Notes and Exercises

HKDSE BAFS

(Elective) Financial Accounting

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

(Elective) Financial Accounting

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

expense
extension

current
purchase

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

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

a
b

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

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

a
b

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

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

The double entry for capital expenditure is:

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

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Notes and Exercises

HKDSE BAFS

(Elective) Financial Accounting

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

Page 2 of 18

Notes and Exercises

HKDSE BAFS

(Elective) Financial Accounting

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

B. Depreciation of non-current assets (Notes)

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

useful
cost

matching
benefits

Depreciation is the systematic allocation of the ____ cost ____ of a tangible non-current
asset over its ___ useful ___ life.

In each accounting period, a ___ portion __ of the cost of the asset is written off (charged
to the ____ profit and loss ____ account) as depreciation charges.
According to the ___ matching ___ concept, the amount allocated to each accounting
period (as depreciation charges) should be matched with the amount of ____ benefits ____
generated in that period (which usually refers to the usage of the asset during that period).

Accounting entries for depreciation

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

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

Page 3 of 18

Notes and Exercises

HKDSE BAFS

(Elective) Financial Accounting

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

C. Commonly used depreciation methods (Notes)

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

straight-line
evenly

diminishing
reducing balance

produced
constant

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

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

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

Under this method, the amount of depreciation charged in each period is ____
diminishing _____.

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

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

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

The ___ straight-line _____ and the ___ reducing balance __ methods are the more
popular ones, but they are not appropriate in some cases.

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

Page 4 of 18

Notes and Exercises

HKDSE BAFS

(Elective) Financial Accounting

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

D. Disposal of non-current assets (Notes)

Fill in the blanks with the following words.
profit

loss

damaged

sold

Disposal can happen if the asset is ___ sold ___, ____ damaged ___ or lost in an
accident. In these situations, a separate disposal account would be opened to record the
disposal of non-current assets.

Adjustments needed when a non-current asset is disposed of

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

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

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

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

HKDSE BAFS
Cr

(Elective) Financial Accounting

Topic 3: Depreciation of Non-current Assets (ANSWER)
Disposal / Profit and loss account

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Notes and Exercises

HKDSE BAFS

(Elective) Financial Accounting

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

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

1.

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

(No. 1)
(No. 2)

Motor vehicles

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

(No. 2) 25,000
61,000

45,000

It is the firms policy to depreciate its machinery at 10% per annum on a reducing-balance basis
and motor vehicles at 25% per annum on cost.
On 31 December 2012, machinery (No. 1) was sold for $9,500. A full years depreciation is to
be charged in the year of acquisition and none in the year of disposal.
Required:
Prepare the following accounts for the year ended 31 December 2012:
(a) Machinery
Answer:

Machinery
2012
Jan 1 Balance b/f

(b)

$
61,000

2012
$
Dec 31 Machinery disposal (No. 1) 15,000
" 31 Balance c/f
46,000

61,000

61,000

Motor vehicles

Answer:

Motor Vehicles
2012
Jan 1 Balance b/f
Sept1 Bank (No. 2)

$
2012
20,000 Dec 31 Balance c/f
25,000
Page 7 of 18

$
45,000

Notes and Exercises

HKDSE BAFS

(Elective) Financial Accounting

Topic 3: Depreciation of Non-current Assets (ANSWER)
45,000

45,000

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Notes and Exercises

HKDSE BAFS
(c)

(Elective) Financial Accounting

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

Accumulated Depreciation: Machinery

Answer:

Accumulated Depreciation: Machinery

2012
Dec31 Machinery disposal
" 31 Balance c/f

$
2012
$
2,850 Jan 1 Balance b/f (W1)
7,450
8,740 Dec 31 Depreciation: Machinery 4,140
(W3)
11,590

(d)

11,590

Accumulated Depreciation: Motor vehicles

Answer:

Accumulated Depreciation: Motor Vehicles

2012
Dec31 Balance c/f

(e)

$
2012
21,250 Jan 1 Balance b/f (W2)
Dec 31 Depreciation: Motor
vehicles (W4)

$
10,000
11,250

21,250

21,250

Machinery disposals

Answer:

Machinery Disposals
2012
Dec31 Machinery (No. 1)

$
2012
15,000 Dec 31 Accumulated depreciation:
Machinery
"
31 Bank
"
31 Profit and loss
Loss on disposal
15,000

$
2,850
9,500
2,650
15,000

Workings:
(W1)

$15,000 10% + {[$15,000 ($15,000 10%)] 10%}

$46,000 10%

=
=

$
2,850
4,600
7,450

Page 9 of 18

Notes and Exercises

HKDSE BAFS

(Elective) Financial Accounting

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

(W2)

$20,000 25% 2 years

10,000

(W3)

$41,400 10%

4,140

(W4)

$45,000 25%

11,250

2.

