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December 11, 2016 at 7:50 pm
Sir ,your lectures are very helpful!!! Thankyou so much
John Moffat says
December 12, 2016 at 6:44 am
Thank you for your comment 🙂
November 10, 2016 at 3:18 pm
I’m really confused with the accumulated depreciation as the value of asset before revaluation is equal to original cost less acc.depreciation so her befor revaluation we have the original cost 3600000 and accumulated depreciation 1116000 so for the current value of asset before revaluation we shod mines the accumulated depreciation 1116000 from the original cost 3600000 I know I’m going wrong but please help
November 10, 2016 at 6:58 pm
But if you look at the final balance on the revaluation account, it is the difference between the new value and the value in the accounting statements (cost less accumulated depreciation).
November 11, 2016 at 5:58 am
How ? It is the only lecture that I’m confused.
November 11, 2016 at 6:41 am
Thank you I got my answer
November 11, 2016 at 7:15 am
I am pleased you got the answer 🙂
Khoula Khan says
October 18, 2016 at 2:10 pm
In notes of chapter The provisions of IAS16 it is written that any upward revaluation should be credited to revaluation reserve and any downward value should be charged as an expense in the statement of profit or loss.
But in the above lecture you credited the downward value in example 5 i.e. 3,072,000 to revaluation reserve. I think it should be charged as an expense to statement of p&l account. Please explain.
October 18, 2016 at 2:56 pm
What downward value?!!
The building is being revalued upwards from a current value of 2,520,000 up to 3,072,000.
In order to achieve this the ‘cost’ and the accumulated depreciation both need entries and the double entry for both is to the revaluation account.
October 18, 2016 at 8:34 pm
No sir, it was 3,600,000 then we revalued it to 3,072,000. Isn’t the value decreasing (going downwards)?
Im so confused.
October 19, 2016 at 7:11 am
3,600,000 was the original cost.
The value in the Statement of financial position before the revaluation is the original cost less the accumulated depreciation, which comes to 2,520,000!
October 19, 2016 at 12:32 pm
oh! Alright. Thank you so much sir.
October 19, 2016 at 2:08 pm
You are welcome 🙂
July 1, 2016 at 11:04 am
sir John, the way i always understood revaluation and how i applied it to this question was:
the original cost was 3.6m.
the cost before revaluation was 3.6m – 1.08m (acc depn) – 36,000 (6 months depn before rev) = 2.484m.
thus, in the t-account for “building”, i’ll start my opening balance with 2.484m on debit side, recognise revaluation gain of 0.588m on debit side, and the depreciation of 44,522 (6 months after depreciation).
was i wrong, or it’s just another allowed method?
July 1, 2016 at 2:05 pm
It doesn’t matter how you do the entries provided that the end result is correct.
(In the exam it doesn’t matter because you will not be asked for the entries – only for the end result)
abdurrahman faster says
June 8, 2016 at 10:42 am
Thanks for the lectures!!?
June 8, 2016 at 1:18 pm
Thank you for the comment 🙂
May 16, 2016 at 1:45 am
Thanks Mr Moffat.. your lectures are very helpful
May 16, 2016 at 7:55 am
March 27, 2016 at 1:44 pm
Hi. I just wanted to know, why do we debit depreciation expense, but credit accumulated depreciation? Since both of them are depreciatons, why do we treat them differently? TIA.
March 27, 2016 at 2:22 pm
The debit is to record the expense for the Statement of profit or loss. The credit is to reduce the value of the asset for the Statement of financial position.
March 1, 2016 at 9:44 pm
Many thanks for all the lectures!
I have a question on the notes for this lecture: “The depreciation charge will be higher than it was before the revaluation, and then excess of
the new charge over the old charge should be transferred from the revaluation reserve to
Could you expand on this point with an example?
Thanks in advance!
March 2, 2016 at 6:35 am
Not here (and it is not something you are likely to need to do in the F3 exam).
If you want an example then ask in the Ask the Tutor Forum.
March 2, 2016 at 9:51 pm
March 26, 2016 at 8:23 pm
Thank Sir for your lectures, perfect and excellent . But my questions are:
Will it be wrong if we initially credit the Asset account ( Building) with the revaluation account 3,072,000 and debit the revaluation account with same value?
Secondly, you talked about the 50 years of the useful life the Building (Asset) by 100/2 … how did you arrive at 100/2 that gave us the 50 yrs.? Sorry i am not very mathematical.
March 27, 2016 at 8:55 am
It would be wrong because crediting the asset account would reduce its value.
For your second question it is because the total is 100% and 2% each year will take 50 years to reduce the cost to zero.
(In the same way, 10% a year would take 10 years to reduce the cost to zero.)
February 8, 2016 at 7:21 am
thank you for comprehensive lecture on depreciation. it helped me alot understanding how to depreciate after revaluation of asset.
However, i need your help while solving question 2 of test questions. I would reproduce the question over here.
on 31 Oct 2013 machine cost is 120,000, accumulated dep. is 25000.
business sells machine for 10,000 on 1 jan 2014. this machine had orignal cost of 30,000 on 1 apr 2012.
company policy is str. line depreciation @ 20%, on monthly basis.
sir, according to my understanding from lecture, when asset was revalued it should have been divided upon remaining years of life to get depreciation expense for year. here we dont have that information so we dont know remaining life period. Secondly, if asset is sold on 1jan 2014, we dont have asset after this month so we cannot depreciate it for remaining months of financial years. but in answer it has been depreciate for remaining months of financial year as well and then the amount of 30,000 orignal cost is subtracted from total. I dont understand how we subtract orignal cost while this has been depreciated for atleast first two years @ 20% so we have already taken part of its value.
much appreciated if you clearify.
February 8, 2016 at 8:01 am
There is no mention of a revaluation in this question!!!
The machine is sold and the profit or loss on sale is the difference between the sale proceeds and the carrying value (net book value) at the date of sale.
