2022 06 Depreciation

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CHAPTER 6

DEPRECIATION

IN THIS CHAPTER: AT A GLANCE


Non-current assets are used in business for more than one
AT A GLANCE accounting period. Acquisition and improvement costs are
capitalised and other costs are charged as an expense.
SPOTLIGHT
Depreciation is an accounting method of allocating the cost of a
Non-Current Assets tangible non-current asset over its useful life. Depreciation
represents how much of an asset's value has been used up.
Depreciation: Concept and Depreciating assets helps entities measure financial
Computation performance by comparing revenue earned by utilising an asset
and expensing a portion of asset’s cost each year.
Accounting for Depreciation There are mainly four types of depreciation methods that may
be used;
Comprehensive Examples
 Straight line method (recognising depreciation evenly
Objective Based Q&A throughout useful life)
 Reducing balance method (amount of depreciation
STICKY NOTES reduces as the life of the asset progresses)
 Units of production method (usage basis)
 Sum of the digit method (amount of depreciation,
calculated as a fraction of remaining years and sum of
years’ digits, reduces as the life of the asset progresses)
Non-current assets are presented in statement of financial
position at cost less accumulated depreciation. The
accumulated depreciation is cumulative depreciation charged
to date.

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN 191


AT A GLANCE
CHAPTER 6: DEPRECIATION PRC 4: INTRODUCTION TO ACCOUNTING

1. NON CURRENT ASSETS


Assets that have a long useful life and are expected to provide future economic benefits for the entity over a
period of several years. Non-current assets may be intangible or tangible.
Intangible non-current assets do not have a physical existence such as patent rights, licensing, software etc.
Tangible non-current assets are assets having physical existence, such as land and buildings, plant and
equipment, office equipment, furniture and fixture and motor vehicles. These are often referred to as ‘property,

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

Distinguish non-current assets and Inventory


If an entity’s main business is selling machines, then that machine does not classify as non-current asset rather
the machinery used to produce the machines for sales is non-current asset. The machines manufactured for
STICKY NOTES

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.

192 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN


PRC 4: INTRODUCTION TO ACCOUNTING CHAPTER 6: DEPRECIATION

 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.

Examples of directly attributable costs are:


 wages for the construction or acquisition;
 costs of site preparation including material and labour costs;
 initial delivery and handling costs (i.e. loading, unloading, carriage, freight);
 installation and assembly costs;
 costs of testing whether the asset is functioning properly; and
 professional fees such as architect and surveyor fee.
 Example 02:
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?
 ANSWER

Cost of machinery: Rs. 000


Cost 46,000
Cost of delivery 900
Modification cost 3,400
Total 50,300

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.

Improvements are capitalised


Expenditure on a non-current asset after acquisition is treated as capital expenditure when it represents an
improvement. This is added to the cost of the original asset.
In practice, this means that expenditure is capitalised if it improves the asset (for example, by enhancing its
performance or extending its useful life).
CHAPTER 6: DEPRECIATION PRC 4: INTRODUCTION TO ACCOUNTING

Repairs are expensed


Expenditure on a non-current asset after acquisition is treated as revenue expenditure when it is incurred to
make a repair. This is recognised as an expense in the statement of comprehensive income.

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.

Consumption of economic benefits


A capital expenditure is assumed to be consumed over the useful life of the related non-current asset. A
revenue expenditure is assumed to be consumed within a very short period of time. Therefore, capital
expenditures are charged to expense gradually via depreciation or amortisation and over a long period of time.
Revenue expenditures are charged to expense in the current period.
 Example 03:
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
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

Cost of premises: Rs. 000


Cost 400,000
Adaptation 12,000
Legal fees 2,500
Total 414,500

The related journal entries are as follows:


When payment is made in cash
Debit Non-current assets
Credit Cash / Bank
When payment is made in arrears
Debit Non-current assets
Credit Payable to Vendors
When payment is made in advance (at the date of payment)
Debit Advance to Vendor (Receivable)
Credit Cash / Bank
PRC 4: INTRODUCTION TO ACCOUNTING CHAPTER 6: DEPRECIATION

When payment is made in advance (at the date asset is recognised)


Debit Non-current assets
Credit Advance to Vendor (Receivable)
Note: the advance is an asset too but it is not depreciated.