(A) State which class of expenditure (revenue/capital) each of the following items belongs to.
$
(i)
Rent and rates
8,400
(ii) Costs of installing a new control room
58,000
(iii) Wages for installing a new control room
7,000
(iv) Electricity and water charges
13,000
(v) Legal fees incurred in the acquisition of new premises
4,800
(vi) Repairs to existing machines
7,800
(vii) Costs of training staff to operate machinery which was
installed a year ago
49,000
(viii) Painting the outside of a new building
28,000
(ix) Repainting the outside of a building after five years of use
19,000
(x) Transport costs of machinery purchased
400
Capital expenditure:
Revenue expenditure:

____(ii), (iii), (v), (viii), (x)_________

____(i), (iv), (vi), (vii), (ix)_________

(B) Mr Poon, a sole trader, is about to prepare his final accounts. As his bookkeeper, you
need to adjust the figures shown in certain accounts.
His financial year ended on 31 December 2011. On that date, certain accounts had the
following balances:
$
Rent revenue
42,000 (Cr)
Electricity
4,200 (Dr)
Advertising
4,500 (Dr)
Wages
224,800 (Dr)
You have ascertained the following information relating to the above accounts:
(i) Rent revenue the tenant owed $10,500 for rent outstanding as at 31 December 2011.
(ii) Electricity the amount accrued as at 31 December 2011 was $410.
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Notes and Exercises

HKDSE BAFS

(Elective) Financial Accounting

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

(iii) Advertising included in the advertising account was a payment of $2,800 for
posters to be used in the next financial year.
(iv) Wages the amount accrued as at 31 December 2011 was $58,000.

Page 11 of 18

Notes and Exercises

HKDSE BAFS

(Elective) Financial Accounting

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

Required:
(a) Open the above accounts, enter the balances given, deal with the accruals or
prepayments as necessary and show the transfers to the profit and loss account.
Answer:
(i)
Rent Revenue
2011
Dec 31 Profit and loss

$ 2011
52,500 Dec 31 Balance b/f
" 31 Accrued c/f

$
42,000
10,500

52,500

52,500

(ii)
Electricity
2011
Dec 31 Balance b/f
" 31 Accrued c/f

$ 2011
4,200 Dec 31 Profit and loss
410

$
4,610

4,610

4,610

(iii)
Advertising
2011
Dec 31 Balance b/f

$ 2011
4,500 Dec 31 Profit and loss
" 31 Prepaid c/f

$
1,700
2,800

4,500

4,500

(iv)
Wages
2011
Dec 31 Balance b/f
" 31 Accrued c/f

(b)

$ 2011
224,800 Dec 31 Profit and loss
58,000

$
282,800

282,800

282,800

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

Answer:
Mr Poon
Balance Sheet as at 31 December 2011 (extract)
Page 12 of 18

Notes and Exercises

HKDSE BAFS

(Elective) Financial Accounting

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

Current assets
Prepayments
Accrued revenue

$
2,800
10,500

Current liabilities
Accruals ($410 + $58,000)
3.

$
13,300

58,410

Bee Co, a trading firm, purchased a photocopier (No. 1) from overseas. Payment for the
invoice price of $50,000 was from the bank account. The photocopier was delivered on 30
November 2009 after the purchase price, plus import duty and transport costs amounting to
$5,000 and $1,200, respectively, had been paid. Installation was completed on 1 December
2009 at a further cost of $3,800.
The firm estimated that the photocopier would have a useful life of five years and a scrap
value of 10% of the cost price. The financial year ends on 31 December each year and
depreciation is to be charged on a straight-line basis. On 1 March 2011, due to the
unsatisfactory performance of the photocopier, it was traded in for a new one (No. 2) at a
price of $40,000. The trade-in value was $30,000. The depreciation method used for the
new photocopier was the same as the old one.
The accounting policy of the firm is to charge a full years depreciation in the year of
purchase and no depreciation in the year of disposal.
Required:
Prepare the following accounts to record the above:
(a) Photocopiers

Photocopiers
2009
Dec 1

2010
Jan 1
2011
Jan 1
Mar 1

Bank ($50,000 + $5,000 +

$1,200 + $3,800)

Balance b/f
Balance b/f
Disposal: Photocopiers
(trade-in value)

