CAF 1 – IAS 16 IAS 16 Property, Plant & Equipment 06kashifadeel.com/wp-content/uploads/2020/05/06-IAS-16-PPE.pdf · 2020-05-06 · CAF 1 – IAS 16 Latest update: April 2020 Page

CAF 1 – IAS 16

© kashifadeel.com

Page | 1

IAS 16 Property, Plant & Equipment

06 INTRODUCTION

NON-CURRENT ASSETS Assets that have a long useful life and are expected to provide future economic benefits for the entity over a period of several years.

Tangible non-current assets

These are physical assets, such as land and buildings, plant and equipment, office equipment, furniture and fixture and motor vehicles. IAS 16 Property, plant and equipment covers the accounting issues related to these items.

Intangible non-current assets

These are assets that do not have a physical existence such as patent rights, licensing, software etc. IAS 38 Intangible assets covers the accounting issues related to these items.

DEFINITIONS

Property, plant and equipment

are tangible items that: are held for use in the production or supply of goods or services, for

rental to others, or for administrative purposes; and are expected to be used during more than one period.

Distinguish PPE and Inventory

If a company main business is selling machines, then that machine does not classify as PPE rather the machinery used to produce the machine for sales is PPE. The machine manufactured for sale is classified as inventory. The same goes for real estate companies. Their offices are PPE but the houses they sell are inventory.

Cost Cost is the amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire an asset at the time of its acquisition or construction.

RECOGNITION

General criteria

The cost of an item of PPE shall be recognized as an asset if, and only if: (a) it is probable that future economic benefits associated with the

item will flow to the entity; and (b) the cost of the item can be measured reliably.

Spare parts & servicing equipment

Usually carried as inventory and recognized in PL when consumed. Major spare parts & standby equipment PPE It can be used only in connection with an item of PPE PPE

Unit of measure IAS 16 does not prescribe the unit of measure for recognition. However, the IFRSs are intended to be applied on material items.

CAF 1 – IAS 16

Latest update: April 2020

Page | 2

INITIAL MEASUREMENT

An item of PPE shall be initially measured at its cost.

Elements of costs

The cost of an item of PPE comprises: (a) its purchase price, including import duties and non-refundable

purchase taxes, after deducting trade discounts and rebates. (b) any costs directly attributable to bringing the asset to the

location and condition necessary for it to be capable of operating in the manner intended by management.

(c) the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located (IAS 37).

Directly attributable costs

Examples of directly attributable costs are: (a) costs of employee benefits arising directly from the construction or

acquisition of the item of PPE; (b) costs of site preparation; (c) initial delivery and handling costs; (d) installation and assembly costs; (e) costs of testing whether the asset is functioning properly; and (f) professional fees such as architect and surveyor fee.

Not Cost of PPE

Examples of costs that are not costs of an item of PPE are: (a) costs of opening a new facility; (b) costs of introducing a new product or service (including costs of

advertising and promotional activities); (c) costs of conducting business in a new location or with a new

class of customer (including costs of staff training); (d) administration and other general overhead costs; (e) Interest paid to finance the purchase of PPE is expensed. An

exception is interest incurred on funds borrowed to finance construction of PPE which is capitalised (IAS 23)

(f) The acquisition of new machinery is accompanied by employee training. The normal rule is that training costs are expensed except on rare occasion

Costs not to be included

The costs of day-to-day servicing of an asset are not included in the carrying amount of the asset but expensed when incurred. Costs are no longer recognised when the item is ready for use. This is when it is in the location and condition necessary for it to be capable of operating in the manner intended by management. Therefore, costs incurred in using or redeploying an item is not included in the carrying amount of that item. Costs incurred in using or redeploying an item are not included in the carrying amount of that item. For example, the following costs: (a) costs incurred while an item capable of operating in the manner

intended by management has yet to be brought into use or is operated at less capacity;

(b) initial operating losses (c) costs of relocating

CAF 1 – IAS 16

© kashifadeel.com

Page | 3 Costs related to land and land improvements

When the land is acquired, certain costs are necessary and should be part of the cost of land. These costs include the cost of the land, title and legal fees, site preparation costs like grading and draining and survey costs etc. All of these costs may be considered necessary to get the land ready for its intended use. Some costs are land improvements. This asset category includes the cost of parking lots, sidewalks, landscaping, irrigation systems etc. Care must be taken to distinguish land and land improvement costs. Land is considered to have an indefinite life and is not depreciated. Whereas, land improvements do wear out and must be depreciated.

SUBSEQUENT EXPENDITURE

CAPITALISATION

Criteria Subsequent expenditure relating to non-current assets, after their initial acquisition, should be capitalised if it meets the criteria for recognising an asset.

Explanation

In practice, this means that expenditure is capitalised if it: improves the asset (for example, by enhancing its performance or

extending its useful life); or is for a replacement part (provided that the part that it replaces is

treated as an item that has been disposed of). CAPITAL AND REVENUE EXPENDITURE

Improvements are capitalised

Capital expenditure is expenditure made to acquire or improve long term assets that are used by the business.

Expenditure on a non-current asset after acquisition is treated as capital expenditure when it represents an improvement. This is added to the cost of the original asset.

Repairs are expensed

Revenue expenditure is expenditure on day-to-day operating expenses, for example, repair and maintenance expenses or salaries.

Expenditure on a non-current asset after acquisition is treated as revenue expenditure when it is incurred to make a repair. This is recognised as an expense in the statement of comprehensive income.

Timing Capital expenditures are charged to expense gradually via depreciation or amortisation and over a long period of time. Revenue expenditures are charged to expense in the current period.

Consumption A capital expenditure is assumed to be consumed over the useful life of the related non-current asset. A revenue expenditure is assumed to be consumed within a very short period of time.

Size

A capital expenditure tends to involve larger monetary amounts than revenue expenditures. However, certain quite large expenditures can still be classified as revenue expenditures, as long they are directly associated with sale transactions or are period costs.

CAF 1 – IAS 16


Page | 4

Advance payment for asset

At the date of payment Dr. Advance to Vendor (Receivable) Cr. Cash or Bank

At the date asset is recognised Dr. Asset Cr. Advance to Vendor (Receivable) (the advance is an asset too but it is not depreciated)

DEPRECIATION

What is depreciation?

Depreciation is an expense that matches the cost of a non-current asset to the benefit earned from its ownership. It is calculated so that a business recognises the full cost associated with a non-current asset over the entire period that the asset is used. In effect, the cost of the asset is transferred to the statement of comprehensive income over the life of the asset. This may be several years.

Definition Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life.

Depreciable amount = Cost – residual value

Residual value

The residual value of an asset is the estimated amount that an entity would currently obtain from disposal of the asset, after deducting the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life.

Useful life

Useful life is: (a) the period over which an asset is expected to be available for use

by an entity; or (b) the number of production or similar units expected to be obtained

from the asset by an entity. Accumulated Depreciation The depreciation charged to date on a non-current asset.

Carrying amount

This is also called net book value or written down value.

Carrying amount = Cost – accumulated depreciation

At this amount an asset is presented in statement of financial position. METHODS OF CALCULATING DEPRECIATION

1.

Straight line depreciation: Where the depreciable amount is charged in equal amounts to each reporting period over the expected useful life of the asset.

푅푎푡푒 =퐶표푠푡 − 푅푉퐶표푠푡

×1

푈푠푒푓푢푙 푙푖푓푒 퐷푒푝. = 퐶표푠푡 × 푅푎푡푒

2.

Reducing balance method: Where the annual depreciation charge is a fixed percentage of the carrying amount of the asset at the start of the period.

푅푎푡푒 = 1−푆퐶

퐷푒푝. = 푁푒푡 푏표표푘 푣푎푙푢푒 × 푅푎푡푒

CAF 1 – IAS 16

© kashifadeel.com

Page | 5

3.

Sum of unit method: Where depreciation is calculated by expressing the useful life of an asset in terms of its expected total output and allocating the annual charge to depreciation based on actual output.

푅푎푡푒 =퐶표푠푡 − 푅푉

푈푠푒푓푢푙푒 푙푖푓푒 푢푛푖푡푠 퐷푒푝. = 푈푛푖푡푠 푖푛 푦푒푎푟 × 푅푎푡푒

4.

Sum of digit method: Where depreciation is calculated by multiplying the depreciable amount by a fraction where numerator is the remaining life of the asset at the start of the period and the denominator is the sum of all the years’ useful life at the start of ownership.

푅푎푡푒 =푅푒푚푎푖푛푖푛푔 푦푒푎푟푠푆푢푚 표푓 푑푖푔푖푡푠

퐷푒푝. = 퐷푒푝푟푒푐푖푎푏푙푒 푎푚표푢푛푡 × 푅푎푡푒

Which method? The depreciation method used should reflect as fairly as possible the pattern in which the asset’s economic benefits are consumed by the entity.

DEPRECIATION CHARGE

Charge Depreciation should be charged as an expense in the statement of comprehensive income each year over the life of the asset.

Zero Charge Under usage methods of depreciation, the depreciation charge can be zero while there is no production. Land is not depreciated because it has indefinite useful life.

Commencement of depreciation

Depreciation must be charged from the date the asset is available for use. This may be earlier than the date it is actually brought into use.

End of depreciation

The depreciation is no more charged when the asset is derecognized or disposed of.

CHANGE IN DEPRECIATION METHOD

When allowed? A change from one method of providing depreciation to another method is permissible only on the grounds that the new method will give a fairer presentation of the results and of the financial position.

Nature The change in depreciation method is change in accounting estimate and does not constitute change in accounting policy.

Treatment The carrying amount should be written off over the remaining useful life, commencing with the period in which the change is made.

REVIEW OF USEFUL LIFE AND RESIDUAL VALUES

Requirement Useful life and residual value of PPE should be reviewed at end of each reporting period and revised if expectations are significantly different from previous estimates.

Treatment The carrying amount of the asset at the date of revision less any residual value should be depreciated over the revised remaining useful life.

ACCOUNTING FOR DEPRECIATION

Accounting entry

Dr. Depreciation expense [Profit or loss] Cr. Accumulated depreciation [deducted from asset]

CAF 1 – IAS 16


Page | 6

RELEVANT LEDGER ACCOUNTS:

Non-current asset Balance b/d XXX Disposal (later) XX Bank (new additions) XXX Balance c/d (SFP) XXX XXX XXX Balance b/d XXX

Accumulated depreciation

Disposal (later) XX Balance b/d XX Balance c/d (SFP) XX Depreciation expense XX XX XX Balance b/d XX

Depreciation expense

Accumulated dep. XX Transfer to PL XX

XX XX STATEMENT OF PROFIT OR LOSS

Specimen

SPL (extracts) Rs. Depreciation XX Gain or loss on disposal (later) XX / (XX)

. STATEMENT OF FINANCIAL POSITION

Specimen

SFP (extracts) Rs. Non-current asset XXX Less: Accumulated depreciation (XX) Carrying amount (net book value) XXX

These figures are taken from closing balances of relevant ledger accounts.

