E1083B

Bookkeeping

Certificate IV in Bookkeeping

2 Preparing ledgers and financial reports

2.8 Accounting for fixed assets

Table of Contents

2.8.1 Depreciation

2.8.2 Asset Register

Accounting for fixed assets

2.8.1 Depreciation

Definitions

Depreciation

Australian Accounting Standard AASB 116 defines depreciation as “a systematic allocation of the

depreciable amount of an asset over its useful life”. Depreciation is the term used in accounting

for the expensing of the cost of a depreciable asset over its economic life. This process of

depreciation is an essential element of the matching principle i.e. the matching of revenue earned

in a period with the expenses of that period (including depreciation) incurred in earning that

revenue.

Depreciable asset

Depreciable assets are tangible assets acquired for use in a business and that diminish in value

over time. Usually they are assets that lose value because of a combination of use (wear and

tear), obsolescence and the passing of time. Importantly, they are not items that are intended for

resale in the ordinary course of business but are acquired to assist in earning revenue and

provide this benefit over a number of accounting periods. Examples are machinery, furniture and

fixtures, office equipment and motor vehicles.

Asset cost

From AASB 116: “Cost is the amount of cash or cash equivalents paid, or the fair value of the

other consideration given, to acquire an asset at the time of its acquisition or construction.” The

cost of a non-current asset includes the purchase price plus any other costs incurred in bringing

the asset to its required location and to make it ready for use.

Useful life

From AASB 116, the useful life of an asset is “the period over which an asset is expected to be

available for use by an entity or the number of production units expected to be obtained from the

asset by an entity.” The estimation of the useful life of the asset is a matter of judgement based

on the experience of the entity with similar assets.

Residual value

AASB 116 defines the residual value of an asset as the estimated amount that an entity would

currently obtain from disposal of the asset, after deducting the estimated costs of disposal, if the

asset was already of the age and in the condition expected at the end of its useful life. AASB 116

provides that the residual value should be reviewed at least at the end of each annual reporting

| Topic - 2 / 59

© Open Colleges Pty Ltd, 2018.

period.

Depreciable amount

The depreciable amount is the cost of an asset less its (estimated) residual value.

Depreciable Amount = Cost – Estimated Residual Value

Impairment loss

AASB 116 states that “an asset is impaired when its carrying amount exceeds its recoverable

amount.” Impairment loss is the amount by which the value of an asset is reduced to bring it to its

recoverable amount.

Carrying amount (Book value or written down value)

AASB 116 provides that the carrying amount is the amount at which an asset is recognised after

deducting any accumulated depreciation and impairment losses.

Fair value

AASB 116 states that “fair value is the amount for which an asset could be exchanged between

knowledgeable, willing parties in an arm’s length transaction”. Fair value is sometimes referred to

as the “market value”.

Capital vs. Revenue Expenditure

Any expenditure that provides benefit to a business beyond a twelve month period is considered

to be Capital Expenditure. Expenditure that will provide benefit to a business for not more than

twelve months is considered to be Revenue Expenditure.

| Topic - 3 / 59

© Open Colleges Pty Ltd, 2018.

The term Revenue Expenditure may seem a contradiction but it is expenditure that will be

charged against Revenue (in arriving at the profit or loss for the period).

Capital expenditures are recorded in asset accounts and revenue expenditures are recorded in

expense accounts, for example, vehicle registration and insurance paid on purchase of a vehicle is

an expense (not part of the capital cost) as its benefit to the business is only 12 months.

Capital Cost of Non-Current Assets

The cost of a non-current asset includes all expenditures of buying the asset and getting it into

location and condition ready for use in the business. The purchase price of an asset is the

easiest to find, being its invoice price. To this should be added the costs of freight, insurance in

transit, installation, testing and any other costs incurred in making the asset ready for use,

including training of staff if necessary. The total cost of the asset including freight in, installation,

etc. is called the capital cost of the asset.

Why should the costs of preparing the asset for use be included in the depreciable cost amount

and not treated as expenses for the period in which the asset was installed?

Costs must be matched against revenue. It would be unreasonable to allocate the capital cost to

the period in which the depreciable asset was acquired. The benefits of the capital costs incurred

should be spread over the life of the asset and therefore allocated against revenue in all the

periods in which the asset provides services to the business.

GST is not part of the cost of an asset. Any GST paid will be claimed from the tax office in the

periodical BAS Statement.

| Topic - 4 / 59

© Open Colleges Pty Ltd, 2018.

Activity 49634

Machine purchase and installation costs

A machine is bought on credit for $62,700. In addition, installation costs amounting to $8,800

were paid in cash. Both amounts include GST.

Required: Record the purchases.

Activity Template

[https://opencolleges.sharepoint.com/:w:/s/OS/ERDx4OJvQWpGvqmBqrLrve4BWXpbO4CYnuSYnwQN0Yq_oA?e=glpC

md]

Hints

Solution:

Both the purchase price and installation costs are capital expenditure and will be allocated to the

Machinery account as part of the cost of the asset. The total amount of capital expenditure,

excluding GST, to acquire the asset and get it ready for use is ($57,000 + $8,000) = $65,000.

To record the asset purchase, two entries are necessary: one for each source document.

[https://res.cloudinary.com/opencolleges/image/upload/v1444886125/jhu9t4uh0sbudg6fzssk.png]

The total posted to the Machinery account should be the capital cost of the asset. In this case,

57,000 + 8,000 = $65,000.

| Topic - 5 / 59

© Open Colleges Pty Ltd, 2018.

Activity 11515

Truck purchase

A delivery truck was purchased on 30 June for $102,300. Painting of the company logo on the truck

cost $3,300 and shelves were fitted at a total cost of $1,980. All amounts include GST and were

paid for in cash from the one supplier.

Required: Record the purchase of the delivery truck. As there is only one source document, this

purchase is recorded as a single journal entry.

Activity Template

[https://opencolleges.sharepoint.com/:w:/s/OS/ERDx4OJvQWpGvqmBqrLrve4BWXpbO4CYnuSYnwQN0Yq_oA?e=glpC

md]

Hints

[https://res.cloudinary.com/opencolleges/image/upload/v1444886226/onfmy5x0q7otnub9cidw.png]

[https://res.cloudinary.com/opencolleges/image/upload/v1444886269/se5wsxerumozib6iurrg.png]

Straight Line Method

What is depreciation?

