Depreciation and Disposals

Session 9
Depreciation and Disposals
FOCUS
This session covers the following content from the ACCA Study Guide.
D. Recording Transactions and Events

4. Tangible non-current assets
a) Define non-current assets.
e) Prepare ledger entries to record the acquisition and disposal of non-current
assets.
f) Calculate and record profits or losses on disposal of non-current assets in
the statement of profit or loss including part exchange transactions.
j) Explain the purpose and function of an asset register.
5. Depreciation
a) Understand and explain the purpose of depreciation.
b) Calculate the charge for depreciation using straight line and reducing
balance methods.
c) Identify the circumstances where different methods of depreciation would
be appropriate.
d) Illustrate how depreciation expense and accumulated depreciation are
recorded in ledger accounts.
f) Calculate the adjustments to depreciation necessary if changes are made
in the estimated useful life and/or residual value of a non-current asset.
g) Record depreciation in the statement of profit or loss and statement of
financial position.
Session 9 Guidance
Concentrate on definitions in (s.3) and the depreciation methods of straight line and reducing balance
and then work through Illustrations 1 and 2 and Example 1.
Note the effect of changes in accounting estimates (s.3.8) and work Illustration 3.
Work through (s.4.1) disposals. Be sure to attempt Example 2 covering the basic entries before
working through (s.4.2) (part exchange).
(continued on next page)

F3 Financial Accounting Becker Professional Education | ACCA Study System
Ali Niaz - ali.niaz298@gmail.com

VISUAL OVERVIEW
Objective: To account for the depreciation, disposal and revaluation of non-current
tangible assets.
NON-CURRENT ASSETS
PROPERTY, PLANT AND

EQUIPMENT
DEPRECIATION DISPOSALS REVALUATION

• Introduction • Ledger Entries • Appreciating Assets
• Terminology • Part Exchange • Recognition
• Methods
• Straight Line
• Reducing Balance
• Comparison of
Methods
• Changes in
Estimates
PRACTICAL ISSUES
• Depreciation Methods
• Ledger Accounts
• Shortcut Calculations
• Fixed Asset Register
Session 9 Guidance
Appreciate that assets (usually properties) may be revalued and the effect which this would have
on the financial statements (s.5).
Understand the practical aspects of accounting for depreciation (s.6.1–6.3), which have particular
relevance for examination questions.
Appreciate that the fixed asset register (s.6.4) is neither a book of prime entry nor a ledger
account, but it plays an important role in controlling and accounting for non-current assets.
© 2014 DeVry/Becker Educational Development Corp. All rights reserved. 9-1

Session 9 • Depreciation and Disposals F3 Financial Accounting
1 Non-current Assets
Non-current assets can be classified as tangible or intangible.*
Non-current assets—
 Tangible assets are non-monetary assets having physical assets expected to be
substance. Examples include: used during more than
• Property, plant and equipment* one accounting period
(therefore not held for
• Investments (other than those held for the short-term)
trading purposes and
 Intangible assets are non-monetary assets without physical not expected to be
substance. Examples include: realised in less than
• Copyrights 12 months).
• Manufacturing licences
• Goodwill
• Development costs
• Patented rights (e.g. medicines, inventions, etc)
• Brands
*This session concentrates on the bookkeeping entries used to account

for non-current assets.
*The remainder of this session concerns only the tangible assets of
property, plant and equipment.
2 Property, Plant and Equipment

IAS 16 Property, Plant and Equipment prescribes how property,
plant and equipment are accounted for. The principle issues
addressed by this standard are:*
 asset recognition; *The requirements
of IAS 16 are
 the determination of carrying amount; and
comprehensively dealt
 depreciation charges to be recognised. with in Session 23.
3 Depreciation
3.1 Introduction
 A capital expenditure (e.g. purchase of a machine) is not
charged to the I&E a/c at the time of the expenditure, but
a revenue expenditure (e.g. repairs and maintenance) is
immediately charged to the I&E a/c (see Session 2).
 Most tangible non-currents assets wear out with time and use,
so their capital costs are spread and charged to the I&E a/c
over their useful lives (thereby matching their cost with the
revenue generated from their use).
9-2 © 2014 DeVry/Becker Educational Development Corp. All rights reserved.