I do suggest that you watch the free lecture on depreciation again.
guo jiun says
December 22, 2015 at 7:12 am
Good day sir, example 5 shows how we revaluate on a straight line basis. But, what if it is reducing, i think the double entries are the same but what about the part where we determine the remaining life? I know there’s probably a formula for this to work backwards.
December 23, 2015 at 6:53 am
With reducing balance we do not estimate the useful life.
We would continue to use the same % applied to the new value.
December 23, 2015 at 8:00 am
As if it is the first year huh? How did it slip my mind? Thank you.
December 23, 2015 at 8:26 am
And you are welcome 🙂
November 21, 2015 at 8:50 am
What do you mean by saying non current assets fall in value and we depreciate them. In previous lecture you said we depreciate just because to spread the cost over it useful life as expense?.
November 21, 2015 at 9:22 am
The reason for depreciating is to spread the cost, certainly.
But as you will have seen in the earlier lectures on depreciation, when we do depreciate, one effect is to have the expense in the Statement of profit or loss, and the other effect is to reduce the carrying value (net book value) in the Statement of financial position.
November 20, 2015 at 4:07 pm
Why you choose to take 2% of orignal cost in first half to take depreciation charge on orignal cost of building i.e. 3,600,000and in second half you choose to take remaining years to take depreciation charge on re valued building cost i.e.3,072,000. Why u didn’t take 2% in second half also
November 20, 2015 at 4:09 pm
The 2% meant that there was expected to be a 50 year life (100% / 50 = 2%).
After it is revalued there are no longer 50 years of life left, so the new depreciation is based on the remaining life.
Why u didn’t take 2% to take depreciation charge on revalued cost?
November 20, 2015 at 4:10 pm
I have just answered that!!!
December 22, 2015 at 7:00 am
The building was revalued yes? So new value is 3.072mil. How do we charge on a straight line basis? New value less any residual value (in the exampe, none) over remaining life. What sir is saying is that the remaining life have changed. If we were to charge 2% we would be going against the last line in the example since we would be depreciating over 50 years again. That is why new cost over remaining life times proportion of time up till end of reporting year = 44.522k.
December 23, 2015 at 6:54 am
Reducing balance at 2% is not the same as a useful life of 50 years.
November 20, 2015 at 3:20 pm
I didn’t understand revaluation profit at all. In what sense you are calling it profit although i know its not earned by selling building?
November 20, 2015 at 3:57 pm
Suppose you have a building that appears on the Statement of financial position at $100,000.
Suppose you get a valuation and it is now really worth $250,000.
If you decide to revalue that it will appear on the SOFP at $250,000 which is a ‘profit’ of $100,000.
It is not a ‘real’ profit because you have not actually sold it. That is why the ‘profit’ does not appear in the Statement of profit or loss, but instead is shown separately as ‘revaluation reserve’ (and cannot be paid out to shareholders as a dividend).
November 20, 2015 at 5:11 pm
Sir can you explain that how there is profit in this case, as the value decreases from 3,600,000 to 3,072,000
November 20, 2015 at 5:13 pm
But the value is not 3,600,000 at all – that is the original cost.
The ‘value’ is the cost less the accumulated depreciation.
October 28, 2015 at 8:24 pm
There are no lectures on Chapter 7
October 28, 2015 at 9:12 pm
I know 🙂
It is because there are no calculations involved in that chapter, and so it is for you to read yourself!
(And most of it is mentioned in the depreciation lecture anyway)
October 20, 2015 at 11:41 am
Hello Jonh.I am confused why you revalued the asset when actually it has decreased in value from 3.6 m to 3072m,couldn’t be possible that we were supposed to impair it,by Debiting impairment(expense) and credit the asset as you have credited it?
October 29, 2015 at 4:12 am
Hi Sifiso.Hahaha am based at Durban.But chances are i might come to NMMU next year for B.com Accounting.I have to think about that.
October 29, 2015 at 7:37 am
Its value has not decreased.
Its carrying value (net book value) is cost less accumulated depreciation, and that has increased. It is always the net book value that is changed in a revaluation, and we do it by removing the accumulated depreciation and adjusting the cost to the revalued amount.
(I removed the other comments because this page is for comments on lectures – not for private chatting. You can message privately using the message facility on this website 🙂 )
December 22, 2015 at 7:18 am
Google is my friend, however i think there is some slight distinction between us and uk accounting so in what paper can i read more about this impairment which seems to effect directly the value of an asset unlike revaluation which seems to effect the nbv. Since the exam is marked by uk standards i hope the material is the same.
October 11, 2015 at 6:05 am
I have a question regarding to Question 5, Test.
From the lecture note, NBV 31/12/03; 52000-30000=22000
but why 30000? I think it would be 15000 because revalued depreciation for 3rd year is 15000..
please give me an answer.
October 11, 2015 at 8:59 am
I assume you mean question 4.
The NBV at 31.12.01 is 52,000.
There are 2 more years up to 31.12.03.
So the NBV at 31.12.03 is 52,000 – (2 x 15,000) = 22,000.
(The question does not say ‘no charge in the year of sale’ and therefore the is a depreciation charge in both of the two year).
October 5, 2015 at 4:57 pm
You mentioned in the lecture that useful life is 100/2=50years. Can you please tell where did the figure 100 come from?
October 5, 2015 at 6:54 pm
Because it says that the depreciation is 2% a year.
2% is 100%/50. So it means that they are depreciating over 50 years.
Ee King says
September 11, 2015 at 1:24 pm
John, how do we know the useful life is 50 years?
September 11, 2015 at 1:37 pm
Because it is 2% straight line.
2% each year means spreading over 100/2 = 50 years
August 29, 2015 at 7:44 am
Could you please help me explain question 1 chapter 6
August 29, 2015 at 8:05 am
There is more than one way of arriving at the correct answer.
The answer at the back has calculated depreciation for the whole year on 240,000, then subtracted depreciation for 9 months on the 60,000 that was sold (so only leaving depreciation for the 3 months they were owned), and then added on depreciation on 160,000 for 6 months because they are only owned for 6 months.
