CHAPTER 10

Chapter 10
Property, plant and equipment
Chapter 10
Learning Objectives:
After you have studied this chapter, you should be able to:
- explain the purpose of charging depreciation on property, plant and
equipment;
- explain the concept of estimated useful lives, estimated residual values and
depreciable amount;
- calculate depreciation using both the straight line and reducing balance
methods, including assets bought or sold part way through the financial year;
- calculate the gain or loss on the disposal of PPE, including part-exchange asset
(trade-in); and
- make the necessary entries to write off PPE that has no further use.
1 | PAGE
FOUNDATION IN BUSINESS- INTRODUCTION TO FINANCIAL ACCOUNTING 1
PREPARED BY: AGNES WONG
Chapter 10
1. What a property, plant and equipment is?

Property, plant and equipment (“PPE”) is tangible non-current asset that have a physical existence,
so they be seen and touched.
You have already learnt that non-current assets are long-life assets that are expected to be used in the
business for several years and have not been bought for the purposes of resale.
Examples:
Land and building
Plant & Machinery
Motor vehicle
Renovation
Office Equipment
Furniture & fittings
1.1 What exactly is included in capital expenditure?

Initial cost - an item of PPE should initially be recorded at cost. Cost includes all costs necessary
to bring the asset to working condition for its intended use. This would include:
• its purchase price, net of any discounts

• delivery and handling
• taxes (such as import duty of stamp duty) that need to be paid to acquire the asset and that
cannot be reclaimed by the business
• any costs of having the asset assembled, installed or tested before it is used for the first time
• professional fee essential to the acquisition of the asset, such as legal cost incurred when
buying land and building.
Subsequent expenditure incurred on a PPE should be capitalised if the expenditure improves its
working condition of the asset beyond its previous performance.
2. The need to account for depreciation

You learnt about the matching concept of accounting, which mean that the income earned in the
year must be matched against the expenses incurred in earning that income. The matching concept
is fundamental to the need to account for depreciation.
Example:
Suppose a business buys a machine for $1,200 on 1 January 2021 and expects to use the machine for
3 years, after which it will have to be scrapped. In this example, the machine is expected to help the
business to generate income for 3 years, so under the matching concept, the cost of the machine
should be matched against the income of those 3 years.
The simplest approach would be to assume that the machine will be equally productive in each of its
3 years of use, so an expense of $400 would appear in the statement of profit or loss for 2021, another
$400 in 2022 and $400 again in 2023. In this way, the total original cost of $1,200 will be recognised
as an expense in the statement of profit or loss over a period of 3 years.
2 | PAGE
Chapter 10
Key terms in the accounting of property, plant and equipment
• Depreciation: systematic allocation of the depreciable amount (cost less residual value) of an asset
over its estimated useful life.
• Carrying amount/Net book value = Cost - Accumulated Depreciation
• Useful life: The estimated times/periods that a company can enjoy from the used of fixed assets.
• Residual value/Scrap value: The estimated amount that the asset can be sold for at the end of its
useful life.
• Addition: Purchase of fixed assets
• Disposal: Sale of fixed assets
• Write off: Removed fixed assets as it has no further use.
• Sales proceeds: The selling price of the disposed assets.
• Part-exchange/ Trade in: Use the selling price of the old assets to partially offset against the cost of
the new assets.
• Pro-rata: Based on the number of months that an asset is used to calculate depreciation.
3 | PAGE
Chapter 10
2.1. The two main methods of calculating depreciation
Straight-line method
Depreciation = (Cost - residual value) x depreciation rate OR
Depreciation = (Cost - residual value) / useful life
Example:
Useful life 4 years = 1/4 x 100% = 25%
Classroom Exercise 10.1

Suppose a business buys a van for $22,000 and expects to use it for 4 years, after which it will be sold for
$2,000. Using the straight-line method, the depreciation expense each year will be:
Cost – Residual value = $22,000 - $2,000
Useful life 4 years
= $5,000
In the statement of financial position as at the end of each of the four years, the asset will be shown at its
carrying amount:
Extract from the statement of financial position:
At end of At end of At end of At end of

year 1 year 2 year 3 year 4
Cost 22,000 22,000 22,000 22,000

Less: Accumulated depreciation (5,000) (10,000) (15,000) (20,000)
Carrying amount 17,000 12,000 7,000 2,000
Depreciation = $5,000/ year