$
60,000

2009
Dec 31 Balance c/f

$
60,000

60,000

2010
Dec 31 Balance c/f

60,000

2011
Mar 1 Disposal: Photocopiers
Dec 31 Balance c/f

60,000
40,000

60,000
30,000

Page 13 of 18

Notes and Exercises

HKDSE BAFS
" 1

(Elective) Financial Accounting

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

Bank

10,000
100,000

100,000

(b) Accumulated depreciation: Photocopiers

Accumulated Depreciation: Photocopiers

2009
Dec 31 Balance c/f
2010
Dec 31 Balance c/f

$
10,800

21,600

2009
Dec31 Depreciation
[($60,000 $6,000) 5]
2010
Jan 1 Balance b/f
Dec31 Depreciation

21,600
2011
Mar 1

Disposal: Photocopiers
(No. 1)
Dec 31 Balance c/f

21,600
7,200

$
10,800

10,800
10,800
21,600

2011
Jan 1 Balance b/f
Dec31 Depreciation
[($40,000 $4,000) 5]

28,800

21,600
7,200
28,800

(c) Disposal: Photocopiers

Disposal: Photocopiers
2011
Mar1 Photocopiers (No. 1)

$
60,000

2011
Mar 1 Accumulated depreciation:
Photocopiers (No. 1)
" 1 Photocopiers (No. 2)
Dec31 Profit and loss Loss on
disposal
Page 14 of 18

$
21,600
30,000
8,400

Notes and Exercises

HKDSE BAFS

(Elective) Financial Accounting

Topic 3: Depreciation of Non-current Assets (ANSWER)
60,000

60,000

Page 15 of 18

Notes and Exercises

HKDSE BAFS
4.

(Elective) Financial Accounting

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

Wing Fung Hong is a grocery retailer. The income statement was prepared by a part-time
bookkeeper who did not possess sufficient accounting knowledge. The business owner is
now seeking your advice on how to correct the following income statement.
Wing Fung Hong
Income Statement for the year ended 31 December 2010
$

Sales
Less Cost of goods sold:
Opening inventory
Add Purchases
Less Closing inventory
Gross profit
Less Expenses:
Salaries and wages
Electricity
Carriage inwards
Discounts received
Printing and stationery
Drawings
Commissions
Depreciation: Plant and machinery
Van expenses

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

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

(vi)

(344,700 )
155,300

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

Net profit
(i)

$
500,000

(103,850 )
51,450

25% of the commissions were commissions received from a wholesaler for selling a
new brand of drinks.
40% of the carriage inwards was related to the cost of delivering goods to customers.
60% of the discounts received were actually discounts granted to the customers of
Wing Fung Hong.
Included in the electricity was a $500 deposit paid to the utility company.
Plant and machinery should be charged using the reducing-balance method at 25% per
annum.
However, depreciation had been calculated using the straight-line method at the same
percentage for the year ended 31 December 2010.
Wing Fung Hong purchased its plant and machinery on 1 July 2007 at a cost of
$85,000.
A second-hand van was bought on 1 Jan 2010 at a cost of $13,000.
Page 16 of 18

Notes and Exercises

HKDSE BAFS

(Elective) Financial Accounting

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

This was treated as van expenses.

The owner expected the van to be used in the business for five years.
Depreciation should be calculated on a straight-line basis.
Required:
Prepare for Wing Fung Hong a corrected income statement for the year ended 31 December
2010.
Wing Fung Hong
Corrected Income Statement for the year ended 31 December 2010
$
Sales
Less Cost of goods sold:
Opening inventory
Add Purchases
Carriage inwards [$6,700 (1 40%)]
Less Closing inventory

$
500,000

297,000
180,300
4,020
481,320
(132,600 )

Gross profit
Add Other revenues:
Commissions revenue ($24,000 25%)
Discounts received [$2,500 (1 60%)]

(348,720)
151,280
6,000
1,000
158,280

Less Expenses:
Salaries and wages
Electricity ($3,600 $500)
Carriage outwards ($6,700 40%)
Discounts allowed ($2,500 60%)
Printing and stationery
Commissions [$24,000 (1 25%)]
Depreciation: Plant and machinery (Workings)
Vans ($13,000 20%)

25,000
3,100
2,680
1,500
4,600
18,000
10,459
2,600

Net profit

90,341

Workings:
Plant and machinery, at cost
Less Depreciation 31 December 2007 ($85,000 25% )

(67,939)

$
85,000
(10,625)
Page 17 of 18

Notes and Exercises

HKDSE BAFS

(Elective) Financial Accounting

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

Less Depreciation 31 December 2008

74,375
(18,594)

Less Depreciation 31 December 2009

55,781
(13,945)

Less Depreciation 31 December 2010

41,836
(10,459)

Net book value as at 31 December 2010

31,377

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