Put simply, depreciation refers to the loss in value of an asset over time, and the cost of

depreciation is allocated to certain periods of time to capture this loss of value as an expense.

The accounting term “depreciation” can have a twofold meaning:

| Topic - 6 / 59

© Open Colleges Pty Ltd, 2018.

depreciation as a process of decline in value

depreciation as an outcome that is an expense allocated to a period the asset has been

used by the business.

Depreciation as a process relates to the systematic allocation of the cost of the asset against

revenue earned by the asset over its economic life.

Depreciation as an outcome is the portion of the cost of an asset, or the future economic benefit

represented by the asset, which is “expensed” and charged against revenue in arriving at the

profit or loss for a period.

Except for land, most assets will reduce in value in some way over time. The loss in value of non-

current assets mostly results from one of, or a combination of, the following:

physical deterioration

obsolescence

Physical deterioration

Physical deterioration of a depreciable asset results from its use (wear and tear) and sometimes

from its exposure to the elements – sun, wind and sea. Regular and careful maintenance can

usually diminish the rate of physical deterioration and generally lengthen the useful life of assets.

Obsolescence

An asset may reduce in value because it has become outdated, or because its technology has

been superseded by new technology, e.g. computers. While an asset may still work effectively as

if new, it may have lost value because there are similar assets that are newer and have superior

performance.

An asset may also become obsolete through redundancy. If there is a fall in demand for the

goods produced by the asset then the asset may have no further use.

1

2

| Topic - 7 / 59

© Open Colleges Pty Ltd, 2018.

The depreciation process

The depreciation process may be summarised in the following steps:

Determine the cost of the asset i.e. its purchase cost and any other costs of getting the

asset into location and condition necessary for its intended use.

Estimate the useful life of the asset and its residual value.

Calculate the depreciable amount of the asset:

Depreciable amount = asset cost less its estimated residual value

Determine the appropriate method of depreciation according to how the service potential

of the asset is to be reduced. The methods of depreciation are:

Straight-line (or fixed instalment) method;

Diminishing Balance ( or reducing balance or written-down value ) method; and

Units of production ( or units of use ) method.

Calculate the depreciation expense.

Allocate depreciation to each accounting period via a general journal entry.

Depreciation is a book entry only and is a non-cash transaction.

There are 2 ledgers used to record depreciation:

| Topic - 8 / 59

© Open Colleges Pty Ltd, 2018.

Depreciation expense which is the allocation of the portion of the asset’s depreciable

amount that is estimated to have been used during the current accounting period. Usually only

one Depreciation ledger is maintained in the General Ledger. The balance is transferred to Profit

+ Loss at the end of the financial year.

Accumulated Depreciation is a contra asset. This means that it has a credit balance, which is

attached to, and reduces, the value of the asset to which it relates. The credit to Accumulated

Depreciation each period increases the balance of Accumulated Depreciation over the useful life

of the asset and thereby reduces the book value of the asset each year the asset is held. Being

an asset account, this ledger remains open until the asset is disposed of or retired.

The General Journal entry to record depreciation is:

Debit Depreciation Expense xxx

Credit Accumulated Depreciation xxx

Activity 49636

Depreciation charge as per depreciation schedule

The cost of equipment purchased on 1 April 2015 was $80,000. Depreciation for the first three

months to 30 June 2015 is $2,000. Depreciation for the year ending 30 June 2016 is $8,000.

Required:

Activity Template

[https://opencolleges.sharepoint.com/:w:/s/OS/ERDx4OJvQWpGvqmBqrLrve4BWXpbO4CYnuSYnwQN0Yq_oA?e=glpC

md]

Prepare a journal entry to record depreciation expense at 30 June 2015

Prepare an extract of the Income Statement at 30 June 2015

Prepare an extract of the Balance Sheet at 30 June 2015

Prepare an extract of the Balance Sheet at 30 June 2016

Hints

1

2

a

b

c

d

| Topic - 9 / 59

© Open Colleges Pty Ltd, 2018.

Solution:

Extract of Income Statement for year ending 30 June 2015

Extract of Balance Sheet at 30 June 2015 Non-Current Assets

[https://res.cloudinary.com/opencolleges/image/upload/v1444886796/fjvbaidwls0cz6mdeotp.png]

Extract of Balance Sheet at 30 June 2016

[https://res.cloudinary.com/opencolleges/image/upload/v1444886821/ozqndpgtgxeq3ifsfzv6.png]

Calculation of depreciation using different methods

The calculation of the depreciation amount for an asset (or class of assets) at the end of the

accounting period is based on:

estimated useful life

residual value

the selected depreciation method.

a

b

c

d

| Topic - 10 / 59

© Open Colleges Pty Ltd, 2018.

Estimated useful life

Upon acquiring a depreciable asset, management estimates its useful life, i.e. the period of time

the asset will be used. The estimate would be based on past experience with similar assets and

the business’s circumstances and plans. Hence, estimates of the useful life of similar assets may

vary from business to business. Useful life can be expressed either in years or in usage, e.g.

kilometres travelled, units produced etc.

Residual value (scrap value)

Management estimates the value of an asset at the end of its useful life. This estimate is based

on the expected amount realisable at the planned time of disposal.

Methods of calculating depreciation

There are a number of different methods for calculating depreciation. AASB 116 states that the

depreciation method used should reflect the pattern in which the asset’s future economic

benefits are expected to be consumed by the entity.

Management may select different methods for different classes of assets and once a method is

adopted, that method will apply to the entire asset class.

The methods of calculating depreciation demonstrated in this chapter

are:

straight-line (or fixed instalment) method

diminishing balance (or reducing-balance or written-down value) method

units of production (or units of use) method.

The calculation of depreciation for a period is conveniently presented by way of a depreciation

schedule. In practice, depreciation for part-years is calculated on a daily basis. For simplicity we

will use months.

| Topic - 11 / 59

© Open Colleges Pty Ltd, 2018.

Straight Line method

The Straight-Line method is the simplest depreciation method. The annual depreciation charge is

calculated by dividing the depreciable amount of the asset by the estimated life of the asset in

years.

It is also referred to as the fixed-instalment method as it gives a constant depreciation charge

each period.

