CHAPTER 12

DEPRECIATION OF NON
CURRENT ASSETS

ELIZABETH – ACCOUNTING PRIVAT CLASS

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 DEPRECIATION ?
Depreciation is an estimate of the loss
in value of a non current asset over its
expected working life.
Most of the non current assets of a business lose value over a
period of time they are used by the business. If the accounting
records continue to show these assets at their cost prices then
the accounts will provide misleading information.

Special case for LAND… it doesn’t usually

lose value (unless it is something like a
well or mine when value is removed from
the land).
The cost of the NCA is spread over the years which benefit from the use of
that asset.
For example:
At 1 January 2011, the company bought a new machinery cost at $1000. It has
useful life for 4 years with no residual value. The company could allocate the
depreciation of the machineryequally $250 per year. The company received
income from using the machinery $1,200 per year.

Calculation of profit
Profit 2011 = $1200 - $250 = $950
Profit 2012 = $1200 - $250 = $950
Profit 2013 = $1200 - $250 = $950
Profit 2014 = $1200 - $250 = $950

The depreciation is included as part of expenses in the Income Statement.

CAUSES OF DEPRECIATION

1. Physical deterioration (wear andtear)

This is the result due to the normal usage of the NCA.
2. Economic reason
The NCA may become inadequate as it can no longer meet the needs of the business.
3. Passage oftime
This arises where a NCA has fixed life of a set number of years
4. Depletion
This arises in connection with non current assets such as wells and mines. The worth
of the asset reduces as value is taken from the asset.
 METHODS TO CALCULATE DEPRECIATION

A. Straight linemethod/ Garis Lurus

1st formula: (Cost – Residual Value) / Useful life
2nd formula: % depreciation x Cost

Example: On 1 July 2003, Kavita purchased fixtures costing $25000 and paid by
cheque.She estimated that she would be able to use the fixtures for 4 years and
then be able to sell them for $3000

Answer: Depreciation each year = ($25000 - $3000) / 4 years = $5500 per year

This method commonly used to calculate the depreciation of building.

B. Reducing balance method/Pengurangan saldo

1st formula: % depreciation x (Cost – Provision for Depreciation)

2nd formula: % depreciation x Book Value

Example:
On 1 July 2003, Kavita purchased fixtures costing $25000
and paid by cheque. She estimated that she would be able
to use the fixtures for 4 years and then be able to sell
them for $3000. Rate of depreciation = 40% per annum
Answer:
Depreciation for the year ended 30 June 2004 = 40% x ($25000 – 0) = $10000
Depreciation for the year ended 30 June 2005 = 40% x ($25000 – $10000) = $6000
Depreciation for the year ended 30 June 2006 = 40% x ($25000 – $16000) = $3600
Depreciation for the year ended 30 June 2007 = 40% x ($25000 – $19600) =$2160
This method commonly used to calculate the depreciation of :
Equipment, machinery and motor vehicles.
 C. Revaluation Method

Formula:
Opening book value of NCA + Purchase new NCA – Closing book value of NCA
Example:
On 1 July 2003, Kavita purchased loose tools costing $25000 and paid by cheque.
She decided to revalue the loose tools at the end of each year. On 30 June 2004,
the fixtures were valued at $20500

Answer:
Depreciation for the year ended 30 June 2004 = $0 + $25000 - $20500
=$4500
This method commonly used to calculate the depreciation of loose tools
(small equipment) The price is quite cheap.
CASE 1

Answer : Depreciation each year = ($18000 - $6000) / 4 years = $3000 per year
CASE 2

Answer:
Depreciation for the year ended 31 Des 2012 = 40% x ($18000 – 0) = $7200
Depreciation for the year ended 31 Des 2013 = 40% x ($18000 – $7200) = $4320
Depreciation for the year ended 31 Des 2014 = 40% x ($18000 – $11520 ) = $2592
CASE 3

On 1 January 2018, Nainci Ltd bought a machinery for $75 000 paid by
cheque.
Nainci Ltd will use the machinery for three years, and then sell the
machinery for $15 000.
The machinery is depreciated by 20% per annum using straight line
method.
2nd formula: % depreciation x Cost

Answer :
Depreciation 2018 = 20% x $75000 = $15000 per year
Depreciation 2019 = 20% x $75000 = $15000 per year
Depreciation 2020 = 20% x $75000 = $15000 per year
CASE 4