Accounting entry for depreciation
Dr Depreciation expense (Expense - SOPL)
Cr Accumulated depreciation (Contra-asset - SOFP) Residual value
The entry to accumulated depreciation is made because the cumulative total of the asset’s cost that has been
‘used up’ so far must be offset against the original cost of that asset in the statement of financial position.
With each year that passes, the cumulative amount of depreciation charged on an asset builds up, meaning
that the carrying amount of the asset in the statement of financial position decreases each year.
4 | PAGE
Chapter 10
Reducing balance method

Depreciation = (Cost - Accumulated depreciation) x depreciation rate OR
Depreciation = (Cost - Accumulated depreciation) / useful life

Suppose a machine is bought for $10,000 and depreciation is to be charged at 20% per year on a reducing
balance basis:
$
Original cost 10,000
Depreciation expense in the 1st year at 20% (10,000 – 0) x 20% (2,000)
Carrying amount at the end of the 1st year 8,000
Depreciation expense in the 2nd year ($10,000 - $2,000) x 20% (1,600)
Carrying amount at the end of the 2nd year 6,400
Depreciation expense in the 3rd year ($10,000 - $3,600) x 20% (1,280)
Carrying amount at the end of the 3rd year 5,120
The asset will continue to be depreciated in the manner shown above until it is
scrapped or sold.
From the example above, the annual depreciation expense is higher in the early years ($2,000 in the first year)
than the later year ($1,280 in the 3rd year). In other words, the reducing balance method essentially assumes
that the benefits obtained from using the asset are greater in the early years and decline over time.
5 | PAGE
Chapter 10

a) A business bought a motor vehicle for $50,000 which it believes will last for 5 years, after which it
will be sold for 10% of its costs. Using the straight-line method of depreciation, what will be the
machine’s carrying amount (or ‘net book value’) after 4 years of use?
b) A business bought a motor vehicle for $50,000 and depreciates it at 20% per year using the reducing
balance method, after which it will be sold for 10% of its cost. What is the depreciation expense in the
third year of use?
2.2 Depreciation on assets bought or sold part way through a year

So far, we have only calculated the depreciation expense for whole year of use.
Most assets are likely to be bought at some point part way through the financial year. They will therefore be
used for less than 12 months in the year in which they are bought. In this situation, businesses can choose
one of the two approaches:
1. Calculate depreciation ‘pro rata’ basis based on the no of months that the asset was in use during
the financial year; or
For example, if a machine is bought on 1 July 2022, then the depreciation expense for the financial
year ended 31 December 2022 will be 6/12 of the full annual charge.
Depreciation = (Cost - residual value) x depreciation rate x no of months of ownership/12 months
OR
Depreciation = (Cost - residual value) / useful life x no of months of ownership/12 months

Depreciation =
(Cost - Accu. depreciation) x depreciation rate x no of months of ownership/12 months
OR
Depreciation =
(Cost – Accu. depreciation)/useful life x no of months of ownership/12 months
2. Charge a full year’s depreciation in the year of purchase but none in the year of disposal. This policy
can also be described as simply calculating a full year of depreciation on all assets in use as at the
end of the year.
Exam questions will tell you which of the two methods to use.
6 | PAGE
Chapter 10