Depreciation is calculated as follows:

[https://res.cloudinary.com/opencolleges/image/upload/v1444886888/giswmihqc2abqgpulln3.png]

Activity 49639

Aussie Gum Ltd

Aussie Gum Ltd provides the following information (all figures are net of GST):

Asset cost at 01/07/2014 $35,000

Estimated residual value $5,000

Balance to be depreciated (depreciable amount) $30,000

Estimated useful life 3 years

Required: Complete a depreciation schedule using the straight line method.

Activity Template

[https://opencolleges.sharepoint.com/:w:/s/OS/ERDx4OJvQWpGvqmBqrLrve4BWXpbO4CYnuSYnwQN0Yq_oA?e=glpC

md]

| Topic - 12 / 59

© Open Colleges Pty Ltd, 2018.

Hints

Solution:

[https://res.cloudinary.com/opencolleges/image/upload/v1444886945/pym41wtattwbd2eviepo.png]

[https://res.cloudinary.com/opencolleges/image/upload/v1444886980/snap95rkcs6bmmqfkqvr.png]

Workings

The amount to be depreciated is $30,000 ($35,000 less the residual value of $5,000) over 3

years. The depreciation charge is thus $10,000 per year.

Depreciation rate p.a. = Depreciation p.a./cost = 10,000/35,000 = 28.57%

The depreciation rate is applied to the cost of the asset. Therefore when calculating the

depreciation rate, it is expressed as a percentage of the asset cost.

In practice, the depreciation is commonly calculated on a spreadsheet. In this format, the easiest

method of calculating depreciation is by using the depreciation rate x cost.

| Topic - 13 / 59

© Open Colleges Pty Ltd, 2018.

Activity 11517

Laser Lights

Laser Lights Ltd provides the following information (all figures are net of GST):

Cost of asset at 01/01/2015 $83,200

Estimated residual value $13,200

Balance to be depreciated $70,000

Estimated useful life 5 years

Required: Complete a depreciation schedule using the straight line method.Use the template

provided in the

Activity Template

[https://opencolleges.sharepoint.com/:w:/s/OS/ERDx4OJvQWpGvqmBqrLrve4BWXpbO4CYnuSYnwQN0Yq_oA?e=glpC

md]

document.

Hints

[https://res.cloudinary.com/opencolleges/image/upload/v1444887097/qpivap3anictuf9wundj.png]

| Topic - 14 / 59

© Open Colleges Pty Ltd, 2018.

[https://res.cloudinary.com/opencolleges/image/upload/v1444887242/y9gyi2atorm93xxki1tm.png]

Diminishing balance method

The diminishing balance method calculates depreciation for each period by applying a fixed

percentage rate to the carrying amount, or written down value (WDV), of the asset at the end of

the previous period. This means that the amount of depreciation charged is greater in earlier

years than in later years as the calculation is made on the carrying amount which is decreasing

each year. Therefore depreciation will decrease each year.

The depreciation rate used for the diminishing balance method is determined by a mathematical

formula that takes into account the estimated residual value and the estimated life of the asset.

Consequently, if you are given a diminishing value depreciation rate, consideration of the residual

value of the asset is not needed in calculating the annual depreciation amount when using the

diminishing balance method.

When the rate is used over the estimated life of the asset, the carrying amount at the end will be

the estimated residual value.

| Topic - 15 / 59

© Open Colleges Pty Ltd, 2018.

[https://youtube.com/watch?v=aZFS-_vF3Ps]

| Topic - 16 / 59

© Open Colleges Pty Ltd, 2018.

Activity 49640

Pal Printing

Pal Printing provides the following information relating to a purchase of plant:

Cost of plant on 01/07/2014 $80,000

Residual value $0

Depreciation Rate 40%

Required: Complete a depreciation schedule for 5 years using the Diminishing Balance method.

Activity Template

[https://opencolleges.sharepoint.com/:w:/s/OS/ERDx4OJvQWpGvqmBqrLrve4BWXpbO4CYnuSYnwQN0Yq_oA?e=glpC

md]

Hints

Solution:

[https://res.cloudinary.com/opencolleges/image/upload/v1444887470/wks8mcouovhmp3zjosmf.png]

[https://res.cloudinary.com/opencolleges/image/upload/v1444887517/rqn1vjgzvhnd29wrbmdv.png]

| Topic - 17 / 59

© Open Colleges Pty Ltd, 2018.

Activity 11519

Deluxe Packaging

Deluxe Packaging provides the following information:

Cost of plant on 01/01/2014 $90,000

Residual value $500

Depreciation Rate 30%

Required: Complete a depreciation schedule for 5 years using the diminishing balance method

(whole numbers only). In this activity, the financial year ends on 31 December. Use the template

provided in the

Activity Template

[https://opencolleges.sharepoint.com/:w:/s/OS/ERDx4OJvQWpGvqmBqrLrve4BWXpbO4CYnuSYnwQN0Yq_oA?e=glpC

md]

document.

Hints

[https://res.cloudinary.com/opencolleges/image/upload/v1444887634/zll2dyv1v0oghfz2qecc.png]

[https://res.cloudinary.com/opencolleges/image/upload/v1444887665/mh0hw9tjtwgpu4hk7ulf.png]

| Topic - 18 / 59

© Open Colleges Pty Ltd, 2018.

Units of production method

The units of production method is based on the service capacity (or potential) of the asset,

measured in an appropriate unit, e.g. kilometres for a motor vehicle or units of output or

production hours for a factory machine. The depreciation charge for a period is calculated on the

basis of the amount of the total service capacity used up in the period.

The rate per unit is calculated thus:

Photocopiers are typically depreciated using this method. Copiers have an expected life of a

given number of copies. The counter on the copier records the number of copies done. The

number of copies is read at the start of the year and the end of the year to determine the usage

through the year.

| Topic - 19 / 59

© Open Colleges Pty Ltd, 2018.

Activity 49641

Units of production with no residual value

A machine has an asset cost of $20,000. The useful life is estimated at 16,000 hours and the

asset will have a zero value at the end of its life.

What is the depreciation rate per hour of use?

What is the depreciation charge in a year in which the machine works 3,500 hours?

Hints

Solution:

Depreciation rate per hour = $20,000/16,000 = $1.25 per hour

Depreciation = 3,500 hours x $1.25 = $4,375

or Depreciation = 3,500 hours x ($20,000/16,000) = $4,375

1

2

1

2

| Topic - 20 / 59

© Open Colleges Pty Ltd, 2018.

