SCHOOL OF COMMERCE – LILONGWE CAMPUS

BACHELOR OF APPLIED ACCOUNTING: AUDIT AND

INFORMATION SYSTEMS

FININCIAL REPORTING AND ANAYSIS 300

FRA(321)
ASSIGNMENT

YEAR 3, SEMESTER 2

SUBMITTED TO: MR FIWA

DATE: 14 JUNE 2021
STUDENT NAME: DORRAH KONDOWE

STUDENT NUMBER: KH3083

QUESTION 1A
There are a number of things Solomon needs to know about depreciation and impairment. We
are going to discuss about depreciation first.
According to IAS 16 property, plant and equipment, depreciation is the allocation of the
depreciable amount of an asset over its useful life. Depreciation is charged to net profit or loss
for the period either directly or indirectly.
There are a number of methods of calculating depreciation of non-current assets. But because of
time we will look at only three methods. The first one is straight line method. Under this method,
an equal amount is provided each year for depreciation of an asset until the asset has been
written down to nil or its scrap value at the end of the estimated life of the asset. The formula of
the annual depreciation under this the method is;

D=C–S
n where D = annual depreciation
C = cost of an asset
S = scrap value
n = estimated life of years
This method is not only simple to understand but also easy to calculate. In addition, the book
value of an asset can be fully written off. The life of the certain asset sometimes depend on the
contracts like leasehold property, patent, trademarks etc. in this case, this method is very much
appropriate.
Despite a number of advantages, straight-line method has disadvantages as well. The first one is
that the method does not take into account the interest on capital invested on the asset. This
method also ignores the time value of money.
Another method is reducing balance. It is also known as diminishing balance or declining
balance method. It is a way of accounting for assets over a period of time. It is charged at a fixed
rate, like the straight line method. However, unlike the straight line method, the percentage rate
is not calculated on the cost of an asset but on the book value of the asset, which in turn is
calculated by subtracting depreciation from its cost.
Below is the formula of reducing balance method;
Dpn per annum = (net book value – residual value) x depreciation factor (rate %)
From a financial accounting perspective, the reducing balance method makes sense for assets
that lose their value quickly, like new cars and vehicles. For these assets, reducing balance
depreciation better matches depreciation expense with the actual decline in fair market value.
Lastly will look at piecemeal method of depreciation. This is one of the simplest method of
depreciation calculation. It is basically counted on estimated products to find the depreciation
rate. It is then later multiplied by the production per year to find the depreciation per year. The
formula used to calculate piecemeal is as follows;
Dpn /product (rate) = cost x product produced/yr
Total estimated products

Impairment is a fall in the value of an assert, so that its recoverable amount is now less than its
carrying value in the balance sheet (IAS 36).
Business recognize impairment when the financial statement carrying amount of a long-lived
asset or asset group exceeds its fair value and is not recoverable. A carrying amount is not
recoverable if it is greater than the sum of the undiscounted cash flows expected from the assets
use and eventual disposal.
Upon a bit discussion and clarification of depreciation and impairment, Solomon is able to have
a picture of what these things really are. I can now advise him to choose a better method to
calculate the depreciation. In this case I would advise him to still use piecemeal method since it
is simple to understand as well as calculate. In addition it is good for him to still use this method
as instructed by his boss to avoid the cases of insubordination.
QUESTION 1B
Calculation of depreciation charge for the third year using piecemeal method
Cost = k250, 000,000
Estimated products = 500,000,000
Dpn/product = total cost
Total est. products
= 250,000,000
500,000,000
= 0.5
To find number of products per year
= total est. products
Number of years
= 500,000,000
10
= 50,000,000
Therefore to calculate depreciation
 1st year = 50,000,000 x 0.5
= 25,000,000
2nd year= 50,000,000 x 0.5
= 25,000,000
3rd year =50,000,000 x 0.5
= 25,000,000
Therefore depreciation charge for the third year = k25, 000,000

Financial position extract

Non-current asset Cost K’ Dpn K’ NBV K’
Machine 250,000,000 (75,000,000) 175,000,000