F3 Financial Accounting Session 9 • Depreciation and Disposals
3.2 Terminology*
Property, plant and equipment: tangible assets held for use
in production or supply of goods or services (or for rental or
admin purposes) and expected to be used during more than one *More detailed
period. definitions are given in
Session 23.
Depreciation: systematic allocation of an asset's depreciable
amount over its useful life.
Depreciable amount: cost (or revalued amount) less residual
value.
Useful life: period of time over which an asset is expected to
be used.
Cost: amount of cash paid to acquire (or construct) an asset.
Residual value: net amount expected to be obtained for an
asset at the end of its useful life after deducting expected costs
of disposal.
Carrying amount:* for an asset, it is the amount recognised in
the statement of financial position after deducting accumulated
depreciation.
3.3 Methods *"Carrying amount"

is the term used in
There are many methods of calculating depreciation, generally International Financial
based on either the passage of time or the level of activity (or use) Reporting Standards.
of the asset. These include: This is often called net
book value in practice
 straight line
(i.e. the book value
 reducing balance net of all depreciation
 activity based expensed to date).
 sum of years digits
 units of production
 units of time
The straight-line and reducing balance methods are the most

commonly used in practice and only these two methods are
examinable in FFA/F3.
3.4 Straight-Line Method

This method requires:
 estimating useful life;
 estimating residual value (if any); and then
 spreading the net capital cost (i.e. depreciable amount) in
equal, annual instalments.
The straight-line method is the simplest method and it is widely
used when it is appropriate to recognise the consumption of the
asset on a pro-rata basis over its useful life. It is also used as the
default method where a reliable pattern of consumption cannot be
recognised.

 *Calculation:
Cost − Residual value
Useful life
*What constitutes
 Usually expressed as: cost and the factors
 straight line over n years (e.g. 5 years); or which affect the
determination of useful
 at x% per year (per annum) on cost (e.g. 20%), life are considered
where x = 100/n. later in Session 23.
Illustration 1 Straight-Line Depreciation
A new car is purchased on 1 January 2013 for $80,000. Its useful life is estimated to be four
years. Its residual value is expected to be $10,000.
Solution
 Annual depreciation charge
$80,000 − $10,000
= $17,500
4
 Carrying amount
End of Cost Depreciation Carrying amount
reporting period $ $ $
31.12.13 80,000 17,500 62,500
31.12.14 80,000 35,000 45,000
31.12.15 80,000 52,500 27,500
31.12.16 80,000 70,000 10,000
 D/E Original purchase
$ $
Dr Asset (e.g. Motor vehicle) a/c* 80,000
Cr Cash, bank loan or accounts payable 80,000
 Ledger Accounts
Motor vehicles a/c
$ $
(1) Cash (or payable) 80,000 31.12.13 Balance c/d 80,000
1.1.14 Balance b/d 80,000 31.12.14 Balance c/d 80,000
1.1.15 Balance b/d 80,000 etc...
*As long as the car is owned, this ledger account will show its Carrying amount does
original purchase price. not represent worth
(i.e. what the non-
current tangible asset
might be sold for). It
is simply the amount of
historical (i.e. original)
cost which has not
been expensed (as
depreciation) to the
I&E a/c.

Illustration 1 Straight-Line Depreciation (continued)
 D/E Depreciation
• One side of the double entry is an expense (charge) for the year  a debit entry (to
depreciation expense).
• The other side of the double entry reduces the carrying amount of the asset (in the
statement of financial position)  a credit entry (to accumulated depreciation).*
$ $
Dr Depreciation expense a/c 17,500
Cr Accumulated depreciation a/c 17,500
• The depreciation expense account will be closed to the I&E a/c at the end of each
accounting year:
$ $
Dr I&E a/c 17,500
Cr Depreciation expense a/c 17,500
Depreciation expense a/c

$ $
31.12.13 Charge for year 17,500 Transfer I&E a/c 17,500
31.12.14 Charge for year 17,500 Transfer I&E a/c 17,500
etc...
Accumulated depreciation a/c

