Chapter 8

chapter
8
Non Current Assets
Chapter learning objectives
Upon completion of this chapter you will be able to:

l Explain and illustrate the ledger entries to record the
acquisition of non-current assets
l Define and explain the purpose of depreciation
l Explain the straight line, reducing balance and sum of digits
methods of depreciation and make necessary calculations
l Explain and illustrate how depreciation expense and
accumulated depreciation are recorded in ledger accounts
l Explain and illustrate how depreciation is presented in the
income statement and balance sheet
l Explain the relevance of consistency and subjectivity in
accounting for depreciation
l Make the necessary adjustments if changes are made in the
estimated useful life / residual value of a non current asset
l Explain and illustrate the ledger entries to record the disposal
of non current assets for cash
l Explain and illustrate the ledger entries to record the disposal
of non-current assets through part exchange
l Explain and illustrate the inclusion of profits or losses on
disposal in the income statement
l Explain and record the revaluation of a non-current asset in
ledger accounts and in the balance sheet
l Explain the impact of a revaluation on accounting for
depreciation and disposal of a non-current asset
l Explain and illustrate how non-current asset balances and
movements are disclosed in company financial statements
133
Non Current Assets
NON-CURRENT
ASSETS
MEASURE RECORD
PURCHASE PURCHASE
COST
STRAIGHT
LINE
RECORD
USE WITHIN REDUCING
DEPRECIATE DEPRECIATION
BUSINESS BALANCE CHARGE
SUM OF
DIGITS
APPRECIATES RECORD
IN VALUE REVALUE REVALUATION
CASH
DISPOSAL
RECORD
DISPOSE OF DISPOSAL
PART
EXCHANGE
134 KAPLAN PUBLISHING

chapter 8
1. Acquisition of a Non-current Asset

l The cost of a non-current asset is any amount incurred to
acquire the asset and bring it into working condition:
Includes Excludes
Capital expenditure such as Revenue expenditure such as
l Purchase price l Repairs
l Delivery costs l Renewals
l Legal fees l Repainting
l Subsequent expenditure
which enhances the asset
l The correct double entry to record the purchase is:
Dr Non-current asset X
Cr Bank / Cash / Payables X
l A separate cost account should be kept for each category

of non-current asset eg motor vehicles, fixtures and fittings
Expandable text
Illustration 1
Acquisition of a Non-current asset

F Butcher, a used car salesman, acquired new premises at
the start of 20X5. He incurred the following costs during the
following financial year (ended 31st December 20X5):
$
Purchase price 500,000
Legal costs relating to purchase 21,750
(including $20,000 stamp duty)
Cost of adapting premises to be showroom 12,000
Window cleaning contract (for 1 year) 1,200
Repairing roof damage caused by 3,000
tornado on Christmas Day 20X4
What amount should be capitalised as the cost of Land and
Buildings in F Butcher's balance sheet at 31st December
20X5?
KAPLAN PUBLISHING 135

Non Current Assets
Solution
The cost of Land and Buildings is: $
Purchase price 500,000
Legal costs including stamp duty 21,750
Cost of adapting premises 12,000
Roof repairs 3,000
––––––––––
536,750
Note:
l Window cleaning is an ongoing cost and therefore
cannot be capitalised
l The cost of repairing the roof can be capitalised as the
damage was a pre-existing condition at purchase.
Expandable text
Test your understanding 1 [answer on p163]
Acquisition of a non current asset
Bilbo Baggins started business providing limousine taxi

services on 1st January 20X5. In the year to 31st
December he incurred the following costs:
$
office premises 250,000
legal fees associated with purchase of office 10,000
cost of materials & labour to paint office in 300
Bilbo's favourite colour, purple
3 Mercedes E series estate cars 116,000
number plates for cars 210
delivery charge for cars 180
road licence fee for cars 480
drivers' wages for first year of operation 60,000
blank taxi receipts printed with Bilbo 450
Baggins' business name and number
What amounts should be capitalised as 'Land and Buildings'

and 'Motor Vehicles'?

chapter 8
Solution
Land and Buildings
$
–––––––––
Motor vehicles
$
–––––––––
2. Depreciation
l IAS 16 defines depreciation as 'the measure of the cost or
revalued amount of the economic benefits of the tangible
non-current asset that has been consumed during the
period'
l In simple terms, depreciation is a mechanism to reflect the
wearing out of a non-current asset
l Depreciation matches the cost of a non-current asset to
the revenues generated by that asset over its useful life
l This is achieved by recording a depreciation charge each
year, the effect of which is twofold ('the dual effect')
l Reduce the balance sheet value of the non-current
asset by cumulative depreciation to reflect the
wearing out
l Record the depreciation charge as an expense in the
income statement to match to the revenue generated by
the non-current asset
Expandable text