July 9, 2015 at 2:58 pm
hi sir in test question one y are we chargeing depreciation on the 240000
July 9, 2015 at 5:57 pm
Because the cost stays at 240,000 for the first three months of the year, therefore there is three months depreciation on 240,000.
June 24, 2015 at 10:51 am
when we calculate the new depreciation per year after the revaluation , shall we consider the residual value of the assets?? we just use the remaining years divide the new value or something??
June 24, 2015 at 11:07 am
If it is straight line depreciation, then you divide the revalued amount less the residual value by the remaining life of the asset.
June 24, 2015 at 11:52 am
thank you very much!! by the way could you please tell me where is the answer of the test? I just cant find it .;)
June 24, 2015 at 12:01 pm
Please look at the contents page – it tells you where.
(the answers are at the back of the notes)
October 20, 2015 at 11:35 am
If its a reducing balance method,why don’t we subtract residual value from cost and divide by useful life?or do we,but i dought.Please help.
October 20, 2015 at 11:39 am
What you are describing it the straight line method. With reducing balance method the residual value is not method.
You should watch all of the free depreciation lectures – both methods are explained in detail. (This is one of the later lectures on depreciation)
June 24, 2015 at 10:47 am
where is the answer for the test? sorry . I just got here.
June 24, 2015 at 11:06 am
At the end of the Lecture notes. If you look at the contents page, then it tells you which page!
June 20, 2015 at 6:41 am
Could you solve following question for me. Banjo Co purchased a building on 30 June 20X8 for $1,250,000. At acquisition, the useful life of the building was 50 years. Depreciation is calculated on the straight-line basis. 10 years later, on 30 June 20Y8 when the carrying amount of the building was $1,000,000, the building was revalued to $1,600,000. Banjo Co has a policy of transferring the excess depreciation on revaluation from the revaluation surplus to retained earnings.
Assuming no further revaluations take place, what is the balance on the revaluation surplus at 30 June 20Y9?
A $335,000 B $310,000 C $560,000 D $585,000
June 20, 2015 at 8:04 am
In future, please ask questions like this in the Ask the Tutor Forum (and not as a comment on a lecture).
The depreciation on the original cost was $25,000 a year.
On revaluation, there is a revaluation surplus of 600,000 (1,600,000 – 1,000,000).
There are 50 years left for the building, and so the new depreciation will be 1,600,000 / 40 = $40,000 a year. The is what is charged in the Statement of profit or loss.
However the excess over the original depreciation of 15,000 (40,000 – 25,000) is transferred from revaluation surplus to retained earnings. So the balance left on revaluation surplus is 600,000 – 15,000 = $585,000
June 20, 2015 at 1:51 pm
May 18, 2015 at 10:11 pm
Sir, a tiny misleading. always i did like Kelechi did, without T accounts. like what it should be and what it is. so difference is loss/gain. but in the last working, Revaluation account is an asset account? (not like “Revalutaion surplus” is capital account (Credit acc).
Because when we’re debiting with rev’n surplus (528K) we should also debit this account with acc.dep’n…this is then nonsense… it concludes that it is just new building account (asset acc.).:)
May 18, 2015 at 10:30 pm
It is not an asset account – I really do not know what you are trying to say.
Why on earth should we debit it with the accumulated depreciation? We debit accumulate depreciation to remove it, and credit the revaluation account. The revaluation account is being use to calculate the gain on revaluation.
(And there is never going to be a loss – in F3 we only will revalue upwards.)
May 13, 2015 at 3:46 pm
Hello, for this example 5, you say that we have a gain or profit on revaluation of 588,000. Could you explain how else I could know whether we would have a loss or a gain by merely looking at the question (or intuition) even if I would not know the exact figure of profit or loss.
May 13, 2015 at 4:28 pm
In Paper F3 we only revalue upwards – it is always going to be a gain. (Although you will still need to be able to calculate the amount!)
May 13, 2015 at 5:25 pm
yeah, thanks. I got the idea eventually. Normally as at 30 june 2003, the value of the asset should have been 3600000-1080000-36000=2484000.
But we have chosen to value the asset at 3072000.
Thus there would be a gain of 3072000-2484000=588000. Thanks a lot.
May 13, 2015 at 5:26 pm
May 4, 2015 at 4:51 am
Hi. I have a little bit of confusion on this statement from the lecture notes and would like further clarifications: “…and then excess of the new charge over the old charge should be transferred from the revaluation reserve to accumulated profits.”
May 4, 2015 at 7:01 am
We calculate the depreciation on the revalued amount, and this is charged as an expense in the Statement of profit or loss.
We then calculate what the depreciation would have been if there had not been a revaluation. The difference between the two figures is then transferred – Dr Revaluation reserve; Cr Retained earnings (accumulated profits).
May 4, 2015 at 1:55 pm
Ok, thanks for clarifying. Would this be done only in the year of revaluation and then no more? Thanks
May 2, 2015 at 9:56 am
I need help in this question.
A business purchased an asset on 1 Jan 20X1 at a cost of $160,000. The asset had an expected life of 8years and a residual value of $40,000. Straight line method is used to measure depreciation. The financial year ends on 31 Dec.
At 31 Dec 20X3 the estimated remaining life of the asset from that date is now expected to be only 3 more years, but the residual value remains unchanged.
What will be the net book value of the asset as at 31 December 20X3, for inclusion in the statement of financial position?
May 2, 2015 at 10:31 am
You must ask this question in the Ask the Tutor Forum and not as a comment on a lecture.
April 26, 2015 at 7:19 pm
hello sir. Sir, i am stuck in one question of depreciation. Below is the question;
A firm bought a car for $10,000 on 1 January 200, which had an expected useful life of 4 years and expected residual value of $2,000.
Th e firms policy is to charge depreciation in the year of disposal.
On 31 December 2011, the car was sold for for $3,200.
What amount would appear in the statement of profit or loss for the year ended 31 December 2011, for the loss on disposal?
April 27, 2015 at 7:50 am
In future you must ask questions like this in the Ask the Tutor Forum – not as a comment on a lecture.