$ $
31.12.13 Balance c/d 17,500 31.12.13 Charge for year 17,500
1.1.14 Balance b/d 17,500
1.1.15 Balance b/d 35,000
1.1.16 Balance b/d 52,500
1.1.17 Balance b/d 70,000
*The accumulated depreciation a/c provides the balance which is

set off against the asset's cost in arriving at carrying amount in
the statement of financial position. Though sometimes called in
provision for depreciation, this term is misleading because the credit
balance is not a liability.
This double entry will be the year-end adjustment for depreciation
of the car until it is either fully depreciated (i.e. after four years) or
disposed of.

3.5 Reducing Balance Method

The reducing balance method of depreciation (also called
reducing instalment method) provides a progressively decreasing
depreciation charge over the life of the asset.
 It is used where the pattern of consumption of the asset is highest
when it is newest (e.g. if operating capacity of a machine is
reduced through usage). It is widely used for the depreciation of
vehicles which "lose" more of their "value" in the first year than in
subsequent years.
 A constant percentage is applied to the carrying amount
(i.e. cost less accumulated depreciation to date).
Calculation: Carrying amount × annual depreciation rate (%)
 Residual value is generally ignored under this method.
Illustration 2 Reducing Balance Method
A new car is purchased on 1 January 2013 for $81,000. Depreciation is charged at 33⅓% on the
reducing balance basis.
Solution
 Annual depreciation charges
Year 1: $81,000 × 33⅓% = $27,000
Year 2: $54,000 × 33⅓% = $18,000
Year 3: $36,000 × 33⅓% = $12,000
etc...
 Carrying amount
End of Cost Depreciation
reporting period (Motor Vehicles a/c) (Accumulated) Carrying amount*
$ $ $ $
31.12.13 81,000 27,000 54,000
31.12.14 81,000 45,000 36,000
31.12.15 81,000 57,000 24,000
31.12.16 81,000 65,000 16,000
etc...
31.12.20 81,000 77,842 3,161
*There will always be a reduced balance (however small) under this

method.

3.6 Comparison of Methods

3.6.1 Straight-Line Method
Advantages Disadvantages
This is the simplest method (with a Unrealistic (i.e. does not reflect pattern
one-off calculation of annual charge). of consumption of benefits).
Constant annual charge does not distort Depreciation charge must cease when
year-on-year comparisons. end of useful life is reached (i.e. when
Easy to calculate accumulated asset is fully depreciated, though still
depreciation (i.e. annual charge × in use).
number of years).
3.6.2 Reducing Balance Method
Advantages Disadvantages
Accelerated depreciation expense Calculations are more complex (as the
reflects greater usage of assets in balance to which percentage is applied
earlier years. is reduced each year).
Assets in use are never fully
depreciated.
No need to separately identify assets
(until disposed of).

Example 1 Depreciation Methods
Jan bought a new computer on 1 January 2013 for $12,000. Its useful life is estimated to be
five years, after which its second-hand value is expected to be $3,000.
Required:
(a) Calculate the annual depreciation charge using:
(i) Straight-line method
(ii) 25% reducing balance (with no residual value)
(b) Using the straight-line method:
(i) Write up the asset and accumulated depreciation ledger accounts over the
useful life of the asset.
(ii) Show the relevant extracts of the statements of financial position for each year.
Solution
(a) (i) Straight-Line Method
Depreciation per year =
(ii) Reducing Balance Method
Workings $
01.01.13 Cost
31.12.13 Depreciation
31.12.13 Carrying amount




(b) (i) Ledger Accounts
Computer cost a/c

$ $
1.1.13 Cash 31.12.13 Bal c/d
1.1.14 Bal b/d 31.12.14 Bal c/d
1.1.15 Bal b/d 31.12.15 Bal c/d
1.1.16 Bal b/d 31.12.16 Bal c/d
1.1.17 Bal b/d 31.12.17 Bal c/d
1.1.18 Bal b/d