Non Current Assets
3. Methods of Calculating Depreciation
REDUCING
STRAIGHT LINE SUM OF DIGITS
BALANCE
A reducing amount A variation on the

Depreciation of depreciation is reducing balance
charge is the same charged each year method which also
each year and so and so assumes results in a
assumes benefit is more benefit is reducing amount of
consumed evenly consumed in depreciation each
earlier years year
Useful for assets

which provide Useful for assets which provide more
equal benefit each benefit in earlier years eg cars, IT
year eg machinery equipment
Straight Line method

Depreciation charge = Cost - Residual Value
–––––––––––––––––––––––––––
Useful life
Or X% x cost
Residual Value: the estimated disposal value of the asset
at the end of its useful life
Useful Life: the estimated number of years that the

business will use the asset for
Expandable text
Reducing Balance Method
Depreciation charge = X % x Net Book Value (NBV)
Net Book Value: original cost of the non-current asset less

accumulated depreciation on the asset
to date

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Sum Of Digits Method
Depreciation charge = X x (Cost - residual value)

Y
X : Year 1 = estimated useful life (n)
Year 2 = estimated useful life (n) - 1
Year 3 = estimated useful life (n) - 2 and so on
Y: constant each year and calculated as n(n+1)
–––––––––
2
Assets bought / sold in the period
If a non-current asset is bought or sold in the period, there are

two ways in which the depreciation could be accounted for:
l Provide a full year's depreciation in the year of acquisition
and none in the year of disposal
l Monthly or Pro Rata depreciation , based on the exact
number of months that the asset has been owned
Illustration 2
Methods of calculating depreciation - straight line
Ronaldo, a builder, bought a new cement mixer on 1st

January 20X5. It cost $3,800 and he estimates that he will
use it for 15 years after which he will be able to sell it for a
scrap value of $50.
What is the depreciation charge for the year ended 31st

December 20X5?
Solution
Depreciation charge = Cost - Residual Value
–––––––––––––––––––––––––
Useful life
= $3,800 - $50
–––––––––––––––
15 yrs
= $250 per annum
Illustration 3
Methods of calculating depreciation - reducing balance
Dev, a trader purchased an item of plant for $1,000 on 1

August 20X1 which he depreciates on the reducing balance
at 20% per annum. What is the depreciation charge for each
of the first five years if the accounting year end is 31 July?

Non Current Assets
Solution
Year Depreciation charge Depreciation Cumulative
% x NBV charge depreciation
$ $
1 20% x $1,000 200 200
2 20% x $(1,000 - 200) 160 360
3 20% x $(1,000 - 360) 128 488
4 20% x $(1,000 - 488) 102 590
5 20% x $(1,000 - 590) 82 672
Illustration 4
Methods of calculating depreciation - Sum of Digits

Sharmini bought a new computer for her consultancy
business costing $4,200 on 1 January 20X4. She estimates
that she will be able to sell it second hand after four years
for $200. She uses the sum of digits method to allocate
depreciation. What is the depreciation charge for each of
the four years ended 31 December 20X4 , X5, X6, X7?
Solution
Depreciation charge = X/Y x (cost - residual value)
Y = n(n+1) = 4 x 5 = 10
–––––– ––––––
2 2
20X4: 4/10 x $4,000 = $1,600

20X5: 3/10 x $4,000 = $1,200
20X6: 2/10 x $4,000 = $800
20X7: 1/10 x $4,000 = $400
calculation of depreciation
Karen has been running a successful nursery school 'Little
Monkeys' since 20X1. She bought the following assets as
the nursery grew:
l A new oven for the nursery kitchen at a cost of $2,000
(purchased 1 December 20X4)
l A mini bus to take the children on trips for $18,000
(purchased 1 June 20X4)

chapter 8
She depreciates the oven at 10% straight line and the mini
bus at 25% reducing balance. A full year's depreciation is
charged in the year of purchase and none in the year of
disposal
What is the total depreciation charge for the years ended 31

October 20X5 and 20X6?
Solution
Oven 20X5 20X6

$ $
Mini Bus
–––––– ––––––
Total depreciation charge
Calculation of depreciation
The following information relates to Bangers & Smash, a car
repair business:
Machine 1 Machine 2
Cost $12,000 $8,000
Purchase date 1 August 20X5 1 October 20X6
Depreciation method 20% straight 10% reducing

line pro rata balance pro rata
What is the total depreciation charge for the years ended

31st December 20X5, X6 and X7?

