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  1. 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 馃檪

    • 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.

    • 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).

    • 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.)

  5. 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 馃檪

    • 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).

      • 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 ?

      • 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.

  6. Hi, Mr. Moffat. i don鈥檛 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.

    • 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.

  7. Hello Sir,

    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?

    • 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.

  8. Hello John,

    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?

    • 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.

  12. 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.

    • 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.

    • 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.(

      • 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 ?

        Thank you.

      • 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).

  14. 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?

    • 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.

    • 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.)

    • 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.

  18. 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
    2001 2002
    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
    399,200 399,200
    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?

    • It is a bit difficult to follow the question because the formatting does not work on here.
      However I will try my best 馃檪

      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 馃檪 )

      • Thank you very much Sir. It is very clear and very well explained & It came with the right answer 76,840.

      • Hello,

        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?

      • 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

      • 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.

      • 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

  20. 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 ?

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