Activity 49643

Units of production with a residual value

A business uses its motor vehicles for 200,000 kilometres and they are then sold. A motor vehicle

costing $30,000 has an expected resale value of $5,000 after 200,000 kilometres (amounts

exclude GST).

What is the depreciation per kilometre?

What is the depreciation in a year in which the vehicle travels 85,000 kilometres?

Hints

Solution:

Depreciation per km =

[https://res.cloudinary.com/opencolleges/image/upload/v1448505628/ntzfxhjerdauniajlp8x.png]

= 12.5 cents per km

Depreciation = $0.125 x 85,000 km = $10,625 for that year

1

2

| Topic - 21 / 59

© Open Colleges Pty Ltd, 2018.

Activity 27587

Depreciation

A motor vehicle that cost $30,000 has an expected residual value of $8,000 after its useful

life of 200,000 km. What is the depreciation rate per kilometre?

A machine costing $50,000 is depreciated using the units of use method. It is expected to

produce 500,000 units. How much depreciation will be charged in a year in which it produces

20,000 units?

Hints

1

2

| Topic - 22 / 59

© Open Colleges Pty Ltd, 2018.

Activity 49644

Units of production – depreciation schedule

A machine that cost $15,000 (plus GST) on 1 July 2014 is expected to produce 500,000 items

during its life and at the end its scrap value will be $1,000 (GST exclusive).

The machine has been operating for three years. Its production in each of those years has been

80,000, 110,000 and 112,000 units. It is being depreciated on the units of production method.

Balance day is 30 June each year.

Required: Prepare a schedule showing details of the asset and its depreciation.

Activity Template

[https://opencolleges.sharepoint.com/:w:/s/OS/ERDx4OJvQWpGvqmBqrLrve4BWXpbO4CYnuSYnwQN0Yq_oA?e=glpC

md]

Hints

Solution:

[https://res.cloudinary.com/opencolleges/image/upload/v1448506308/gi62wl8he4j0hkdulqhd.png]

| Topic - 23 / 59

© Open Colleges Pty Ltd, 2018.

Activity 27589

Berry Furnishings

Berry Furnishings bought a truck on 15 March 2014. It cost $47,000 and it can be sold for $5,000

(net of GST) after it has travelled 400,000 km.

Reports are prepared on 31 December each year. The vehicle is being depreciated using

the units of production method based on the following number of kilometres travelled:

Year ended 31 December 2014 45,000

Year ended 31 December 2015 70,000

Year ended 31 December 2016 58,000

Required: Using the activity template prepare a worksheet showing details of the asset and its

depreciation.

Activity Template

[https://opencolleges.sharepoint.com/:w:/s/OS/ERDx4OJvQWpGvqmBqrLrve4BWXpbO4CYnuSYnwQN0Yq_oA?e=glpC

md]

Hints

[https://res.cloudinary.com/opencolleges/image/upload/v1448506431/oh7hl41mhnthowesehy9.png]

| Topic - 24 / 59

© Open Colleges Pty Ltd, 2018.

Accounting for depreciation

After the amount of depreciation has been calculated, a General Journal entry is prepared. The

entry is made at the end of each accounting period or when the asset is disposed of.

General Journal

The purpose of the General Journal entry is to:

Record the depreciation expense for the period.

Increase the Accumulated Depreciation account. The Accumulated Depreciation is

subtracted from the asset cost to determine the carrying amount of the asset.

[https://res.cloudinary.com/opencolleges/image/upload/v1444887757/uw3hkitpwhyvbhmwknbe.png]

Presentation in the f inancial statement

Accumulated Depreciation is shown in the Balance Sheet as a deduction from the asset, or class

of assets to which it relates, as required by AASB 116. It reduces the value of the asset to which it

relates.

The Accumulated Depreciation account has a credit balance that will increase each time

depreciation is recorded for the asset, until the carrying amount of the asset reaches its residual

value, or until the asset is sold or scrapped. The Balance Sheet presentation of plant costing

$100,000 and having Accumulated Depreciation of $60,000 is as follows:

Extract of Balance Sheet:

| Topic - 25 / 59

© Open Colleges Pty Ltd, 2018.

[https://res.cloudinary.com/opencolleges/image/upload/v1444887809/chhdmdnkwvz55pn8bxij.png]

The Profit and Loss Account

The Profit and Loss Account is a Temporary Ledger used at year end to determine the profit for

the year. Balances of all revenue and expense ledgers are transferred to the Profit and Loss

account: this brings the balances in these ledgers to zero, ready for the following year’s figures.

Depreciation, an expense, is transferred to the Profit and Loss account at balance date, as seen

in this last example.

Activity 11520

Metal Makers Ltd

Metal Makers Ltd provides the following information.

01/01/15 Machinery at cost (including GST) $88,000

Depreciation rate (diminishing balance method) 25%

Required:

A depreciation worksheet at 30 June 2015 and 2016.

General journal entry on 30 June 2015 and 2016 for depreciation.

Ledger accounts for Machinery, Accumulated Depreciation of Machinery and Depreciation

Expense.

Income Statement and Balance Sheet extracts for the year ended 30 June 2016 showing

the Depreciation Expense and the Machinery.

Use the templates provided in the

Activity Template

[https://opencolleges.sharepoint.com/:w:/s/OS/ERDx4OJvQWpGvqmBqrLrve4BWXpbO4CYnuSYnwQN0Yq_oA?e=glpC

md]

1

2

3

4

| Topic - 26 / 59

© Open Colleges Pty Ltd, 2018.

document.

Hints

[https://res.cloudinary.com/opencolleges/image/upload/v1444888552/zeuc2xu2e2myum6tvrp2.png]

[https://res.cloudinary.com/opencolleges/image/upload/v1444888607/ikuimxpgsjhf7owqkx5v.png]

1

2

3

| Topic - 27 / 59

© Open Colleges Pty Ltd, 2018.

[https://res.cloudinary.com/opencolleges/image/upload/v1444888651/hcssgs6tbajqo5z5iyrv.png]

[https://res.cloudinary.com/opencolleges/image/upload/v1444888706/ysplcj72uloywd1ubkly.png]

Accounting for the disposal of depreciable assets

A business may dispose of depreciable assets as they wear out or become obsolete. They may

be sold, traded in on new equipment, or scrapped.

