E3 (1) - Further Exercise

Notes and Exercises
(Elective) Financial Accounting

HKDSE BAFS
Topic 3: Depreciation of Non-current Assets -- Further Exercise (1)

Topic 3: Depreciation of Non-current Assets
Further Exercise (1)
1.
Future Co commenced business on 1 January 2008. The firm purchased equipment for
production and motor vehicles to deliver goods to customers. Depreciation is provided for
both assets each year on 31 December.
Equipment is to be depreciated using the straight-line method with a five-year estimated
useful life and residual value of 15% on cost. Motor vehicles are to be depreciated at 25%
per annum on a reducing-balance basis.
Information on the equipment and motor vehicles is as follows:
Equipment
EQ1
EQ2
EQ3
Date of acquisition
Cost
Date of disposal
Amount received
Motor vehicle
Date of acquisition
Cost
Date of disposal
Amount received
1/1/2008
$150,000
30/9/2009
$105,000
MV1
1/1/2008
$100,000
30/6/2008 31/10/2009
$100,000
$85,000
MV2
MV3
MV4
31/8/08 30/9/2009 31/3/2010

$120,000
$80,000
$95,000
30/4/2010
$70,000
The accounting policy of the firm is to charge a full years depreciation if the asset is
purchased in the first half of the year, and no depreciation if the asset is purchased in the
second half of the year.
For disposal of assets, no depreciation should be charged if they are sold in the first half of
a year; a full years depreciation should be charged if they are sold in the second half of a
year.
Required:
(a) Prepare the following accounts for the years ended 31 December 2008, 2009 and 2010:
(i) Equipment
(ii) Motor vehicles
(iii) Accumulated depreciation: Equipment
(iv) Accumulated depreciation: Motor vehicles
(v) Disposal: Equipment
Page 1 of 12
Notes and Exercises

HKDSE BAFS
(vi) Disposal: Motor vehicles
Required:
(a) Prepare the following accounts for the years ended 31 December 2008, 2009 and 2010:
(i) Equipment
ANSWER:
Calculations:
Depreciation charge on equipment per annum on a straight-line basis:
EQ1 : [$____________ ($_____________ _____%)] ____ = $___________
EQ2 : [$____________ ($_____________ _____%)] ____ = $___________
EQ3 : [$____________ ($_____________ _____%)] _____ = $___________
2008
(ii)
2008
2008
2008
Motor vehicles
Page 2 of 12
Notes and Exercises

HKDSE BAFS
(iii) Accumulated depreciation: Equipment
2008
2008
(iv) Accumulated depreciation: Motor vehicles
2008
2008
Page 3 of 12
Notes and Exercises

HKDSE BAFS
Workings:
(W1) Depreciation on motor vehicle for 2008:
MV1 $______________ _____% = $_____________
MV1 ($______________ $25,000) 25% = $_____________
MV2 $______________ _____% = $_____________
Depreciation for 2009 = $______________ + $______________ = $______________
MV1 ($____________ $____________ $____________) ____% = $__________
MV3 $______________ _____% = $_____________
MV4 $______________ _____% = $_____________
Depreciation for 2010 = $__________ + $__________ + $__________ = $___________
(v)
Disposal: Equipment
2009
2009
(vi) Disposal: Motor vehicles
2010
2010
Page 4 of 12
Notes and Exercises

HKDSE BAFS
Page 5 of 12
Notes and Exercises

HKDSE BAFS
On 1 January 2011, Future Co found that it was more suitable to use the reducing-balance
method at 20% for equipment. The company is considering changing the depreciation basis of
equipment in order to give a more accurate view of the business.
Net profit for Future Co for the past three years is as follows:
$
2008
369,000
2009
372,000
2010
354,000
Required:
(b) Calculate the effect on the depreciation charge on equipment for each of the three years
ended 31 December 2008, 2009 and 2010, if the reducing-balance method was adopted.
Effect on Equipments Depreciation
Year
Depreciation calculated on
the reducing-balance basis of 20% per annum
EQ1
EQ2
EQ3
Total
Original
Difference
2008
$__________ ____%
= $__________
$__________ ____%
= $__________
________ ________ +________
2009
($__________
($__________
$__________) ____% = $__________) ____%
$__________
= $__________
________ ________ ________
2010
($__________
$__________
$__________) ____%
= $__________
$__________ ________ ________ ________

____%
= $________
Page 6 of 12
Notes and Exercises

HKDSE BAFS
Show the effects on the net profit if the method of calculating depreciation on equipment
was changed from a straight-line basis to a reducing-balance basis.
(Calculations to the nearest dollar)
(c)
Recalculation of Net Profit

2008
$
Original net profit
Add Decrease in depreciation
Increase in profit on disposal (W4)
2009
$
2010
$
Less Increase in depreciation
Recalculated net profit

Workings:
(W4) Effect on the profit or loss on disposal of equipment:
$
Accumulated depreciation (EQ1)
Amount received on disposal
Less Cost of equipment
Profit on disposal using the reducing-balance method
Less Original profit using the straight-line method
Increase in profit on disposal
Page 7 of 12
Notes and Exercises

HKDSE BAFS
2.
Sesame Enterprise is a toy manufacturer. The firm uses several lorries to deliver toys to its
customers.
Lorries are depreciated on a straight-line basis over their estimated useful life of five years, with a
residual value of 10% of cost.
A proportion of a years depreciation is charge against the acquisition or disposal of trucks during a
year, as shown below:
Proportion of the yearly depreciation
Acquired during the year
Jan Apr
May Aug
Sept Dec
100%
50%
Nil
Nil
50%
100%
Disposed of during the year

