Depreciation Charge for the Year - Essay Example

?Financial Accounting: Resit Assignment (a) (i) Depreciation Charge for the year Buildings: According to IAS 16, the revalued amount of the building will be charged over its remaining life time. As such depreciation for the buildings would be ?3Mn over 50 years, amounting to ?60,000. Plant and Machinery Item 1: As per IAS 16, depreciation charge for the current year would be cost divided by the useful life. As such, the charge would amount to ?800,000/5=?160,000. Plant and Machinery Item 2: Assuming that the policy of depreciating plant and machinery for 5 years applies to all items of plant and machinery, the depreciation charge for the year in relation to this item would be ?180,000/5=?36,000. Motor Vehicles: The depreciation charge for the new vehicle purchased would be ?25,000 x 40% = ?10,000. The remainder of the vehicles that need to be depreciated for the current year cost ?980,000 less the car disposed of ?20,000 = ?960,000. From the total accumulated depreciation figure of ?500,000, ?8,000 is attributable to the vehicle disposed of. As such, accumulated depreciation attributable to the vehicles to be depreciated for the current year amounts to ?492,000, giving a net book value of ?468,000. As such, the depreciation charge for the year for these vehicles is 40% of ?468,000 amounting to ?187,200. Total depreciation charge for the year is the sum of the emboldened figures = ?453,200. (a) (ii) Profit / Loss of Disposal The motor vehicle disposed of cost ?20,000 and the accumulated depreciation in respect of such vehicle was ?8,000 (?20,000x40%). As such the balance on the vehicle was ?12,000. The company was only able to obtain ?8,000 from the sale and as such made a loss of ?4,000 (12-8). (a)(iii) Impairment Loss for the year As at the date of the impairment review, the item 2 of plant and machinery had a carrying value of ?180,000 less the ?36,000 depreciation charge = ?144,000. The recoverable amount has been ascertained as ?50,000. As per IAS 36, the asset must be written down to the lower of carrying value or recoverable amount. As such, there is an impairment loss of ?94,000 (144-50). (a)(iv) Release of the grant for the year In accordance with IAS 20, the grant has been treated as deferred income and released over the lifetime of the asset. As such, the release for the year would be ?400,000/5=?80,000. (b) Notes to the Balance Sheet as at 30th September 2010: Property Plant and Equipment Land & Buildings Plant & Machinery Motor Vehicles Total COST as at 1 Oct 2009 3,000,000 980,000 980,000 4,960,000 Additions 25,000 25,000 Disposals (20,000) (20,000) Revaluations 2,000,000 2,000,000 as at 30 Sept 2010 5,000,000 980,000 985,000 6,965,000 ACCUMULATED DEPRECIATION as at 1 Oct 2009 500,000 436,000 500,000 1,436,000 Depreciation on Disposals (8,000) (8,000) Depreciation written off for revaluation (500,000) (500,000) depreciation charge for the year 60,000 196,000 197,200 453,200 as at 30 Sept 2010 60,000 632,000 689,200 1,381,200 Impairment of assets (94,000) NET BOOK VALUE as at 30 Sept 2010 4,940,000 254,000 295,800 5,583,800 (c) MEMO To: Peter Williams, Marketing Director From: John Doe, Financial Accountant Date: 15th April 2011 Subject: Queries on the Financial Statements for the year ended 30.9.10 I am writing to you in response to the various queries you made known to me in relation to the aforesaid Financial Statements of Green PLC. Revaluation Surplus The land and buildings were revalued by ?2 Million in the aforesaid Financial Statements so that the resulting value of the asset at the end of the said period was ?5 Million. This is permitted under IAS 16 Property Plant and Equipment, which provides that assets can be valued using the Revaluation Model, under which the asset will be recognised at its fair value as opposed to the cost of the asset. The accounting entry in the case of an upward revaluation is to increase the asset value to the revalued amount and to create or increase the Revaluation Reserve by the amount revalued (i.e. the difference between the carrying amount of the asset and the fair value as at the revaluation date). As such, you can see that the corresponding entry to the increase in the asset is not to the profit and loss account but to the Revaluation Reserve, and as such will not be shown in the Income Statement. This corresponding entry is recognised in the Statement of Changes in Equity (SCE) (increase in the Revaluation Reserve) and in the Statement of Other Comprehensive Income (SOCI). It does not come into the main portion of the Income Statement but the stakeholders will clearly see the increase via the SOCI and SCE. The rational behind this is that this revaluation is as yet an unrealised gain. In such time as the asset is sold and the gain realised, this amount will be transferred into the income statement of the company via the entry relating to the disposal of the relevant asset. IAS 16 only allows the upward revaluations to be shown in the Income Statement in instances where such revaluation reverses a previous devaluation previously recognised as a loss in the Income Statement. Impairment Depreciation is a charge that recognised the cost of using the asset. I.e. as an asset is used, its value will decrease. It is a revenue expense. Impairment, on the other hand, refers to the capital value of the asset decreasing. Its ability to generate future cash flows or its value in use has decreased…i.e. the value of the asset has decreased by reason of something other than the use of the asset. IAS 36 Impairment of Assets provides that in such a case the carrying value of the asset must be written down immediately to its recoverable value. In the case of the plant that was impaired, there may have been some sign that it was now less valued…for example by reason of some damage to it or the asset not performing as expected. The recoverable value of the asset is determined by looking at the fair value of the asset less selling costs and the value in use (present value of future cash flows). The higher of the two is the recoverable value and it will be up to the accounting team along with the management to substantiate the above values in determining the impairment. Government Grant One of the underlying principles of accounting and one recognised in the IASB Framework is that of matching. I.e the income must be matched with the corresponding expenses. In the case of an asset, the expenses relating to this is the wearing away of the asset. In accounting terms this is taken into the accounts by way of a depreciation charge. The government grant is income in the sense that it helps to ‘pay’ for this depreciation charge. As such, and as allowed by IAS 20 Accounting for Government Grants and Disclosure of Government Assistance, the grant value is treated as deferred income (liability) and this liability is reduced each by taking a portion into the Income Statement to set off against the depreciation charge. As such, as the Company is ‘paying’ of the use of the asset, the government is similarly compensating for such use. I.e. the expenses are being matched to the income. A capital grant can never be taken into the income statement in a lump sum at the start, just like the capital expenditure on an asset is never expensed in the Income Statement in the initial year. It must be recognised over time, to match the use of the asset by the company. I trust the above answers your queries. Please do let me know if you need further clarifications. Read More