2. DEPRECIATION: CONCEPT AND COMPUTATION


Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life.
In simple words, depreciation is an expense that matches the cost of a non-current asset to the benefit earned
from its ownership. It is calculated so that a business recognises the full cost associated with a non-current
asset over the entire period that the asset is used. In effect, the cost of the asset is transferred to the statement
of comprehensive income over the life of the asset. This may be several years.

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.

METHODS OF CALCULATING DEPRECIATION


The depreciation method used should reflect as fairly as possible the pattern in which the asset’s economic
benefits are consumed by the entity.

Straight line depreciation


CHAPTER 6: DEPRECIATION PRC 4: INTRODUCTION TO ACCOUNTING

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

2021 2022 2023 2024 2025


Rs. Rs. Rs. Rs. Rs.
Annual depreciation 18,000 18,000 18,000 18,000 18,000
Rs. 100,000 x 18%

Cost 100,000 100,000 100,000 100,000 100,000


Accumulated depreciation (18,000) (36,000) (54,000) (72,000) (90,000)
82,000 64,000 46,000 28,000 10,000

 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

Reducing balance method:


In this method, the annual depreciation charge is a fixed percentage of the carrying amount of the asset at the
start of the period which results in gradually lower depreciation charge as asset’s efficiency is reduced over its
useful life.

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 %

2021 2022 2023 2024 2025


Rs. Rs. Rs. Rs. Rs.
Annual depreciation 36,900 23,284 14,692 9,271 5,853
Carrying amount x 36.9%

Cost 100,000 100,000 100,000 100,000 100,000


Accumulated depreciation (36,900) (60,184) (74,876) (84,147) (90,000)
63,100 39,816 25,124 15,853 10,000

 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 of asset 64,000


Year 1 Depreciation (25%) (16,000)
Carrying amount at the end of year 1 48,000
Year 2 Depreciation (25%) (12,000)
Carrying amount at the end of year 2 36,000
Year 3 Depreciation (25%) (9,000)
Carrying amount at the end of year 3 27,000

Sum of unit method


In this method, depreciation is calculated by expressing the useful life of an asset in terms of its expected total
output and allocating the annual charge to depreciation based on actual output. The higher the usage, the
higher the depreciation charge and vice versa.

Cost−Residual value
Rate=
Usefule life∈units

Depreciation=Units used∨ produced × Rate

 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

2021 2022 2023 2024 2025


Rs. Rs. Rs. Rs. Rs.
Annual depreciation 18,000 21,600 14,400 24,000 12,000
Units produced x Rs. 12

Cost 100,000 100,000 100,000 100,000 100,000


Accumulated depreciation (18,000) (39,600) (54,000) (78,000) (90,000)
82,000 60,400 46,000 22,000 10,000

Sum of digits method


PRC 4: INTRODUCTION TO ACCOUNTING CHAPTER 6: DEPRECIATION

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

2021 2022 2023 2024 2025


Rs. Rs. Rs. Rs. Rs.
Annual depreciation 30,000 24,000 18,000 12,000 6,000
Rs. 90,000 x remaining years /
15

Cost 100,000 100,000 100,000 100,000 100,000


Accumulated depreciation (30,000) (54,000) (72,000) (84,000) (90,000)
70,000 46,000 28,000 16,000 10,000

 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

DEPRECIATION CHARGE AND PERIOD


Depreciation should be charged as an expense in the statement of comprehensive income each year over the
life of the asset even if the asset is idle and not being used. However, under usage methods of depreciation (sum
of units’ method), the depreciation charge can be zero while there is no production.
Land is not depreciated because it has indefinite useful life.

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)

CHANGE IN DEPRECIATION METHOD


A change from one method of providing depreciation to another method is permissible only on the grounds
that the new method will give a fairer presentation of the results and of the financial position.
The carrying amount should be written off over the remaining useful life, commencing with the period in which
the change is made.
 Example 15:
On 1 January 2001, Air Limited purchased an asset for Rs. 10,000 with nil residual value and is
intended to be used for 10 years. The entity uses straight line method.
On 1 January 2003, Air Limited reconsidered the use of its depreciation methods and concluded
that the straight-line method is not appropriate for this type of asset instead 25% depreciation
on reducing balance method is appropriate.
Required:
Calculate depreciation expense from year 2001 to year 2004.
 ANSWER

Year Calculation Rs.