CAF 1 – IAS 16

© kashifadeel.com

Page | 7

DERECOGNITION / DISPOSAL

Time The carrying amount of PPE is derecognised: On disposal (by sale, leasing or donation). When no future economic benefits are expected.

Gain or loss

= Net disposal proceeds – carrying amount at the time of disposal

Rs. Sale proceeds on disposal (Cash received) XX Sale proceeds (part-exchange asset received) XX Less: Disposal costs and cash paid (X)

Net disposal proceeds XX

Asset at cost XX Less: Accumulated depreciation (XX)

Carrying amount at date of disposal (XX)

GAIN (LOSS) ON DISPOSAL XX/(XX)

The gain or loss is recognised in profit or loss but gain is not classified as revenue.

Replaced part

The carrying amount of replaced part is derecognised on disposal even if the replaced part was not depreciated separately. The cost of replacement may be used as an indication for carrying amount of the replaced part.

Trade-in value The value of old asset agreed in exchange of assets. JOURNAL ENTRIES – DISPOSAL

1. Transfer the cost of non-current asset Dr. Disposal Cr. PPE

2. Transfer the accumulated depreciation Dr. Accumulated depreciation Cr. Disposal

3. Sale proceeds (cash received) Dr. Bank / Receivable Cr. Disposal

4. Part-exchange (asset received) Dr. PPE (new) Cr. Disposal

5. Disposal costs Dr. Disposal Cr. Bank / Payables

6. Cash paid in part exchange Dr. Disposal Cr. Bank

7. Gain or loss (balance on disposal account)

Dr. Disposal Cr. Gain (PL) Dr. Loss (PL) Cr. Disposal

The entry 1 to 7 may be combined as follows:

1 to 7.

Dr. Accumulated depreciation Dr. Bank (received) Dr. PPE (new) Dr. Loss (balancing figure) Cr. Bank (paid) Cr. PPE (old) Cr. Gain (balancing figure)

CAF 1 – IAS 16


Page | 8

RELEVANT LEDGER ACCOUNT: Disposal Account

Asset at cost XXX Accumulated depreciation XXX Cash (disposal cost) XX Receivable / Cash / Bank XXX Gain on disposal XX Loss on disposal XX XXX XXX

EXCHANGE OF ASSETS Possible Scenarios 1 2 3 4 Commercial substance? Yes Yes Yes No

Fair value of asset received known and clearly evident?

Yes No No Yes/No

Fair value of asset given up is known?

Yes/No Yes No Yes/No

Cost of new asset FV of asset

acquired

FV of asset given ± Cash

CA of asset given ± Cash

Cash paid (received) QUESTION PROBLEMS

Exam questions on PPE usually involve multiple assets, missing figures, working backwards and correction of errors and omissions. The guidance on dealing with these issues is given below:

Tabular approach

A columnar table is often a suitable approach to long question involving complex issues. The table may be on carrying amount basis or be split into cost and accumulated depreciation based on data in the question.

Working backwards

It is simple mathematics, for example, if carrying amount at end of period is known, we can find out carrying amount at beginning of period or depreciation charged during the period.

퐶퐴 (푏푒푔푖푛푛푖푛푔) = 퐶퐴 (푒푛푑) ×100

(100 −퐷푒푝%)

퐷푒푝푟푒푐푖푎푡푖표푛 = 퐶퐴 (푒푛푑) ×퐷푒푝%

(100 − 퐷푒푝%)

Multiple assets

Keep separate columns for each asset bought or disposed of during the intervening period. Also have columns titled other and total.

Errors Correct the error and always remember to incorporate the depreciation effects arising due to correction of error.

Approach to a long question

1. Prepare columnar table 2. Put figures available in question 3. Work or work-backwards the figures as much as possible 4. Incorporate balancing figures to complete the table 5. Follow the question requirement

CAF 1 – IAS 16

© kashifadeel.com

Page | 9

SYLLABUS

Reference Content/Learning outcome

D2 IAS 16: Property, plant and equipment (other than disclosure and revaluation)

LO4.2.1 Calculate the cost on initial recognition of property, plant and equipment in accordance with IAS-16 including different elements of cost and the measurement of cost

LO4.2.2 Analyse subsequent expenditure that may be capitalised, distinguishing between capital and revenue items.

LO4.2.3 Explain the nature of depreciation expense and accumulated depreciation LO4.2.4 Compute depreciation for assets using different depreciation methods LO4.2.5 Post journal entry to record depreciation expense

LO4.2.6 Account for de-recognition of property, plant and equipment recognised earlier under cost methods

LO4.2.7 Understand the disposal of Fixed Assets and gain/loss on disposal LO4.2.8 Post journal entries of disposal and gain or loss on disposal

Proficiency level: 2 Testing level: 2 Past Paper Analysis A14 S15 A15 S16 A16 S17 A17 S18 A18 S19 A19 S20 CAF 1 - - - - - 14 - 12 - - 18 09

CAF 5 25 14 15 13 17 04 18 17 12 16

Note: This topic has been examined in CAF 1 with other topics e.g. Rectification of errors and Preparation of financial statements.

CAF 1 – IAS 16


Page | 10

PRACTICE Q&A

Sr.# Description Marks Reference RECOGNITION AND MEASUREMENT 1C Definition and recognition basics 05 KA 2C B Company: Initial measurement 06 FR* 3H Measurement Basic Scenarios 07 QB

DEPRECIATION 4C Depreciable amount and useful life 02 KA 5C Depreciation methods – Various 12 CI & KA 6H Straight line - basic 04 CI 7H Straight line – proportion of a year 03 CI 8H Reducing balance method - Basic 04 CI 9H Sum of Digit method - Basic 04 CI

10H Land and building depreciation 03 CI 11C Commencement and Cessation 03 KA 12C Change in depreciation method 04 KA 13C Change in useful life and residual value 04 KA 14H Maturin – Ledgers and FS extracts 08 QB 15H Sophie – Ledgers and FS extracts 10 QB 16C Diana – Ledgers 12 QB 17C Delta – FS with initial measurement 10 PE S16 DERECOGNITION / DISPOSALS / EXCHANGE OF ASSETS 18C Gain on disposal – Accumulated depreciation of disposal 06 CI 19C Disposal – Basic Ledgers 08 CI & KA 20C Exchange Scenarios and gain or loss on disposal 06 PE S18 21H Chiniot Trucking Limited: Ledgers – lengthy 15 QB 22H Lahore Motors Limited: Exchange and disposal – basic 10 QB 23C MJ Enterprises: Disposal, exchange, transfer – ledgers 09 QB WORKING BACKWARDS (COMPLEX) 24C Azfar and Company: Depreciation and disposal 22 QB 25C Naveed Enterprises: Depreciation and disposal 13 QB CORRECTION OF ERRORS (ADVANCED) 26H Time Life Enterprises – Errors & impact 10 QB 27C Ziakot Steel Works: Ledgers – corrections & recalculations 15 QB ADVANCED 28C Star Traders – Adjusting and closing entries 14 PE S17 29H Rose Enterprises – JE (disposal & complicated calculation) 12 PE S18 30C Aslam, Bashir & Co – JE (complicated recalculations) 16 QB 31H Kamran Enterprises: JE (calculation intensive) 17 PE A16 32C Alpha Enterprises: Ledgers based on exchange, disposal,

initial measurement and depreciation calculations 16 PE A19

CAF 1 – IAS 16

© kashifadeel.com

Page | 11

QUESTION 01 Complete the following table by stating whether the items listed below can be recognised as property, plant and equipment and reason if they cannot be so recognised: (05) Items Y/N Reason Small tools and spare parts Standby generator expected to be used for 7 years An office building. A trademark An office printer. A plot of land held for resale A factory including building and machineries. A bus for pick-and-drop of staff members. A generator given to another company on rent

QUESTION 02 B Co started construction on a building for its own use on 1 April 2007 and incurred the following costs:

Rs. 000 Purchase price of land 250,000 Stamp duty 5,000 Legal fees (registry cost) 10,000 Site preparation and clearance 18,000 Materials 100,000 Labour (1 April 2007 to 1 July 2008) 150,000 Architect’s fees 20,000 General overheads 30,000 583,000

The following information is also relevant: Material costs were greater than anticipated. On investigation, it was found that

materials costing Rs. 10 million had been spoiled and therefore wasted and a further Rs. 15 million was incurred as a result of faulty design work.

As a result of these problems, work on the building ceased for a fortnight during October 2007 and it is estimated that approximately Rs. 9 million of the labour costs relate to this period.

Required: Calculate the cost of the building that will be included in property, plant and equipment. (06) QUESTION 03 Part 1 A company purchased some heavy machinery. The invoice for the machinery showed the following items:

Rs.000 Cost of machinery 46,000 Cost of delivery 900 Cost of 12-month warranty on the machinery 1,600 Total amount payable 48,500

In addition, the company incurred Rs.3.4 million in making modifications to its factory so that the heavy machinery could be installed. What should be the cost of the machinery in the company’s machinery account in the ledger? (03)

CAF 1 – IAS 16


Page | 12

Part 2 A business acquired new premises at a cost of Rs.400 million on 1 January 2015. In the period to the year end of 31 March 2015 the following further costs were incurred.