Non Current Assets
Solution
Machine 1 $ $
Machine 2
Total Depreciation charge
4. Accounting for Depreciation

Whichever method is used to calculate depreciation, the
accounting remains the same:
Dr Depreciation expense (IS) X

Cr Accumulated Depreciation(B/S) X
l The depreciation expense account is an income statement

account and therefore is not cumulative.
l The accumulated depreciation account is a balance sheet
account and as the name suggests is cumulative ie reflects
all depreciation to date
l On the balance sheet it is shown as a reduction against
the cost of non-current assets:
$
Cost X
Accumulated depreciation (X)
–––
Net book value X

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Illustration 5
Accounting for depreciation

Santa runs a large toy shop in Windsor. In the year ended
31 August 20X5, she bought the following fixed assets:
l A new cash register for $5,000. This was purchased on
1 December 20X4, in time for the Christmas rush, and
was to be depreciated at 10% straight line;
l A new delivery van, purchased on 31 March 20X5, at a
cost of $22,000. The van is to be depreciated at 15%
reducing balance.
Santa charges depreciation on a monthly basis.

l What is the depreciation charge for the year ended 31st
August 20X5?
l Show the balance sheet presentation at that date
Solution
Cash register Depreciation charge: 10% x $5,000 x 9/12

= $375
Delivery Van Depreciation charge: 15% x $22,000 x 5/12
= $1,375
Balance sheet extract at 31 August 20X5

Cash register Delivery Van
$ $
Cost 5,000 22,000
Accumulated Depreciation (375) (1,375)
–––––––––––––––––––––––––––
Net Book Value 4,625 20,625
Illustration 6
Accounting for depreciation

Dolly's Dailys, a domestic cleaning business, bought a new
fixed asset on 1 January 20X5, costing $12,200. It
depreciates similar assets at 20% straight line.
Show the accounting entries for the acquisition of the asset

and depreciation for the years ending 31 December X5, X6
& X7 using ledger accounts.

Non Current Assets
Solution
Non current asset cost
$ $
1.1.X5 New asset 12,200 balance c/f 12,200
–––––––– ––––––––
12,200 12,200
–––––––– ––––––––
Balance b/f 12,200
Depreciation charge
$ $
X5 accumulated 2,440 Income statement 2,440
depreciation –––––––– ––––––––


Accumulated depreciation
$ $
Balance c/f 2,440 X5 depreciation 2,440
–––––––– charge ––––––––
2,440 2,440
–––––––– ––––––––
Balance b/f 2,440
–––––––– charge ––––––––
4,880 4,880
–––––––– ––––––––
Balance b/f 4,880
–––––––– charge ––––––––
7,320 7,320
–––––––– ––––––––
Balance b/f 7,320

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accounting for depreciation

Coco acquired 2 fixed assets for cash on 1 August 20X5 for
use in her party organising business:
l A 25 year lease on a shop for £200,000
l A chocolate fountain for £4,000
The fountain is to be depreciated at 25% per annum using

the reducing balance method.
A full year of depreciation is charged in the year of

acquisition and none in the year of disposal.
Show the ledger account entries for these assets for the
years ending 31 October 20X5, X6 and X7
Solution
Leases (cost)
$ $
––––––––– –––––––––
––––––––– –––––––––
Fixtures and fittings (cost)

$ $
––––––––– –––––––––
––––––––– –––––––––
Depreciation charge
$ $
––––––––– –––––––––
––––––––– –––––––––
––––––––– –––––––––

Non Current Assets
Accumulated depreciation (leases)

$ $
––––––––– –––––––––
––––––––– –––––––––
––––––––– –––––––––
––––––––– –––––––––
Accumulated depreciation (fixtures and fittings)

$ $
––––––––– –––––––––
––––––––– –––––––––
––––––––– –––––––––
––––––––– –––––––––
––––––––– –––––––––
––––––––– –––––––––
Annual depreciation workings:

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5. Consistency and Subjectivity when

Accounting for Depreciation
The following are all based on estimates made by the

management of a business:
l Depreciation method
l Residual value
l Useful life
Different estimates would result in varying levels of

depreciation and so profits.
It can be argued that these subjective areas could therefore

result in manipulation of the accounts by management.
In order to reduce the scope for such manipulation and

increase consistency of treatment, IAS 16 Property, Plant and
Equipment requires the following:
l depreciation method should be reviewed at each year end
and changed if the method used no longer reflects the
pattern of use of the asset
l residual value and useful life should be reviewed at each
year end and changed if expectations differ from previous
estimates
Illustration 7
Changes to the useful life / residual value of an asset

Alfie purchased a non-current asset for $100,000 on 1
January 20X2 and started depreciating it over five years.
Residual value was taken as $10,000.
At 1 January 20X3 a review of asset lives was undertaken

and the remaining useful life was estimated at eight years.
Residual value was nil.
Calculate the depreciation charge for the year ended 31

December 20X3 and subsequent years.