2001 Rs. 10,000 / 10 years 1,000
2002 Rs. 9,000 / 9 years 1,000
CHAPTER 6: DEPRECIATION PRC 4: INTRODUCTION TO ACCOUNTING

2003 Rs. 10,000 – 1,000 – 1,000 = Rs. 8,000 x 25% 2,000


2004 Rs. 8,000 – 2,000 = Rs. 6,000 x 25% 1,500

REVIEW OF USEFUL LIFE AND RESIDUAL VALUES


Useful life and residual value of tangible non-current assets should be reviewed at end of each reporting period
and revised if expectations are significantly different from previous estimates.
The carrying amount of the asset at the date of revision less any residual value should be depreciated over the
revised remaining useful life.
 Example 16:
On 1 January 2001, Water Limited purchased an asset for Rs. 12,000 with estimated residual
value of Rs. 2,000 and is intended to be used for 10 years. The entity uses straight line method.
In 2003, Water Limited reviewed the useful life and residual value of the asset. It was estimated
that the asset’s remaining useful life is now only 5 years, however, the estimate of residual
value has been increased to Rs. 3,000.
Required:
Calculate depreciation expense from year 2001 to year 2004.
 ANSWER

Year Calculation Rs.


2001 Rs. 12,000 – 2,000 = Rs. 10,000 / 10 years 1,000
2002 Same as above 1,000
2003 Rs. 12,000 – 1,000 – 1,000 = Rs. 10,000 – Rs. 3,000 = Rs. 7,000 / 5 years 1,400
2004 Same as above 1,400
PRC 4: INTRODUCTION TO ACCOUNTING CHAPTER 6: DEPRECIATION

3. ACCOUNTING FOR DEPRECIATION


The accounting entry for recognising the depreciation is as follows:
Debit Depreciation expense [Profit or loss]
Credit Accumulated depreciation [deducted from asset]

RELEVANT LEDGER ACCOUNTS:

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

PRESENTATION IN FINANCIAL STATEMENTS

STATEMENT OF PROFIT OR LOSS (extracts) Rs.


Depreciation XX

STATEMENT OF FINANCIAL POSITION (extracts) Rs.


Non-current asset XXX
Less: Accumulated depreciation (XX)
Carrying amount (net book value) XXX
CHAPTER 6: DEPRECIATION PRC 4: INTRODUCTION TO ACCOUNTING

 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

Statement of profit or loss (extracts) Y 01 Y02


Rs. Rs.
Depreciation expense 8,000 8,000

Statement of financial position (extracts) Y 01 Y02


Rs. Rs.
Non-current asset 40,000 40,000
Less: Accumulated depreciation (8,000) (16,000)
Carrying amount (net book value) 32,000 24,000
PRC 4: INTRODUCTION TO ACCOUNTING CHAPTER 6: DEPRECIATION
CHAPTER 6: DEPRECIATION PRC 4: INTRODUCTION TO ACCOUNTING

 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

Depreciation = [10,000 – 800] /8 years= Rs. 1,150


Part (b)

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)

Statement of financial position (extract) 2012 2011 2010


Non-current assets Rs. Rs. Rs.
Machinery at cost 12,700 9,200 4,200
Acc. Depreciation (6,203) (3,337) (1,050)
6,497 5,863 3,150

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

Accumulated depreciation (ii)


Date Particulars Rs. Date Particulars Rs.
31.12.2 Balance c/d 140 31.12.23 Depreciation (W) 140
3
140 140
01.01.24 Balance b/d 140
31.12.2 Balance c/d 365 31.12.24 Depreciation (W) 225
4
365 365
01.01.25 Balance b/d 365
31.12.2 Balance c/d 725 31.12.25 Depreciation (W) 360
5
PRC 4: INTRODUCTION TO ACCOUNTING CHAPTER 6: DEPRECIATION