Rs.000 Costs of initial adaptation of the building 12,000 Legal costs relating to the purchase 2,500 Monthly cleaning contract 3,400 Cost of air conditioning unit necessary for machinery to be used 2,800 Cost of machinery 12,300

What amount should appear as the cost of premises in the company’s statement of financial position at 31 March 2015? (04) QUESTION 04 An asset costs Rs. 100,000 and can be easily used for ten years. The company intends to use the asset for six years at which point expected residual value will be Rs. 40,000 (at current prices). Required: What is depreciable amount and depreciation expense of year 1? (02) QUESTION 05 Plant bought on 1 January 2011 for Rs. 100,000 with expected useful life of 5 years and residual value of Rs. 10,000 and the plant can be used to produce 7500 units over its life. Actual production of units has been 1500 units, 1800 units, 1200 units, 2000 units and 1000 units from year 1 to 5 respectively. Required: Calculate the amount of depreciation under various methods of depreciation. (12)

QUESTION 06 An item of equipment cost Rs. 1,260,000. It has an expected useful life of six years and an expected residual value of Rs. 240,000. Using the straight-line method of depreciation: What is the annual depreciation charge? (02) What will be the carrying amount of the asset after four years? (02) QUESTION 07 The financial year of a company is 1st January to 31st December. A non-current asset was purchased on 1st May for Rs. 60,000. Its expected useful life is five years and its expected residual value is zero. It is depreciated by the straight-line method. What will be the charge for depreciation in the year of acquisition if a proportion of a full year’s depreciation is charged, according to the period for which the asset has been held? (03)

QUESTION 08 A non-current asset cost Rs. 64,000. It is depreciated by the reducing balance method, at the rate of 25% each year. What is the annual depreciation charge in Year 1, Year 2 and Year 3? (04)

CAF 1 – IAS 16

© kashifadeel.com

Page | 13

QUESTION 09 A motor vehicle cost Rs.400,000. It has an expected residual value after 5 years of Rs.40,000. If the sum of the digits method of depreciation is used, what will be the carrying amount of the asset at the end of Year 2? (04) QUESTION 10 An office property cost Rs. 5 million, of which the land value is Rs. 2 million and the cost of the building is Rs. 3 million. The building has an estimated life of 50 years. What is the annual depreciation charge on the property, using the straight-line method? (03) QUESTION 11 A company constructed a building for its own use. The building was completed on 1 July 2008 and occupied on 1 September 2008. The company used the building for a long time but then due to expansion in its business it decided on 1 July 2015 it decided to shift in new rented premises. The company shifted to new premises on 1 August 2015 and disposed of the old building on 31 December 2015. Required: Identify the date from which depreciation should be commenced and date when depreciation charge should cease. (03) QUESTION 12 On 1 January 2001, Air Limited purchased an asset for Rs. 10,000 with nil residual value and is intended to be used for 10 years. The company uses straight line method. On 1 January 2003, Air Limited reconsidered the use of its depreciation methods and concluded that the straight-line method is not appropriate for this type of asset instead 25% depreciation on reducing balance method is appropriate. Required: Calculate depreciation expense from year 2001 to year 2004. (04) QUESTION 13 On 1 January 2001, Water Limited purchased an asset for Rs. 12,000 with estimated residual value of Rs. 2,000 and is intended to be used for 10 years. The company uses straight line method. In 2003, Water Limited reviewed the useful life and residual value of the asset. It was estimated that the asset’s remaining useful life is now only 5 years, however, the estimate of residual value has been increased to Rs. 3,000. Required: Calculate depreciation expense from year 2001 to year 2004. (04)

CAF 1 – IAS 16


Page | 14

QUESTION 14 Maturin bought a machine for Rs.10,000 on 1 January 2012. He estimates a useful life of 8 years and a residual value of Rs.800. Depreciation is to be calculated on a straight-line basis. Required: (a) Write up for 2012 and 2013 the

Machinery account Accumulated depreciation account Depreciation expense account.

(b) Show how the machine would be presented in the statement of financial positions as at 31 December 2012 and 31 December 2013. (08)

QUESTION 15 Since he commenced business on 1 January 2010 Sophie has purchased for cash the following three machines:

Date of purchase Cost Rs. Rate of depreciation Machine 1 20 January 2010 4,200 25% Machine 2 17 April 2011 5,000 30% Machine 3 11 July 2012 3,500 35%

Sophie’s policy is to charge a full year’s depreciation in the year of purchase irrespective of the date of purchase. The reducing balance method is used to calculate depreciation. Accounts are prepared to 31 December each year. Required: (a) Prepare the machinery account and accumulated depreciation account showing the

charge to the depreciation account for each year. (b) Show the relevant statement of financial position extracts for each year. (10) QUESTION 16 Diana leases out German sports cars. She started business on 1 January 2010 and has decided to depreciate the cars on a straight line basis at 25% per annum on cost at the year-end. During the years 2010 to 2013 the following purchases took place.

2010 Acquired 20 Porsche 924 Turbos at a cost of Rs.18,600,000 each 2011 Purchased 6 Porsches for a total cost of Rs.108,600,000. 2012 Purchased a further two cars costing Rs.19,800,000 each. 2013 Purchased 15 cars for Rs.21,000,000 each. Diana prepares accounts to 31 December each year.

Required: Prepare a vehicle account, an accumulated depreciation account and a depreciation account for the years 2010 to 2013. (12)

CAF 1 – IAS 16

© kashifadeel.com

Page | 15

QUESTION 17 On 1 January 2013 Delta acquired a specialized machine for its production department. The available information is as follows:

Rupees List price of machine 9,200,000 Freight charges 263,000 Electrical installation cost 245,000 Staff training for use of machine 351,000 Pre-production testing 193,000 Purchase of a three-year maintenance contract 528,000 Estimated residual value 175,000

Trade discount on list price 5% Early settlement discount taken 3% Estimated life (in machine hours) 12,000

Machine hours used during the years ended 31 December 2013, 2014 and 2015 were 2000, 3200 and 1400 respectively. On 1 January 2015 Delta decided to upgrade the machine by adding new components at a cost of Rs. 1,753,000. This upgrade led to a reduction in the production time per unit of goods being manufactured by the machine. The upgrade also increased the estimated remaining life of the machine at 1 January 2015 to 8,000 machine hours and its estimated residual value to Rs. 350,000. Required: For the years ended 31 December 2013, 2014 and 2015, compute the relevant amounts to be included (under each head) in the income statement and statement of financial position. Notes to the financial statements are not required. (10) QUESTION 18 A non-current asset was purchased on 1 June Year 1 for Rs.216,000. Its expected life was 8 years and its expected residual value was Rs.24,000. The asset is depreciated by the straight-line method. The financial year is from 1 January to 31 December. The asset was sold on 1 September Year 4 for Rs.163,000. Disposal costs were Rs.1,000. It is the company policy to charge a proportionate amount of depreciation in the year of acquisition and in the year of disposal, in accordance with the number of months for which the asset was held. What was the gain or loss on disposal? (06) QUESTION 19 R vehicle cost Rs.80,000 two years ago. It has been depreciated by the reducing balance method at 25% each year. It has now been disposed of for Rs.41,000 on 1st January 2019. Disposal costs were Rs.200. On 1st January 2019, the balance on the motor vehicles account before the disposal was Rs.720,000 and the balance on the accumulated depreciation of motor vehicles account was Rs.250,000. Show the ledgers for the year ended December 31, 2019 to record the disposal. (08)

CAF 1 – IAS 16


Page | 16

QUESTION 20 Following information pertains to three exchange transactions relating to fixed assets:

(i) (ii) (iii) --------- Rs. in million --------- Cash received/(paid) 1.1 (2.1) - Assets given-up: Original cost 10.3 12.4 14.5 Book value 6.4 7.3 3.4 Estimated fair value 8.5 6.6 4.6 Assets received: Estimated fair value 7.1 9.0 4.1

Additional information:

In case of transaction (i), fair values of both assets are reliably measurable. In case of transaction (ii), fair value of the asset received is clearly more evident. In case of transaction (iii), fair value of neither asset is reliably measurable.

Required: Compute gain or loss on disposal of fixed assets in each of the above transactions. (06)

QUESTION 21 Chiniot Trucking Limited is a haulage contractor. At 1 May 2014 the company had three lorries, details of which are as follows:

Lorry registration number Date purchased Cost Rs.000

BOW 1 1 July 2011 16,000 COW 2 1 February 2013 21,000 DOW 3 1 April 2014 31,000

During the year to 30 April 2015, the following lorry transactions took place: (a) BOW 1 was sold on 31 July 2014 for Rs.3 million on cash terms. On 1 August 2014

Chiniot Trucking Limited replaced it with a new lorry, registration number FOW 4 for which he paid Rs.35 million in cash.

(b) On 1 December 2014, the new lorry (FOW 4) was involved in a major accident, and as a result was completely written off. The company was able to agree a claim with his insurance company, and on 31 December 2014 he received Rs.30 million from the insurance company. On 1 January 2015 he bought another lorry (registration number HOW5) for Rs.41 million.

(c) During March 2015, the company decided to replace the lorry bought on 1 April 2014 (registration number DOW 3) with a new lorry. It was delivered on 1 April 2015 (registration number JOW 6). The company agreed a purchase price of Rs.26 million for the new lorry, the terms of which were Rs.20 million in part exchange for the old lorry and the balance to be paid immediately in cash.

Notes: (1) Chiniot Trucking Limited uses the straight-line method of depreciation. (2) The lorries are depreciated over a five-year period by which time they are assumed

to have an exchange value of Rs.1 million each. (3) Month wise deprecation is to be charged. (4) Chiniot Trucking Limited does not keep separate ledger accounts for each individual

lorry.

CAF 1 – IAS 16

© kashifadeel.com

Page | 17

Required (a) Write up the following accounts for the year to 30 April 2015:

(i) lorries account (ii) lorries disposal account (iii) allowance for depreciation on lorries account.

(b) Show how the lorries account and the allowance for depreciation account would be presented in Chiniot Trucking Limited’s statement of financial position as at 30 April 2015. (15)

QUESTION 22 Lahore Motors Limited leases second-hand German sports cars, generally a standard model. It started business on 1 January 2012 and has decided to depreciate the cars on a straight line basis at 25% per annum on cost at the year-end. During the years 2012 to 2015 the following purchases and sales of cars took place. 2012 Acquired 20 Porsche 924 Turbos at a cost of Rs.18.6 million each 2013 Purchased 6 Porsches for a total cost of Rs.108.6 million. 2014 Traded-in two of the cars acquired in 2012 and received an allowance of Rs.9

million each which was set against the purchase of a further two cars costing Rs.19.8 million each

2015 Replaced 15 cars purchased in 2012 with another 15, each of which cost Rs.21 million. A trade-in allowance totalling Rs.48 million was received.

Lahore Motors Limted prepares accounts to 31 December each year. Required: Prepare a vehicle account, a provision for depreciation account, a depreciation account and a disposals account for the years 2012 to 2015. (10) QUESTION 23 The following information is available in respect of non-current assets of MJ Enterprises (MJE): (i) The opening balances of cost and accumulated depreciation of non-current assets as

on January 1, 2015 were Rs. 100,000 and Rs. 33,000 respectively.

(ii) Assets costing Rs. 20,000 were acquired on July 1, 2014. The remaining noncurrent assets were acquired when MJE commenced business on January 1, 2011. There were no disposals of non-current assets up to January 1, 2015.

(iii) MJE provides for depreciation on the cost of assets at the rate of 10% per annum using the straight line basis. Depreciation is calculated on a monthly basis.

(iv) Assets acquired on January 1, 2011 whose net book value on June 30, 2015 was Rs. 2,750 were sold for Rs. 1,500.

(v) On July 1, 2015, an asset which was acquired at a cost of Rs. 2,000 when MJE commenced business, was exchanged for a new asset. The balance of the purchase price was settled with a cheque for Rs. 800. The list price of the new asset was Rs. 1,200.

(vi) On October 1, 2015 MJE transferred to its factory an asset which had been included in its trading inventory and which bore a price label of Rs. 15,400 in the showroom. MJE makes a gross profit of 40% of cost, on sale of such assets.