On 1 January 2018, Jumbo Ltd bought a machinery for $50 000 paid by
cheque. Jumbo Ltd will use the machinery for three years, and then sell
the machinery for $15 000.
The machinery is depreciated by 25% per annum using reducing
balance method.
2nd formula: % depreciation x Book Value

Answer :
Depreciation 2018 = 25% x $50000= $12500  50000-0 = book value 2018
Depreciation 2019 = 25% x $37500 = $ 9375  50000-12500= book value 2019
Depreciation 2020 = 25% x $28125 = $7031,25  37500-9375 = book value 2020
 CASE
5
On 1 January 2011 Youssef bought three machines costing S9000 each paying
by cheque.
They were expected to have a useful life of 4 years and a resale value of $1000
each
Youssef charges depreciation on the straight line basis according to the time the
asset is in use in the businiess.
On 1 July 2012 Youssef sold one machine receiving a cheque for $5800.

REQUIRED
a) Calculate the depreciation of machinery for the year ended 31 December 2011,
2012 and 2013
b) Prepare the statement of financial position at 31 December 2011, 2012 and 2013

Answer :
Cost = 3 x 9000 = 27.000
useful life = 4 years
Residual Value = 1000/Asset=3000
1st formula: (Cost – Residual Value) / Useful life
Depreciation each year = ($27000 - $3000) / 4 years = $6000 per year
2011=$6000
2012=$6000
2013=$6000
b) statement of financial position at 31 December 2011, 2012 and 2013

Youssef
statement of financial position at 31 December 2011

Cost Accumulated Depreciation Net Book Value

Vehicle Equipment 27.000 6000 21000

Youssef
Provision for depreciation Account
PAPER EXAM
 CASE
1
Motor vehicle 56.000
Usefull life 8 Years
Reduci ballance 25 %
Sold motor 22.000 (1 januari 2019)

Answer:
A
Depreciation for the year ended 31 Desember 2016 = 25% x ($56.000 – 0) = $14.000
Depreciation for the year ended 31 Desember 2017 = 25% x ($56.000 – 14.000) = $10.500
Depreciation for the year ended 31 Desember 2018 = 25% x ($56.000 – 24.500 = $7875

B
Book value per 1 januari 2019 = 56.000 - (14.000 + 10.500 + 7875) = 32,375
Sold motor = 22.000
Lose/profit on Disposal = 10,375

1st formula: % depreciation x (Cost – Provision for Depreciation)

 CASE
2
Case 2
Equipment 15.0000
Depreciation 6000/years
1 januari 2019 8000
Using methode straight Line me
Answer:
A
Depreciation for the year ended 31 Maret 2018 =$.6000
Depreciation for the year ended 31 Maret 2019 =$.6000

Book value per maret 2019 = 15.000-12.000 =3000

Buy other equipment = 12,5% x 8000 = 1000/years
Ken’s
statement of financial position at 31 Maret 2018
Cost Accumulated Depreciation Net Book Value
Equipment (A) 15.000 6000 9000

Ken’s
statement of financial position at 31 Maret 2019
Cost Accumulated Depreciation Net Book Value
Equipment (A) 15.000 12.000 3000
Equipment (B) 8000 250 7750
NB : 3/12 x 1000 = 250
 CASE
3
31 May 2019
Trade receivable = 30.000
Hanna
Kevin
3800
1700
31 May 2020
Trade Receivable = 28,000

(a) Calculate the changes in the provision for doubtful debts at 31 May 2020.
Journal entries:
Bad debts 3800
Hanna 3800
Bad debts 1700
Kevin 1700
PDD = %PDD x (Trade Receivables – Bad debts)
= 5% x (28.000 - 3800 – 1700)
= 5% x 22.500 = 1.125
b) State where the entry for doubtful debts will appear in the income statement
I/S $1125
PDD $1125
 CASE 3 -
Next
(c) Prepare an extract of statement of financial position at 31 May 2020,
Statement of Financial Position (extract):
Trade Receivables PDD Net Trade Receivables
31 May 2020 $28,000 - $3800 - $1700 = $22,500