When an asset is sold it will rarely be at the end of an accounting period. To conform with the

matching principle, depreciation is recorded up to the date of sale.

4

| Topic - 28 / 59

© Open Colleges Pty Ltd, 2018.

When the asset is disposed of it is probable that the sale price will differ from the carrying

amount of the asset. If the sale price is greater than the carrying amount then the business

makes a profit on disposal. If the sale price is less than the carrying amount it makes a loss on

disposal.

In the Income Statement, the Profit on Disposal is shown as Other Income and a Loss on

Disposal is shown as Other Expenses. The Notes to the Financial Statements will identify the

proceeds of sale (what the asset was sold for), its carrying amount and the profit or loss on

Disposal.

When an asset is disposed of, the asset’s cost and its related accumulated depreciation are

removed from the books using a journal entry. The other side of the double entries is an

allocation to a temporary account called the Disposal account.

The Disposal account brings together the financial details of the asset disposal; its cost,

accumulated depreciation to date of sale and the proceeds from trading in or selling the asset.

A Credit balance in the Disposal account indicates a Profit on Disposal. That is the asset is

sold or traded in for an amount greater than the carrying amount.

A Debit balance in the Disposal account indicates a Loss on Disposal: the asset is sold or

traded in for less than the carrying amount.

The balance of the Disposal account is transferred to either a Profit on Disposal (Revenue

account) or Loss on Disposal account (Expense). At the end of the financial year, these accounts

are closed to the Profit and Loss account, and are included in Net Profit for the year.

Profit or Loss on Disposal is calculated as follows:

Profit / (Loss) on Disposal of the Asset = Sale Proceeds less Carrying Amount

Where:

Carrying Amount = Cost less Accumulated Depreciation

| Topic - 29 / 59

© Open Colleges Pty Ltd, 2018.

The steps to record the disposal of an asset are:

Depreciate the asset to date of sale.

Transfer the asset at cost and its accumulated depreciation to the Disposal account.

Record the proceeds of the sale in the Disposal account.

The balance in the Disposal account is the profit or loss on disposal. Transfer any balance

to the “Profit (or Loss) on Disposal of Asset” account.

At the end of the accounting period, transfer the Depreciation expense and the

“Profit/Loss on Disposal of Non-Current Asset” balance to the Profit & Loss Account.

Activity 49646

Markham Fabrics Ltd

On 31 March 2014, Markham Fabrics Ltd sold a machine.

Information relating to the asset and its disposal:

Machinery account balance at 31 March was $228,000.

Accumulated Depreciation account balance at 31 March was $72,000.

The asset sold had originally cost $25,000

Depreciation was last recorded on 31 December 2013 and the balance of accumulated

depreciation on this machine at that date was $14,000.

It was depreciated at 16% pa straight line.

The machine was sold for $8,800 cash (including GST).

Balance date is 31 December.

Prepare journal entries to record the disposal of the machine.

Activity Template

[https://opencolleges.sharepoint.com/:w:/s/OS/ERDx4OJvQWpGvqmBqrLrve4BWXpbO4CYnuSYnwQN0Yq_oA?e=glpC

md]

1

2

3

4

5

| Topic - 30 / 59

© Open Colleges Pty Ltd, 2018.

Hints

[https://res.cloudinary.com/opencolleges/image/upload/v1444888786/ccf9stzcqdnoxlrr653n.png]

Extract of Income Statement

Other Expenses

Depreciation $1,000

Loss on Disposal of Non-current Asset $2,000

| Topic - 31 / 59

© Open Colleges Pty Ltd, 2018.

The asset disposed of and its accumulated depreciation having been removed from the accounts,

will not appear in the Balance Sheet.

[https://res.cloudinary.com/opencolleges/image/upload/v1444888848/pvxahpn8htaackkfxn62.png]

[https://res.cloudinary.com/opencolleges/image/upload/v1444888876/coms2omkjp5mykqki02w.png]

[https://res.cloudinary.com/opencolleges/image/upload/v1444888898/vmjqmx4ctdmd83prqjkp.png]

[https://res.cloudinary.com/opencolleges/image/upload/v1444888926/dzergnvwrmfwd7wwxlt7.png]

[https://res.cloudinary.com/opencolleges/image/upload/v1444888950/zsgbhyuotcdnttelikap.png]

| Topic - 32 / 59

© Open Colleges Pty Ltd, 2018.

[https://res.cloudinary.com/opencolleges/image/upload/v1444888993/b9iauhxotconuev3pyk2.png]

Activity 11521

Western Contractors

On 30 April 2015, Western Contractors sold a grader. Relevant information is:

Plant and Equipment account balance at 1 July 2014 $445,000

Accumulated Depreciation at 1 July 2014 $85,000

Capital Cost of grader $35,000

Accumulated Depreciation on grader to 30 June 2014 $17,000

Depreciation rate 20% diminishing balance

The grader was sold for cash to Devon Council for $9,900 including GST. Balance date is 30 June.

Required:

Prepare journal entries for the disposal of the grader.

Prepare ledgers for Plant and Machinery, Accumulated Depreciation, Depreciation,

Disposal and Profit (Loss) on Disposal.

Use the templates provided in the

Activity Template

[https://opencolleges.sharepoint.com/:w:/s/OS/ERDx4OJvQWpGvqmBqrLrve4BWXpbO4CYnuSYnwQN0Yq_oA?e=glpC

md]

document.

Hints

a

b

| Topic - 33 / 59

© Open Colleges Pty Ltd, 2018.

| Topic - 34 / 59

© Open Colleges Pty Ltd, 2018.

[https://res.cloudinary.com/opencolleges/image/upload/v1444889207/t0vcsdngy4kntxxn2dao.png]

Trading-in retired assets

When an asset is retired it may be traded-in for a new one. The trade-in allowance given by the

supplier is considered to be the sale price of the asset being disposed of.

GST applies to the trade-in amount. The disposal process is similar to that described earlier

except that the invoice for the new asset will be recorded in full to Accounts Payable and the

trade-in as an ‘adjustment’ against Accounts Payable. The balance of Accounts Payable will be the

amount owing to the asset supplier.