Non Current Assets
Solution
Initial depreciation = $100,000 - $10,000

charge p.a. ––––––––––––––––––––––
5 years
= $18,000
Net book value at = $100,000 - ($18,000 x 1yrs)

date of change
= $82,000
New depreciation = $82,000 - nil

charge ––––––––––––––––
8 years
= $10,250
Changes to useful life / residual value of an asset

Alberto bought a wood burning oven for his pizza restaurant
for $30,000 on 1 January 20X0. At that time he believed
that the oven's useful life would be 20 years after which it
would have no value.
On 1 January 20X3, Alberto revises his estimations: he now

believes that he will use the oven in the business for
another 12 years after which he will be able to sell it second
hand for $1,500.
What is the depreciation charge for the year ended 31

December 20X3?
Solution

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6. Disposal of Non-current Assets
Profit / Loss on disposal

An accounting profit or loss will arise on the disposal of a non-
current asset:
Proceeds
(cash or part > Net Book Value Profit
disposal allowance) at disposal date
Proceeds
(cash or part < Net Book Value Loss
disposal allowance) at disposal date
Proceeds
(cash or part = Net Book Value Neither profit
disposal allowance) at disposal date nor loss
A DISPOSALS T account is required when recording the

disposal of a non-current asset. This is an income statement
account which reflects any profit or loss on disposal.
Disposal for cash consideration
three step process:
1. Remove the original cost of the non-current asset from the

'non-current asset' account.
Dr Disposals original cost
Cr NC Assets original cost
2. Remove accumulated depreciation on the non-current
asset from the 'accumulated depreciation' account
Dr Acc'd Dep'n acc'd dep'n
Cr Disposals acc'd dep'n
3. Record the cash proceeds
Dr Cash proceeds
Cr Disposals proceeds

Non Current Assets
The balance on the disposals T account is the profit or loss on

disposal:
Disposals
Original cost X Accumulated X
depreciation
Proceeds X
Loss on disposal ß Profit on disposal ß
–– ––
X X
–– ––
Illustration 8
Disposal of non current assets

Eddie runs a haulage business, and owns 6 articulated
lorries. On 1 April 20X5 he disposes of 1 of the lorries for
$5,000 cash. Each lorry originally cost $45,000 on 1
January 20X1, when Eddie started business and has been
depreciated at 20% per annum on the straight line basis. A
full year's depreciation is charged in the year of acquisition
and none in the year of disposal.
What are the accounting entries to reflect the disposal?

Show the ledger entries for the year ended 31 December
20X5
Solution
1. Remove the original cost of the non current asset

Dr Disposals $45,000
Cr Motor Vehicles $45,000
2. Remove accumulated depreciation on the non current

asset
Dr Accumulated depreciation $36,000
Cr Disposals $36,000
Working:
$45,000 x 20% x 4 years = $36,000
3. Record proceeds:
Dr cash $5,000
Cr Disposals $5,000

chapter 8
Motor vehicles
$ $
1.1.X5 balance b/f
(6 x $45,000) 270,000 Disposals 45,000
Balance c/f 225,000
–––––––––– ––––––––––
225,000 225,000
–––––––––– ––––––––––
Balance b/f 225,000
$ $
1.1.X5 balance b/f 216,000
(6 x $36,000)
Disposals 36,000
Balance c/f 180,000
–––––––––– ––––––––––
180,000 180,000
–––––––––– ––––––––––
Balance b/f 180,000
Disposals
$ $
Motor vehicle cost 45,000 Accumulated
depreciation 36,000
Cash proceeds 5,000
Loss (ß) 4,000
–––––––––– ––––––––––
45,000 45,000
–––––––––– ––––––––––
Accounting for the disposal of a non current asset

for cash
Percy Throwerp runs a landscape gardening business. On 1
February 20X2, he purchased a sit on lawnmower costing
$3,000. He depreciates it at 10% straight line on a monthly
basis. A few years later he decides to replace it with one
with an enclosed cabin for when it rains. He sells the
lawnmower to an old friend Alan Titchmuck for $2,000 on 31
July 20X5.
How much is charged to Percy's Income Statement in

respect of the asset for the year ended 31 December 20X5?