Example 1 Depreciation Methods (continued)
Solution

$ $
31.12.13 Bal c/d 31.12.13 Charge for year
1.01.14 Bal b/d

1.01.15 Bal b/d

1.01.16 Bal b/d

1.01.17 Bal b/d

1.01.18 Bal b/d
(b) (ii) Statement of Financial Position: Extracts

Cost Accumulated Carrying
depreciation amount
$ $ $
31.12.13 Equipment
31.12.14 Equipment
31.12.15 Equipment
31.12.16 Equipment
31.12.17 Equipment
3.7 Change in Estimates

Estimates of useful life and/or residual value can be changed at
any time.
 This is not a correction of an error and the change is reflected
in the depreciation expense of current and future periods.
 Depreciation is calculated on the depreciable amount over the
remaining life.
 Residual value is most likely to be adjusted downwards
(increasing the depreciable amount).

Illustration 3 Changes in Accounting Estimates
With reference to Illustration 1. After two years it is expected that the car will remain in use for
the next four years (a six-year total life as compared to the original estimated life of four years).
Any residual value will then be considered negligible, as compared to the original residual value of
$10,000.
Solution
Carrying amount after two years is $45,000 (carry amount balance as of 31.12.14 in the Solution
to Illustration 1).
This carrying amount must now be depreciated over the remaining useful life assuming a residual
value of $0:
$45,000 − 0
Annual depreciation = = $11,250
4
4 Disposals
4.1 Ledger Entries

If an asset is sold, or otherwise disposed of, it must be removed
from the books and the disposal proceeds (if any) accounted for
as follows.
 Transfer the asset's cost and accumulated depreciation to a
disposals account:
D/E
Dr Disposals a/c $Cost
Cr Asset a/c $Cost
Dr Accumluated depreciation a/c $Accd Depr

Cr Disposals a/c $Accd Depr
 Account for the proceeds from the disposal:
D/E
Dr Cash (or receivable) a/c $x
Cr Disposals a/c $x
 Close the books:
At the end of the accounting period, transfer the profit or loss on
disposal (i.e. the balance on the disposals a/c) to the I&E a/c.*
Profit on sale (over allowance for depreciation)
D/E
*A profit means that
Dr Disposals a/c the asset's value has
fallen by less than the
Cr I&E a/c amount of depreciation
Loss on sale (under allowance for depreciation) charged. A loss means
that its value has fallen
D/E by more.
Dr I&E a/c
Cr Disposals a/c

Illustration 4 Asset Disposal
A car which cost $80,000 and has been depreciated for three years at 25% per year using the
straight-line method is sold for $25,000 cash. Assume that the residual value was estimated as
$0.
Solution
 On disposal accumulated depreciation is $80,000 × 25% × 3 years = $60,000. This means
the carrying amount is $20,000 ($80,000 − 60,000) and a $5,000 gain has arisen on
disposal (sales price of $25,000 − carrying amount of $20,000).
 Ledger Accounts
Car a/c
$ $
Balance b/d 80,000 (1) To disposals 80,000
Accumulated depreciation
$ $
(2) To disposals 60,000 Balance b/d 60,000
Disposals
$ $
(2) Accumulated
(1) Cost 80,000 60,000
depreciation
Profit on disposal Proceeds
(I & E a/c) 5,000 25,000
85,000 85,000
Example 2 Asset Disposal
Grigory sold a motor vehicle for $15,000. This originally cost $70,000 and accumulated
depreciation amounted to $50,000.
Required:
Write up the disposals account to determine the profit or loss on disposal.
Solution
Disposals a/c
$ $

4.2 Part Exchange or Trade-In

This topic is particularly appropriate to assets which are
periodically replaced or upgraded (e.g. cars and computers).
With a trade-in allowance the accounting is to treat the allowance
as being:
 Part of the cost of the new asset (increase or debit the asset
cost a/c), and
 Proceeds from the sale of the asset being traded in (credit the
disposals a/c).
 The double entry is:
Dr Asset cost a/c
Cr Disposals a/c
Illustration 5 Trade-in Allowance
Tomas buys a BMW, list price $92,500, for cash $80,000 and trades in a VW.
Solution
 D/E
$ $
Dr Motor vehicle a/c 80,000
Cr Cash (or bank) a/c 80,000
This is the cash being paid for the new car.