CAF 1 – IAS 16


Page | 18

Required: Prepare the following ledger accounts for the year ended December 31, 2015: (a) Non-current assets (b) Accumulated depreciation (c) Profit/loss on sale of non-current assets (09) QUESTION 24 The written down value of plant and machinery of Azfar and Company as at 30 June 2015 is Rs. 831,128. Following additional information is also available: (i) On 1 July 2011, second-hand machinery was purchased for Rs. 300,000. An amount

of Rs. 200,000 was spent on its overhauling, before use.

(ii) On 1 January 2012 machinery costing Rs. 250,000 was purchased.

(iii) The machinery purchased on 1 July 2011 became obsolete and was sold for Rs. 100,000 on 1 January 2014. On the same date, new machinery was purchased at a cost of Rs. 600,000.

(iv) Machinery purchased on 1 January 2012 was sold on 30 June 2015 at its book value plus Rs. 50,000.

Azfar and Company provides depreciation on machinery @ 15% on written down value. Depreciation on addition / deletion is provided in proportion to the period of use. Required: (a) Machinery Account from 1 July 2013 to 30 June 2015 (b) Machinery Disposal Account for the years ended 30 June 2014 and 2015 (22) QUESTION 25 Naveed Enterprises commenced business on 01 July 2012. Certain information about their vehicles, for the years ended 30 June 2014 and 2015 can be ascertained from the following ledger accounts:

Accumulated depreciation on vehicles All amount in Rupees 28-02-14 Vehicle disposal 435,467 01-07-13 Balance b/d 1,360,000 30-06-14 Balance c/d 2,160,800 30-06-14 Dep. for the year 1,236,267

2,596,267 2,596,267 30-04-15 Vehicle disposal 560,000 01-07-14 Balance b/d 2,160,800 30-06-15 Balance c/d 3,025,040 30-06-15 Dep. for the year 1,424,240

3,585,040 3,585,040

Vehicle disposal account All amount in Rupees 28-02-14 Cost 01-07- 2012 1,420,000 28-02-14 Accumulated Dep. 435,467 28-02-14 Profit on disposal 165,467 28-02-14 Cash received 1,150,000

1,585,467 1,585,467 30-04-15 Cost 01-07- 2012 1,200,000 30-04-15 Accumulated Dep. 560,000

30-04-15 Cash received 500,000 30-04-15 Loss on disposal 140,000

1,200,000 1,200,000

CAF 1 – IAS 16

© kashifadeel.com

Page | 19

Following further information is available in respect of the vehicles for the last three years (01-07-2012 to 30-06-2015): (i) Depreciation is being provided at the rate of 20% per annum on diminishing balance

method. (ii) Accumulated depreciation brought down on 1 July 2013 represents depreciation for

the whole year on vehicles bought on 1 July 2012. (iii) Two vehicles were purchased on 1 November 2013 and 1 September 2014. Required: Prepare Vehicles (Asset) Account for the years ended 30 June 2014 and 2015. (13) QUESTION 26 The draft statement of financial position of Time Life Enterprises (TLE) as on December 31, 2013, depicts the following: Rs.

Plant and Machinery – Cost 12,387,060 Less: Accumulated Depreciation 4,792,540 7,594,520

On reviewing the accounts of the business, its auditor found that the records have been correctly maintained except for the following events: (i) On January 17, 2013 a contract was signed for the purchase of a machine from

Makers Limited for Rs.1,125,000 which is to be delivered on July 17, 2014. TLE paid an advance of Rs. 450,000 on the signing of the contract and the balance was to be paid on delivery of the machine. The advance was debited to plant and machinery account.

(ii) Installation of a machine was completed on January 21, 2013. The cost of machine of Rs.2,700,000 was debited to plant and machinery account. The cost of installation amounting to Rs.300,000 had been debited to Repairs Account.

Depreciation is charged on a reducing balance method at 10% per annum. Depreciation on new assets commences in the month in which the asset is acquired. The depreciation expense for the year 2013 have been correctly calculated and recorded except for the impact of errors discussed above. Required: Determine the correct balances as at December 31, 2013 by recording appropriate adjustments in the following accounts: (a) Plant and machinery (b) Accumulated depreciation - plant and machinery (10)

CAF 1 – IAS 16


Page | 20

QUESTION 27 Ziakot Steel Works, a sole proprietorship, provides depreciation on plant and machinery at 20% per annum on diminishing balance method. On July 1, 2014 the balances in the plant and machinery and accumulated depreciation accounts were Rs. 712,000 and Rs. 240,000 respectively. Depreciation is provided from the month of purchase till the month of disposal. It was discovered during 2014-2015 that: (a) Rs. 25,000 being ordinary repairs to machinery, incurred on October 1, 2012 had

been capitalised incorrectly. (b) A machine which was purchased on January 1, 2012 for Rs. 100,000 was traded in,

on March 31, 2014 for a new and more sophisticated machine. The disposal was not recorded and the new machine was capitalised at Rs. 120,000 being the net amount paid to the supplier. The trade-in allowance amounted to Rs. 50,000.

It was decided to correct the above mistakes while finalising the accounts for the year ended June 30, 2015.

Only one machine was purchased during the year ended June 30, 2015 costing Rs. 60,000. The machine was received in the factory on October 1, 2014 and was installed on January 1, 2015.

Required Plant and machinery account and accumulated depreciation account for the year ended June 30, 2015. (Show all workings) (15) QUESTION 28 The following balances pertaining to fixed assets have been extracted from the trial balance of Star Traders for the year ended 31 December 2016:

Rupees Fixed assets – cost 25,000,000 Accumulated depreciation 6,250,000 Depreciation expense 1,250,000 Gain on disposal of fixed assets 58,000

Depreciation on fixed assets is charged from the month of addition to the month prior to disposal using reducing balance method at 20% per annum. Depreciation expense for the current year has been correctly calculated and recorded except for the following: (i) Physical verification of fixed assets carried out on 31 December 2016, revealed the

following matters: Two laptops purchased on 1 July 2015 at a cost of Rs. 245,000 were

withdrawn by the proprietor on 1 May 2016 for his personal use.

Equipment costing Rs. 800,000 purchased on 1 January 2014 was damaged in rain in December 2016 and was scrapped.

A machine costing Rs. 75,000 is not in the list of fixed assets, but has been in the use of sales department since 1 March 2016. On investigation it was found that the machine was transferred from stock-in-trade but no adjustment was made in the books.

CAF 1 – IAS 16

© kashifadeel.com

Page | 21

(ii) Installation of an assembly plant was completed on 1 December 2016. Installation charges amounting to Rs. 240,000 have not yet been recorded in the books due to non-receipt of the invoice.

(iii) An invoice of Rs. 683,000 for a machine purchased on 1 October 2016 was mistakenly accounted for as Rs. 863,000.

Required: Prepare necessary adjusting and closing entries for the year ended 31 December 2016.

(14) QUESTION 29 Following information pertains to Rose Enterprises for the year ended 31 December 2017: (i) Acquisition of land and construction of a factory building:

Rs. in '000 Cost of freehold land purchased with old building structure 25,000 Cost of demolition of the old building structure 1,500 Proceeds from sale of scrap of the old building 250 Fee paid to ABC Architects for site plan and drawings 800 Advance paid to Quality Construction (QC) for construction of the building

6,000

Further payment to QC 35,000 (ii) Acquisition and installation of new plant:

Rs. in '000 25% cost of the plant paid in advance 4,000 Transportation and import charges 1,250 Cost of installation 400

(iii) Other information:

Cost of freehold land includes property tax for 2017-18 and transfer fee of Rs. 120,000 and Rs. 850,000 respectively.

Factory building was available for use from 1 July 2017. The final invoice of Rs. 19,000,000 is still unpaid.

Transportation and import charges of the plant include annual fire insurance premium and insurance in-transit of Rs. 350,000 and Rs. 60,000 respectively.

The plant started operations on 1 August 2017. Remaining amount was paid on 31 August 2017.

Old plant was sold on 1 September 2017 at its written down value plus 20%. The plant was purchased on 1 April 2015 at a cost of Rs. 8,500,000.

Building and plant are depreciated at the rate of 5% and 10% respectively on reducing balance method.

Required: (a) Pass journal entry to record disposal of the old plant. (03) (b) Determine written down value of the fixed assets as at 31 December 2017. (09)

CAF 1 – IAS 16


Page | 22

QUESTION 30 The accountant of Aslam, Bashir & Company, a partnership concern, has finalised the draft financial statements for the year ended June 30, 2015. Mr Bashir is not satisfied with the non-current assets reported in the above financial statements and have asked you to review the same. The details of non-current assets appearing in the financial statements are as follows: Useful life

(years) Cost (Rs.) Accumulated

depreciation (Rs.) 2015 2014 2015 2014 Land 5,000,000 5,000,000 - - Building 20 7,250,000 7,000,000 4,562,500 4,200,000 Plant & Machinery 15 11,910,000 10,000,000 3,994,000 3,200,000 Furniture & Fixtures 10 3,075,000 3,000,000 2,257,500 1,950,000

Depreciation is provided on straight line basis from the date of purchase to the date of sale. An analysis of the working papers has revealed that the details of additions/deletions to non-current assets are as follows: (i) In January 2015, Rs. 200,000 were spent on the extension of the underground water

tank and Rs. 50,000 were spent on fumigation of the entire building.

(ii) On March 31, 2015 a generator which had completed five years of its life was replaced by another generator. The cost of new generator was Rs. 2,000,000 whereas the supplier allowed 10% of the cost of the old generator as trade-in-allowance.

As a result, the company made a payment of Rs. 1,910,000 only.

(iii) On July 1, 2014 fully depreciated furniture costing Rs. 400,000 was repaired at a cost of Rs. 75,000. It is expected that the repairs would allow the furniture to be used for the next five years.

Required: Prepare necessary journal entries to record the required corrections. (16) QUESTION 31 Kamran Enterprises (KE) provides depreciation on plant and machines at 10% on written-down value. Depreciation is charged from the month the asset is available for use in operations up to the month prior to its disposal. Cost of its plant & machines and the accumulated depreciation as on 1 July 2015 were Rs. 75 million and Rs. 17 million respectively. The following information is available in respect of its plant & machines, for the year ended 30 June 2016: (i) On 1 October 2015, a second-hand machine was acquired from a Chinese company

for Rs. 15 million. The machine was renovated and overhauled at a cost of Rs. 3 million. 25% of this expenditure was in respect of purchase of consumables.

(ii) On 1 November 2015, KE transferred a machine having a list price of Rs. 10 million from its stock-in-trade to its Engineering Department. KE sells such machines at cost plus 25%.