A business bought Machine A for $24,000 on 1 November 2021 and Machine B for $19,200 on 1 February
2022. The business’s policy is to charge depreciation on machinery at a rate of 25% straight line per year.
What will be the total depreciation expense for the financial year ended 31 May 2022 if it:
a) the business records a full year’s charge in the year of acquisition and none in the year of disposal;
b) the business charges depreciation on asset purchased and sold during the year on a pro rata basis
according to the months of ownership.
Solutions:
a) Full year charge basis:
Depreciation for the financial year ended 31 May 2022:
- Machine A = ($24,000 - $0) x 25% = $6,000
- Machine B = ($19,200 - $0) x 25% = $4,800
Total = $10,800
b) Pro-rata basis:
Depreciation for the financial year ended 31 May 2022:
- Machine A = ($24,000 - $0) x 25% x 7/12 = $3,500
- Machine B = ($19,200 - $0) x 25% x 4/12= $1,600
Total = $5,100

a) A business has financial year-end on 31 December. The business purchased machine A for $50,000 on
1 April 2017. The machine was depreciated at the rate of 20% per annum using the straight-line method,
after which it is estimated to be sold for 10% of its cost. The business charges depreciation on asset
purchased and sold during the year on a pro rata basis according to the months of ownership.
Fill in the following information:

31/12/2017 31/12/2018 31/12/2019 31/12/2020 31/12/2021 31/12/2022
Depreciation
expense
Cost
Less:
Accumulated
depreciation
Carrying
amount
b) A business has financial year-end on 31 December. The business purchased machine A for $50,000 on
1 July 2019. The machine was depreciated at the rate of 30% per annum using the reducing balance
method. The business charges depreciation on asset purchased and sold during the year on a pro rata
basis according to the months of ownership.
Fill in the following information:

31/12/2019 31/12/2020 31/12/2021 31/12/2022
Depreciation expense
Cost
Less: Accumulated depreciation
Carrying amount
7 | PAGE
Chapter 10
3. Disposal of property, plant and equipment

Occasionally, a business will sell one of its old property, plant and equipment. When it is sold, a gain or loss
will therefore arise which can be calculated as follows:
$
Sales proceeds (Amount received on disposal) X
Less: Carrying amount of the asset on the date of disposal (X)
Gain/(Loss) on disposal X/ (X)
If the sales proceeds > carrying amount → Gain on disposal (Other income – SOPL)
If the sales proceeds < carrying amount → Loss on disposal (Expense – SOPL)
Accounting entry for disposal of PPE

As you’ve already seen, the gain or loss on disposal will be the difference between the sales proceeds and
the carrying amount of the assets at the date of disposal. In the ledger accounts, this gain or loss will be
calculated on the disposal account.
Step 1: Derecognise the assets – asset sold must be removed from the book. The cost is therefore transferred
to the disposal account:
Dr Disposal Account
Cr Asset Account
Step 2: Reversal of accumulated depreciation – the accumulated depreciation must also be removed from
the book and transferred to the disposal account:
Dr Accumulated depreciation
Cr Disposal Account
Step 3: Recognise the receipt of sales proceed

Dr Bank / Cash / Asset (if trade-in)
Cr Disposal Account
Step 4: Transfer the balance of disposal accounts to gain or loss on disposal

Dr Loss on disposal or Dr Disposal Account
Cr Disposal Account Cr Gain on disposal
The balance that results on the disposals account represents the gain or loss on the disposal which will be
transferred to the gain or loss ledger account and will ultimately appear in the statement of profit or loss:
- If the balance is entered on the debit side of the disposal account, then it must be credited to the
gain on disposal (Other income).
- If the balance is entered on the credit side of the disposal account, then it must be debited to the
loss on disposal (Expense).
To double check the correctness of the gain or loss on disposal calculated on the disposal accounts, it is
usually a good idea to also calculate it using the method we used in the previous section.
8 | PAGE
Chapter 10
On 1 January 2022, a business owns various pieces of equipment that originally cost a total of $90,000. The
depreciation policy is 10% per year on a straight-line basis. The total accumulated depreciation on this
equipment on the same date is $50,000. On 2 January 2022, the business sells a piece of equipment for
$11,000 via bank transfer which had originally been purchased on 1 January 2016 for $20,000. There were
no other acquisitions or disposals of equipment during 2022.
Prepare the ledger accounts for the cost and accumulated depreciation of equipment, as well as the disposals
account, balancing them off at the end of 2022.
Equipment, at cost
Date Description Amount Date Description Amount
$ $
Accumulated Depreciation - Equipment

