Non-current assets and depreciation

capital expenditure + what is it + definition

Creates or improves a non-current asset.

Examples:

✅ Purchase of machinery

✅ Purchase of building

✅ Delivery of machinery

✅ Legal fees on purchase

✅ Extension to building

what is revenue expenditure + examples

Day-to-day running costs.

Examples:

✅ Repairs

✅ Wages

✅ Electricity

✅ Repainting

✅ Road licence fee

what is included/ excluded in the cost of ppe

Include Anything needed to get the asset ready for use. ✅ Purchase price ✅ Delivery ✅ Legal fees ✅ Installation ✅ Number plates

Exclude ✅ Repairs ✅ Repainting ✅ Wages ✅ Road tax ✅ Running costs

An asset costs £3,800, has a residual value of £50, and a useful life of 15 years. Calculate the annual depreciation charge using the straight‑line method. If the asset is owned for only 6 months in the first year, calculate the depreciation for that period.

• 1) annual depreciation: (3800-50)/15 = 250

• owned for 6 months: 150 × 6/12 = £125

A machine costs £20,000 and is depreciated using the reducing balance method at 20% per year. Calculate the depreciation charge and carrying amount for Years 1, 2 and 3.

1) Year 1

• 20,000 × 20% = 4000

• 20000 - 4000 = 16000

• 2) Year 2

• 16000 × 20% = 3200

• 16000 - 3200 = 12,800

• Year 3)

• 12,800 × 20% = 2560

• 12.800 - 2560 = 10,420 carrying amount

An asset with a carrying amount of £15,000 is sold for £12,000. Calculate the profit or loss on disposal.

12,000 - 15,000 = 3000 loss

Cost = £15,000 Accumulated depreciation = £9,000 Proceeds = £12,000

• Dr 15,000 (cost)

• Cr 9,000 (acc dep)

• Cr 12,000 (proceeds)

Cr = 9000 + 12000 = 21,000

21,000 = 15000 = 6,000 of credit so 6000 profit

An asset costing £30,000 has a useful life of 20 years and is depreciated using the straight‑line method. After 3 years, the useful life is revised to 12 years remaining and the residual value is estimated to be £1,500. Calculate the new annual depreciation charge.

• cost = 30,000

• life = 20 years

• residual value = 1500

1. Original depreciation:

30,000/20=1,500

2. Carrying amount after 3 years:

30,000−(1,500×3)=25,500

3. New depreciation going forward:

(25,500−1,500)/12=2,000

what are intangible assets

✅ Licence

✅ Patent

✅ Copyright

software

NOT : brand, loyalty or reputation

what is the depreciation of intangible assets

amortisation

• cash paid = 23,000

• list price = 28,000 cost of car

• so trade-in value of 5000 for the old machine

• 28000 - (28000 × 10%) = £25,200

• 1) Total cost: 15,000 (machine purchase) + 1300 (transportation) + 2500 (installation) = 18,800

• 18,800 - (18,800 × 10%) = £16,920

• cost = 22,000

• accumulated depreciation = 11,500

- Carrying amount: 22,000 - 11,500 = 10,500

Proceeds = 9000

so profit/loss = 9000 - 10,500 = (1500) so 1500 loss

IN Question: bank transaction already records

dr bank 9000

cr suspense 9000

SHOULD BE:

• dr suspense account 9000

• dr accumulated depreciation 11,500

• dr loss on disposal 1,500

• cr machine cost 22,000

1) Depreciable amount: 6000 - 300 = 5700

2) annual depreciation: 5700/ 5 = 1140

3) Appropriate:

purchased April 20×1 - September 20×1: 6 months

so 6/12 × 1140 = 570 depreciation charge

• dr depreciation expense 570

• cr accumulated depreciation 570

23,500 - (10% x 23,500) = 21,250

D

1) 5000 - 1000/ 4 = £1000 annual depreciation

2) bought Jan 20×1 , sold Dec 20×3: so 20×1, 20×2, 20×3 = 3 years

• 3 × 1000 = £3000 total accumulated depreciation

3) 5000 - 3000 = 2000 carrying amount

4) sale proceeds (1600) - 2000 ( carrying amount = (400) so loss

• license is separate - ignore £150,000

• 20×1: 1,000,000 - (25% x 1,000,000) = 750,000

• 20×2: 750,000 - (25% x 750,000) = 562,500

• 20×3: 562,500 - (25% x 562,500) = 421,875, buses disposed of on 1 jan 20×4 so don’t need to 20×4

• proceeds (500,000) - carrying amount (421,875) = 78,125

1) profit/loss = proceeds - carrying amount

• -1250 = 4000 - CA

• so CA = 5250

2) 67,460 - 5250 = 62,210

capital expenditure: 48000 + 400 + 2200 = 50,600

1) depreciation on opening assets: £381,200

• asset costing £36,000 sold June 20×2 so only owned for 8 months of the year (31oct 20×1 - 31 may 20×2)