(iii) On 1 January 2016, certain worn-out parts of a plant were replaced at a cost of Rs. 4 million. The replaced parts neither enhanced the useful life of the plant nor its

CAF 1 – IAS 16

© kashifadeel.com

Page | 23

operating efficiency. The old parts were sold for Rs. 0.75 million. The plant was purchased for Rs. 25 million on 1 January 2015. On 1 May 2016, the plant was damaged and remained in-operative for one month. KE spent an amount of Rs. 3 million on repairs to restore the plant in working condition.

(iv) On 1 April 2016, a machine which was purchased on 1 July 2012 for Rs. 12 million was completely damaged and was sold for Rs. 1.2 million.

Required: Prepare accounting entries to record the above transactions in KE’s books for the year ended 30 June 2016. (17) QUESTION 32 Following information pertains to plant and machinery of Alpha Enterprises (AE): (i) As at 1 January 2018, balances of cost and accumulated depreciation amounted to

Rs. 12,700,000 and Rs. 6,240,000 respectively.

(ii) On 1 April 2018, an old machine having fair value of Rs. 340,000 was exchanged for a new machine. The balance of the purchase price was paid through a cheque of Rs. 680,000. The list price of the new machine was Rs. 1,130,000. The old machine had been acquired for Rs. 870,000 on 1 September 2015.

(iii) On 1 February 2018, a plant having a list price of Rs. 10,000,000 was acquired. A

trade discount of 5% was allowed on the list price. The plant was ready for use on 1 August 2018 after incurring the following costs:

Rs. in '000 Freight charges 660 Consultant fees 540 Installation and testing 600 Administration and other general overheads 160 Staff training 120 Opening ceremony 100 2,180

(iv) On 31 October 2018, another machine was sold for Rs. 334,000. It was acquired on

1 January 2015 and had a net book value of Rs. 512,000 on 1 January 2018. A cost of Rs. 25,000 was incurred on its disposal.

(v) AE depreciates plant and machinery at 20% per annum using the reducing balance method.

Required: Prepare following ledger accounts pertaining to the plant and machinery for the year ended 31 December 2018: (a) Cost (06) (b) Accumulated depreciation (06) (c) Assets disposal (04)

CAF 1 – IAS 16


Page | 24

CAF 1 – IAS 16

© kashifadeel.com

Page | 25

ANSWER 01

Items Y/N Reason Small tools and spare parts N Immaterial Standby generator expected to be used for 7 years Y An office building. Y A trademark N Intangible asset An office printer. Y A plot of land held for resale N Inventory A factory including building and machineries. Y A bus for pick-and-drop of staff members. Y A generator given to another company on rent Y ANSWER 02

Rs. 000 Purchase price of land 250,000 Stamp duty 5,000 Legal fees (registry cost) 10,000 Site preparation and clearance 18,000 Materials Rs. 100,000 – 10,000 – 15,000 75,000 Labour (1 April 2007 to 1 July 2008) 150,000 – 9,000 141,000 Architect’s fees 20,000 General overheads (not included) 0 519,000 ANSWER 03

Part (1): Cost of machinery: Rs. 000 Cost 46,000 Cost of delivery 900 Modification cost 3,400 Total 50,300

Part (2): Cost of premises: Rs. 000 Cost 400,000 Adaptation 12,000 Legal fees 2,500 Total 414,500

ANSWER 04 Depreciable amount Rs. 100,000 – 40,000 = Rs. 60,000

Depreciation expense – year 1 Rs. 60,000 / 6 years = Rs. 10,000

CAF 1 – IAS 16


Page | 26

ANSWER 05

Straight Line Method =100,000 − 10,000

100,000×

15 푦푒푎푟푠

= 18%

Year CA at start Annual Depreciation CA at end 1 100,000 [100,000 – 10,000] / 5 years = Rs. 18,000 82,000 2 82,000 [100,000 – 10,000] / 5 years = Rs. 18,000 64,000 3 64,000 [100,000 – 10,000] / 5 years = Rs. 18,000 46,000 4 46,000 [100,000 – 10,000] / 5 years = Rs. 18,000 28,000 5 28,000 [100,000 – 10,000] / 5 years = Rs. 18,000 10,000

Total Depreciation 5 years = Rs. 90,000

Reducing balance method = 1−10,000

100,000= 36.9%

Year CA at start Annual Depreciation CA at end 1 100,000 100,000 x 36.9% = Rs. 36,900 63,100 2 63,100 63,100 x 36.9% = Rs. 23,284 39,816 3 39,816 39,816 x 36.9% = Rs. 14,692 25,124 4 25,124 25,124 x 36.9% = Rs. 9,271 15,853 5 15,853 15,853 x 36.9% = Rs. 5,853 10,000

Total Depreciation 5 years = Rs. 90,000 Sum (Number) of units method [also called usage method] =

100,000 − 10,0007500 푢푛푖푡푠

× 푢푛푖푡 푢푠푒푑 Year CA at start Annual Depreciation CA at end

1 100,000 [100,000 – 10,000] x 1500/7500 = Rs. 18,000 82,000 2 82,000 [100,000 – 10,000] x 1800/7500 = Rs. 21,600 60,400 3 60,400 [100,000 – 10,000] x 1200/7500 = Rs. 14,400 46,000 4 46,000 [100,000 – 10,000] x 2000/7500 = Rs. 24,000 22,000 5 22,000 [100,000 – 10,000] x 1000/7500 = Rs. 12,000 10,000

Total Depreciation 5 years = Rs. 90,000 Sum of Digit Method = n (n+1) / 2 = 5 (5+1) / 2 = 15

Year CA at start Annual Depreciation CA at end 1 100,000 [100,000 – 10,000] x 5/15 = Rs. 30,000 70,000 2 70,000 [100,000 – 10,000] x 4/15 = Rs. 24,000 46,000 3 46,000 [100,000 – 10,000] x 3/15 = Rs. 18,000 28,000 4 28,000 [100,000 – 10,000] x 2/15 = Rs. 12,000 16,000 5 16,000 [100,000 – 10,000] x 1/15 = Rs. 6,000 10,000

Total Depreciation 5 years = Rs. 90,000

ANSWER 06 Annual depreciation charge = Rs. (1,260,000 – 240,000) / 6 years = Rs. 170,000

Rs. Asset at cost 1,260,000 Less: Accumulated depreciation Rs. 170,000 x 4 years (680,000) 580,000

CAF 1 – IAS 16

© kashifadeel.com

Page | 27

ANSWER 07 Depreciation in year 1 = Rs. (60,000 – 0) / 5 years x 8/12 = Rs. 8,000

ANSWER 08

Rs. Cost of asset 64,000 Year 1 Depreciation (25%) (16,000) Carrying amount at the end of year 1 48,000 Year 2 Depreciation (25%) (12,000) Carrying amount at the end of year 2 36,000 Year 3 Depreciation (25%) (9,000) Carrying amount at the end of year 3 27,000

ANSWER 09

Sum of digits = 5 + 4 + 3 + 2 + 1 = 15 Rs. Cost of asset 400,000 Year 1 Depreciation (400,000 – 40,000) x 5/15 (120,000) Carrying amount at the end of year 1 280,000 Year 2 Depreciation (400,000 – 40,000) x 4/15 (96,000) Carrying amount at the end of year 2 184,000

ANSWER 10

Rs. Rs. 3,000,000 / 50 years = 60,000

Land is not depreciated ANSWER 11

Commencement of depreciation 1 July 2008 Cessation of depreciation 31 December 2015

ANSWER 12 Year Calculation Rs.

2001 Rs. 10,000 / 10 years 1,000 2002 Rs. 9,000 / 9 years 1,000 2003 Rs. 10,000 – 1,000 – 1,000 = Rs. 8,000 x 25% 2,000 2004 Rs. 8,000 – 2,000 = Rs. 6,000 x 25% 1,500

ANSWER 13 Year Calculation Rs. 2001 Rs. 12,000 – 2,000 = Rs. 10,000 / 10 years 1,000 2002 Same as above 1,000 2003 Rs. 12,000 – 1,000 – 1,000 = Rs. 10,000 - Rs. 3,000 = Rs. 7,000 / 5 years 1,400 2004 Same as above 1,400

CAF 1 – IAS 16


Page | 28

ANSWER 14 Part a

Machinery Date Particulars Rs. Date Particulars Rs. 2012 2012 1 Jan Bank 10,000 31 Dec Balance c/d 10,000

10,000 10,000 2013 2013 1 Jan Balance b/d 10,000 31 Dec Balance c/d

10,000 10,000

Accumulated Depreciation Date Particulars Rs. Date Particulars Rs. 2012 2012

31 Dec Balance c/d 1,150 31 Dec Depreciation 1,150 1,150 1,150

2013 2013 1 Jan Balance b/d 1,150

31 Dec Balance c/d 2,300 31 Dec Depreciation 1,150 2,300 2,300


Date Particulars Rs. Date Particulars Rs. 2012 2012

31 Dec Acc. Dep 1,150 31 Dec P & L 1,150 1,150 1,150

2013 2013 31 Dec Acc. Dep 1,150 31 Dec P & L 1,150

1,150 1,150 Depreciation = [10,000 – 800] /8 years= Rs. 1,150 Part (b) 2013 2012 Non-current assets Rs. Rs. Machinery at cost 10,000 10,000 Acc. Depreciation (2,300) (1,150) 7,700 8,850

ANSWER 15 Part (a):

Machinery Date Particulars Rs. Date Particulars Rs. 2010 2010

20 Jan Bank 4,200 31 Dec Balance c/d 4,200 4,200 4,200

2011 2011 1 Jan Balance b/d 4,200 17 Apr Bank 5,000 31 Dec Balance c/d 9,200

9,200 9,200 2012 2012 1 Jan Balance b/d 9,200

11 July Bank 3,500 31 Dec Balance c/d 12,700 12,700 12,700

CAF 1 – IAS 16

© kashifadeel.com

Page | 29

Accumulated Depreciation Date Particulars Rs. Date Particulars Rs. 2010 2010

31 Dec Balance c/d 1,050 31 Dec Depreciation- (W1) 1,050 1,050 1,050

2011 2011 1 Jan Balance b/d 1,050


2012 2012 1 Jan Balance b/d 3,337


Part (b) Statement of financial position (extract) 2012 2011 2010 Non-current assets Rs. Rs. Rs. Machinery at cost 12,700 9,200 4,200 Acc. Depreciation (6,203) (3,337) (1,050) 6,497 5,863 3,150 W1 – Depreciation Rs. Year 2010 M1 Rs.4, 200 x 25% = 1,050 1,050 Year 2011 M1 Rs.4,200 – 1,050 = Rs.3,150 x 25% = 787 M2 Rs.5,000 x 30% = 1,500 2,287 Year 2012 M1 Rs. 3,150 – 787 = Rs.2,363 x 25% = 591 M2 Rs.5000 – 1,500 = Rs.3,500 x 30% = 1,050 M3 Rs.3,500 x 35% = 1,225 2,866