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

Statement of financial position (extracts) (iii)


2023 2024 2025 2026
Machinery 1,400 3,600 3,600 4,000
Less: Accumulated depreciation (140) (365) (725) (1,115)
1,260 3,235 2,875 2,885

 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

Date Particulars Rs Date Particulars Rs

01.01.11 Cash 34,000

31.12.11 Balance c/d 34,000

34,000 34,000

01.01.12 Balance b/d 34,000

01.01.12 Cash 51,000 31.12.12 Balance c/d 85,000


CHAPTER 6: DEPRECIATION PRC 4: INTRODUCTION TO ACCOUNTING

85,000 85,000

01.01.13 Balance b/d 85,000

01.07.13 Cash 68,000 31.12.12 Balance c/d 153,000

153,000 153,000

Accumulated depreciation account


Date Particulars Rs Date Particulars Rs
01.01.11 Balance b/d 0
31.12.11 Balance c/d 11,832 31.12.11 Depreciation (w-1) 11,832
11,832 11,832
01.01.12 Balance b/d 11,832
31.12.12 Balance c/d 32,857 31.12.12 Depreciation (w-2) 21,025
32,857 32,857
01.01.13 Balance b/d 32,857
31.12.13 Balance c/d 62,834 31.12.13 Depreciation (w-3) 29,977
62,834 62,834

Depreciation Calculation Cost 2011 NBV 2012 NBV Dep


Asset 1 [12, 12, 12 months] 34,000 (11,832) 22,168 (7,714) 14,454 (5,030)
Asset 2 [0, 9, 12 months] 51,000 (13,311) 37,689 (13,115)
Asset 3 [0, 0, 6 months] 68,000 (11,832)
Total (11,832) (21,025) (29,977)

Depreciation Rates calculation


Asset 1: 1 – 5√ (4000/34000) = 34.8%;
Asset 2: 1 – 5√ (6000/51000) = 34.8%;
Asset 3: 1 – 5√ (8000/68000) = 34.8%
 Example 23:
On 1 January 2013 Delta acquired a specialized machine for its production department. The
available information is as follows:
Rupees
List price of machine 9,200,000
Freight charges 263,000
Electrical installation cost 245,000
Staff training for use of machine 351,000
Pre-production testing 193,000
Purchase of a three-year maintenance contract 528,000
Estimated residual value 175,000

Discount (trade & settlement) on list price 5%


PRC 4: INTRODUCTION TO ACCOUNTING CHAPTER 6: DEPRECIATION

Estimated life (in machine hours) 12,000


Machine hours used during the years ended 31 December 2013, 2014 and 2015 were 2000,
3200 and 1400 respectively.
On 1 January 2015 Delta decided to upgrade the machine by adding new components at a cost
of Rs. 1,753,000. This upgrade led to a reduction in the production time per unit of goods being
manufactured by the machine. The upgrade also increased the estimated remaining life of the
machine at 1 January 2015 to 8,000 machine hours and its estimated residual value to Rs.
350,000.
Required:
For the years ended 31 December 2013, 2014 and 2015, compute the relevant amounts to be
included (under each head) in the statement of profit or loss and statement of financial
position. Notes to the financial statements are not required.

 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 - -

As at 31-Dec-13 31-Dec-14 31-Dec-15


Statement of financial position: --------------- Amount in Rs. --------------
Property, plant and equipment
Cost (W-1) 9,441,000 9,441,000 *11,194,000
Accumulated depreciation (1,544,333) (4,015,267) (5,210,295)
7,896,667 5,425,733 5,983,705

Long term prepayment 176,000 - -


Short term Prepayment 176,000 176,000 -
* [9,441,000+1,753,000]
W1: Cost price of machine Rupees
List price 9,200,000
Less: Discount (9,200,000×5%) (460,000)
Add: Freight charges 263,000
Electrical installation cost 245,000
Pre-production testing 193,000
9,441,000

W2 – Valuation after upgrade Rupees


Original cost W1 9,441,000
Depreciation up to 31-12-14 (1,544,333 + 2,470,934) (4,015,267)
CHAPTER 6: DEPRECIATION PRC 4: INTRODUCTION TO ACCOUNTING