Activity 49652

Richards Publishing

Richards Publishing traded in a motor vehicle for a new vehicle on 30 September 2014.

The cost of the motor vehicle was $22,000 (excluding GST) and it was being depreciated

using the diminishing balance method at 30% per annum.

The balance of accumulated depreciation relating to this asset on 31 December 2013 was

$14,000.

The new motor vehicle cost $36,300 including GST. The trade in allowance was $5,500

including GST.

The financial year ends on 31st December.

| Topic - 35 / 59

© Open Colleges Pty Ltd, 2018.

Required: General Journal entries and the relevant General Ledgers to record the disposal of the

vehicle and the purchase of the replacement vehicle.

Activity Template

[https://opencolleges.sharepoint.com/:w:/s/OS/ERDx4OJvQWpGvqmBqrLrve4BWXpbO4CYnuSYnwQN0Yq_oA?e=glpC

md]

Hints

[https://res.cloudinary.com/opencolleges/image/upload/v1444889278/hzmnctki5g8stbcudk9d.png]

| Topic - 36 / 59

© Open Colleges Pty Ltd, 2018.

[https://res.cloudinary.com/opencolleges/image/upload/v1444889323/wodtkkotuapsbwherfvv.png]

The asset disposed of and its accumulated depreciation, having been removed from the

accounts, will not appear in the Balance Sheet.

Example:

General Ledger

| Topic - 37 / 59

© Open Colleges Pty Ltd, 2018.

[https://res.cloudinary.com/opencolleges/image/upload/v1444889396/yupn6ik35aylowndswxk.png]

[https://res.cloudinary.com/opencolleges/image/upload/v1444889438/xmjz4ymtfgdwtulw7ks6.png]

| Topic - 38 / 59

© Open Colleges Pty Ltd, 2018.

Activity 11522

Carla's Cakes

Carla's Cakes traded in an existing bread making machine for a new machine on 30 Sept 2015.

The cost of the old machine was $10,000 and it was being depreciated using the straight-

line method at 20% p.a.

Accumulated depreciation to 30 June 2015 was $5,400.

The new machine cost $15,400 including GST. The trade in allowance was $5,500 (including

GST) and the remainder of the purchase price was to be paid on account.

Balance date is 30 June.

Required: General Journal entries and the relevant General Ledgers to record the disposal of the

asset and the purchase of the new asset. Templates are provided in the

Activity Template document

[https://opencolleges.sharepoint.com/:w:/s/OS/ERDx4OJvQWpGvqmBqrLrve4BWXpbO4CYnuSYnwQN0Yq_oA?e=glpC

md]

for this activity.

Hints

| Topic - 39 / 59

© Open Colleges Pty Ltd, 2018.

[https://res.cloudinary.com/opencolleges/image/upload/v1444889601/bnirg15p58cxwqp4nbkv.png]

General Ledger

| Topic - 40 / 59

© Open Colleges Pty Ltd, 2018.

[https://res.cloudinary.com/opencolleges/image/upload/v1444889663/ognfueqmmv6n0fxwsoqq.png]

Calculation of Profit on Disposal

[https://res.cloudinary.com/opencolleges/image/upload/v1444889736/vbbwvdjhvsaeugrivqb5.png]

Calculations

| Topic - 41 / 59

© Open Colleges Pty Ltd, 2018.

[https://res.cloudinary.com/opencolleges/image/upload/v1444889796/dctzsqohgurc3cuxlq3t.png]

Activity 11523

Purpose of depreciation

What is the purpose of depreciation? How does it relate to the matching principle?

Hints

The purpose of depreciation is to match the cost of a productive asset (that has a useful life of

more than a year) to the revenues earned from using the asset. Since it is hard to see a direct link

to revenues, the asset's cost is usually allocated to (assigned to, spread over) the years in which

the asset is used. Depreciation systematically allocates or moves the asset's cost from the

balance sheet to expense on the income statement over the asset's useful life. In other words,

depreciation is an allocation process in order to achieve the matching principle; it is not a

technique for determining the fair market value of the asset.

For more information in regards to depreciation go to

accountingtools.com

[http://www.accountingtools.com/questions-and-answers/what-is-the-purpose-of-depreciation.html]

.

| Topic - 42 / 59

© Open Colleges Pty Ltd, 2018.

Activity 11524

Motor vehicle depreciation

A motor vehicle with a cost of $30,000 excluding GST has an expected residual value of $8,000. It

is depreciated using the straight-line method and has an expected useful life of 10 years.

Determine:

The annual depreciation

The depreciation rate for the machine.

Hints

The annual depreciation

[https://res.cloudinary.com/opencolleges/image/upload/v1444889992/o5uhhkzjna0qjs8sqdrh.png]

The depreciation rate for the machine. 7.33%

Activity 11526

Machinery depreciation

A machine that cost $15,000 plus GST has an expected useful life of 10 years and a residual value

of $1,500. Using the straight-line depreciation method,

How much will it depreciate annually?

What is the annual depreciation rate?

Draw up a Depreciation schedule to 30/06/17, assuming the machine was purchased on

01/02/2015 and balance date is 30 June. Use the depreciation rate as calculated in (b).

a

b

a

b

a

b

c

| Topic - 43 / 59

© Open Colleges Pty Ltd, 2018.

A template is provided for this activity in the

Activity Template

[https://opencolleges.sharepoint.com/:w:/s/OS/ERDx4OJvQWpGvqmBqrLrve4BWXpbO4CYnuSYnwQN0Yq_oA?e=glpC

md]

document.

Hints

How much will it depreciate annually?

[https://res.cloudinary.com/opencolleges/image/upload/v1444890123/nejjci9gikzebvqrinha.png]

What is the annual depreciation rate? 9%

[https://res.cloudinary.com/opencolleges/image/upload/v1444890242/wecoqj59acsuv7ett6qq.png]

Activity 11529

Asset depreciation

An asset that cost $4,000 plus GST on 1 January 2014 is estimated to have a useful life of 10

years at the end of which it is expected to have a resale value of $200 plus GST. The business

financial year ends on 31 December.

Required:

a

b

c

| Topic - 44 / 59

© Open Colleges Pty Ltd, 2018.

Prepare a journal entry on 31 December 2014 for depreciation for that year using the

straight-line method.

What is the written down value of the asset at the end of the first year?