ANSWER 16

Vehicle Date Particulars Rs.000 Date Particulars Rs.000 2010 2010

Bank 372,000 31 Dec Balance c/d 372,000 372,000 372,000

2011 2011 1 Jan Balance b/d 372,000


2012 2012 1 Jan Balance b/d 480,600


2013 2013 1 Jan Balance b/d 520,200

Bank 315,000 31 Dec Balance c/d 835, 200 835,200 835,200

CAF 1 – IAS 16


Page | 30

Accumulated Depreciation Date Particulars Rs.000 Date Particulars Rs.000 2010 2010

31 Dec Balance c/d 93,000 31 Dec Depreciation- (W) 93,000 93,000 93,000

2011 2011 1 Jan Balance b/d 93,000


2012 2012 1 Jan Balance b/d 213,150


2013 2013 1 Jan Balance b/d 343,200



Date Particulars Rs.000 Date Particulars Rs.000 2010 2012

31 Dec Acc. Dep 93,000 31 Dec P & L 93,000 93,000 93,000

2011 2013 31 Dec Acc. Dep 120,150 31 Dec P & L 120,150

120,150 120,150 2012 2013

31 Dec Acc. Dep 130,050 31 Dec P & L 130,050 130,050 130,050

2013 2013 31 Dec Acc. Dep 208,800 31 Dec P & L 208,800

208,800 208,800 Working (W)

Year Calculation Depreciation 2010 372,000 x 25% 93,000 2011 480,600 x 25% 120,150 2012 520,200 x 25% 130,050 2013 835,200 x 25% 208,800

ANSWER 17 Year ended 31-Dec-13 31-Dec-14 31-Dec-15 Income statement: --------------- Amount in Rs. -------------- Depreciation [9,441,000(W-1)-175,000]×2,000/12,000 1,544,333 [9,441,000(W-1)-175,000]×3,200/12,000 2,470,934 [7,178,733(W-2)-350,000]×1,400/8,000 1,195,028 Maintenance cost (528,000/3) 176,000 176,000 176,000 Other income (Discount received (8,740,000×3%)) (262,200) - - Administration expenses (Staff training) 351,000 - -

CAF 1 – IAS 16

© kashifadeel.com

Page | 31

As at 31-Dec-13 31-Dec-14 31-Dec-15 Statement of financial position: --------------- Amount in Rs. -------------- Property, plant and equipment Cost (W-1) 9,441,000 9,441,000 *11,194,000 Accumulated depreciation (1,544,333) (4,015,267) (5,210,295) 7,896,667 5,425,733 5,983,705 Long term prepayment 176,000 - - Short term Prepayment 176,000 176,000 - * [9,441,000+1,753,000] W1: Cost price of machine Rupees List price 9,200,000 Less: Trade discount (9,200,000×5%) (460,000) 8,740,000 Add: Freight charges 263,000 Electrical installation cost 245,000 Pre-production testing 193,000 9,441,000

W2 – Valuation after upgrade Rupees Original cost W1 9,441,000 Depreciation up to 31-12-14 (1,544,333 + 2,470,934) (4,015,267) Carrying amount on 1-Jan-15 5,425,733 Capitalisation of upgrade 1,753,000 Valuation after capitalisation 7,178,733 ANSWER 18 Rs. Sale proceeds on disposal (Cash received) 163,000 Less: Disposal costs and cash paid (1,000)

Net disposal proceeds 162,000

Asset at cost 216,000 Less: Accumulated depreciation W1 (78,000)

Carrying amount at date of disposal 138,000

GAIN (LOSS) ON DISPOSAL 24,000 W1 Rs. Depreciation year 1 (Rs. 216,000 – 24,000) / 8 years = 24,000 x 7/12 14,000 Depreciation year 2 Rs. 24,000 x 12/12 24,000 Depreciation year 3 Rs. 24,000 x 12/12 24,000 Depreciation year 4 Rs. 24,000 x 8/12 16,000 78,000

CAF 1 – IAS 16


Page | 32

ANSWER 19

Motor Vehicles Balance b/d 720,000 Disposal 80,000 Balance c/d 640,000 720,000 720,000 Balance b/d 640,000

Accumulated depreciation

Disposal W1 35,000 Balance b/d 250,000 Balance c/d 321,250 Depreciation expense 106,250 356,250 356,250 Balance b/d 321,250

Disposal

Motor vehicle 80,000 Accumulated dep. 35,000 Bank (disposal cost) 200 Bank / Receivable 41,000 Loss on disposal 4,200 80,200 80,200

W1 Depreciation of disposed asset Rs. Rs. Cost of asset 80,000 Year 2017 Depreciation 25% (20,000) 20,000 60,000 Year 2018 Depreciation 25% (15,000) 15,000 35,000

W1: Depreciation (Year 2019)

Cost Acc. Dep. WDV Rate Months Rs. 1 Jan 2019

Rs. Disposed 80,000 35,000 45,000 25% 0/12 0 Other remaining 640,000 215,000 425,000 25% 12/12 106,250 Total opening 720,000 250,000 470,000 106,250 ANSWER 20 (i) (ii) (iii) Rs. m Rs. m Rs. m Asset Acquired (see below) 7.4 9.0 3.4 Cash (paid)/received 1.1 (2.1) -

Net disposal proceeds 8.5 6.9 3.4

Carrying amount at date of disposal (6.4) (7.3) (3.4)

GAIN (LOSS) ON DISPOSAL 2.1 (0.4) 0 Case (i) Fair value of asset given up ± Cash 8.5 – 1.1 = 7.4 Case (ii) Fair value of asset received = 9.0 Case (iii) Carrying amount ± Cash 3.4 + 0 = 3.4

CAF 1 – IAS 16

© kashifadeel.com

Page | 33

ANSWER 21 Part (a)

Lorries Rs. 000 Rs. 000 01.05.14 b/d 68,000 31.07.14 Disposal (BOW 1) 16,000 01.08.14 Cash (FOW 4) 35,000 15.12.14 Disposal (FOW 4) 35,000 01.01.15 Cash (HOW 5) 41,000 01.04.15 Disposal (DOW 3) 31,000 01.04.15 Disposal A/c (JOW 6) 26,000 30.04.15 c/d 88,000

170,000 170,000

Accumulated depreciation Rs. 000 Rs. 000 31.07.14 Disposal (BOW 1) 9,250 01.05.14 b/d 14,000 15.12.14 Disposal (FOW 4) 2,267 30.04.15 Charge for year W 15,601 01.04.15 Disposal (DOW 3) 6,000 30.04.15 c/d 12,084 29,601 29,601

Disposal A/C Rs. 000 Rs. 000 31.07.14 Disposal (BOW 1) 16,000 31.07.14 Acc. Dep. (BOW 1) 9,250

31.07.14 Cash (BOW 1) 3,000

15.12.14 Disposal (FOW 4) 35,000 01.12.14 Acc. Dep. (FOW 4) 2,267 31.12.14 Cash (FOW 4) 30,000

01.04.15 Disposal (DOW 3) 31,000 01.04.15 Acc. Dep. (DOW 3) 6,000 01.04.15 Cash (in part exchange) 6,000 01.04.15 New Asset (JOW 6) 26,000

30.04.15 Loss on disposal 11,483 88,000 88,000

Part (b) Statement of financial position (extract) at 30 April 2015 Non-current assets Rs. 000 Lorries – at cost (Note) 88,000 Less: accumulated depreciation (12,084) Carrying amount 75,916 Working - Depreciation Year – (Months of Dep.) BOW 1 COW 2 DOW 3 FOW 4 HOW 5 JOW 6 TOTAL 2012 (10, 0, 0, 0, 0, 0) 2,500 2,500 2013 (12, 3, 0, 0, 0, 0) 3,000 1,000 4,000 2014 (12, 12, 1, 0, 0, 0) 3,000 4,000 500 7,500 8,500 5,000 500 14,000 2015 (3, 12, 11, 4, 4, 1) 750 4,000 5,500 2,267 2,667 417 15,601 9,250 9,000 6,000 2,267 2,667 417 Working – Annual Depreciation Particulars BOW 1 COW 2 DOW 3 FOW 4 HOW 5 JOW 6 TOTAL Cost 16,000 21,000 31,000 35,000 41,000 26,000 Residual value (1,000) (1,000) (1,000) (1,000) (1,000) (1,000) Depreciable amount 15,000 20,000 30,000 34,000 40,000 25,000 Useful life 5 years 5 years 5 years 5 years 5 years 5 years Annual Depreciation 3,000 4,000 6,000 6,800 8,000 5,000

CAF 1 – IAS 16


Page | 34

ANSWER 22

Vehicles Rs. 000 Rs. 000 2012 Cash (18.6 x 20) 372,000 2012 c/d 372,000

372,000 372,000 2013 b/d 372,000

Cash 108,600 2013 c/d 480,600 480,600 480,600

2014 b/d 480,600 2014 Disposal (18.6 x 2) 37,200 Exchange/Disposal (New) 39,600 c/d 483,000 520,200 520,200

2015 b/d 483,000 2015 Disposal (18.6x15) 279,000 Disposal (new 21 x 15) 315,000 c/d 519,000

798,000 798,000

Accumulated depreciation Rs. 000 Rs. 000 2012 c/d 93,000 2012 Depreciation 372x25% 93,000

93,000 93,000 2013 c/d 213,150 2013 b/d 93,000

Depreciation 480.6x25% 120,150 213,150 213,150

2014 Disposal 18,600 2014 b/d 213,150 c/d 315,300 Depreciation 483x25% 120,750 333,900 333,900

2015 Disposal 209,250 2015 b/d 315,300 c/d 235,800 Depreciation 519x25% 129,750

445,050 445,050

Depreciation Rs. 000 Rs. 000 2012 Accumulated depreciation 93,000 2012 PL 93,000 2013 Accumulated depreciation 120,150 2013 PL 120,150 2014 Accumulated depreciation 120,750 2014 PL 120,750 2015 Accumulated depreciation 129,750 2015 PL 129,750

Disposal

Rs. 000 Rs. 000 2014 Vehicle 37,200 2014 Acc. Dep. (37.2x25%x2) 18,600

Cash (19.8 x 2 – trade in) 21,600 New Vehicles 39,600 Loss on disposal 600 58,800 58,800

2015 Vehicle 279,000 2015 Acc. Dep. (279x25%x3) 209,250 Cash (315,000 – 48,000) 267,000 New Vehicle 315,000 Loss on disposal 21,750 546,000 546,000

Note: Detail of dates is not given so depreciation has been charged on yearly basis.