However, the cash cost of the BMW must be "grossed-up" for the trade-in value of the
VW (i.e. its disposal proceeds).
$ $
Cr Disposals a/c 12,500
The disposal of the VW is then treated in the normal way.

In summary:
$ $
Cr Cash (or bank) a/c 80,000
Cr Disposals a/c 12,500

5 Revaluation
5.1 Appreciating Assets

Revaluation occurs when an asset or assets are revalued
(e.g. properties to market value).
 The asset's carrying amount is then the revalued amount less
subsequent accumulated depreciation.
5.2 Recognition of Gains

 A gain arising from a revaluation does not relate to trading.
Until the asset is sold, the gain is unrealised. Therefore, it
is not recognised in profit or loss. But it is included in other
comprehensive income.*
 The double entry for a gain on revaluation is as follows: *Gains on successive
revaluations are
$ $ accumulated in a
revaluation surplus
Dr Asset x
which is shown
Cr Other comprehensive income x separately in the
statement of changes
in equity (see
6 Practical Issues Session 23).
6.1 Depreciation Methods

 Depreciation is often calculated from the date an asset is
brought into use.
 Once an appropriate method of calculating depreciation has
been selected, it should be consistently applied to all similar
assets.
 Assets are rarely acquired on the first day of a year or
disposed of on the last day. It would be tedious to have to
calculate depreciation for every asset from its date of purchase
to its date of disposal. There are two alternative approaches:
1. Calculate depreciation on a pro rata basis (i.e. number of
months the asset is owned at x%).
2. Charge a full year's depreciation in the year of acquisition.
No depreciation is then charged in the year of disposal.
Companies may be required, in some jurisdictions, to charge

depreciation according to a statute or some other regulation.
For example, using specified rates or methods, on a monthly basis,
perhaps commencing when purchased. Such country-specific rules
should be ignored on this course of study. If a question does not
specify when in a year an asset it purchased there is no alternative to
charging a full year's depreciation in the year of acquisition.

6.2 Ledger Accounts

It is impractical and unnecessary to assign a general ledger
account to each individual asset. For practical purposes, a ledger
account for each category (e.g. motor vehicles) with the same
depreciation policy will suffice. Using a ledger account for each
category has one significant advantage ( ) and one significant
disadvantage ( ):
Assuming no residual values, the depreciation charge for the
year can simply be calculated on the balance on the account
at the end of the year (see shortcut calculations below).*
Using the straight-line method, if assets are kept beyond their
useful life, care must be taken not to charge depreciation on *One reason why
fully depreciated assets. many businesses
assume residual
values to be zero is
6.3 Shortcut Calculations because it necessitates
 As discussed above, one alternative when there are additions calculating
and disposals in the same year is to assume a full year's depreciation on an
depreciation charge in the year of purchase and none in the asset-by-asset basis.
year of sale.
 When using the straight-line method, first adjust cost for
additions and disposals and then calculate depreciation on
net cost. For example:
$
Opening cost 40,000
+ Additions 8,000
− Disposals (6,000)
42,000
@ 25% (say) 10,500 charge for year
 When using the reducing balance method, first adjust cost

and accumulated depreciation for additions and disposals and
calculate depreciation on the net amount. For example:
$ $
Opening cost 40,000 Opening depreciation 15,000
+ Additions 8,000 (Not applicable)
− Disposals (6,000) On disposals (3,000)
42,000 12,000
Net amount $30,000 @ 25% (say) = $7,500 charge for year

 If an asset account is maintained at carrying amount

(instead of having separate accounts for cost and accumulated
depreciation), the depreciation charge using the reducing
balance method is the percentage applied to the balance on the
a/c before the depreciation is calculated.
Using the example:
Asset a/c (at carrying amount)

$ $
Bal b/d ($40,000 − 15,000) 25,000 Disposals ($6,000 − 3,000) 3,000
Additions 8,000 Depreciation (25% × $30,000) 7,500
Bal c/d ($30,000 − 7,500) 22,500
33,000 33,000
Bal b/d ($30,000 − 7,500) 22,500
6.4 Fixed Asset Register