(d) Name the two accounting principles is applying by maintaining a provision

for doubtful debts
- PRUDENCE  Assets should not be overstated, profit should not be overstated
- MATCHING  Matching between revenue and costs in the same period
 CASE
 
1
Zaffar Khan
Debit
$
$170
Credit
$
 ………………

Zubin Khan ……………… $170

Equipment  $1000  ………………
Office Ekspenses ……………… $100
Stationary $19 ………………
Purchases ……………… $19
 Sales Return  $25  ………………
Marriam Sittar ……………… $25
 CASE
2

Nadia $65 Nadira $65

Drawings $150 Purchases $150

no entry suspense 4100

discount
received 340 suspense
discount
allowed 430 770
 CASE 2
next
b) State whether all the errors in Sabir’s books have been discovered. Give a rea-
son for your answer.
Have all the errors been discovered? ......No......................
Reason : The errors discovered will not cancel out the original difference on the
trial balance of $7000/the suspense account will still have a balance.................

990
√(1) 990
150
4100
340
430
150 6850
24 700
 CASE
3
 

Debit credit
2011
April 1 balance 3950
2012
Mar 31 income statement
20 % x 3950 790 3160
 CASE
3Bad debs wiritten off
a)
210 (last year)
Trade receivable 15530
Provision 2,5 %
K singh (written off) 90

PDD = %PDD x (Trade Receivables – Bad debts)

= 2,5% x (15.530 – 90)
= 2,5% x 15,440 = 386
b
 CASE 3
next
 CASE
1 paid by cheque. No residual value. Depreciation of the equipment using
On 1 July 2015 Ben started a bussiness. On that date, he purchased an equipment
$24,000,
straight line methode at 12,5% per annum.On 1 February 2020 Ben to Sold the
equipment for 12,500
a) Calculate the useful life of the equipment
12,5% x $24.000 = 3000
24,000 : 3000 = 8 years

b) Calculate depreciation of equipment to each year

12,5% x $24.000 = 3000 per years

c) Calculate the profit (loss) on disposal of the equipment

1 July 2015 – 1 Februari 2020 = 4 years 7 months
total depreciation = (4 years x 3000= 12,000)+(7/12 moths x 3000= 1750)
= $13,750
Net Book Value = 24000-13750=10250
Profit (loss) on disposal = 12,500-10,250 = 2250 (profit)
On 1 Janary 2017 XYZ Ltd bought a motor vehcle, $40,000 paid by cheque. It can
be used for 8 years and has a residual value $6000
Depreciation of the equipment using reducing balance method at 25% per annum.
On 1 january 2020 XYZ Ltd decided to sold the motor vehicle for $9000
a) Calculate depreciation of MV for the year ended 31 December 2017,2018 and
2019
1st formula: % depreciation x (Cost – Provision for Depreciation)=
Depreciation for the year ended 31 Dec 2017 = 25% x ($ 40,000 – 0) = $10.000
Depreciation for the year ended 31 Dec 2018 = 25% x ($ 40,000 – $10000) = $7500
Depreciation for the year ended 31 Dec 2019 = 25% x ($ 40,000 – $17500) = $5625

b) Calculate the profit (loss) on disposal of disposal of the motor vehicle

Net Book Value = 40,000-(10.000+7500+5625)=16,875
Profit (loss) on disposal = 9000-16,875 = - 7875 (loss)
 CASE
4
a) Prepare the journal entries required to correct
these errors.
  Debit
$
Credit
$
Suspense account
Purchases $230  ………………
Details $ Details $
Bank ……………… $230
Suspenses Account  $100  ………………  Sales Return  90
Sales ……………… $100 Difference on trial 1270
Commission Received $75 ……………… balance
Sales 100 Purchase Return 90
Interest Received ……………… $75
 Purchases Return  $90  ………………
1370 Drawing 30
Suspenses Account ……………… $90
 Sales Return  $90  ……………… ………………………. ……... 800
Cheque Receive
Suspenses Account ……………… $90
………………………. ……... Loan 180
Bank  $2200  ………………
Sales ……………… $2200
Selisih 80 1290
Drawing $30 ………………
Suspenses account ……………… $30
Bank $800 ……………… ………………………. ……...
Suspenses Account ……………… $800

Carlo $640 ………………

Suspenses Account $180

$460
Loan
THANK YOU

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