$ $
Disposals account
$ $
Gain/ Loss on disposal

$ $
9 | PAGE
Chapter 10
Suggested Answers for Classroom Exercise 10.6
Equipment, at cost
$ $
2022 2022
Jan 1 Balance b/d 90,000 Jan 2 Disposal Account 20,000
Dec 31 Balance c/d 70,000
90,000 90,000
2023
Jan 1 Balance b/d 70,000
Accumulated Depreciation - Equipment

$ $
2022 2022
Jan 2 Disposal Account 12,000 Jan 1 Balance b/d 50.000
31 Dec Balance c/d 45,000 Dec 31 Depreciation expense 7,000
57,000 57,000
2023
Disposals account
$ $
2022 2022
Jan 2 Cost – Equipment 20,000 Jan 2 Accumulated depreciation – 12,000
Jan 2 Gain on disposal 3,000 Equipment
Jan 2 Bank 11,000
23,000 23,000
Gain on disposal
$ $
2022 2022
Dec 31 Income statement 3,000 Jan 2 Disposal account 3,000
The equipment has been owned for exactly six years, so the accumulated depreciation on it at the date of
disposal is $20,000 x 10% x 6 years = $12,000.
Annual depreciation charge for 2022 = ($90,000 - $20,000) x 10% = $7,000
We can double check the gain on disposal is indeed $3,000 by calculating it without using ledger accounts:
$
Sales proceeds 11,000
Less: Carrying amount of the asset on the date of disposal ($20,000 - $12,000) (8,000)
Gain on disposal 3,000
10 | PAGE
Chapter 10
3.1 Disposal by part-exchange (‘Trade-in’)

It is sometimes possible to trade in your old phone in exchange for a discount on a new one. Businesses often
do the same. They might trade in (or ‘part exchange’) an old machine or vehicle when they buy a new one.
The old asset is being disposed of by part-exchange, and the disposal proceeds in the situation are equal to
the trade-in value.
Suppose a new van priced at $16,000 is bought at paying $12,000 cash plus the trade-in of an old van. If so,
the effective ‘disposal proceeds’ for the old van would be the trade-in value of $4,000 ($16,000- $12,000).
The gain or loss on disposal can then be calculated in the normal way.

Vehicle A was purchased for $25,000 on 1 January 2019 and was depreciated at 20% per year straight line.
On 1 January 2022, it is part exchange for a new car, Vehicle B. The list price of Vehicle B is $40,000, and
it is paid for with a bank transfer of $32,000 plus the trade-in of vehicle A.
(i) What was the gain or loss on the disposal of Vehicle A?
(ii) Record this disposal in the form of journal entries.
(iii) Show the entries in the disposals account.
Solutions:
(i)
$
Sales proceeds/ trade-in value ($40,000 normal price - $32,000 paid) 8,000
Less: Carrying amount of Vehicle A on date of disposal
[$25,000 cost – ($25,000 x 20% x 3 years) accumulated depreciation] (10,000)
Loss on disposal 2,000
(ii) The journal entries for the transaction:
Dr Disposal $25,000
Cr Motor Vehicle – Vehicle A $25,000
which is the removal of the cost of Vehicle A from the ledger accounts following its disposal by part-exchange
Dr Accumulated depreciation – Vehicle A $15,000

Cr – Disposals $15,000
which is the removal of the accumulated depreciation on Vehicle A following its disposal by part-exchange.
Dr Motor Vehicle – Vehicle B $40,000

Cr Cash at bank $32,000
Cr Disposal Account $8,000
which is the purchase of Vehicle B costing $40,000, paid by bank transfer plus trade-in of Vehicle A
Dr Loss on disposal $2,000

Cr – Disposals $2,000
which is the recognition of loss of disposal by transferring the resulting balance from disposal account to gain or
loss on disposal.
Disposals account
Date Description Amount $ Date Description Amount $
2022 2022
Jan 1 Vehicle - cost 25,000 Jan 1 Motor vehicle B - Part exchange value 8,000
Jan 1 Accumulated depreciation on vehicle 15,000
Dec 31 Loss on disposal 2,000
25,000 25,000
11 | PAGE
Chapter 10
4. Write-off
A PPE is written off when it is decided that there is no further use of the asset. It means that assets would not
be able to generate any economic benefit or value to the company.
A write-off of PPE includes:

- de-recognise the asset and reversal of accumulated depreciation from the book – asset written
off must be removed from the book
- recognise the difference between the cost and accumulated depreciation as an expense in the
statement of profit or loss.
Accounting entries for write-off:
Dr Accumulated depreciation (Contra-asset – SOFP)

Cr Asset – cost (Asset – SOFP)
Dr Asset written-off (Expense – SOPL)
12 | PAGE
Chapter 10

Tom Enterprise is a newly start-up business. The business is in delivery services, started on 1 January 2020,
with a financial year ended 31 December every year. The following are the transactions in relation to the
motor vehicles of the business:
In year 2020
1 January Purchase Motor Vehicle A and B by cash at cost of $40,000 and $60,000 respectively.
1 April Purchase Motor Vehicle C by cheque at cost of $50,000
31 December Purchase Motor Vehicle D by cash at cost of $80,000
In year 2021
31 March Write off Motor Vehicle A due to major accident.
1 April Purchase Motor Vehicle E by cash to replace the Motor Vehicle A. The cost is $55,000
30 September Pay $12,000 by cash to replace the tyres of all motor vehicles.
In year 2022
1 February Dispose Motor Vehicle B with a selling price of $23,000. The amount is collected by
cheque.
1 July Trade in Motor Vehicle C and purchase Motor Vehicle F. The trade in value of Motor
Vehicle C is $30,000 and the cost of Motor Vehicle F is $70,000. The balance is paid by
cash.
31 December Upkeep and maintenance of all motor vehicles and pay $14,000 by cash.
The following is the accounting policy on depreciation:

a) Straight line method
b) Useful life is 5 years for motor vehicle
c) Depreciation is charged on asset purchased and sold during the year on a pro rata basis according to the
months of ownership.
d) No residual value of assets
Requirements:
Based on the above information, please prepare the following ledgers (T-accounts) from 1 January 2020 to
31 December 2022:
i) Motor Vehicles
ii) Accumulated Depreciation of Motor Vehicles
iii) Depreciation expenses
iv) Disposal Account
v) Gain/Loss on Disposal
vi) Written off account
vii) Repair and Maintenance expense
13 | PAGE
Chapter 10
Suggested Answers for Classroom Exercise 10.8:

Motor Vehicles
Date Description Amount ($) Date Description Amount ($)
2020 2020
Jan-01 Cash - Motor Vehicle A 40,000 Dec 31 Balance c/d 230,000
Jan-01 Cash - Motor Vehicle B 60,000
Apr-01 Bank - Motor Vehicle C 50,000
Dec 31 Cash - Motor Vehicle D 80,000
230,000 230,000
2021 2021
Jan 1 Balance b/d 230,000 Mar 31 Asset written off - MV A 40,000
Apr 1 Cash - Motor Vehicle E 55,000 Dec 31 Balance c/d 245,000
285,000 285,000
2022 2022
Jan 1 Balance b/d 245,000 Feb 1 Disposal - MV B 60,000
Disposal - Motor Vehicle F
July 1 (Trade in MV C) 30,000 July 1 Disposal - MV C 50,000
July 1 Cash - Motor Vehicle F 40,000 Dec 31 Balance c/d 205,000
315,000 255,000
2023
Accumulated depreciation - Motor Vehicles

