January 2018 for Rs. 4,000,000.
On 1 January 2021, the entity concluded that straight line method would be more appropriate for
this equipment and estimated remaining useful life of 5 years with residual value of Rs. 500,000 at
the end of useful life.
What is depreciation expense for the year ended 31 December 2021?
41. An entity which makes up its accounts annually to 31 December provided for depreciation of its
equipment at the rate of 10% per annum using straight line method since it was bought on 1
January 2018 for Rs. 4,000,000.
On 1 January 2021, the entity concluded that reducing balance method would be more
appropriate for this equipment and estimated remaining useful life of 5 years with residual value
of Rs. 500,000 at the end of useful life.
PRC 4: INTRODUCTION TO ACCOUNTING CHAPTER 6: DEPRECIATION
44. At financial year end of 31 December 2020, an entity reported the following in its statement of
financial position:
Rs. in million
Property, plant and equipment – Cost 860
– Accumulated depreciation (260)
600
On 31 August 2021, the entity purchased another item of equipment for Rs. 100 million.
Depreciation is charged at 20% per annum on pro rata basis using straight line method.
What is the depreciation charge for the year ended 31 December 2021?
(a) Rs. 192 million
(b) Rs. 178.67 million
(c) Rs. 140 million
(d) Rs. 126.67 million
45. At financial year end of 31 December 2020, an entity reported the following in its statement of
financial position:
Rs. in million
Property, plant and equipment – Cost 860
– Accumulated depreciation (260)
600
CHAPTER 6: DEPRECIATION PRC 4: INTRODUCTION TO ACCOUNTING
On 31 August 2021, the entity purchased another item of equipment for Rs. 100 million.
Depreciation is charged at 20% per annum on pro rata basis using reducing balance method.
What is the depreciation charge for the year ended 31 December 2021?
(a) Rs. 192 million
(b) Rs. 178.67 million
(c) Rs. 140 million
(d) Rs. 126.67 million
46. At financial year end of 31 December 2020, an entity reported the following in its statement of
financial position:
Rs. in million
Property, plant and equipment – Cost 860
– Accumulated depreciation (260)
600
The cost amount of Rs. 860 million includes Rs. 150 million relating to freehold land. On 31 August
2021, the entity purchased another item of equipment for Rs. 100 million. Depreciation is charged
at 20% per annum on pro rata basis using reducing balance method.
What is the depreciation charge for the year ended 31 December 2021?
(a) Rs. 96.67 million
(b) Rs. 106.67 million
(c) Rs. 116.67 million
(d) Rs. 126.67 million
47. A non-current asset was bought for Rs. 1,400,000 on 1 January 2019. It has estimated useful life of
3 years and residual value of Rs. 200,000. The entity uses reducing balance method of
depreciation. What would be carrying amount of this asset on 31 December 2021?
(a) Rs. 100,000
(b) Rs. 200,000
(c) Rs. 300,000
(d) Rs. 400,000
48. A non-current asset was bought for Rs. 1,400,000 on 1 January 2019. It has estimated useful life of
3 years and residual value of Rs. 200,000. The entity uses reducing balance method of
depreciation. Calculate the total depreciation to be charged throughout the useful life of the asset?
(a) Rs. 1,000,000
(b) Rs. 1,100,000
(c) Rs. 1,200,000
(d) Rs. 1,300,000
49. The following are details for two entities as at 30 June 2021:
PRC 4: INTRODUCTION TO ACCOUNTING CHAPTER 6: DEPRECIATION
Entity A Entity B
Property, plant and equipment Rs. Rs.
Cost 100,000,000 25,000,000
Less: Accumulated depreciation (80,000,000) (5,000,000)
20,000,000 20,000,000
50. Jupiter Limited (JL) purchased a machine on 1 July 2017 for Rs. 500,000. It is being depreciated on
a straight line basis over its expected life of ten years. Residual value is estimated at Rs. 20,000. On
1 January 2018, following a change in legislation, JL fitted a safety guard to the machine. The
safety guard cost Rs. 25,000 and has a useful life of five years with no residual value.
What amount will be charged to profit or loss for the year ended 31 March 2018 in respect of
depreciation on this machine?
Rs. ___________
CHAPTER 6: DEPRECIATION PRC 4: INTRODUCTION TO ACCOUNTING
ANSWERS
01. (d) Items held for resale are inventories and not property, plant and equipment.
02. (c) Plot of land held for resale is inventory and not property, plant and equipment.
03. (c) Assets held for sale in the normal course of business are inventories.
04. (b) & (d) Direct costs relating to the acquisition of the asset can be included such as materials
and labour costs, the administration cost is not a direct cost. Also costs relating to
errors or wastage cannot be capitalised.
05. (d) Administration costs or share thereof cannot be capitalised.
06. (a) & (b) The maintenance costs should be expensed as incurred over three years. The residual
value should be taken into account for the purposes of calculating depreciation, but
not for the amount to be capitalised.
07. (d) Cost of machinery: Rs. 000
Cost 46,000
Cost of delivery 900
Modification cost 3,400
Total 50,300
\\
88,060
11. (a) Rs. 000
Freehold land 4,500
Architect fees 620
Site preparation 1,650
Materials 7,800
Direct labour costs 11,200
Legal fees 2,400
28,170
12. (b) The additional amount should be capitalised as it is probable that economic benefits
would increase.
13. (d) Rs. 1,000,000 + 20,000 + 45,000 = Rs. 1,065,000
14. (c) Refundable sales tax is not a cost as it would be received back.
15. (a) Professional fees are directly attributable expenditure. Other items are not.
16. (c) Carriage inwards for fuel for the machinery are revenue expenditure.
17. (c) New room is improvement and the repair work is revenue expenditure.
18. (c) Debit Equipment Rs. 800,000; Credit Bank Rs. 500,000; Credit Payables Rs. 300,000
19. (c) Debit Equipment Rs. 800,000;
Credit Advance Rs. 160,000 & Bank Rs. 320,000 & Payables Rs. 320,000
20. (a) Debit Equipment Rs. 800,000;
Credit Advance Rs. 160,000 & Bank Rs. 400,000 & Payables Rs. 240,000
21. (a) The depreciation is systematic allocation of depreciable amount of an asset over its
useful life.
22. (b) Depreciable amount = Cost less residual value
23. (a) Residual value is amount expected at the end of useful life.
24. (b) (Rs. 6m – 1m) / 5 years = Rs. 1 million
25. (c) = 6.5m / (8m x 7 years) = 11.6%
26. (c) Rs. 2,000,000 x (0.75)5 = 474,609
27. (d) The carrying amount of an asset is equal to its residual value at the end of useful life,
under any depreciation method.
28. (a) = 1 – (1.5/8) (1/7) = 21.27%
29. (c) Sum of units’ method
30. (d) Rs. 75,000,000 / 48,000 x 1,800 = Rs. 2,812,500
31. (d) Sum of digits = 5 + 4 + 3 + 2 + 1 = 15 Rs.
Cost of asset 400,000
Year 1 Depreciation (400,000 – 40,000) x 5/15 (120,000)
Carrying amount at the end of year 1 280,000
Year 2 Depreciation (400,000 – 40,000) x 4/15 (96,000)
CHAPTER 6: DEPRECIATION PRC 4: INTRODUCTION TO ACCOUNTING
STICKY NOTES
Methods of depreciation
SPOTLIGHT
Sum-of-the-year- Units of
Straight line Reducing balance
digit method production
method method method
is based on the
units produced
it will result in
STICKY NOTES
SPOTLIGHT
STICKY NOTES