 The fixed asset register is a log of all non-current tangible
assets.
 In the register, the information shown for each asset includes:
 Date acquired
 Original cost
 Useful life
 Residual value (if any)
 Depreciation method
 Distinguishing features (e.g. vehicle registration or serial
number)
 The register can be used for:
 calculating depreciation charges;
 recognising when individual assets are fully depreciated;
 providing historic information necessary to account for
disposals; and
 providing a record to be used as a basis for conducting
periodic inspections of assets (to ensure their operational
existence).

Summary
 Non-current assets are assets expected to be used during more than one accounting period.
 Tangible non-current assets are recorded and maintained in the ledger at original cost until
they are disposed.
 Most tangible non-currents assets wear out with time and use, so their capital costs are
spread and expensed to profit or loss (as depreciation) over their useful lives.
 Depreciation is the systematic allocation of an asset's depreciable amount over its useful life.
 Depreciable amount is cost (or revalued amount) less residual value.
 An asset's cost is the amount of cash paid to acquire (or construct) it.
 Depreciation may be calculated by a number of methods; the straight-line method with no
residual value is the easiest.
Cost − Residual value
 Straight-line depreciation is calculated as:
Useful life
 The reducing balance method provides a progressively decreasing depreciation charge over
the life of the asset.
 Depreciation using the reducing balance method is calculated as:
Carrying amount × annual depreciation rate (%)
 D/E Annual depreciation charge, however calculated, is:
Dr Depreciation expense a/c $x

Cr Accumulated depreciation a/c $x
 When an asset is disposed of, original cost and accumulated depreciation are transferred to
a disposals a/c. Profit or loss on a disposal is the difference between carrying amount and
sale proceeds (if any).
 Gains arising on revaluation are unrealised and are not recognised in profit or loss.
They are included in other comprehensive income.
 A full year's depreciation may be charged in the year of acquisition (with no charge in the
year of disposal). Alternatively, depreciation may be charged on a pro rata basis for each
month of use.
 The fixed asset register provides a detailed log of all non-current tangible assets.

Session 9
Session 9 Quiz
Estimated time: 25 minutes
1. State the main difference between tangible and intangible assets. (1)
2. Name the International Accounting Standard which deals with the accounting treatment of
tangible non-current assets. (2)
3. Define both residual amount and carrying amount. (3.2)
4. True or false? Carrying amount shows the value of an asset to a business. (3.2)
5. State under which depreciation method an asset will always have a carrying amount. (3.5)
6. Give TWO advantages and ONE disadvantage of the straight-line method. (3.6.1)
7. Give TWO advantages and ONE disadvantage of the reducing balance method. (3.6.2)
8. True or false? Depreciation of an asset will fall if its estimated life is increased. (3.7)
9. True or false? A change in residual value is a change in accounting estimate. (3.7)
10. State the double entries which you should expect to find in a disposals a/c. (4.1)
11. True or false? The value of an asset given in part exchange effectively represents its sale
proceeds. (4.2)
12. State the double entry for a gain on revaluation of a property. (5)
13. True or false? A revaluation gain is not an item of profit or loss. (5.1)
14. List FOUR items of information that may be included in a fixed asset register. (6.4)
Study Question Bank

Estimated time: 50 minutes
Priority Estimated Time Completed
Q33 Alexander 10 minutes
Q35 Popov 10 minutes
Q37 MCQs 30 minutes

Additional
Q32 Rookie
Q34 Udot
Q36 Reuther

EXAMPLE SOLUTIONS
Solution 1—Depreciation Methods
(a) (i) Straight-Line Method
Cost − Residual value ($12,000 − $3,000)
Depreciation per year = $1,800 =
Useful life 5
(ii) Reducing Balance Method
Workings $
01.01.13 Cost 12,000
31.12.13 Depreciation ($12,000 × 25%) (3,000)
31.12.13 Carrying amount 9,000