CAF 1 – IAS 16

© kashifadeel.com

Page | 35

ANSWER 23 Part (a)

Non-current assets Rs. Rs. 01.01.15 b/d (i) 100,000 30.06.15 Disposal (iv)

2,750x10/5.5 years 5,000

01.07.15 Disposal (new asset) 1,200 01.07.15 Disposal (v) 2,000 01.10.15 Inventory

(15,400x100/140)

11,000

31.12.15 c/d

105,200

112,200 112,200 Part (b)

Accumulated depreciation Rs. Rs. 30.06.15 Disposal (iv) 2,250 01.01.15 b/d (i) 33,000 01.07.15 Disposal (v) 900 31.12.15 Charge for year W1 9,985 31.12.15 c/d 39,835 42,985 42,985 Part (c)

Disposal A/C Rs. Rs. 30.06.15 Non-current asset (iv) 5,000 30.06.15 Acc. Dep. (5,000-2,750) 2,250

30.06.15 Cash 1,500 30.06.15 Loss on disposal 1,250 5,000 5,000

01.07.15 Non-current asset (v) 2,000 01.07.15 Acc. Dep. 2,000 x 10% x4.5 years

900

01.07.15 Cash (for new asset) 800 01.07.15 New Asset (exchange) 1,200 01.07.15 Loss on disposal 700 2,800 2,000


Cost Acc. Dep. WDV Rate Months Rs. 1 Jan 2015

Rs. Disposed 1 5,000 10% 6/12 250 Disposed 2 2,000 10% 6/12 100 Other remaining 93,000 10% 12/12 9,300 Total opening 100,000 Addition 1 1,200 10% 6/12 60 Addition 2 11,000 10% 3/12 275 9,985

ANSWER 24 Part (a)

Plant & Machinery (Net) Rs. Rs. 01.07.13 b/d 1,055,221 01.01.14 Additions 600,000 01.01.14 Disposal 334,156

30.06.14 Depreciation 176,189 30.06.14 c/d 1,144,876

1,655,221 1,655,221 01.07.14 b/d 1,144,876 30.06.15 Disposal 142,016 30.06.15 Depreciation 171,732 30.06.15 c/d 831,128 1,144,876 1,144,876

CAF 1 – IAS 16


Page | 36

Part (b) Disposal A/C

Rs. Rs. 01.01.14 Plant & Machinery 334,156 01.01.14 Cash 100,000

01.01.14 Loss on disposal 234,156 334,156 334,156

30.06.15 Plant & Machinery 142,016 30.06.15 Cash 192,016 30.06.15 Gain on disposal 50,000

192,016 192,016 Working – Movement (Dep 15%] Year M1 [W1] M2 [W2] M3 [W3] Other β Total Cost 500,000 250,000 Dep. 2012 [12, 6, 0, 12 months] (75,000) (18,750) 425,000 231,250 Dep. 2013 [12, 12, 0, 12 months] (63,750) (34,687) 361,250 196,563 497,409 1,055,221 Additions 600,000 600,000 Dep. 2014 [6, 12, 6, 12 months] (27,094) (29,484) (45,000) (74,611) W4 (176,189) Disposal (334,156) (334,156) 0 167,078 555,000 422,798 1,144,876 Dep. 2015 [0, 12, 12, 12 months] (25,062) (83,250) (63,420) W4 (171,731) Disposal (142,016) (142,016) 0 0 471,750 359,378 β 831,128 W4: Rs. 359,378 x 15 / 85 = Rs. 63,420 & Rs. 422,798 x 15/85 = Rs. 74,611 ANSWER 25

Vehicle Rs. Rs. 01.07.13 b/d W1 6,800,000 28.02.14 Disposal 1,420,000 01.11.13 Additions 1,680,000 30.06.14 c/d 7,060,000 8,480,000 8,480,000 01.07.14 b/d 7,060,000 30.04.15 Disposal 1,200,000 01.09.14 Additions 2,820,000 30.06.15 c/d 8,680,000 9,880,000 9,880,000

Workings: Cost D1 D2 A1 (W3) A2 Other Total 1 Jul 2012 1,420,000 1,200,000 - - 4,180,000 β 6,800,000 WB Addition - - - - - - Depreciation (284,000) (240,000) - - (836,000) (1,360,000) Disposal - - - - - - 1 Jul 2013 1,136,000 960,000 3,344,000 5,440,000 Additions - - 1,680,000 WB - 1,680,000 Depreciation (151,467) (192,000) (224,000) β (668,800) (1,236,267) Disposals (984,533) - - - (984,533) 30 June 2014 - 768,000 1,456,000 - 2,675,200 4,899,200 Additions - - - 2,820,000 WB - 2,820,000 Depreciation - (128,000) (291,200) (470,000) β (535,040) (1,424,240) Disposals - (640,000) - (640,000) 30 June 2015 - - 1,164,800 2,350,000 2,140,160 5,654,960 W1: Rs. 224,000 x 100 / 20 x 12/8 months = Rs. 1,680,000 [worked backwards] W2: Rs. 470,000 x 100/20 x 12/10 months = Rs. 2,820,000 [worked backwards]

CAF 1 – IAS 16

© kashifadeel.com

Page | 37

ANSWER 26

Plant and Machinery Date Particulars Rs. Date Particulars Rs. 2013 2013

Balance b/d (uncorrected) 12,387,060 Jan 17 Advance (N2) 450,000

Jan 21 Installation costs (N1) 300,000 Dec 31 Balance c/d (corrected) 12,237,060

12,687,060 12,687,060

Accumulated Depreciation – Plant and machinery Date Particulars Rs. Date Particulars Rs. 2013 2013

Dec 31 Reversal of Dep. (N2) 45,000 Balance b/d (uncorrected) 4,792,540 Dec 31 Balance c/d 4,777,540 Dec 31 Extra depreciation (N1) 30,000

4,822,540 4,822,540 N1: Installation costs are not charged as expense, they should be capitalized. The extra depreciation effect is Rs.30,000 i.e. Rs.300,000 x 10% N2: Advance is shown separately, assets cannot be recognized until they have been delivered to us. The reversal of depreciation effect is Rs.45,000 i.e. Rs.450,000 x 10% ANSWER 27

Plant & Machinery Rs. Rs. b/d 712,000 Repairs [Error (a)] 25,000 Trade in allowance [Error (b)] 50,000 Disposal [Error (b)] 100,000 Additions 60,000 c/d 697,000 822,000 822,000

Accumulated depreciation Rs. Rs. Error (a) W1 8,000 b/d 240,000 Disposal (b) W2 38,800 Error (b) W3 2,500 Error (b) W2 3,600 For the year W7 94,980 c/d 289,960 337,480 337,480 W1 – Depreciation related to repairs [error (a)] Rs. Year 2013 – Rs. 25,000 x 20% x 9/12 3,750 Year 2014 – Rs. 25,000 – 3,750 = Rs. 21,250 x 20% x 12/12 4,250 8,000 W2 – Depreciation related to disposal [error (b)] Year 2012 – Rs. 100,000 x 20% x 6/12 10,000 Year 2013 – Rs. 100,000 – 10,000 = Rs. 90,000 x 20% x 12/12 18,000 Year 2014 – Rs. 90,000 – 18,000 = Rs. 72,000 x 20% x 9/12 (up to disposal) 10,800 38,800 Year 2014 – Rs. 90,000 – 18,000 = Rs. 72,000 x 20% x 3/12 (upto year-end) 3,600

42,400 W3 – Depreciation on asset exchanged [error (b)] Year 2014 – Rs. 50,000 x 20% x 3/12 2,500 2,500

CAF 1 – IAS 16


Page | 38

W4 – Depreciation for the year 2015 Opening assets Cost Rs. 712,000 + 50,000 – 25,000 -100,000 637,000 Opening assets Acc. Dep. Rs. 240,000 + 2,500 – 8,000 – 42,400 (192,100) 444,900 20% 88,980 Depreciation on additions Rs. 60,000 x 20% x 6/12 6,000 94,980 ANSWER 28

Adjusting and Closing entries Date /

Sr Particulars Dr. Rs. Cr. Rs.

(i) (a) Drawings 205,800 Accumulated depreciation W1 39,200 Fixed assets 245,000 W1 [245,000 x 20% x 6/12] + [220,500 x 20% x 4/12] =

Rs. 39,200

Accumulated depreciation 29,400 Depreciation 29,400 [220,500 x 20% x 8/12 = Rs. 29,400

(i) (b) Loss on disposal 418,133 Accumulated depreciation W1 381,867 Fixed assets 800,000 W1

[800,000 x 20% x 12/12] + [640,000 x 20% x 12/12] + [512,000 x 20% x 11/12] = Rs. 381,867

Accumulated depreciation 8,533 Depreciation 8,533 [512,000 x 20% x 1/12 = Rs. 8,533

(i) (c) Fixed assets 75,000 Purchases / Inventory 75,000 Depreciation 12,500 Accumulated depreciation 12,500 [75,000 x 20% x 10/12 = Rs. 12,500

(ii) Fixed assets 240,000 Installation charges payable 240,000 Depreciation 4,000 Accumulated depreciation 4,000 [240,000 x 20% x 1/12 = Rs. 4,000

(iii) Payable for fixed assets 180,000 Fixed assets 180,000 Accumulated depreciation 9,000 Depreciation 9,000 [180,000 x 20% x 3/12 = Rs. 9,000

Closing Statement of comprehensive income 1,579,700 Gain on disposal (Trial balance) 58,000 Depreciation (trial balance ± corrections) 1,219,567 Loss on disposal (i)(b) 418,133

CAF 1 – IAS 16

© kashifadeel.com

Page | 39

ANSWER 29 Rose Enterprises Pat (a) Debit Credit Journal entry for disposal of old plant: --------- Rs. in '000 --------- Bank/Cash/Receivable (8,500–1,896) × 120% 7,925 Accumulated depreciation (W1) 1,896 Fixed assets (Plant) 8,500 Gain on disposal (Balancing figure) 1,321 W-1: Accumulated depreciation: Rs. in ‘000 From 1 April to 31 December 2015 (8,500 x 10% x 9 / 12) 638 For the year ended 31 December 2016 (8,500 – 638) × 10% x 12 / 12 786 From 1 January to 31 August 2017 (8,500 – 638 – 786) × 10% × 8 / 12 472 1,896

Part (b) Ref

Freehold land Building Plant

WDV as at 31 December 2017 -------------- Rs. in '000 -------------- Purchase price (i) 25,000 Demolition of old building Rs. 1,500 – 250 (i) 1,250 Architect fee paid to ABC consultant (i) 800 Construction cost – Advance (i) 6,000 Construction cost – Further payment (i) 35,000 Plant cost – advance 25% (ii) 4,000 Plant cost – remaining 75% (ii) 12,000 Transportation and import charges (ii) 1,250 Installation charges (ii) 400 Property tax year 2017-18 (should be PL) (iii) (120) Transfer fee (correctly included already) (iii) - Construction costs – unpaid amount (iii) 19,000 Annual fire insurance (should be expense) (iii) (350) Insurance in transit (correct already) (iii) -

Cost to be capitalised 26,130 60,800 17,300 Depreciation for 2017

Land - Building (60,800 × 5% × 6 / 12) (1,520) Plant (17,300 × 10% × 5 / 12) (721)

WDV of PPE as at 31 December 2017 26,130 59,280 16,579

CAF 1 – IAS 16


Page | 40

ANSWER 30

JOURNAL ENTRIES WITH WORKINGS Rs. Dr. Cr.