• 36,000 × 20% x 8/12 = 4800

• so opening PPE: 381,200 - 4800 = 345,200

• depreciation for full year: 345,200 × 20% = 69,040

2) depreciation on new asset:

• purchases dec 20×1 - year end 30 sep 20×2: 10 months

• 18000 × 20% x 10/12 = 3000

3) TOTAL DEPRECIATION: 69,040+4,800+3,000=76,840

• dr depreciation expense 76,840

• cr accumulated depreciation 76,840

1) carrying amount: 200,000

2) asset disposed: profit/loss = CA - proceeds → CA = loss + proceeds

• sold for 25,000

• loss on disposal 5000

• 5000 + 25000 = 30,000

3) 200,000 - 30,000 = 170,000 (removed disposed asset)

4) deduct depreciation: 170,000 - 20,000 = 150,00

Depreciation = cost x 20% x months owed/12

• plant held all year: (380000 - 30,000) x 20%

• new plant: 51000 × 20% x 9/12

• plant disposed: 30000 × 20% x 9/12

• 1) LAND NOT DEPRECIATED

• total cost - 420,000

• land = 60,000

• so 420,000 - 60,000 = 360,00 building depreciated

2) straight-line:

360,000 / 50 = 7200

3) Time appropiation

• Dec 20×0 - Sep 20×1 = 10 months

• 7200 × 10/12 = 6000

1) 20×1:

• 35000 × 0.4 = 14,0000

• 35,000 - 14,000 = 21,000 carrying amount

2) 20×2

• 21000 × 40% = 8400

• 21000 - 8400 = 12,600

3) 20×3

• 12600 × 40% = 5040

• 12600 - 5040 = 7650

4) profit on disposal = 2440

profit = proceeds - carrying amount

proceeds = profit + carrying amount : 2440 + 7560 = 10,000

• trade in allowance 10,000

5) they paid 30,000

so cash + trade-in : 30,000 + 10,000 = 40,000

1) 20×7

10,000 × 30% = 3000

10,000 - 3,000 = 7,000 carring amount

2) 20×8

• 7000 × 30% = 2100

• 7000 - 2100 = 4900 = carrying on amount for Jan 20×9

3) pofit

• solf for 6000

• 6000 - 4900 = 1,100 profit on disosal so credit

1) annual depreciation

• 120,000 - 4000/ 4 = 29,000

2) time appropriation

• 1 oct - 31 dec = 3 months

• 29,000 × 3/12 = 7250 depreciation expense

3) draft profit - depreciation: 56,780 - 7250 = 49,350

• profit + wrong expense - correct depreciation

• 83600 + 18000 - 4500 = 97,100

1) find original cost - don’t include admin cost as not capitalised

• 96720 (machine) + (3660) delivery = 100,380 cost

2) annual depreciation: 100380/ 5 = 20,076

3) carryin amount at change date

• estimate changes on 1 jan 20×6: so depreciation charged for 20×4, 20×5

• 20,076 × 2 = 40,152 = accumulated depreciation

• 100,380 - 40152 = 60,228

4) 20×6: one year remaning : 60228 - 0/ 1 = 60 228

(38000 - 2000)/5 = 6000 per year

500 per month, Augx4 - March x5 = 8 months

8 × 500 = 4000

1) Depreciation: 614,500 × 0.25 = 153,625

2) new asset = +11,500

3) closing amount: 399,960 (opening carrying amount) + 11,500 - (153,625) = 257,835

Opening Carrying Amount + Additions − Depreciation − Carrying Amount of Asset Sold=Closing Carrying Amount

• 1) opening carrying amount: 92000 (cost) - 51,000 (accumulated depreciation) = 41,000

• 2) closing carrying amount: 110,000 (cost) - 72000 (accumulated depceciation) = 38.000

• 3) substiture

• - opening CA: 41,000

• additions: 39,000

• depreciation: (27000)

• closing CA: 38,000

so carrying amount disposed = 15,000

4) loss = carrying amount - proceeds

• proceeds = carrying amount - loss: 15,000 - 2000 = 13,000

1) remove VAT

• price includes VAT at 20%

• net cost: 99,900 / 120 × 100 = 83,250 asset costs

2) 1 july 20×4 - 31 Dec 20×4 = 6 months

• 83250 × 20% (annual depreciation) x 6/12 months = 8325 depreciation

3) carrying amount:

• 83250 - 8325 = 74,925

1) Monthly depreciation:

• 16800 / (12 × 5) as montly over 5 years = 280

• Accumulated depreciation = 280 × 28 (1 July 20×7 - 31 Oct 20×9) = 7840

• 16800 - 7840 =8690 carrying amount

• profit/loss= proceeds - carrying amount = 7650 - 8690 = -1310 so £1310 loss

1) Depreciation rate: - everything bought 1 jan 20×2

• cost = 1,004,408, life = 4 years

• 1004408/4 = 251,102 straight-line depreciation

2) asset sold cost = 6800, disposed 20×4

• 6800/ 4 = 1700

• Depreciation for remaining assets: 251,102 - 1700 = 249,402

3) loss on disposal

• 1700 × 2 = 3400 (accumulated depreciation for 20×2, 20×3)

• 6800 - 3400 = 3400 carrying amount

4) profit/loss

• proceeds is 1800

• 1800 (proceeds) - 3400 (carrying amount) = -1600 loss on disposal

5) Administrative expenses

• 684,000 (starting admin expense) + 249,402 (depreciation) + 1600 (loss on disposal) = 935,002

1) cost of license:

180,000 (license cost) + 2000 (legal fees) = 182,000

• NOT general administrative costs

2)

• license lasts 6 years, but directors only expect to use for 5 years - so 5 years useful NOT lgela

• 182,000/5= 36,400

3) carrying amount

• bought July 20×2 - year-end june 20×3 = 12 months so

• 182,000 (toal cost ) - 36,400 ( one year amortisation) = 145,000

1) original amorisation

• cost = 200,00, life = 4 years

• 200,000/ 4 = 50,000 annual amortisation

2) Carrying amount on 1 June 20×5

• estimate changes on 1 June 20×5, so that’s two years (jun 20×3 - may 20×5)

• 50,000 × 2 = 100,00

• 200,000 - 100,00 = 100,000

3) new estimate

• from 1 june 20×5, another 4 years

• 100,000 (carrying from step 2) / 4 = 25,000

4) for 31 May 20×6 - that’s one year since the estimate so:

• 100,000 - 25,000 = 75,000

b

£259,700

£263,900

£265,100

273,800

cost of premises + initial adaptation + legal costs + air conditioning unit

*machinery not part of premises

On 1 Jan 20X1 Fleet Ltd. bought a non-current asset for £225,000 which had an estimated useful life of 20 years and a residual value of £25,000. Assets are depreciated on a straight line basis. Fleet's year end is 31 December. On 1 January 20X4 the asset's total useful life is revised to 15 years in total with no residual value.

What is the total deprecation charge in 20X4?

• £10,000

• £12,750

• £13,000

• £16,250

1) ( (225000 - 25000)/20 ) 3 = 30,000 depreciation for 3 years (20×1 - 20×3)

• 225000 - 30,000 = 195,000 carrying amount

2) new useful life is 15 years, but 3 years already elapses so 12 years

• 195000/12 = 16,250

At 1 January 20X4 a business owned motor vehicles which had cost a total of £40,000.

On 1 April 20X4 the business disposed of a motor vehicle which had cost £10,000 and on 1 September 20X4 the business acquired a motor vehicle which cost £15,000.

The business charges depreciation on motor vehicles at the rate of 25% per annum on the straight line basis with proportionate amounts being charged in the year of acquisition or disposal based on the number of months ownership.

What is the depreciation charge in respect of motor vehicles for the year ended 31 December 20X4?

• £9,375

• £10,000

• £11,250

• £13,750

1) depreciation: (40,000 - 10,000) x 25% = 7500

2) disposal: 10,000 × 25% x 3/12 = 625 ( 3 months as vehicle was owned for jan, feb, march)

3) acquisition: 15000 × 25% x 4/12 = 1250

= TOTAL DEPRECIATION = 9375

Mario bought a van for his business on 30 June 20X1 for £13,750, including £150 for a road fund licence.

Mario depreciates motor vehicles at 20% per annum on cost, charging depreciation on a monthly basis. His year end is 31 December. On 1 January 20X4 Mario traded in the van for a new one, receiving a part-exchange allowance of £7,250.

What was the profit on disposal of the van?

• £375

• £450

• £1,750

• £1,810

1) cost of van = 13,750 - 150 = 13,600

2) 13,600 × 20% = 2720 annual depreciation

3)

• bought 30 june 20×1, traded in jan 20×4

• months owned: july x1 - dec x3 = 30 months (as bought 30 june meets july)

• 30/12 × 2720 = 6800 depreciation

4) carrying amount = 13,600 - 6800 = 6800

5) proceeds - carrying amount: 7250 - 6800 = 450 profit on disposal

ow are research costs treated in financial statements?

• Capitalised as an asset

• Amortised over their useful life

• Charged to the statement of profit or loss

• Deferred until future periods

• Incorrect Answers:

  • A (Capitalised as an asset): Research costs are not capitalised.

  • B (Amortised over their useful life): Research costs are not amortised.

  • D (Deferred until future periods): Research costs are not deferred.

• so C - charged to statement of profit or loss