The depreciation is (10000-2000)/4 = 2,000 per year.
You have not typed what year it was bought in and so I cannot answer in full. There will be depreciation for each year (including 2011). The profit or loss on disposal will be the difference between the sale proceeds of 3,200 and the book value at 31.12.2011
April 27, 2015 at 8:05 am
Oh, sorry there was a typing error. The car was bought in the year of 2009.
Thanks for the kind response, will surely do that next time!
April 26, 2015 at 1:07 pm
Hello sir.Can you please help me,I didn’t understand something.
Isn’t depreciation calculated on the original price?And here we calculated it on the $3,600,000.But isn’t this the depreciated price?
Also,in the building a/c also we valued the building at the depreciated value of $3,600,000.Shouldn’t it have been at the original price?
April 26, 2015 at 1:54 pm
The question says that the cost was 3,600,000. Therefore this was the original cost.
And yes – since the depreciation is straight line, it is calculated on the original cost of 3,600,000 (until, of course, the revaluation).
(I assume that you have printed out the free Lecture Notes that are used in the lectures? Otherwise there is no point in watching the lectures.)
April 26, 2015 at 7:23 pm
Yes,I have the notes. Actually,I had misunderstood the 3,600,000 as the depreciated price,not original price!
April 9, 2015 at 1:08 pm
You are very wrong.
However if you are so sure then you should pay for tuition and then discover that you are wrong.
March 21, 2015 at 10:25 pm
Hello sir. Could you explain Test question 1 please ? Thanks.
March 21, 2015 at 10:34 pm
There are two ways of getting the same answer. One way is the way it is done in the answers at the end of the Lecture Notes, but maybe you will be happier with this way:
From 1 Jan up to 13 March (3 months) the cost is 240,000. So the depreciation for this period is 3/12 x 20% x 240,000.
On 31 March they sell some, so from 1 April to 30 June (3 months) the cost is 180,000. So the depreciation for this period is 3/12 x 20% x 180,000.
On 30 June they buy more, so the cost becomes 340,000 and stays at this from 1 July to 31 December (6 months). So the depreciation for this period is 6/12 x 20% x 340,000.
Add up the three workings and the total comes to 55,000 (as per the answer at the back)
(In future, it is better if you ask specific questions like this in the F3 Ask the Tutor Forum, then I am certain to see it 🙂 )
March 21, 2015 at 11:28 pm
I certainly will Sir. Many thanks.
March 16, 2015 at 2:52 pm
I don’t understand why accumulated depreciation is included in the revaluation a/c?
March 16, 2015 at 3:44 pm
Because what we are revaluing is the net book value (carrying value) and the net book value is the cost less the accumulated depreciation.
March 16, 2015 at 1:32 pm
Stuck again here… Question 4 on the test.
70K – 7K = 63K depreciation charge 9K p.a.
Charge for 2000. and 2001 = 18k
NBV at start of of 2002 = 52k
we change useful life – 52k – 7k – 45k / 3 = 15k
Accumulated depreciation should = (2000: 9K, 2001: 9K, 2002: 15K) = 33K?
My answer is not correct, so I want to understand what exactly I have done wrong? thanks!
March 16, 2015 at 3:43 pm
It is not sold until 31 Dec 2003, so there is depreciation for 2003 also.
March 12, 2015 at 10:06 am
Hi, i’m stuck on Ex.5, when you calculated the second depreciation for the last 6 months. Why was it not calculated simply as: 2% * 3’0720’000 * (6/12).
March 12, 2015 at 2:39 pm
2% straight line is equivalent to spreading the cost over a useful life of 50 years (100% / 2%).
Before the revaluation, the depreciation was 2% x 3,600,000 = 72,000 per year, and since the accumulated depreciation was 1,080,000, it means that we must have been using the asset for 1080000/72000 = 15 years as at 31 December 2002. So at the date of the revaluation we had used it for 15.5 years.
Since the useful like originally was 50 years, and the question says there is no change in the remaining life, it means that 50 – 15.5 = 34.5 years remain.
So we must depreciation in future over 34.5 years which is 3072000 / 34.5 = 89,043 over year. (Only 6/12 for the year in which we revalue because it occurred 6 months through the year)
February 1, 2015 at 8:00 am
Could you please walk us thru the Test Question # 4?
To me, they made a loss but loss is not an option in the MCs.
This is my working.
Depreciation expense p.a:($70,000-$7,000)/7yrs = $9,000 p.a.
At the end of yr 2, the worth of the machine is $70,000-$18,000 = $52,000
Two years later the useful life was revised to 3 remaining years, and at 31 Dec the machine was sold for $30,000 (at the end of yr3)
($52,000-$7,000)/3 = $15,000
Machine worth by the end of yr3 = $52,000-$15,000 = $37,000
PnL of Sale = $37,000-$30,000 = $7,000 loss.
February 5, 2015 at 7:45 pm
At the beginning of 2002 the machine’s value is 52,000.
You have to depreciate 15k for 2002 and 2003 which would give you 52k – 30k = 22,000 remaining on the asset value.
30k – 22k = 8k profit
February 1, 2015 at 7:35 am
I’m confused regarding Example 5. The original cost of building was $3,600,000. and the revaluated amount was $3,072,000. Isn’t that a LOSS of $528K? Since the value of the building dropped.
Thanks in adv.
February 1, 2015 at 7:51 am
It is being revalued from its carrying value (net book value), which is cost less accumulated depreciation.
February 1, 2015 at 8:14 am
Hi Mr Moffat.
Thanks for getting back to me.
got it, thanks a lot.
November 4, 2014 at 4:55 pm
Dear Mr Moffat
i’m sorry for bugging you but I have my exam on the 13th and I self studied so I have issues.
Can you just sum me down the entries for dividends.
In your notes it says all dividends paid go in statement of changes in equity but what about those dividends which are declared during the year but NOT paid by th year end.We will show them in the statement of financial position but will we show them in the statement of changes in equity as well?