Carrying amount on 1-Jan-15 5,425,733


Capitalisation of upgrade 1,753,000
Valuation after capitalisation 7,178,733
PRC 4: INTRODUCTION TO ACCOUNTING CHAPTER 6: DEPRECIATION

5. OBJECTIVE BASED Q&A


01. Which of the following cannot be classified as tangible non-current asset:
(a) A commercial generator held for use in factory in case of electricity shortage
(b) A commercial generator held for earning by renting to customers
(c) A commercial generator held for use in office in case of electricity shortage
(d) A commercial generator held for resale to customers

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

03. Which of the following is not a property, plant and equipment?


(a) Tangible assets
(b) Assets held for the production or supply of goods or services
(c) Assets held for sale in the normal course of business
(d) Assets expected to be used for more than one period

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?

(a) Rs. 98,750,000


CHAPTER 6: DEPRECIATION PRC 4: INTRODUCTION TO ACCOUNTING

(b) Rs. 95,060,000


(c) Rs. 91,750,000
(d) Rs. 88,060,000

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

14. Which of the following is not a component of cost of an asset?


(a) Purchase price
(b) Import duties
(c) Refundable sales tax
(d) Installation and assembly costs
15. Which of these cost is capitalised as cost of an asset?
(a) Professional fees
(b) General overheads
(c) Initial operating losses
(d) Administration expenses

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

21. The purpose of depreciation is to:


(a) Allocate the cost less residual value on a systematic basis over the asset’s useful life
(b) Write the asset down to its realisable value each period
(c) Accumulate a fund for asset replacement
(d) Recognise that assets lose value over time

22. Depreciable amount means;


(a) Cost of an asset + Residual value
(b) Cost of an asset – Residual value
(c) Cost of an asset – Residual value / useful life
(d) Residual value – Cost of an asset

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

(a) Straight line method


(b) Reducing balance method
(c) Sum of units’ method
(d) Sum of digits’ method

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

36. If an asset is idle then?


(a) Depreciation is paused
(b) Depreciation for the entire period 
(c) Depreciation is ignored
(d) Depreciation continues

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?

(a) Rs. 816,097


(b) Rs. 460,000
(c) Rs. 700,000
(d) Rs. 483,200

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

What is depreciation expense for the year ended 31 December 2021?

(a) Rs. 816,097


(b) Rs. 460,000
(c) Rs. 700,000
(d) Rs. 483,200
42. How often should the residual value of an asset be reviewed?
(a) Every six months
(b) As and when the market value will significantly change
(c) At the end of each reporting period
(d) Never

43. How often should the useful life of an asset be reviewed?


(a) Every six months
(b) As and when the market value will significantly change
(c) At the end of each reporting period
(d) Never

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

Which TWO of the following statements are correct?


(a) The details above do not provide any comparable information.
(b) Entity A has initially invested more in non-current assets as compared to Entity B
(c) Entity A has older assets as compared to Entity B
(d) Entity A profitability must be higher than Entity B

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
\\

08. (a) Cost of premises: Rs. 000


Cost 400,000
Adaptation 12,000
Legal fees 2,500
Total 414,500

09. (b) Rs. 000


Land 1,200
Materials 2,400
Labour 3,000
Architects fees 25
Surveyors fees 15
Site overheads 300
Testing fire alarms 10
6,950

10. (d) Rs. 000


List price of machine 82,000
Less: trade discount 10% (8,200)
73,800
Less: cash discount 5% (3,690)
Import duty 1,500
Delivery fees 2,050
Electrical installation costs 9,500
Pre-production testing 4,900
PRC 4: INTRODUCTION TO ACCOUNTING CHAPTER 6: DEPRECIATION

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

Carrying amount at the end of year 2 184,000


32. (c) (Rs. 2,200,000 – 200,000) x 5/15 = Rs. 666,667
33. (b) Sum of digits = [45 (45+1)] /2 = 1035
Depreciation 4th year = Rs. 160m x 42/1035 = Rs. 6,492,754
34. (a) Six months’ depreciation is required on the building structure and air conditioning
system.
Rs. 000
Land (not depreciated) 2,000
Building structure (10,000 – (10,000/25 × 6/12)) 9,800
Air conditioning system (4,000 – (3,500/10 × 6/12)) 3,825
15,625

35. (c) Land is not depreciated because it has indefinite life.