2020 2020
Dec 31 Balance c/d 27,500 Dec 31 Depreciation expense 27,500
2021 2021
Mar 31 Asset written off - MV A 10,000 Jan 1 Balance b/d 27,500
Dec 31 Balance c/d 65,750 Dec 31 Depreciation expense 48,250
75,750 75,750
2022 2022
Feb 1 Disposal - MV B 25,000 Jan 1 Balance b/d 65,750
July 1 Disposal - MV C 22,500 Dec 31 Depreciation expense 40,000
Dec 31 Balance c/d 58,250
105,750 105,750
2023
Depreciation Expenses
2020 2020
Dec 31 Accumulated depreciation 27,500 Dec 31 Income Statement 27,500
2021 2021
2022 2022
14 | PAGE
Chapter 10
Disposal accounts
2022 2022
Feb 1 Cost - MV B 60,000 Feb 1 Accumulated depr - MV B 25,000
Feb 1 Bank 23,000
Feb 1 Loss on disposal 12,000
60,000 60,000
2022 2022
July 1 Cost - MV C 50,000 July 1 Accumulated depr - MV C 22,500
July 1 Gain on disposal 2,500 July 1 Motor Vehicle - MV F (Trade in) 30,000
52,500 52,500
Loss on Disposal
2022 2022
Feb 1 Disposal - MV B 12,000 Dec 31 Income Statement 12,000
Gain on Disposal
2022 2022
Dec 31 Income Statement 2,500 July 1 Disposal - MV C 2,500
Asset written off

2021 2021
Mar 31 Cost - MV A 40,000 Mar 31 Accumulated depr - MV A 10,000
Dec 31 Income Statement 30,000
40,000 40,000
Repair and Maintenance Expense

2021 2021
Sept 30 Cash 12,000 Dec 31 Income Statement 12,000
2022 2021
Dec 31 Cash 14,000 Dec 31 Income Statement 14,000
Depreciation - Year 2020 $ Depreciation - Year 2021 $ Depreciation - Year 2022 $

MV A = 40,000/5 8,000 MV A = 40,000/5 *3/12 2,000 MV B = 60,000/5*1/12 1,000
MV B = 60,000/5 12,000 MV B = 60,000/5 12,000 MV C = 50,000/5*6/12 5,000
MV C = 50,000/5 x 9/12 7,500 MV C = 50,000/5 10,000 MV D = 80,000/5 16,000
MV D = No depreciation - MV D = 80,000/5 16,000 MV E = 55,000/5 11,000
27,500 MV E = 55,000/5 *9/12 8,250 MV F = 70,000/5 *6/12 7,000
48,250 40,000
15 | PAGE
Chapter 10
Summary:
Depreciation = (Cost - residual value) x depreciation rate x no of months of ownership/12 months OR
Depreciation = (Cost - residual value) / useful life x no of months of ownership/12 months

Depreciation = (Cost - Accu. depreciation) x depreciation rate x no of months of ownership/12 months OR
Depreciation = (Cost – Accu. depreciation)/useful life x no of months of ownership/12 months
Accounting entry for depreciation

Dr Depreciation expense (Expense - SOPL)
Cr Accumulated depreciation (Contra-asset - SOFP)
Accounting entry for disposal

Step 1: Derecognise the assets
Dr Disposal Account
Cr Asset Account
Step 2: Reversal of accumulated depreciation

Dr Accumulated depreciation
Cr Disposal Account
Step 3: Recognise the receipt of sales proceed

Dr Bank / Cash / Asset (if trade-in)
Cr Disposal Account
Step 4: Transfer the balance of disposal accounts to gain or loss on disposal

Dr Loss on disposal or Dr Disposal Account
Cr Disposal Account Cr Gain on disposal
Accounting entry for write-off:

Dr Accumulated depreciation (Contra-asset – SOFP)
Cr Asset – cost (Asset – SOFP)
Dr Asset written-off (Expense – SOPL)
16 | PAGE
Chapter 10
Home Exercise 10.1

1. What is the purpose of charging depreciation in the financial statements?
A. To ensure that funds are available for replacement of the asset in the future.
B. To allocate the cost of asset over the accounting periods expected to benefit from its use.
C. To comply with the substance over form concept.
D. To reduce the cost of asset in the statement of financial position to its estimated market value.
2. A business buys a machine for $55,000 which it believes will last for 10 years, after which it will be
sold for $5,000. Using the straight-line method of depreciation, what will be the machine’s carrying
amount (or ‘net book value’) after 4 years of use?
A. $20,000
B. $30,000
C. $33,000
D. $35,000
3. A business buys a machine for $80,000 and depreciates it at 25% per year using the reducing balance
method. What is the depreciation expense in the third year of use?
A. $20,000
B. $15,000
C. $11,250
D. $60,000
4. A business buys a machine for $100,000 and depreciates it at 20% per year on straight line basis.
After exactly three years it is sold for $36,000. What is the gain or loss on disposal?
A. $4,000 gain
B. $4,000 loss
C. $24,000 gain
D. $24,000 loss
5. A trader purchased a motor vehicle costing $36,000 on 1 July 2020. The estimated useful life is 5 years
and an estimated residual value of $6,000. Depreciation is provided on month-by-month basis using the
straight-line method.
The motor vehicle was sold on 31 March 2022 for $22,500.
What was the gain or loss on disposal of the motor vehicle?
A. $900 loss
B. $900 gain
C. $3,000 loss
D. $3,000 gain
17 | PAGE
Chapter 10
Home Exercise 10.2