Please reply 🙂
November 4, 2014 at 6:46 pm
In future, please do not ask a question about dividends under a lecture on depreciation. Ask in the F3 Ask the Tutor forum. Here is to make comments regarding the lecture.
If a dividend has been declared, then it means that it is certain (it has been voted on). So it will appear in the Statement of changes in equity. If it has not yet been paid, then it will also appear in the SOFP as a current liabaility.
If a dividend has only been proposed, then it has not been voted on and is not certain. Therefore it will appear nowhere.
November 4, 2014 at 3:14 pm
Is the formular acceptable if the estimated useful life of a depreciable asset is not given? Accumulated dep./annual dep.
Thanks for your time!
November 4, 2014 at 4:16 pm
No – that would not give the estimated useful life!
(Suppose I have an asset which cost $10,000 and I am depreciating straight line over 10 years. The annual deprecation is $1000. If I have owned if for 6 years then the accumulated depreciation if $6000. $6000/$1000 is not giving me the estimated useful life!
What it does tell me is how many years that I have owned it (assuming obviously that I am using straight line depreciation).
November 4, 2014 at 9:10 am
Under what condition are companies to extend / reduce the useful life of depreciable assets if it is allowed in IAS 16?
November 4, 2014 at 4:12 pm
There are no conditions – it is up to the accountant to do whatever he/she thinks is sensible.
(Although in practice it is rare to change the expected life)
November 4, 2014 at 9:03 am
Is it allowed in IAS 16 to trade in a depreciable asset for a new one? If yes what is the accounting treatment?
November 4, 2014 at 4:11 pm
Certainly! It is very common (especially with cars) to trade in the old one for the new one.
The entries for removing the old asset are the same as for any sale.
The cash paid for the new one is Cr Cash Dr Asset account.
The trade-in value is Dr Disposal account; Dr Asset account.
(Although those are the entries, Paper F3 asks for very little double entry indeed. They will ask for things like ‘what is the profit or loss on sale’ but you do not need t-accounts to answer that (or most of the questions), and using t-accounts is wasting time in the exam.)
November 4, 2014 at 8:58 pm
I must say i’m most grateful. More grace to you.
November 4, 2014 at 3:53 am
Mr Moffat ,
Can you please tell me why haven’t you transferred the excess of the new charge of depreciation over the old charge from the revaluation account to Retained earnings? It says in the your notes that we will transfer this every time we revalue.
Will appreciate your help 🙂
November 4, 2014 at 4:07 pm
The transfer is made from the revaluation reserve, and I have not shown the account for the revaluation reserve.
The profit on revaluation is transferred to the revaluation reserve.
We then make a transfer from revaluation reserve to retained earnings of the excess (although in fact, the transfer is not compulsory).
November 4, 2014 at 4:51 pm
So what you’re saying is that the profit on revaluation will then go in th revaluation reserve after which a transfer will be made to retained earnings in that particular account.If its not compulsory how will we know if we have to make it or not ?Because the balance on revaluation will differ due to it.
Also do we show this transfer in the Statement of changes in equity ?
November 4, 2014 at 6:48 pm
It will be clear from the question whether or not you are being asked about the transfer from revaluation reserve to retained earnings.
If the transfer is made, then yes – it will appear in the SOCE.
October 11, 2014 at 8:46 pm
Hi, Mr. Moffat. i don’t understand examples four(4) and five(5) of depreciation; sale of non-current assets and revaluation. please, i need a detailed explanation. also, text question 1.Thanks.
October 12, 2014 at 10:25 am
I do go through both of the examples in the lecture, and give a detailed explanation. You will have to say which bit of it you do not understand, because I cannot repeat the whole lecture here.
With regard to test question 1, there are various ways of getting the sale answer.
In the answer at the back of the Course Notes, what I have done is firstly calculate depreciation for the whole year on the 240,000 that was there at the start of the year.
However, 60,000 of them were not there the whole year – they were only there for three months – and so I have subtracted the other 9 months depreciation on them.
Finally, some extra assets were bought for 160,000 half way through the year, and so we need to add on 6 months depreciation for those assets.
October 7, 2014 at 10:08 pm
Thank you for a great presentation.
I having a little trouble with question 1 in the test at the end of Chapter 6.
Please could you explain the 60,000 transfer disposal account. Is that to do with the sale of the plant at the end of its life. And why did you work out 9/12s of it when it is only to March?
October 8, 2014 at 4:36 pm
There are several ways that you can set out the workings (all obviously giving the same answer).
The workings in the course notes have calculated the depreciation on the brought forward 240,000 for the whole year. However 60,000 of them were not there for the whole year because they were sold – they were only there for 3 months.
So because depreciation had been calculated on 240,000 for the whole year, we need to take out 9 months depreciation on those that were sold (because they weren’t there for 9 months of the year).
We also need to add depreciation on those bought during the year (because they are not included in the 240,000) but for those it is only for 6 months because we only owned them for 6 months of the year.
September 8, 2014 at 3:37 pm
Thanks for the wonderful presentation. I was wondering how depreciation on land is handled since its lifetime is not limited. If a company purchases a piece of land, how will its expense show in the income statement?
September 8, 2014 at 6:22 pm
Land is one of the few things (and probably the only thing as far as the exam is concerned) that we do not depreciate, because it has an unlimited life.
Therefore no expense appears in the Statement of profit or loss. The land remains at cost in the Statement of financial position (unless it is revalued).
Buildings on the other hand must be depreciated. It will usually be over a long time (50 or 100 years), but they have to be depreciated because they do have a limited life.
May 22, 2014 at 3:46 pm
For F3, revaluation is always valuing higher (as with this example).
May 22, 2014 at 3:57 pm
Yes i now understand…so the revaluation amount (3,072 000) less the carrying amount (2,484,000) gives the profit of 588,000.
May 22, 2014 at 3:31 pm
Hi Mr Moffat,
If the revaluation is actually more will the entries be the opposite from what they are than when the bldg is revalued downwards?
May 4, 2014 at 11:14 am
I dont understand the 528,000, which is the difference in revaluation. It is suppose to be a cost or profit?