Activity Template

[https://opencolleges.sharepoint.com/:w:/s/OS/ERDx4OJvQWpGvqmBqrLrve4BWXpbO4CYnuSYnwQN0Yq_oA?e=glpC

md]

Hints

Prepare a journal entry on 31 December 2014 for depreciation for that year using the

straight-line method.

[https://res.cloudinary.com/opencolleges/image/upload/v1444893147/y680w2ijavbdn9ifp2q5.png]

What is the written down value of the asset at the end of the first year?

Written down value at end of first year ( 4,000 - 380 ) $ 3,620

a

b

a

b

| Topic - 45 / 59

© Open Colleges Pty Ltd, 2018.

Activity 11531

Dealing with different annual depreciation rates

An asset is being depreciated using the straight-line method. If the annual depreciation is

25% of the asset's cost and its residual value is zero, how long is its expected useful life?

An asset is being depreciated using the straight-line method. If the annual depreciation is

12.5% of the asset's cost and its residual value is zero, how long is its expected useful life?

Hints

Annual depreciation = 25% = 1/4, so the life is 4 years

Annual depreciation = 12.5% = 1/8, so the life is 8 years

Activity 11532

2015 motor vehicle

A motor vehicle was purchased on 31 March 2015 for $42,000 plus GST. It has an expected

useful life of 5 years and is being depreciated using the straight-line method to a residual value of

$10,000 plus GST. Assuming balance day is 30 June:

Required:

How much is depreciation each year?

How much is depreciation on 30 June 2015?

Prepare a journal entry to record depreciation on 30 June 2015.

Prepare a depreciation schedule to 30 June 2017.

A template is provided for this activity in the

Activity Template

[https://opencolleges.sharepoint.com/:w:/s/OS/ERDx4OJvQWpGvqmBqrLrve4BWXpbO4CYnuSYnwQN0Yq_oA?e=glpC

md]

document.

1

2

1

2

a

b

c

d

| Topic - 46 / 59

© Open Colleges Pty Ltd, 2018.

Hints

[https://res.cloudinary.com/opencolleges/image/upload/v1444893482/iiqu9wipccd5dizpsnyo.png]

[https://res.cloudinary.com/opencolleges/image/upload/v1444893509/faaouh7bq4mthl0lcugy.png]

[https://res.cloudinary.com/opencolleges/image/upload/v1444893531/zqyta94uqs4cahue69il.png]

[https://res.cloudinary.com/opencolleges/image/upload/v1444893551/cxug4nlgcj97d63p4vjj.png]

a

b

c

d

| Topic - 47 / 59

© Open Colleges Pty Ltd, 2018.

Activity 11533

Diminishing balance method

An asset costing $8,000 plus GST is depreciated using the diminishing balance method at 40%

per annum.

Required:

How much is depreciation in the first year?

What is the carrying amount of the asset at the end of the first year?

Hints

Depreciation in first year = 8,000 x 0.4 = $3,200

Carrying amount at end of first year = 8,000 - 3,200 = $4,800

a

b

a

b

| Topic - 48 / 59

© Open Colleges Pty Ltd, 2018.

Activity 11534

Computer depreciation

A computer that originally cost $5,000 plus GST is being depreciated using the diminishing

balance method at 40% per annum. Use the template provided in the

Activity Template

[https://opencolleges.sharepoint.com/:w:/s/OS/ERDx4OJvQWpGvqmBqrLrve4BWXpbO4CYnuSYnwQN0Yq_oA?e=glpC

md]

document to prepare a depreciation worksheet for the computer for the first four years.

Hints

[https://res.cloudinary.com/opencolleges/image/upload/v1444893747/yqtzsjkygob8mvf5rz71.png]

| Topic - 49 / 59

© Open Colleges Pty Ltd, 2018.

Activity 11535

Diminishing balance method for a machine

A machine with a depreciable amount of $36,000 is being depreciated using the diminishing

balance method at 35% pa. The machine is expected to have no residual value.

Required: Calculate the depreciation for:

6 months

4 months

8 months

Hints

Annual depreciation= 36,000 x 35% = 12,600

Charge for 6 months = 12,600 x 6/12 = 6,300

Charge for 4 months = 12,600 x 4/12 = 4,200

Charge for 8 months = 12,600 x 8/12 = 8,400

Activity 11536

Snoopy Manufacturing Co

The following information relates to a machine purchased on 31 August 2012 by Snoopy

Manufacturing Co. to produce dog bowls.

a

b

c

a

b

c

| Topic - 50 / 59

© Open Colleges Pty Ltd, 2018.

Asset cost 31/08/12 $19,680 plus GST

Estimated useful life of machine 6 years or 250,000 units

Estimated scrap value of machine nil

Production to 30 June 2013 28,000 units

Production for year ending 30 June 2014 44,000 units

Production for year ended 30 June 2015 45,000 units

Prepare depreciation worksheets (provided in the

Activity Template

[https://opencolleges.sharepoint.com/:w:/s/OS/ERDx4OJvQWpGvqmBqrLrve4BWXpbO4CYnuSYnwQN0Yq_oA?e=glpC

md]

document) for the years ended 30 June 2013, 2014 and 2015 for the machine using:

Straight line method

Units of use

Diminishing value method

Note: Diminishing value depriciation rate is 27.5%

Hints

a

b

c

| Topic - 51 / 59

© Open Colleges Pty Ltd, 2018.

Straight Line depreciation charge (Snoopy Manufacturing Co.)

[https://res.cloudinary.com/opencolleges/image/upload/v1444894036/ixqnmzkapaykqppp7dxu.png]

Units of use depreciation charge per unit ( 19,680 / 250,000 ) = $0.07872

[https://res.cloudinary.com/opencolleges/image/upload/v1444894082/f2jre8wf7wfolmev9gg0.png]

Diminishing value rate per annum = 27.5%

[https://res.cloudinary.com/opencolleges/image/upload/v1444894127/ptlqkyy87soswrtzgfkl.png]

a

b

c

| Topic - 52 / 59

© Open Colleges Pty Ltd, 2018.

Activity 11537

Felco Limited

Felco Limited purchased a new item of plant on 1 August 2015 for $5,000 plus GST. The plant is

being depreciated using the diminishing balance method at a rate of 30% per annum.

What is the carrying amount of the machine on 30 June 2018?