At 31 December 2020, the position was as follows:
Total cost to date Total depreciation to date
$ $
Motor vehicle 200,000 80,000
The company has the following depreciation policy:

• Motor vehicles are expected to be used for 5 years, and then sold for 10% of their original cost. They
are depreciated using straight line method.
• Depreciation is charged on asset purchased and sold during the year on a pro rata basis according to
the months of ownership.
• All payments and receipts are through bank transfer.
During the year ended 31 December 2021, the following transactions occurred:
Date Events
1 April 2021 Dispose Motor Vehicles A for Motor Vehicles B. The value of Motor Vehicle
B is $180,000. The company is required to pay $130,000 to the supplier after
trade in Motor Vehicles A.
Required:
a) Calculate the depreciation expense on each of the following asset for the year ended 31 December 2021:
I. Motor vehicle A
II. Motor vehicle B
b) Calculate the gain/loss on disposal of motor vehicle A, using formula. Show your workings.
c) Prepare the following ledger T-accounts recording the transactions for the year ended 31 December 2021
and bringing down the balances at 1 January 2022.
I. Motor vehicles account
II. Accumulated depreciation of motor vehicles account
III. Disposal account
IV. Gain / loss on disposal account
18 | PAGE
Chapter 10
Home Exercise 10.3

At 31 December 2020, the position was as follows:
Total cost to date Total depreciation to date
$ $
Motor vehicle A 120,000 90,000
Motor vehicle B 150,000 50,000
Machinery A 20,000 18,000
Machinery B 30,000 8,000
The company has the following depreciation policy:

• Motor vehicles are expected to be used for 5 years, and then sold for 15% of their original cost. They
are depreciated using straight line method.
• Machineries are depreciated at the rate of 25% per annum using reducing balance method.
• Depreciation is charged on asset purchased and sold during the year on a pro rata basis according to
the months of ownership.
• All payments and receipts are through bank transfer.
During the year ended 31 December 2021, the following transactions occurred:
Date Events
1 April 2021 Wrote off Machinery A as it cannot be used or sold.
1 July 2021 Purchased Machinery C at the cost of $25,000.
1 November 2021 Trade in Motor Vehicles A for Motor Vehicles C. The value of Motor Vehicle
C is $180,000. The company is required to pay $160,000 to the supplier after
trade in Motor Vehicles A.
Required:
Prepare the following ledger T-accounts recording the transactions for the year ended 31 December 2021 and
bringing down the balances at 1 January 2022.
III. Motor vehicles account
IV. Machinery account
V. Accumulated depreciation of motor vehicles account
VI. Accumulated depreciation of machinery account
VII. Asset written off account
VIII. Disposal account
IX. Gain / loss on disposal account
19 | PAGE
Chapter 10
Home Exercise 10.4

The following is the fixed asset listing of Taco Limited as at 31 March 2015:
Description Cost Accumulated Depreciation