Non Current Assets
During 20X5, he will part exchange his old Ice cream van
for a new one. Details of the 2 vans are as follows:
Solution
1. Dr
Cr
2. Dr
Cr
Depreciation working:
3. Dr
Cr
Disposals
$ $
–––––– ––––––
–––––– ––––––
The charge to the Income Statement for the year ended

31 December 20X5 is:
£
Depreciation charge for the year
Profit/Loss on disposal

chapter 8
7. Disposal through a Part Exchange

Agreement
A part exchange agreement arises where an old asset is

provided in part payment for a new one, the balance of the new
asset being paid in cash.
The procedure to record the transaction is very similar to the

three step process seen for a cash disposal. There is however
a fourth step:
1 Remove the original cost of the non-current asset from the
'non current asset' account.
Dr Disposals original cost
Cr NC Assets original cost
2 Remove accumulated depreciation on the non-current
asset from the 'accumulated depreciation' account
Dr Acc'd Dep'n acc'd dep'n
Cr Disposals acc'd dep'n
3 Record the part exchange allowance (PEA) as proceeds
Dr NC Assets PEA
Cr Disposals PEA
4 Record the cash paid for the new asset
Dr NC Assets cash
Cr cash cash
Again, the balance on the disposals T account is the profit or
loss on disposal:
Disposals
Original cost X Accumulated
depreciation X
Part exchange
allowance X
Profit on disposal ß Loss on disposal ß
–– ––
X X
–– ––
Expandable text
Illustration 9
Disposal of non current assets

Zebedee runs a business selling ice creams on the seafront
and prepares accounts to a 31 December year end.

Non Current Assets
Old Van New Van

Purchase date 1 January 20X0 1 June 20X0
Total cost $15,000 $23,000
Depreciation method 10% straight line 10% straight line
Accumulated $7,500
depreciation to
1 January 20X5
Part exchange $6,400
allowance agreed
Show the ledger entries to record the transaction in the year
ended 31 December 20X5, assuming that Zebedee charges
a full year of depreciation in the year of acquisition and
none in the year of disposal.
Solution
Motor Vehicle cost
$ $
Balance b/f 15,000 Disposal 15,000
New Van
Part exchange 6,400
allowance
Cash ($23,000 - $6,400) 16,600 Balance c/f 23,000
–––––––– ––––––––
38,000 38,000
–––––––– ––––––––
Balance b/f 23,000
Motor Vehicle Accumulated depreciation

$ $
Disposal 7,500 Balance b/f 7,500
Balance c/f 2,300 Depreciation charge 2,300
–––––––– ––––––––
9,800 9,800
–––––––– ––––––––
Balance b/f 2,300
Disposals
$ $
Motor vehicle cost 15,000 MV accumulated 7,500
depreciation
Part Exchange
allowance 6,400
Loss on disposal (ß) 1,100
–––––––– ––––––––
15,000 15,000
–––––––– ––––––––

chapter 8
Depreciation charge
$ $
MV accumulated 2,300
depreciation
Depreciation charge working:
10% x $23,000 = $2,300
Accounting for the disposal of a non current asset

through part exchange
Bindi Bobbin runs a business altering and repairing clothes.
When she started business on 1 January 20X2, she bought
a Soopastitch II sewing machine for $2500. She depreciates
sewing machines using the straight line method at a rate of
20% per annum, and she charges a full year of depreciation
in the year of acquisition and none in the year of disposal.
The business has now grown such that she needs a faster
machine, and she will upgrade to the Soopastitch V during
December 20X5. The Soopastitch salesman has offered
her a part exchange deal as follows:
Part exchange allowance for Soopastitch II $750
Balance to be paid in cash for Soopastitch V $4,850
Show the ledger entries for the year ended 31 December

20X5 to reflect this transaction.
Solution
Sewing machine cost
$ $
––––––– –––––––
––––––– –––––––

Non Current Assets
Sewing machine accumulated depreciation

$ $
––––––– –––––––
––––––– –––––––
Disposals
$ $
––––––– –––––––
––––––– –––––––
Depreciation charge
$ $
––––––– –––––––
8. Revaluation of Non-current Assets

l Some non-current assets such as land and buildings rise in
value over time. Businesses may choose to reflect the
current value of the asset in their balance sheet. This is
known as revaluing the asset.
l The difference between the net book value of the asset
and the revalued amount (normally a gain) is recorded in a
revaluation reserve in the balance sheet.
l This gain is not recorded in the income statement because
it is unrealised i.e. it is not realised in the form of cash
Expandable text

chapter 8
Illustration 10
Revaluation of non-current assets

Vittorio owns land which originally cost $250,000. No
depreciation has been charged on the land in accordance
with IAS16. Vittorio wishes to revalue the land to reflect its
current market value, which he has been advised is
$600,000.
What is the double entry to record this revaluation?
Solution
The land is currently held at cost of $250,000. This needs
to be uplifted by $350,000 to reflect the new valuation of
$600,000. Therefore the double entry required is:
Dr Land cost $350,000
Cr Revaluation reserve $350,000
Illustration 11
Revaluation of non-current assets