Why is 588,000 the unrealised profits?
April 10, 2014 at 1:29 pm
hi. I know that for example, if i have asset-cost 10000 ,accumulate depr.-2000 . this asset revalued and become 20000.. i knew that revaluation reserve would be 10000 less 2000=8000 and 20000-8000=12000 this amount.. sorry can you help me? In your example 5 i didn’t understand 528000-revalution reserve.
April 10, 2014 at 3:19 pm
You can do the double entries in more than one way.
However the revaluation reserve is 588,000.
The current carrying value is 3,600,000 – 1,080,000 – 36,000 (depot up to date of revaluation) = 2,484,000
It is revalued to 3,072,000.
So the profit on revaluation is 3,072,000 – 2,484,000 = 588,000 (as per the answer at the back of the course notes).
The double entries are to reduce the ‘cost’ to the revalued amount, and to remove the depreciation. In both case the double entries are to the revaluation account, leaving a balance of 588,000.
April 5, 2014 at 5:13 pm
Evening Tutor, where did the 50 years come from, make me understand, am lost
April 5, 2014 at 5:32 pm
The depreciation is 2% straight line. 2% a year is the same as saying straight line over 50 years.
(In the same way, 25% straight line is the same as straight line over 4 year; 10% straight line is the same as straight line over 10 year etc.(
January 7, 2015 at 11:43 am
Good Morning Sir
Re: Estimated useful remaining life of building.
I don’t understand how where the 100 divided by 2% came from and how you managed to work out 50 years. please could you show me the workings.
in Sept 8, 2014 at 6:22pm you mentioned EUL for building is usually over 50 or 100 years. How do I know whether to take 50 or 100 years ?
January 7, 2015 at 12:42 pm
I assume that you had the example in front of you in the Course Notes while watching the lecture.
The question says that the depreciation is 2% straight line. This means that it is 2% of the cost each year, which is exactly the same as straight line over 50 years (1/50 of the cost is the same as 2% of the cost).
There is no rule about how long to choose for the useful life – in the exam you will be told (as you were in this question).
April 5, 2014 at 10:35 am
What if there’s a mistake in useful life expectation. The asset supposed to be useful for 10 years but was already depreciated over 7 years. What should be done after 7 years of depreciation?
April 5, 2014 at 10:38 am
If the remaining life changes, then the depreciation should be recalculated for the remaining period.
If it has already been fully depreciated (as it seems from your example) then there is nothing that can be done and it is not depreciated any more.
February 14, 2014 at 12:08 pm
Suppose if the building have been using for a 5 years and its expected useful life is 50 years. so what would be the multiplier on that building.
February 14, 2014 at 3:25 pm
If it has been used for 5 year, then the remaining life would be 45 years and the depreciation charge would be the revalued amount divided by 45.
(The 2% charge was equivalent to dividing by 50)
(Please don’t ask questions about a Paper F3 lecture under a lecture introducing F7. The tutor will not know what you are asking about and will ignore it, and it simply confuses other people.)
November 5, 2013 at 11:13 pm
Why wasn’t the depreciation charged at 2% for the remaining life after the revaluation since Purpurs depreciates using a straight line method?
November 6, 2013 at 7:20 am
2% straight line means that the expected life was 50 years (so 1/50 or 2% of the cost each year). After the revaluation there are no longer 50 years left because some years have already passed.
October 10, 2013 at 1:00 pm
Also is there a lecture on Asset register carrying value?
October 10, 2013 at 4:56 pm
No – there is no lecture (and there will not be).
All the asset register is, is a book listing all the assets and (usually) the date of purchase, the cost, and the amount of depreciation charged.
It is not part of the double entry (and so not all companies bother having the book), but some companies find it useful in order to keep control over the assets that they own.
The carrying value is simply another word for the net book value.
If a company does have an asset register, then the total net book value (carrying value) in that book should equal the total net book value (carrying value) in our t-accounts. Obviously if the two are different then someone has made a mistake somewhere.
October 10, 2013 at 10:04 pm
ok. Thank you very much again also for your prompt reply.
October 10, 2013 at 12:59 pm
Dear Sir, please help on BPP revision question.
A company’s plant and machinery ledger account for the year ended 30 september 2002 was as follow
Plant & Machinery – Cost
1 Oct balance 381, 200 1 Jun Disposal account -cost of asset sold 36,000
1 Dec Cash addition 18,000 30 Sept Balance 363,200
The company’s policy is to charge depreciation at 20% per year on the straight line basis, with proportionate depreciation in years of purchase and disposal.
what is the depreciation charge for the year ended 30 september 2002?
October 10, 2013 at 5:16 pm
It is a bit difficult to follow the question because the formatting does not work on here.
However I will try my best 🙂
There are several ways of getting the correct answer – so if you find a different way more easy, then no problem (as long as you end up with the correct figure!)
What I do is this (I may be using the wrong figures because of the formatting):
We started the year on 1 October with a cost of 381200.
It stayed at that amount until 1 December when we bought more.
So…….on that amount we have 2 months (October, November) depreciation = 2/12 x 20% x 381200
We bought more on 1 December and so the cost went up to 399200 (381300 + 18000).
It stayed at this amount until 1 June when we sold some.
So…….on that amount we have 6 months ( Dec, Jan, Feb, Mar, Apr, May) depreciation = 6/12 x 20% x 399200
We sold some on 1 June and so the cost went down to 363200 (399200 – 36000).
It stayed at this amount until the end of the year (30 September).
So….on that amount we have 4 month (jun, jul, aug, sep) depreciation = 4/12 x 20% x 363200
If you calculate the 3 lots of depreciation and add them together, you have the total depreciation for the year.
(As I wrote at the beginning, other people do it different ways – that does not matter. It is whatever way you find the easiest – the total obviously must be the same whichever way you do it 🙂 )
October 10, 2013 at 10:02 pm
Thank you very much Sir. It is very clear and very well explained & It came with the right answer 76,840.
