Free ACCA & CIMA online courses from OpenTuition

Free Notes, Lectures, Tests and Forums for ACCA and CIMA exams

20% off ACCA & CIMA Books

OpenTuition recommends the new interactive BPP books for December 2024 exams.
Get your discount code >>

Reader Interactions

Comments

  2. Hello,
    What’s the difference between accumulated depreciation account and depreciation expense account?how do you determine or decide which side to credit or debit, what’s the difference, it appears to be used interchangeably.

    • I do not think you can have watched the lecture closely enough – I do suggest that you watch it again (and I assume you have watched all the earlier lectures – they are a complete course and so should be watched in order).

      The depreciation expense account is where we record the cost each year of depreciating, which appears in the Statement of profit or loss.

      The accumulated depreciation account is where we record the total depreciation to be subtracted from the cost of the asset in the Statement of financial position.

      We certainly do not use them interchangeably, which is why I suggest that you watch the lecture again (obviously with the free lecture notes in front of you).

  3. sir can you help me with this num
    the closing inventory at a cost of a company at 31 january 20X3 amounted to $284700
    the following items were included at cost in the total.

    1. 400 coats,which had cost $80 each normally sold for $150 each.owing to a defect in manufacture, they were all sold after the reporting date at 50% of their normal price.selling expenses amounted to 5% of the proceeds.

    2. 800 skirts which had cost $20 each.these too were found defective.remedial working febuary 2013 cost $5 per skirt,and selling expenses for the batch totalled $800.they were sold for $28 each.

    what should the value be according to the IAS2 inventories after considering the above items?

    A $281200
    B $282800
    C $329200
    D none of these

    thanking you in advance.
    please explain to me the part 5% of the proceeds i can’t understand it.

  5. Sir,

    Got a quick question! In the lecture I’ve understood everything. Just one simple thing though, you said that when you have a loss on sale it goes to the expenses in the Income Statement but what if we have a profit where does it go? Does it go under Gross Profit?

    • No – it goes under expenses as a negative expense.

      The reason is that any profit or loss on sale is not truly a profit or a loss. It occurs because the deprecation expense in the past turned out to be too high or too low. If we have known from the beginning exactly what it would be sold for, then the depreciation expense each year would have been different and there would be no profit or loss on sale.
      Obviously in real life we don’t know in advance what the sale price will be, and so the profit or loss on sale is really just a correction of the deprecation expense over the years.

  6. Mr Moffat, ive read somewhere that IFRSs require businesses to charge depreciation under exact rules, namely 1st whole year of 50% of reducing balance method (to help new businesses in the 1st year to pay out the corporation tax) and other years are to be charged under direct method according to estimated useful life. am i right?
    Also, one more question arose curiosity in me: if EUL is estimated too low then running expenses will be higher. So the profits could be manipulated and taxes reduced. so, 2 questions 1)who estimates the depreciation in-policy and is it controllable by tax collector bodies? and 2) what is more beneficial for ltd. Co.,ultimately, for example, having undervalued Assets or undervalued profits (if not only depreciation concerned, in general).
    Thank you.

    • First, please ask questions like this in the Ask the Tutor Forum – not as a comment on a lecture.

      Second, you have read wrong! IFRS’s do not require anything of the sort. (What is required is what is written in the Lecture Notes and what I say in the lecture). Tax authorities have their own rules (which are different in different countries) but they cannot tell any business how they should charge depreciation in their accounts. (The tax will recalculate the profits for tax purposes, but we do not change our accounts – in our accounts we do what we think is most sensible). You will learn about this in Paper F6, but tax is irrelevant for Paper F3. (And I do explain all of the above in the lecture).

      This answers your second question – the way we charge depreciation is whatever we think is most sensible, and will not affect the tax payable in the slightest. (The tax authorities do not charge tax on the profit we report for all sorts of reasons – not just the depreciation policy. They have forms that they use to adjust our profit simply in order to calculate the tax.)

      I would also point out that it is not a question of over or under valuing assets in our financial statements – the value show in the Statement of financial position is never intended to show a ‘true’ value. We depreciate in order to spread the cost of the asset over its expected life.

      I do suggest that you watch all of the lectures on depreciation again, because I explain all of the above in the lectures.

      • Thank you! And, by over or undervaluing the assets i meant what are the benefits of charging more or less depreciation, sir? Because it effects both PPI (SOFP) and Running costs (SPL) and…i need more explanation:)what’s the reason…

      • There are no benefits – we are not doing it to make a benefit (that is not the purpose of accounting – we are trying to show a fair view of what is happening).

        Over the life of the asset, the total depreciation will be the same – whichever method we use.

  8. Kindly help with this question

    On 1 October 2013 a machine was bought for $25,000. The depreciation policy for this class of
    asset is 20% WDV (written down value). What are the amounts for depreciation expense in
    respect of this machine for the year ended 31 December 2013, 31 December 2014 & 31 December 2015 ?

    A- $5,000 for each year
    B- 2013: $1,250, 2014: $4,750, 2015: $4,300
    C- 2013: $5,000, 2014: $4,000, 2015: $3,200
    D- 2013: $1,250, 2014: $5,000, 2015: $4,000

    • The ‘trick’ here is that the question does not say whether to time apportion the depreciation, or to have a full years charge in the year of purchase.

      If we were to time apportion, then:

      In the first year, the depreciation will be 20% x 25000 apportioned for 3 months (Oct to Dec), so x 3/12. This gives a figure of $1250.

      In the second year it will be a full 20% of the carrying value, so 20% x (25000 – 1250) = 4750.

      You should be able now to calculate the third year yourself. However, this does not come to one of the four choices.

      So…..it must be a full years charge in the year of purchase.
      This means that in the first year it is 20% x 25000 = 5,000.
      In the second year it will be 20% x (25000 – 5000) = 4000
      You can now calculate the third year yourself and you will find that it is one of the four choices 馃檪

      • Hi John
        Thanks for the answer to the above question.
        What approach would you kindly suggest for one to use, ie between “timing” and whole year’s deprn when not specified in an exam question. I’m asking since one would wanna avoid wasting time trying the one “method” only for the other one to be correct, as my colleague and I just discovered from your answer. Regards

      • I don’t know where Mahrukh found the question, but in the real exam you always time apportion the depreciation unless the questions says to do different.

  10. Good Afternoon, why do we balance the Accumulated Depreciation a/c from the 2nd year? (That’s @ the 8mins 27secs point) How come we don’t balance for.the 1st yr (1400)? Thanks!!

  13. very good explanation, but if we create a separate account for each car, then it will increase the number of accounts in the balance sheet and if one account for all car and the same for accumulated depreciation, then we will not have the the price of each car for each year.

    • @M. Osman Kamran, But we don’t need ‘the price of each car for each year’.

      We only have one car account. Many companies keep an asset register with details of each individual asset, but this is nothing to do with the double entry.

Leave a Reply