Office equipment 1 $30,000 $20,000
Office equipment 2 $40,000 $28,000
Machinery A $120,000 $50,000
Machinery B $150,000 $22,000
Below are the descriptions of Taco Limited depreciation policy on fixed assets:
1. Taco Limited used straight-line method to account the depreciation of office equipment. The estimated
useful life of office equipment is 10 years. The scrap value of each office equipment is $2,000.
2. Taco limited used reducing balance method to account the depreciation of machinery. The depreciation
rate is 20% and the scrap value of machinery is 15% of its cost.
3. All the fixed assets are depreciated on pro-rate basis.
The followings are the transactions of fixed assets from 1 April 2015 to 31 March 2017:
Date Events
30 June 2015 Purchase Office equipment 3 at $50,000.
31 December 2015 Trade in Machinery A at $50,000. The trade in amount will be used to offset
the cost of new Machinery C. Taco Limited is required to pay $150,000 to the
supplier after trade in.
1 January 2016 Disposed Office equipment 1 for $2,000.
1 April 2016 Written off Office equipment 2 due to poor condition.
1 October 2016 Purchase Office equipment 4 for $20,000.
1 January 2017 Trade in Machinery B at $90,000 and replace by Machinery D. The cost of
Machinery D is $180,000.
** All the payment/received are through bank transfer
Requirement:
Please prepare the following accounts for the year ended 31 March 2016 and 31 March 2017
I. Office equipment account

II. Machinery account
III. Accumulated depreciation of office equipment account
IV. Accumulated depreciation of machinery account
V. Disposal account
VI. Gain / loss on disposal account
VII. Asset written off account
20 | PAGE

CHAPTER 10 - PROPERTY, PLANT AND EQUIPMENT (v2)

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

CHAPTER 10 - PROPERTY, PLANT AND EQUIPMENT (v2)

Uploaded by

Copyright:

Available Formats

Property, plant and equipment

1. What a property, plant and equipment is?

1.1 What exactly is included in capital expenditure?

• its purchase price, net of any discounts

2. The need to account for depreciation

Key terms in the accounting of property, plant and equipment

• Carrying amount/Net book value = Cost - Accumulated Depreciation

• Addition: Purchase of fixed assets

• Disposal: Sale of fixed assets

• Write off: Removed fixed assets as it has no further use.

• Sales proceeds: The selling price of the disposed assets.

2.1. The two main methods of calculating depreciation

Classroom Exercise 10.1

At end of At end of At end of At end of

Cost 22,000 22,000 22,000 22,000

Carrying amount 17,000 12,000 7,000 2,000

Depreciation = $5,000/ year

Reducing balance method

Classroom Exercise 10.2

Classroom Exercise 10.3

2.2 Depreciation on assets bought or sold part way through a year

Reducing balance method

Classroom Exercise 10.4

Classroom Exercise 10.5

Fill in the following information:

Fill in the following information:

3. Disposal of property, plant and equipment

Accounting entry for disposal of PPE

Step 3: Recognise the receipt of sales proceed

Step 4: Transfer the balance of disposal accounts to gain or loss on disposal

Classroom Exercise 10.6

Accumulated Depreciation - Equipment

Gain/ Loss on disposal

Suggested Answers for Classroom Exercise 10.6

Accumulated Depreciation - Equipment

Annual depreciation charge for 2022 = ($90,000 - $20,000) x 10% = $7,000

3.1 Disposal by part-exchange (‘Trade-in’)

Classroom Exercise 10.7

(ii) The journal entries for the transaction:

Dr Accumulated depreciation – Vehicle A $15,000

Dr Motor Vehicle – Vehicle B $40,000

Dr Loss on disposal $2,000

A write-off of PPE includes:

Accounting entries for write-off:

Dr Accumulated depreciation (Contra-asset – SOFP)

Classroom Exercise 10.8

The following is the accounting policy on depreciation:

Suggested Answers for Classroom Exercise 10.8:

Accumulated depreciation - Motor Vehicles

Asset written off

Repair and Maintenance Expense

Depreciation - Year 2020 $ Depreciation - Year 2021 $ Depreciation - Year 2022 $

Reducing balance method

Accounting entry for depreciation

Accounting entry for disposal

Step 2: Reversal of accumulated depreciation

Step 3: Recognise the receipt of sales proceed

Step 4: Transfer the balance of disposal accounts to gain or loss on disposal

Accounting entry for write-off:

Home Exercise 10.1

The motor vehicle was sold on 31 March 2022 for $22,500.

What was the gain or loss on disposal of the motor vehicle?