Exam #2A

Question 1

A)
i) Depreciation
ii) Amortisation
iii) Depletion

B)
i) Residual value: the estimated value of an asset at the end of its userful life, realised by selling or scrapping the asset.
ii) Depreciable amount: amount of value subject to depreciation - original cost minus residual value
iii) Fair value: value of an asset if sold under normal cirumstance (not liquidation, market operating normally, sellers and buyers not under duress)
iv) Capital expenditure vs revenue expenditure: expenditure on an asset that will have a benefit extending beyone the accounting period (12 months usually) is capital expenditure, and the debit is to the asset account, so the expenditure is depreciated. Revenue expenditure expenditure with short term benefit, like normal maintenance or repair.
v) Goodwill: the difference between the price paid for a company and the net market value of its assets (assets - liabilities). Typically amortised over 40 years.

C) Cost: 24/72 * 60000 = 20000

D)
i) Cost: 50000*0.98 + 2600 + 3900 = 55500
ERROR: need to include sales tax also

ii) Depreciable amount: 55500 - 10000 = 45500
Useful life is 5 years, is $9100 per year.
For half a year, depreciation is $4550
iii)
lUse Double Declining Balance method (ignore residual value)
First half a year: 55500 * .4 * .5 = 11100 (Jan 2 1994 - June 30 1994)
Remaining: 44400
Depreciation for July 1 1994 - June 30 1995: 44400 * .4 = $17760
 

 Exam #3A

Question 1

(A)

Cost: 120000 + 10000 = 130000
Residual value: $20000
Useful life: 4 years, 20000 hours

(i) Straight Line
110000 / 4 = 27500 per year
Year Book value at year start Depreciation end of this year Book value at year end
19x0 130000 27500 102500
19x1 102500 27500 75000
19x2 75000 27500 47500
19x3 47500 27500 20000
(ii) Units of production
Value per hour = 110000 / 20000 = 5.5
 
Year Book value at year start Depreciation end of this year Book value at year end
19x0 130000 6000 * 5.5 = 33000 97000
19x1 97000 5000 * 5.5 = 27500 69500
19x2 69500 4000 * 5.5 = 22000  47500
19x3 47500 27500 20000
 
(iii) Sum of years
4+3+2+1 = 10
Year Book value at year start Depreciation end of this year Book value at year end
19x0 130000 0.4 * 110000 = 44000 86000
19x1 86000 0.3 * 110000 = 33000 53000
19x2 53000 0.2 * 110000 = 22000 31000
19x3 31000 0.1 * 110000 = 11000 20000
(iv) double declining balance: Percentage = 1/4 * 2 = 0.5.
 
Year Book value at year start Depreciation end of this year Book value at year end
19x0 130000 130000 * .5 = 65000 65000
19x1 65000 32500 32500
19x2 32500 12500 (reached residual value) 20000
19x3 20000 0 20000
 
 

 (B)

Usually in accounting, an asset is something that produces income or contributes towards producing income. If the government raises revenue or expects to normally raise revenue with the objective of making profit from something like a monument, then it clearly should be an asset.
However, an building or historical treasure that will not produce future economic benefit is not an asset in the accounting sense of the word, as economic benefit is usually taken to mean "contribute towards the generation of profit". Governments, representing the community, may have a broader definition of economic benefit, such as cultural benefits of the Sydney Opera House, but these types of economic benefits are hard to measure and therefore outside of the scope of traditional accounting. These assets are never likely to be sold, so it seems difficult to value them objectively for balance sheet purposes.
Assets are only depreciation if their usefulness declines over time. While a monument for which admission is charged may be an asset, it would probably not be subject to depreciation.

(C)
By 31 March 19X3, book value = 6000 - 1500 - 1500 * 9/12 = 3375. Accumulated depreciation 2625
31 March 19X3    Accum dpcn, computer            2625
                        Computer                       2625
31 March 19X3    Cash                            3500
                       Computer                        3375
                       Gain on disposal of computer     125
(D)
(i) Useful life: the period, measured in time or units of production, for which the asset is expected to provide economic benefit to the firm.
(ii) amortisation: the term used to depreciate intangible assets, such as goodwill (to spread the expense of the intangible asset over several accouting periods, for matching purposes). The credit may be made against the asset account, not a contra account, unlike deprecation of tangible assets.
(iii) intangible assets: assets that do not physically exist. Examples include copyright, patents and goodwill. These are assets because they are expected to product economic benefit for the firm.
(iv) capital expenditure vs revenue expenditure
Already answered in a previous question.

Exam #4A
Question 4

(A) Truck: initial book value: 13000. Residual value 1000. Lifetime: 4 years, 120 000.

(i) Straight Line 12000 / 4 = 3000 per year
Year Book value at year start Depreciation expense Book value at year end
19x1 13000 3000 10000
19x2 10000 3000 7000
19x3 7000 3000 4000
19x4 4000 3000 1000
(ii) Units of production
Value per hour = 12000 / 120000 = 0.1 per KM
I think we are always supposed to make the final expense amount get us to the residual value, even if it is more or less than the value indicated by the units of production approach. This is how one of the worked examples in the notes treats this (p 65, module 3)
 
Year Book value at year start Depreciation end of this year Book value at year end
19x1 13000 3400 9600
19x2 9600 3800 5800
19x3 5800 2800 3000
19x4 3000 2000 1000
 
(iii) Sum of years
4+3+2+1 = 10
Year Book value at year start Depreciation end of this year Book value at year end
19x1 13000 0.4 * 12000 = 4800 8200
19x2 8200 3600 4600
19x3 4600 2400 2200
19x4 2200 1200 1000
(iv) double declining balance: Percentage = 1/4 * 2 = 0.5.
 
Year Book value at year start Depreciation end of this year Book value at year end
19x1 13000 13000 * .5 = 6500 6500
19x2 6500 3250 3250
19x3 3250 1625 1625
19x4 1625 625 1000
 
(B) sum = n(n+1)/2 = 55 for ten years
Depreciated 7 full years, and half of the eight year.
49/55 of the value is depreciated, plus 0.5 * 3/55
49/55 * 7700 = 6860
0.5 * 3/55 * 7700 = 210
Total depreciated = $7070
Remaining book value at the time of sale is 7700 - 7070 = $630

(i)
30 June 19X8    Depreciation Expense, Fixtures            210
                    Accumulated Depreciation, Fixtures        210

ii)
30 June 19X8    Accumulated Depreciation, Fixtures    7070
                    Fixtures                                7070
                Cash                                  1600
                    Fixtures                                 630
                    Gain on sale of fixtures                 970

(C) Depreciation is for the matching principle. Purchases of assets are an expense for the business that should be taken into consideration when calculating income. If we didn't do this, profiit would be too high, since real money was required to purchase the assets producing the income, just as real money was used to purchase raw materials or supplies. However, it would be extreme to take the entire cost of the asset as an expense in just one accounting period, because the asset contributes towards income earned over many periods. Thus, depreciation is spreading the expense of an asset over the liftime of the asset.
Depreciation is not about building up funds to replace assets. It is primarily designed to make the profit figure reported on the income statement more useful: without taking the cost of assets into consideration, two firms generating the same revenue, one with no 100 dollar five year declining assets and the other with a million dollar five year declining asset, would report the same profit, which means the accounting model would be too divorced from reality to be very useful (clearly one of these firms is much more productive than the other per dollar of investment).