Hamish runs a kilt making business in Scotland. He has
run the business for many years from a building which
originally cost $300,000 and on which $100,000 total
depreciation has been charged to date. Hamish wishes to
revalue the building to $750,000.
What is the double entry required to record the revaluation?
Solution
The current balances in the accounts are:
Building cost $300,000
Accumulated Depreciation $100,000
l The building cost account needs to be uplifted by

$450,000 to $750,000.
l On revaluation, the accumulated depreciation account
is cleared out
Therefore the double entry required is:

Dr Building cost $450,000
Dr Accumulated Depreciation $100,000
Cr Revaluation Reserve $550,000
The gain of $550,000 reflects the difference between the net
book value pre revaluation of $200,000 and the revalued
amount of $750,000.

Non Current Assets
Revaluation of Non-current assets

Max owns a fishfinger factory. The premises were
purchased on 1 January 20X1 for $450,000 and
depreciation charged at 2% per annum straight line.
Max now wishes to revalue the factory premises to

$800,000 on 1 January 20X7 to reflect the market value.
Show the ledger entries required to record this revaluation.
Solution
Factory cost
$ $
––––––––– –––––––––
––––––––– –––––––––
$ $
––––––––– –––––––––
––––––––– –––––––––
Revaluation reserve
$ $
––––––––– –––––––––
––––––––– –––––––––
9. Depreciation and Disposal of a Revalued

Asset
Depreciation of a revalued asset

l When a non-current asset has been revalued, the charge
for depreciation should be based on the revalued amount
and the remaining useful life of the asset.

chapter 8
Disposal of a revalued asset

l The disposal of a revalued asset is recorded as already
seen.
l There is, however, an extra step: As the revaluation gain
has now been realised, the balance on the revaluation
reserve should be transferred to accumulated profits
Dr Revaluation Reserve X
Cr Accumulated profits X
Illustration 12
Depreciation of a revalued asset

Spartacus United football club's balance sheet at 31
December 20X7 includes the following information:
$
Stadium cost 1,500,000
Depreciation 450,000
–––––––––––
1,050,000
Depreciation has been provided at 2% on the straight line
basis.
The stadium is revalued on 30 June 20X8 to $1,380,000.

There is no change in its remaining estimated future useful
life.
What is the depreciation charge for the year ended 31

December 20X8?
Solution
Depreciation must continue to be charged on the original
cost until the date of revaluation. Thereafter it is charged on
the revalued amount:

Non Current Assets
$
First half 2% x $1,500,000 x 6/12 15,000 Note that this is part of
of 20X the depreciation cleared
out on revaluation and so
is not part of the
accumulated depreciation
balance at the year end
Second half 1,380,000 x 6/12 20,000 This amount will form the
of 20X8 ––––––––– accumulated depreciation
34.5yrs –––––– at the year end
Total 35,000
depreciation
charge
for 20X8
Illustration 13
Disposal of a revalued asset

Tiger Trees owns and runs a golf club. Some years ago
Tiger purchased land next to the existing course with the
intention of creating a smaller 9 hole course. The cost of
the land was $260,000. Tiger hasn't yet built the additional
course but has revalued this land to $600,000. He has now
decided that building the new course is uneconomical and
has found a buyer who is willing to pay $695,000 for the
land.
Solution
Land cost
$ $
––––––––– –––––––––
Disposal
$ $
Land cost 600,000 Proceeds 695,000
B profit on disposal 95,000
––––––––– –––––––––

chapter 8
Revaluation reserve
$ $
––––––––– –––––––––
Accumulated profits
$ $
Revaluation 340,000
reserve
Balance c/f 340,000
––––––––– –––––––––
340,000 340,000
––––––––– –––––––––
Balance b/f 340,000
10.Disclosure of Non-current Asset Balances

in Company Financial Statements
Notes to the
Balance Sheet Income Statement
Accounts
Aggregate net book Depreciation charge • Disclosure of
included within depreciation
valueof non-current
methods and rates
assets disclosed on relevant expense
used
the face of the categories
• Non-current assets
balance sheet disclosure
• Details of
revaulations
Expandable text

Non Current Assets
Chapter Summary
RECORD PURCHASE
MEASURE
PURCHASE Dr Non Current asset
COST
Cr Cash/bank/payable
Capital
expenditure
to buy asset STRAIGHT LINE
and bring COST – RV
into working ----------------------------------
condition UL
REDUCING
USE WITHIN RECORD CHARGE
DEPRECIATE BALANCE
BUSINESS X% x NBV
Dr Dep'n expense
Cr Accumulated Dep'n
SUM OF
DIGITS
RECORD
X/Y x COST
REVALUATION
APPRECIATES Dr NC Assets
REVALUE
IN VALUE
Dr Accumulated Dep'n
Cr Revaluation Reserve
RECORD
DISPOSAL
Dr Disposal
CASH
DISPOSAL Cr NC Asset
DISPOSE OF Dr Accumulated Dep'n
PART Cr Disposal
EXCHANGE Dr Cash (NC Asset)
Cr Disposal
(Dr NC Asset
Cr Cash)

chapter 8
Test your understanding solutions
Test your understanding 1
Land and Buildings