March 13, 2014 at 10:14 am
I followed this same procedure to answer test question 1 because i think they are similar questions but did not get the right answer, please where could i have gone wrong and can you please explain better?
March 13, 2014 at 11:20 am
The questions are indeed similar. I have no idea where you went wrong because you have not written your calculations – I would guess that you have either counted the months wrong or made an arithmetic mistake.
From 1 Jan to 31 Mar, the cost is 240,000 and the depn is 3/12 x 20% x 240,000.
From 1 Apr to 30 Jun, the cost is 180,000 and the depn is 3/12 x 20% x 180,000.
From 1 Jul to 31 Dec, the cost is 340,000 and the depn is 6/12 x 20% x 340,000.
If you calculate and add up, it comes to a total of 55,000
March 13, 2014 at 1:20 pm
Thank You. I counted the months wrong. Clear now.
September 29, 2013 at 3:00 am
hi can you help me figure out how Test 4 is calculated on the answer page because I don’t understand where 30,000 come from.
September 29, 2013 at 8:54 am
30,000 is the sale proceeds.
At 31 Dec 2003, the net book value was 22,000 and it was sold for 30,000. So the profit on sale was the difference of 8,000.
September 30, 2013 at 3:57 pm
Thank you johnmoffat. but it is still not clear for me on how we end up with a profit of 8,000 with double entry accounting. Please can you show me how the profit is worked out on double entry. Thank you.
September 30, 2013 at 4:58 pm
Although I will answer, I really do not know why you want to use double entry – the question does not ask for it (you are not asked for many debits and credits in the exam) and it is wasting time. It is much quicker the way in the answer at the back of the notes (speed is vital otherwise you will not be able to finish the 50 questions).
However…….when we first bought the machine, the depreciation will have been calculated at $9,000 per year ((70,000 – 7,000) / 7 ).
So for each of the first two years we will DR depreciation expense and CR accumulated depreciation. The expense goes to the Income Statement each year, but the accumulated depreciation account will have a credit balance of $18,000 at the end of the two years.
We then decide that the remaining life is in fact only 3 years, and so we recalculate the depreciation charge for the remaining years. The NBV is $52,000 (cost 70,000 – accum depreciation 18,000). We assume that the residual value is still expected to be $7,000 (because we are not told different) and to the depreciation charge from now on is $15,000 per year (52000 – 7000) / 3 years remaining life. (No debits or credit here – this bit is just calculation)
So each year from then on we will DR depn expense and CR accum depn each year as usual, but with 15,000 p.a.. However we only in fact keep it two more years. So at the end of two more years the balance on accum dep’n will be the 18,000 that was already there, plus two years at 15,000 per year, which gives a total accum depn of $48,000.
Now we sell it. Remove the cost: CR Machine DR disposal, with $70,000
Remove the accum depn: DR Accum Depn CR Disposal, with $48,000
Bring in the cash from sale: DR Cash CR Disposal, with $30,000
The balance left on the Disposal account is the profit or loss on sale. In this case it is a profit of $8,000
October 1, 2013 at 1:05 am
Thank you very much. It is now clear. I will take your advice on speed as well.
September 2, 2013 at 4:24 am
if i’m not wrong, what i’ve been thought in high school was that assets like buildings, don’t depreciate, their value only appreciates…. can anyone explain the logic as in why did we depreciate the building ?
September 2, 2013 at 7:29 am
All assets with a limited life MUST be depreciated – this is from IAS 16. This includes buildings, but does not include land. The land is not depreciated, but the buildings must be (obviously they are likely to have a long life and so the rate of depreciation is usually small compared with that for other assets).
September 2, 2013 at 7:30 am
Remember also that the purpose of depreciating is not to show a ‘true’ value, but to spread the cost over the expected life of the asset.
September 4, 2013 at 5:49 am
Thank you sir 😀 I got it now
August 26, 2013 at 9:59 am
Hello. I would like to know if any leesons are available on this site of DIPFR lessons. If not is there any courses here that covers it?
August 26, 2013 at 10:02 am
At the moment we do not have anything on this site specifically for the Diploma in International Financial Reporting.
However Paper P2 of the ACCA covers the international standards and so a lot of the lectures and course notes for P2 are relevant.
August 26, 2013 at 10:04 am
Thnak you so much.
July 13, 2013 at 3:02 pm
is difficult to understand …why we debit Revaluation reserve and credit PPE, if it is an upward revaluation
July 14, 2013 at 10:42 am
Before the revaluation, the buildings stood at:
Immediately after the revaluation we want the balances to be:
Cost (revalued amount) 3072000
To achieve this we need to credit the ‘cost’ account with the difference of 528,000.
We also need to debit the accum. dep’n account with 1080000
In both cases the double entry is the revaluation account which means the balance there will be 552,000 (which is the overall profit on revaluation – the change in the NBV of 3072000 – 2520000 = 552,000)
July 15, 2013 at 5:41 pm
yea, i see… now everything is clear….thanks a lot for such detailed explanation!!
July 11, 2013 at 8:13 pm
After revaluation, we have to depreciate the building based on the new value. However, the depreciation policy stays the same, meaning, to charge 2% straight line. Why don’t you use the 2% but rather calculated the remaining estimated useful life of the building? Will it be wrong if i calculate the depreciation based on the 2%? In that case i’ll have the depreciation as $30720 for the remaining 6 months. Can you please clear this bit for me? Thank you
July 11, 2013 at 8:45 pm
What you say would be wrong.
2% straight line is another way of saying that we depreciate over 50 years.
When we revalue we should continue to depreciate over the remaining useful life (which is then less than 50 years).
July 12, 2013 at 8:05 am
Thank you! 🙂 Understood it now! 🙂
June 11, 2013 at 7:50 pm
Please, can you clarify, why we count the expected useful life in secound half of the year, if it says that depreciation policy is to charge 2% straight line? Shouldn’t we just multiply (3 072 000 *2% \ 2) to get secound year’s depreciation expense? Thanks
June 12, 2013 at 7:52 am
2% straight line is another way of saying that we depreciate over 50 years.