36. (d) Depreciation continues even if the asset is not in use.
37. (c) Rs. 4,800,000/8 years = Rs. 600,000 x 9/12 = Rs. 450,000
38. (c) Rs. 3,000,000 x 10% x 12/12 = Rs. 300,000
Rs. 2,000,000 x 10% x 12/12 = Rs. 200,000
Rs. 4,000,000 x 10% x 6/12 = Rs. 200,000
Total Rs. 700,000
39. (b) (Rs. 3,000,000 – 300,000 – 270,000) x 10% x 12/12 = Rs. 243,000
(Rs. 2,000,000 – 150,000) x 10% x 12/12 = Rs. 185,000
Rs. 4,000,000 x 10% x 6/12 = Rs. 200,000
Total Rs. 628,000
40. (d) Carrying amount on 1 Jan 2021 = Rs. 4,000,000 x (0.90)3=Rs. 2,916,000
Depreciation 2021 = Rs. (2,916,000 – 500,000) / 5 years = Rs. 483,200
41. (a) Carrying amount on 1 Jan 2021
= Rs. 4,000,000 - (400,000 x 3) = Rs. 2,800,000
Depreciation rate = 1 – (500,000/2,800,000) (1/5) = 29.15%
Depreciation 2021 = Rs. 2,800,000 x 29.15% = Rs. 816,097
42. (c) Residual value is reviewed annually at the end of each reporting period
43. (c) Useful life is reviewed annually at the end of each reporting period
44. (b) Rs. 860 m x 20% x 12/12 = Rs. 172 million
Rs. 100 m x 20% x 4/12 = Rs. 6.67 million
Total Rs. 178.67 million
45. (d) Rs. 600 m x 20% x 12/12 = Rs. 120 million
Rs. 100 m x 20% x 4/12 = Rs. 6.67 million
Total Rs. 126.67 million
46. (a) Rs. (600 m – 150m) x 20% x 12/12 = Rs. 90 million
PRC 4: INTRODUCTION TO ACCOUNTING CHAPTER 6: DEPRECIATION

Rs. 100 m x 20% x 4/12 = Rs. 6.67 million


Total Rs. 96.67 million
47. (b) At the end of useful life, the carrying amount of asset becomes equal to its residual
value.
48. (c) The total depreciation throughout useful life is equal to depreciable amount.
= Rs. 1,400,000 – 200,000 = Rs. 1,200,000
49. (b) & (c) Entity A has initially invested more in non-current assets as compared to Entity B.
Entity A has older assets as compared to Entity B.
50. Rs. 37,250 Rs. '000
Machine ((500,000 – 20,000) / 10 × 9/12) 36,000
Safety guard ((25,000/5) × 3/12) 1,250
37,250
.
AT A GLANCE
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

is calculated by during the year.


depreciates the greater depreciatio
applying a fixed The estimated
asset evenly n in the earlier
percentage on the total production of
throughout its years of an asset's
book value of the the asset is the
useful life useful life and less
asset each year. criteria for
in the later years. 
providing
depreciation.
PRC 4: INTRODUCTION TO ACCOUNTING CHAPTER 6: DEPRECIATION

Formula of methods of Depreciation

Formula: Straight-line method

Cost of asset less expected residual value


Depreciation charge =
Expected useful life (years)

Formula: Reducing balance method

Carrying amount at the Fixed


Depreciation charge = 
start of the year %

Formula: Sum of the years digits method


n ( n+1 )
Sum of digits =
2
Where:
n = the useful life at the start of ownership

Formula: Number of units produced method

Cost of asset less expected


Depreciation residual value Output this
= 
charge Expected total output of year
asset over its life
AT A GLANCE
CHAPTER 6: DEPRECIATION PRC 4: INTRODUCTION TO ACCOUNTING

SPOTLIGHT
STICKY NOTES

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