The following information is available:
Lorry No.
Acquisition date
Cost
Disposal date
Amount received
L1
3 Mar 2009
$60,000
29 May 2010
$33,000
L2
1 Oct 2009
$54,000
30 Nov 2010
$38,000
L3
25 Jun 2010
$48,000
All acquisitions and disposals were by cheque.
Required:
Prepare the following accounts for the years ended 31 December 2009 and 2010:
(a) Lorries
_________________
2009
2009
____________ (L1)
____________ (L2)
2010
$
Balance _______
2010
Balance _______
____________ (L3)
____________________ (L1)
____________________ (L2)
Balance _______
Page 8 of 12
Notes and Exercises

HKDSE BAFS
(b)
Accumulated Depreciation: Lorries

___________________________
2009
2009
Balance ______
2010
$
_______________________ (W1)
2010
___________________ (L1)
___________________ (L2)
Balance ______
Balance ______
_______________________ (W2)
Workings:
(W1) Calculation of depreciation for the year ended 31 December 2009:
L1: $____________________ _______% _____ = $_____________________
(W2) Calculation of depreciation for the year ended 31 December 2010:
L1: ($____________________ _______% _____) _____% = $_________________
L2: $____________________ _______% _____ = $_____________________
L3: ($____________________ _______% _____) _____% = $_________________
Total amount: $_______________ + $_______________ + $_______________
= $_______________
Page 9 of 12
Notes and Exercises

HKDSE BAFS
(c)
Lorry Disposals
_________________________
2010
2010
_________________ (L1)
_________________ (L2)
"
"
$
_______________________:
_______________ (L1)
_______________ (L1)
_______________________:
_______________ (L2)
_______________ (L2)
_____________________
______________________
Page 10 of 12
Notes and Exercises

HKDSE BAFS
3.
Tammy Yius business purchased equipment on 1 January 2010 for $4,000,000.

The price included shipping expenses of $20,000, installation costs of $30,000 and a twoyear maintenance contract at a cost of $60,000.
The equipment had an expected life of four years and a residual value of $500,000.
The depreciation policy is to calculate depreciation at 40% per annum on a reducingbalance basis.
Required:
(a) Calculate the net book value of the equipment at the end of four years.
Calculation of the annual depreciation charge on equipment using the reducing-balance method:
$
2010
Equipment at __________, _______________________________ (Workings)

Less _______________ ($_________________ _____%)
2011
Equipment at _____________________, _____________________________

Less _______________ ($_________________ _____%)
2012
Equipment at _____________________, _____________________________

Less _______________ ($_________________ _____%)
2013
Equipment at _____________________, _____________________________

Less _______________ ($_________________ _____%)
Equipment at _____________________, _____________________________

Workings:
Calculation of the cost of the equipment:
$
Purchase price
Less ______________________
Note:The __________________ and _____________________ should be included in the cost
of the equipment as those costs were ______________ (revenue / capital) expenditure.
(b) Assuming the company chose to use the straight-line depreciation method, calculate
the depreciation charges on the equipment over the four years, and show the net book
value of the equipment at the end of four years.
Calculation of the annual depreciation charge on equipment using the straight-line method:
($_____________________ $_____________________) _____ = $_____________________
$
2010 Equipment at __________, _______________________________
Less _______________
Page 11 of 12
Notes and Exercises

HKDSE BAFS
2011 Equipment at _____________________, ________________________
Less _______________
2012 Equipment at _____________________, ________________________
Less _______________
2013 Equipment at _____________________, ________________________
Less _______________
Equipment at _____________________, ________________________
(c) Which of the two methods would give a lower net profit figure when Tammy prepared
an income statement for the year ended 31 December 2010?
The business would show a lower net profit figure for the year ended 31 December 2010 when
the _________________________ method was used.
It is because $____________________ would be charged as depreciation under this method,
which
is
HIGHER
than
the
$____________________
charged
under
_________________________ method.
Page 12 of 12

E3 (1) - Further Exercise

Uploaded by

Copyright:

Available Formats

E3 (1) - Further Exercise

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

E3 (1) - Further Exercise

Uploaded by

Copyright:

Available Formats

How is depreciation calculated for equipment and motor vehicles?

How is depreciation calculated for equipment and motor vehicles?

What information is needed to calculate depreciation for each year?

What information is needed to calculate depreciation for each year?

Notes and Exercises

(Elective) Financial Accounting

(Elective) Financial Accounting

31/8/08 30/9/2009 31/3/2010

Notes and Exercises

Notes and Exercises

(iii) Accumulated depreciation: Equipment

(iv) Accumulated depreciation: Motor vehicles

Notes and Exercises

(vi) Disposal: Motor vehicles

Notes and Exercises

Notes and Exercises

________ ________ +________

________ ________ ________

$__________ ________ ________ ________

Notes and Exercises

Recalculation of Net Profit

Less Increase in depreciation

Recalculated net profit

Notes and Exercises

Acquired during the year

Disposed of during the year

All acquisitions and disposals were by cheque.

Notes and Exercises

Accumulated Depreciation: Lorries

Notes and Exercises

Notes and Exercises

Tammy Yius business purchased equipment on 1 January 2010 for $4,000,000.

Equipment at __________, _______________________________ (Workings)

Equipment at _____________________, _____________________________

Equipment at _____________________, _____________________________

Equipment at _____________________, _____________________________

Equipment at _____________________, _____________________________

Notes and Exercises

You might also like

+

$__

Equipment at , _____________________ (Workings)

Equipment at _, _________

Equipment at _, _________

Equipment at _, _________

Equipment at _, _________