When we revalue we should continue to depreciate over the remaining useful life (which is then less than 50 years).
July 11, 2013 at 11:32 pm
So if in the exam we are asked to depreciate on a 2% straight line basis, it means we depreciate over 50 years?
July 12, 2013 at 6:22 am
Yes. 2% straight line is another way of saying straight line over 50 years (and similarly, 10% straight line is another way of saying straight line over 10 years).
July 13, 2013 at 12:33 am
Oh ok Thank you! I’ll keep that in mind! 😀
May 27, 2013 at 5:33 am
is there chapter 7? what is chapter 7 all about? where i can find it?
admin please response.
You can find chapter 7 in the Course Notes.
May 10, 2013 at 7:33 pm
Hi. Im confused! Shouldn’t we be multiplying 2% by the accumulated depreciation i.e. $1 080 000? why do we multiply it by the cost?
May 10, 2013 at 8:28 pm
Ammm… I think i got it..!!
Mohammad Ibrahim says
April 15, 2013 at 9:34 am
how does he calculate the 50 years ?
April 15, 2013 at 10:39 am
It is being depreciation at 2% straight line.
This means that the cost is being spread over 50 years. (50 x 2% = 100%)
April 15, 2013 at 9:28 am
how does he get a profit when the asset has been revalued at a lesser amount than the original cost?
April 15, 2013 at 10:37 am
The profit is the difference between the revalued amount and the net book value. The net book value is less than the revaluation.
February 21, 2013 at 7:56 pm
can some one please help solve question 1 on the test section, thanks
February 21, 2013 at 7:54 pm
Please can someone solve question no 4 on the test section.Thanks.
February 18, 2013 at 7:31 pm
please clarify if the balance on ACCUMULATED DEPR. A/C is = 44 522 $ ?
so on the balance sheet we put:
a) non-current assets: 3 027 478 $
building a/c 3 072 000 $
accum. depr. a/c (44 522) $
is it correct?
Thank you so much for your help.
December 30, 2012 at 6:16 pm
Would the accounting treatment be same in case of initial revalued amount more than the current worth (here its going down)? Would Revaluation A/c still be debited?
April 18, 2013 at 10:28 am
No, if revalued amount were greater than original cost in NCA a/c, NCA a/c would have to be debited with the difference between the two and the Revaluation a/c credited thereafter. You have to decide on how you will adjust the cost account, whether by a debit or a credit, for it to reflect the revalued amount in the end. And by the way, revalued amount is not greater than current worth. CV= 3.6m – 1.116m= 2.484m < 3.072m (revalued amt)
November 29, 2012 at 4:00 pm
Can anybody explain to me how the (528,000)was got
September 8, 2012 at 11:48 am
Thank you very much Opentuition, however i’ll be grateful if you could plz specify whether we should add up an Accumulated Profit account? If i read page “the excess of the new charge over the old charge should be transferred from the revaluation a/c to accumulated profits. So, here we have an excess of $ 8522 ($80 522 – $ 72 000). Should this amount be reflected in the Accumulated Profit account?
September 8, 2012 at 12:03 pm
@nzeadall, Yes, within the Statement of Changes in Equity there will be a transfer reducing the Revaluation Reserve Account and increasing the Retained Earnings ( also called Accumulated Profits )
September 9, 2012 at 8:44 am
@MikeLittle, thank you v much, just one last question if you don;t mind, so in this example, I’ll credit Revaluation Reserve A/C with $588 000 and Debit it by $ 8522. Then, we credit Acc. Profit A/C by $ 8522. Also, what is the purpose of this transfer since we have already accounted for the profit ($ 588000 made in the Revaluation a/c). I mean this is an unrealised profit in any case, why do we need to transfer the excess to Acc. profit a/c? Once again, Thank you so much for your help
November 9, 2011 at 10:47 pm
can anybody explain to me q1, ch 6 (F3) please?
July 18, 2011 at 11:42 pm
why it was a profit because the cost of building was 3600000 and now its after revaluation is 3072000 it has actually gone down
August 22, 2011 at 9:43 pm
At the time of revaluation the accumulated depreciation was 1,116,000.
as 3,072,000 is higher than 2,484,000 it’s a profit.
You can also see that the depreciation amount has gone up from 72k a year to 89k a year showing that the building is worth more.
I can’t imagine it’s the sale price but the depreciated amount after 15.5 years. If you calculate that back (89kx15.5years + 3,072,000) then you’ll get something like 4.45m. A tidy profit.
July 9, 2011 at 7:41 pm
@ Poutybud its 52000
July 9, 2011 at 7:26 pm
When calculating dep for last 6 months i m confused about life 50 years then 34.5 years…. howz that plz explain
August 22, 2011 at 9:49 pm
at the time of revaluation the accumulated depreciation is 1,116,000.
We know that the annual amount is 72,000 (2% of 3,600,000). Divide the accumulated dep’n buy the annual figure then you get 15.5 years; i.e. if you charge 72k a year, then it would take 15.5 years to get the balance up to 1,116,000.
50 – 15.5 = 34.5 years as there is no change in the remaining useful life of the building.
89k happens to be 2% of the original cost if you calculate the revalued cost back over the previous 15.5 years (ca 4.45M)
February 14, 2013 at 4:35 am
Hi. I’m confused as to why the useful life needed to be calculated after the asset was revaluated and not before revaluation. To get the figure of 36000 we didn’t need to calculate the number of years? Thanks!
February 14, 2013 at 1:11 pm
We need the remaining useful life in order to calculate the new depreciation figure.
We didn’t need it to calculate the 36000 because we were told the depreciation had been at the rate of 2% of cost (which was the same as saying that the original useful life was 50 years, because 50 years at 2% is 100%!)
March 26, 2011 at 2:30 am
Question No 4 on the test section, page 46, which value of the machine is to be used to calculate the new depreciation charge after the useful life was revised to 3 years ? $70,000 or $52,000 ?
December 12, 2010 at 9:56 am
good job very nice
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