Professional Documents
Culture Documents
Examples:
Reporting models:
Initially assets are measured at cost and depreciation is charged on such cost.
Revaluation model:
Assets are revalued at fair market value and then depreciation is charged on revalued amount
Initial measurement:
B. Non-refundable Taxes
Custom duties
Import Duties
All Non-refundable taxes
Practice question.1
Cresent Ltd purchased a plant at a list price of Rs. 10 million from Alpha ltd. Due to personal efforts of
Mr. Arslan, a purchase manager of Aplha Ltd offered 5% discount on list price. Following additional
informations are related to the purchase of plant.
1. Taxes paid(non-refundable) Rs. 100,000.
2. Transportation charges Rs. 200,000.
3. Loading/Unloading charges Rs. 150,000.
4. Personal expenditures of purchase personnel Rs.70,000.
5. Site preparation for plant charges Rs. 230,000.
6. Feasibility report on plant charges Rs. 300,000.
7. Installation charges Rs. 310,000.
8. Advertising expenses for product produced by such plant Rs. 400,000.
9. Civil Engineer salary Rs. 50,000 per month (Rs. 170,000 paid additional for installation of such
plant).
10. Initial testing cost Rs. 250,000.
11. Proceed from initial testing Rs. 50,000
12. Estimated dismantling cost after the useful life Rs. 200,000.Interst rate is 6%. 149,452
13. Scrap value at the end of useful life Rs. 400,000.
14. Components used (produced by crecent Ltd) Rs. 230,000. Company normally sells these
components cost plus 10%.
15. Legal penalty paid Rs. 150,000.
16. Estimated useful life is 5 years.
Required:
Cost of assets.
2. Depreciation:
Systematic allocation of depreciable amount of an asset over its useful life.
Methods of depreciation:
A. Straight line method
Equal amount of depreciation is charged over the life of asset
On the basis of useful life
On the basis production
Sum of year’s digits method
Formula:
Practice Question.2
Data given:
Cost of asset= 42,300
Salvage value =6,000
Useful life =3 years
(42,300−6,000)
Calculations: Depreciation =
3
Annual depreciation =Rs. 12,100
Depreciation schedule
Practice Question.3
Since he commenced business on 1st January 2010 Sophie has purchased for cash the following three machines.
Sophie’s policy is to charge a full year depreciation in the year of purchase irrespective of the date of purchase.
The reducing balance method is used to calculate the depreciation. Accounts are prepared to 31st Dec 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.
Solution:
Depreciation schedule
Depreciation schedule
Practice Question.4
Data given:
Cost of asset= 42,300
Salvage value =6,000
Useful life =3 years
(42,300−6,000)
1st Year Annual depreciation = * 150,000 15,000
363,000
(42,300−6,000)
2nd Year Annual depreciation = * 130,000 13,000
363,000
(42,300−6,000)
3rd Year Annual depreciation = * 83,000 8,300
363,000
Years Openin Addition/ Dispo Net total Net Depreciatio Accumulate Closing
g Cost Acquisitio sal cost openin n d Book
n g book Depreciation Value
(cost) value
20.1.2010 4200 - - 4200
31.12.201 4200 - - 4200 1974 1974 2226
0
31.12.201 4200 5000 - 9200 7226 3396 5370 3830
1
31.12.201 9200 3500 - 12,700 7330 3445 8815 3885
2
*Full year depreciation is charged in the year of purchase and no depreciation in the year of sale.
Depreciation schedule
Years Openi Addition/ Dispos Net Depreciati Depreciation asset Accumulat Closin
ng Acquisiti al total on on acquired during ed g
Cost on cost opening the year assets Depreciati Book
(cost) assets on Value
20.1.201 4200 - - - - 4200
0
31.12.20 4200 - - 4200 4200*47% - 1974 2226
10 =1974
31.12.20 4200 5000 - 9200 2226*47% 5000*0.47*8/12=11 2612 6587
11 =1046 566
31.12.20 9200 3500 - 12,70 6587*47% 3500*47%*6/12 3918 8781
12 0 =3096 =822
*Depreciation is charged for each month of ownership
Diana leases out German sports cars. She started business on 1 st Jan 2010 and has decided to depreciate
the cars on a straight line bases at 25% per annum on cost at the year end. During the year 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 2 cars costing Rs. 19,800,000 each.
2013 Purchased 15 cars for Rs. 21,000,000 each.
Diana prepares account to 31st Dec each year.
Required:
Prepare a vehicle account and accumulated depreciation account and a depreciation account for the years
2010 to 2013.