$
Office premises 250,000
Legal fees 10,000
–––––––––
260,000
l the cost of the purple paint does not form part of the
cost of the office and so should not be capitalised.
Instead it should be taken to the income statement as a
revenue expense.
Motor vehicles
$
3 Mercedes E series 116,000
Number plates 210
Delivery charges 180
–––––––––
116,390
l the number plates are one off charges which forms part
of the purchase price of any car
l the road license fee, drivers' wages and receipts are
ongoing expenses, incurred every year. They cannot
be capitalised, but should be taken to the income
statement as expenses.
Solution
Oven 20X5 20X6

$ $
£2,000 x 10% 200 200
Mini Bus
20X4 : 25% x $18,000 = $4,500
20X5: 25% x $(18,000 - 4,500) = $3,375 3,375
20X6: 25% x $(18,000 - 7,875) = $2,531 2,531
–––––– ––––––
Total depreciation charge 3,575 2,731

Non Current Assets
Solution
Machine 1 $ $
20X5: 20% x $12,000 x 5/12 = 1,000
20X6: 20% x $12,000 = 2,400
20X7: 20% x $12,000 = 2,400
Machine 2
20X6: 10% x $8,000 x 3/12 = 200
20X7: 10% x $(8,000 - 200) = 780
Total Depreciation charge

20X5: 1,000
20X6: $2,400 + $200 2,600
20X7: $2,400 + $780 3,180
Leases (cost)
$ $
1.8.X5 cash 200,000 Balance c/f 200,000
––––––––– –––––––––
200,000 200,000
––––––––– –––––––––
Balance b/f 200,000
Fixtures and fittings (cost)

$ $
1.8.X5 cash 4,000 Balance c/f 4,000
––––––––– –––––––––
4,000 4,000
––––––––– –––––––––
Balance b/f 4,000
Depreciation charge
$ $
depreciation ––––––––– –––––––––
depreciation ––––––––– –––––––––
depreciation ––––––––– –––––––––

chapter 8
Accumulated depreciation (leases)

$ $
––––––––– charge –––––––––
8,000 8,000
––––––––– –––––––––
Balance b/f 8,000
––––––––– charge –––––––––
16,000 16,000
––––––––– Balance b/f 16,000
––––––––– charge –––––––––
24,000 24,000
Balance b/f 24,000
Accumulated depreciation (fixtures and fittings)

$ $
––––––––– charge –––––––––
1,000 1,000
––––––––– –––––––––
Balance b/f 1,000
Balance c/f 1,750 X6 depreciation 750

–––––––––charge –––––––––
1,750 1,750
––––––––– –––––––––
Balance b/f 1,750
Balance c/f 2,313 X7 depreciation 563
––––––––– charge –––––––––
2,313 2,313
––––––––– –––––––––
Balance b/f 2,313
Annual depreciation workings:
Note, details of the depreciation method and rate for the

lease are not given in the question. We are however told
that the lease term is 25 years. This suggests that it would
be appropriate to use the straight line method with a UEL of
25 years.

Non Current Assets
20X5 Lease: $200,000 / 25 years = 8,000

Fountain: $4,000 x 25% = 1,000
–––––––––
9,000
20X6 Lease: $200,000 / 25 years = 8,000

Fountain: $3,000 x 25% = 750
–––––––––
8,750
20X7 Lease: $200,000 / 25 years = 8,000

Fountain: $2,250 x 25% = 563
–––––––––
8,563
Solution
Initial depreciation charge = $30,000 = $1,500
––––––––––––
20 years
Net Book Value at date

of change = $30,000 - ($1,500 x 3yrs)
= $25,500
New depreciation charge = $25,500 - $1,500

––––––––––––––––––
12 years
= $2,000 p.a.
Solution
1. Dr Disposals $3,000
Cr Fixtures and Fittings Cost $3,000
2. Dr Accumulated depreciation $1,050

Cr Disposals $1,050

chapter 8
Depreciation working:
X2 10 % x 3,000 x 11/12 = 275

X3 10% x 3,000 = 300
X4 10% x 3,000 = 300
X5 10% x 3,000 x 7/12 = 175
–––––
1050
3. Dr cash $2,000
Cr Disposals $2,000
Disposals
$ $
31.7.X5 Fixtures and 3,000 Accumulated 1,050
Fittings cost depreciation
Profit on disposal (ß) 50 Cash proceeds 2,000
–––––– ––––––
3,050 3,050
–––––– ––––––
The charge to the Income Statement for the year ended