31.12.14 Depreciation ($9,000 × 25%) (2,250)

31.12.15 Depreciation ($6,750 × 25%) (1,688)

31.12.16 Depreciation ($5,062 × 25%) (1,265)

31.12.17 Depreciation ($3,797 × 25%) (949)
Computer cost a/c

$ $
1.1.13 Cash 12,000 31.12.13 Bal c/d 12,000
1.1.14 Bal b/d 12,000 31.12.14 Bal c/d 12,000
1.1.15 Bal b/d 12,000 31.12.15 Bal c/d 12,000
1.1.16 Bal b/d 12,000 31.12.16 Bal c/d 12,000
1.1.17 Bal b/d 12,000 31.12.17 Bal c/d 12,000
1.1.18 Bal b/d 12,000
*The cost will simply be carried down (c/d) and brought down (b/d)
at the end of each reporting period.

Solution 1—Depreciation Methods (continued)

$ $
31.12.13 Bal c/d 1,800 31.12.13 Charge for year 1,800
1,800 1,800
1.01.14 Bal b/d 1,800
3,600 3,600
1.01.15 Bal b/d 3,600
5,400 5,400
1.01.16 Bal b/d 5,400
7,200 7,200
1.01.17 Bal b/d 7,200
9,000 1.01.18 Bal b/d 9,000
*The debit (Dr) entry for the charge for the year is to the
depreciation expense account (a/c). At the end of each year
the depreciation expense a/c will be closed when the expense is
transferred to the I&E a/c. The balance c/d and b/d at the end of
each reporting period are increased by the charge for the year.
(b) (ii) Statement of Financial Position: Extracts

Cost Accumulated Carrying
depreciation amount
$ $ $
31.12.13 Equipment 12,000 1,800 10,200
31.12.14 Equipment 12,000 3,600 8,400
31.12.15 Equipment 12,000 5,400 6,600
31.12.16 Equipment 12,000 7,200 4,800
31.12.17 Equipment 12,000 9,000 3,000

Solution 2—Asset Disposal

Disposals a/c
$ $
Motor vehicle cost 70,000 Accumulated depreciation 50,000
Sale proceeds (cash) 15,000
Loss on sale (βal fig) 5,000
70,000 70,000
NOT ASKED FOR

Motor vehicle—cost Motor vehicle—accumulated depreciation
$ $ $ $
Bal b/d 70,000 To disposals 70,000 To disposals 50,000 Bal b/d 50,000
70,000 70,000 50,000 50,000

NOTES

Depreciation and Disposals

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Session 9

Depreciation and Disposals

D. Recording Transactions and Events

(continued on next page)

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PROPERTY, PLANT AND

DEPRECIATION DISPOSALS REVALUATION

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*This session concentrates on the bookkeeping entries used to account

2 Property, Plant and Equipment

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3.3 Methods *"Carrying amount"

The straight-line and reducing balance methods are the most

3.4 Straight-Line Method

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Illustration 1 Straight-Line Depreciation

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Illustration 1 Straight-Line Depreciation (continued)

Depreciation expense a/c

Accumulated depreciation a/c

*The accumulated depreciation a/c provides the balance which is

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3.5 Reducing Balance Method

Calculation: Carrying amount × annual depreciation rate (%)

 Residual value is generally ignored under this method.

Illustration 2 Reducing Balance Method

*There will always be a reduced balance (however small) under this

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3.6 Comparison of Methods

3.6.2 Reducing Balance Method

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Example 1 Depreciation Methods

31.12.13 Carrying amount

31.12.14 Carrying amount

31.12.15 Carrying amount

31.12.16 Carrying amount

31.12.17 Carrying amount

(b) (i) Ledger Accounts

Computer cost a/c

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Example 1 Depreciation Methods (continued)

Accumulated depreciation a/c

1.01.14 Bal b/d

1.01.15 Bal b/d

1.01.16 Bal b/d

1.01.17 Bal b/d

(b) (ii) Statement of Financial Position: Extracts

3.7 Change in Estimates

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Illustration 3 Changes in Accounting Estimates

4.1 Ledger Entries

Dr Accumluated depreciation a/c $Accd Depr

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Illustration 4 Asset Disposal