Activity Template

[https://opencolleges.sharepoint.com/:w:/s/OS/ERDx4OJvQWpGvqmBqrLrve4BWXpbO4CYnuSYnwQN0Yq_oA?e=glpC

md]

Hints

[https://res.cloudinary.com/opencolleges/image/upload/v1444894204/h0yv0j0vaq7omifzq5tg.png]

| Topic - 53 / 59

© Open Colleges Pty Ltd, 2018.

Activity 11538

Metal cutting machine

A metal cutting machine that originally cost $8,500 plus GST on 1 Oct 2015 is being depreciated

using the diminishing value method at 25% pa. On 28 February 2018 the machine is sold.

What is the carrying amount of the vehicle on the date of disposal?

Activity Template

[https://opencolleges.sharepoint.com/:w:/s/OS/ERDx4OJvQWpGvqmBqrLrve4BWXpbO4CYnuSYnwQN0Yq_oA?e=glpC

md]

Hints

[https://res.cloudinary.com/opencolleges/image/upload/v1444894326/kc8f902w9njkpljzuduy.png]

Carrying Amount = 4,316

The following additional activities may be used for extra skill practice.

| Topic - 54 / 59

© Open Colleges Pty Ltd, 2018.

Activity 11541

Axel Limited

Axel Limited purchased a new machine for $25,000 on 1 July 2014. The machine's estimated

salvage value is $1,000. It has an expected life of 6 years or total production of 500,000 units. In

the first six months it produced 58,000 units.

Use the template provided in the

Activity Template

[https://opencolleges.sharepoint.com/:w:/s/OS/ERDx4OJvQWpGvqmBqrLrve4BWXpbO4CYnuSYnwQN0Yq_oA?e=glpC

md]

document to prepare a journal entry to record depreciation for the 6 months ended 31

December 2014:

Hints

Straight line method

[https://res.cloudinary.com/opencolleges/image/upload/v1444894420/wcrlykgmplak5z9puu0m.png]

Units of production method

[https://res.cloudinary.com/opencolleges/image/upload/v1444894493/wdoxv2lvtdnkihzx7owj.png]

| Topic - 55 / 59

© Open Colleges Pty Ltd, 2018.

Activity 11543

Marshall Fabrics

Marshall Fabrics sold a machine on 30 April 2016. The machine originally cost $22,000 plus GST

and was being depreciated using the diminishing balance method at 35% per annum. After

depreciation was charged on 30 June 2015, the balance of accumulated depreciation on the

machine was $13,200. Balance date is 30 June.

How much additional depreciation was recorded for the machine on the date of sale?

What was the carrying amount of the machine when it was sold?

Calculate the gain or loss on sale assuming the net proceeds of the sale were $5,000.

Hints

Depreciation to date of sale = (22,000-13,200) x 0.35 x 10/12 = $ 2,567

Carrying amount when sold = 22,000 – 13,200 – 2,567 = $ 6,233

Loss on sale of machine = $6,233 - 5,000 = $1,233

2.8.2 Asset Register

Good internal control requires that organisations maintain an Asset Register. The Asset Register

keeps a record of cost, location, identification, depreciation and other information required by

management regarding assets. Each item of property, plant or equipment owned by the

business is recorded separately in the register on an Asset Register Card. This system could be

kept either manually or computerised.

a

b

c

a

b

c

| Topic - 56 / 59

© Open Colleges Pty Ltd, 2018.

[https://youtube.com/watch?v=GQUOQO8sDZ8]

The following is an example of an asset register record for a motor vehicle:

[https://res.cloudinary.com/opencolleges/image/upload/v1444898252/n2pv76fh5f9it49f6me4.png]

[https://res.cloudinary.com/opencolleges/image/upload/v1444898297/yvnu5t9xjwnfhhwpczwy.png]

The cost price of the motor vehicle is recorded in the Asset Cost column.

| Topic - 57 / 59

© Open Colleges Pty Ltd, 2018.

The depreciation for each year is recorded in the Depreciation column and the cumulative

total in the Accumulated Depreciation column.

The balance in the Accumulated Depreciation column accumulates until the asset is

disposed of or is fully depreciated.

When the vehicle is eventually disposed of, the proceeds of the disposal are recorded and

the resulting balance is the Profit or Loss on Disposal of the asset.

Details of warranty and servicing are also recorded on the Asset Register.

An Assets Register is a subsidiary record to both the Non-Current Asset account and

Accumulated Depreciation account in the general ledger. Each class of asset would have its own

control account in the General Ledger. For example, the Motor Vehicle account in the General

Ledger would be the control account representing all motor vehicles owned by the business, one

of which could be the Ford motor vehicle in the example.

The total asset costs recorded on each Asset Register Card in an asset group should equal the

Asset Control account balance in the General Ledger. Similarly the total Accumulated

Depreciation recorded on each Asset Register Card in an asset group should equal the

Accumulated Depreciation for the group in the General Ledger.

Activity 11545

Pauls Cakes Pty Ltd

Prepare an Asset Register Card for the existing bread making machine of Pauls Cakes Pty Ltd.

These additional details are provided:

| Topic - 58 / 59

© Open Colleges Pty Ltd, 2018.

The purchase cost was $10,000 plus GST.

The purchase date was 18 October 2012 and depreciation recorded for year ending 30

June 2013 was $1,400. Depreciation for each full year is $2,000.

The breadmaker is a Boston Breadmaker model C25 purchased from Food Machinery Pty

Ltd.

The asset number is 62.

The breadmaker is located at the Granshire Bakery

The estimated useful life is 5 years, straight line method with a residual value of nil.

The breadmaker was sold on 30/09/2015 for $5,500 including GST

Required: Use the templates provided to prepare an Asset Register Card for the breadmaker

including all details of its disposal.

Activity Template

[https://opencolleges.sharepoint.com/:w:/s/OS/ERDx4OJvQWpGvqmBqrLrve4BWXpbO4CYnuSYnwQN0Yq_oA?e=glpC

md]

Hints

[https://res.cloudinary.com/opencolleges/image/upload/v1444898414/itzppd5wiwxy6a03gqi5.png]

| Topic - 59 / 59

© Open Colleges Pty Ltd, 2018.

[https://res.cloudinary.com/opencolleges/image/upload/v1444898444/csnsqflbvnq5gdgbmism.png]