31 December 20X5 is:
£
Depreciation charge for the year 175
Profit/Loss on disposal (50)
Note: As depreciation is charged monthly, it is necessary to

charge an amount to the income statement for the period 1
January 20X5 to the disposal date 31 July 20X5

Non Current Assets
Sewing machine cost

$ $
New asset
Part exchange 750
allowance
Cash 4,850 Balance c/f 5,600
––––––– –––––––
8,100 8,100
––––––– –––––––
Balance b/f 5,600
Sewing machine accumulated depreciation

$ $
Balance c/f 1,120 Depreciation 1,120

charge X5
––––––– –––––––
2,620 2,620
––––––– –––––––
Balance b/f 1,120
Depreciation b/f working:
$2,500 x 20% x 3 years = $1,500
Disposals
$ $
Sewing machine cost 2,500 SM accumulated 1,500
depreciation
Part Exchange 750
allowance
Loss on disposal (ß) 250
––––––– –––––––
2,500 2,500
––––––– –––––––
Depreciation charge
$ $
SM accumulated 1,120 Income Statement 1,120
depreciation ––––––– –––––––
Depreciation charge working:

$5,600 x 20% = $1,120

chapter 8
Factory cost
$ $
Balance b/f 450,000
Revaluation 350,000 Balance c/f 800,000
––––––––– –––––––––
800,000 800,000
––––––––– –––––––––
800,000
$ $
Revaluation 54,000 Balance b/f 54,000
(2% x $450,000
––––––––– x 6yrs) –––––––––
54,000 54,000
––––––––– –––––––––
Revaluation reserve
$ $
Factory cost 350,000
Balance c/f 404,000 Accumulated 54,000
––––––––– depreciation –––––––––
404,000 404,000
––––––––– –––––––––
Balance b/f 404,000

Non Current Assets

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Chapter 8

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chapter

Chapter learning objectives

Upon completion of this chapter you will be able to:

134 KAPLAN PUBLISHING

1. Acquisition of a Non-current Asset

l Delivery costs l Renewals

l Legal fees l Repainting

l The correct double entry to record the purchase is:

l A separate cost account should be kept for each category

Acquisition of a Non-current asset

KAPLAN PUBLISHING 135

Test your understanding 1 [answer on p163]

Acquisition of a non current asset

Bilbo Baggins started business providing limousine taxi

What amounts should be capitalised as 'Land and Buildings'

136 KAPLAN PUBLISHING

KAPLAN PUBLISHING 137

3. Methods of Calculating Depreciation

A reducing amount A variation on the

Useful for assets

Straight Line method

Useful Life: the estimated number of years that the

Reducing Balance Method

Depreciation charge = X % x Net Book Value (NBV)

Net Book Value: original cost of the non-current asset less

138 KAPLAN PUBLISHING

Sum Of Digits Method

Depreciation charge = X x (Cost - residual value)

If a non-current asset is bought or sold in the period, there are

Methods of calculating depreciation - straight line

Ronaldo, a builder, bought a new cement mixer on 1st

What is the depreciation charge for the year ended 31st

Methods of calculating depreciation - reducing balance

Dev, a trader purchased an item of plant for $1,000 on 1

KAPLAN PUBLISHING 139

Methods of calculating depreciation - Sum of Digits

20X4: 4/10 x $4,000 = $1,600

Test your understanding 2 [answer on p163]

140 KAPLAN PUBLISHING

What is the total depreciation charge for the years ended 31

Oven 20X5 20X6

Test your understanding 3 [answer on p164]

Cost $12,000 $8,000

Purchase date 1 August 20X5 1 October 20X6

Depreciation method 20% straight 10% reducing

What is the total depreciation charge for the years ended

KAPLAN PUBLISHING 141

Total Depreciation charge

4. Accounting for Depreciation

Dr Depreciation expense (IS) X

l The depreciation expense account is an income statement

142 KAPLAN PUBLISHING

Accounting for depreciation

Santa charges depreciation on a monthly basis.

Cash register Depreciation charge: 10% x $5,000 x 9/12

Balance sheet extract at 31 August 20X5

Accounting for depreciation

Show the accounting entries for the acquisition of the asset

KAPLAN PUBLISHING 143

X6 accumulated 2,440 Income statement 2,440

X7 accumulated 2,440 Income statement 2,440

144 KAPLAN PUBLISHING

Test your understanding 4 [answer on p164]