(i) 1 Repair and maintenance 50,000 Buildings 50,000

Error corrected (i) 2 Accumulated depreciation - Buildings 7,500

Depreciation expense 7,500 W1

(ii) 3

Plant and Machinery – New (remaining) 90,000 Loss on disposal 510,000 Accumulated depreciation – P & M (old) 900,000 /15 x 5 yrs.

300,000

Plant and Machinery – Old 900,000 Disposal now recorded properly 10% allowance is Rs. 90,000 i.e. Rs. 2,000,000 – Rs. 1,910,000 (ii) 4 Accumulated depreciation – P&M 109,000

Depreciation expense 109,000 W2 (iii) 5 Accumulated depreciation – F&F 32,500

Depreciation expense 32,500 W3 W1 – Depreciation of Buildings Rs. On opening assets 7,000,000 /20 years 350,000 On additions Rs. 200,000 / 20 years x 6/12 5,000 355,000 Dep. Charged Rs. 4,562,500 – 4,200,000 362,500 To be charged (reversed) (7,500)

W2 – Depreciation of Plant and machinery Rs. On opening assets 10,000,000 – 900,000 Disposed = Rs. 9,100,000 /15 years 606,667 On assets disposed Rs. 900,000 / 15 years x 9/12 45,000 On additions Rs. 2,000,000 / 15 years x 3/12 33,333 685,000 Dep. Charged Rs. 3,994,000 – 3,200,000 794,000 To be charged (reversed) (109,000)

W3 – Depreciation of Furniture and Fixtures Rs. On opening assets 3,000,000 – 400,000 fully depreciated = Rs. 2,600,000 /10 years 260,000 On major repairs Rs. 75,000 / 5 years x 12/12 15,000 275,000 Dep. Charged Rs. 2,257,500 – 1,950,000 307,500 To be charged (reversed) (32,500)

CAF 1 – IAS 16

© kashifadeel.com

Page | 41

ANSWER 31

Date Description Debit Credit ------- Rupees -------

1-10-15 Machine B (15+3×75%) 17,250,000 Cost of sales/Repair and maintenance / P & L a/c 750,000 Bank 18,000,000 1-11-15 Machine a/c (10,000,000×100/125) 8,000,000 Stock-in-trade 8,000,000 1-1-16 Plant and Machine 4,000,000 Bank 4,000,000 1-1-16 Bank 750,000 Cost of sales/Other income 750,000 1-5-16 Cost of sales/Repair and maintenance / P&L a/c 3,000,000 Bank/payable 3,000,000 1-4-16 Bank 1,200,000 Acc. Dep. – Machine [12-(12×0.9×0.9×0.9×0.925)] 3,908,100 Loss on sale of machine (balancing) 6,891,900 Machine 12,000,000 30-6-16 Depreciation expense (W1) 7,608,383 Accumulated depreciation P&M 7,608,383 W1: Depreciation (Year 2016)

Cost Acc. Dep. WDV Rate Months Rs. 1 July 2015

Rs. Disposed 1 12,000,000 8,748,000* 10% 9/12 656,100 Other remaining 63,000,000 49,252,000 10% 12/12 4,925,200 Total opening 75,000,000 17,000,000 58,000,000 Addition 1 17,250,000 10% 9/12 1,293,750 Addition 2 8,000,000 10% 8/12 533,333 Addition 3 4,000,000 10% 6/12 200,000 7,608,383 *12,000,000×(0.9)3

CAF 1 – IAS 16


Page | 42

ANSWER 32 Alpha Enterprises

Plant and machinery - Cost Date Description Rs. 000 Date Description Rs. 000

1-Jan-18 Balance 12,700 1-Apr-18 Assets disposal 870 1-Apr-18 Assets disposal (340+680) 1,020 31-Oct-18 Assets disposal (W2) 1,000 1-Aug-18 Capital WIP (W4) 11,300 31-Dec-18 Balance 23,150 25,020 25,020

Accumulated depreciation - Plant and machinery 1-Apr-18 Assets disposal (W-1) 376 1-Jan-18 Balance 6,240 31-Oct-18 Assets disposal (W-2) 573 31-Dec-18 Depreciation (W3) 2,292 31-Dec-18 Balance 7,583 8,532 8,532

Assets disposal - Plant and machinery 1-Apr-18 P&M 870 1-Apr-18 Acc. depreciation (W-1) 376 1-Apr-18 Cash paid 680 1-Apr-18 P&M (New) 1,020 31-Oct-18 Cost 1,000 31-Oct-18 Acc. depreciation (W-2) 573 31-Oct-18 Bank (disposal cost) 25 31-Oct-18 Bank (Sales proceeds) 334 31-Dec-18 Loss on disposal (P&L) 272 2,575 2,575 W1: Accumulated depreciation – Machine exchange Rs. 000 Depreciation for 2015 870×20%×4/12 58 Depreciation for 2016 (870–58)×20% 162 Depreciation for 2017 (870–58–162)×20% 130 Accumulated depreciation up to 31-12-2017 350 Depreciation for 2018 W3 26 376 W2: Accumulated depreciation – Machine sold Rs. 000 Cost [512 / (0.8)3] 1,000 Accumulated depreciation up to 01-01-2018 1,000 – 512 488 Depreciation for 2018 W3 85 Accumulated depreciation at the date of disposal 573


Cost Acc. Dep. WDV Rate Months Rs. 000 1 Jan 2018

Rs. 000 Disposed 1 870 350 520 20% 3/12 26 Disposed 2 1,000 488 512 20% 10/12 85 Other remaining 10,830 5,402 5,428 20% 12/12 1,086 Total opening 12,700 6,240 6,460 Addition 1 1,020 20% 9/12 153 Addition 2 11,300 20% 5/12 942 2,292 W4: Cost of the plant: Rs. in '000 Purchase price of the plant 10,000×95% 9,500 Other relevant cost 660+540+600 1,800 11,300

CAF 1 – IAS 16

© kashifadeel.com

Page | 43

ICAP OBJECTIVE BASED QUESTIONS

01. A building contractor decides to construct an office building to be occupied by his own staff.

Which TWO of the following expenses incurred by the building contractor cannot be included as a part of the cost of the office building?

(a) Interest incurred on a specific loan taken out to pay for the construction of the new offices

(b) A proportion of the contractor’s general administration costs

(c) Hire of plant and machinery for use on the office building site

(d) Additional design work caused by initial design errors

02. The purpose of depreciation is to:

(a) Allocate the cost less residual value on a systematic basis over the asset’s useful life

(b) Write the asset down to its realisable value each period

(c) Accumulate a fund for asset replacement

(d) Recognise that assets lose value over time

03. IAS 16 Property, Plant and Equipment requires an asset to be measured at cost on its original recognition in the financial statements.

Alpha Trading Limited (ATL) used its own staff, assisted by contractors when required, to construct a new warehouse for its own use.

Identify the costs listed below that cannot be capitalized.

(a) Clearance of the site prior to commencement of construction

(b) Professional surveyor fees for managing the construction work

(c) ATL’s own staff wages for time spent working on construction

(d) A proportion of ATL’s administration costs, based on staff time spent

04. Which TWO of the following items should be capitalised within the initial carrying amount of an item of plant?

(a) Cost of transporting the plant to the factory

(b) Cost of installing a new power supply required to operate the plant

(c) A deduction to reflect the estimated residual value

(d) Cost of a three-year maintenance agreement

05. Hunza Limited acquired a new office building on 1 October 2014. Its initial carrying amount consisted of:

Rs. 000 Land 2,000

Building structure 10,000

Air conditioning system 4,000

16,000

CAF 1 – IAS 16


Page | 44

The estimated lives of the building structure and air conditioning system are 25 years and 10 years respectively. When the air conditioning system is due for replacement, it is estimated that the old system will be dismantled and sold for Rs. 500,000.

Depreciation is time-apportioned where appropriate.

At what amount will the office building be shown in Hunza Limited’s statement of financial position as at 31 March 2015?

(a) Rs. 15,625,000 (b) Rs. 15,250,000 (c) Rs. 15,585,000 (d) Rs. 15,600,000

06. Which of the following are items of property, plant and equipment?

(i) Standby generator expected to be used for seven years (ii) A plot of land held for resale (iii) A bus for pick-and-drop of staff members (iv) A generator for rental to others

(a) (i) to (iv) all

(b) (i), (ii) and (iii) only

(c) (i), (iii) and (iv) only

(d) (ii), (iii) and (iv) only

07. An entity acquires a plant in exchange of old machinery which has carrying amount of Rs. 760,000 and fair value of Rs. 750,000 at the date of exchange. The list price of plant acquired is Rs. 850,000. The entity is also required to pay cash of Rs. 55,000 in this exchange transaction.

At which amount the acquired plant should be initially recognised?

(a) Rs. 850,000

(b) Rs. 760,000

(c) Rs. 815,000

(d) Rs. 805,000

08. A company purchased some heavy machinery. The invoice for the machinery showed the following items: Rs.000 Cost of machinery 46,000

Cost of delivery 900 Cost of 12-month warranty on the machinery 1,600

Total amount payable 48,500

In addition, the company incurred Rs.3.4 million in making modifications to its factory so that the heavy machinery could be installed. What should be the cost of the machinery in the company’s machinery account in the ledger?

CAF 1 – IAS 16

© kashifadeel.com

Page | 45

(a) Rs. 48,500,000

(b) Rs. 46,900,000

(c) Rs. 46,000,000

(d) Rs. 50,300,000

09. A business acquired new premises at a cost of Rs.400 million on 1 January 2015. In the period to the year end of 31 March 2015 the following further costs were incurred.

Rs.000

Costs of initial adaptation of the building 12,000

Legal costs relating to the purchase 2,500

Monthly cleaning contract 3,400

Air conditioning unit necessary for machinery to be used

2,800

Cost of machinery 12,300

What amount should appear as the cost of premises in the company’s statement of financial position at 31 March 2015?

(a) Rs. 414,500,000

(b) Rs. 412,000,000

(c) Rs. 425,800,000

(d) Rs. 417,800,000

10. An entity has built a new factory incurring the following costs:

Rs. '000 Land 1,200

Materials 2,400

Labour 3,000

Architect's fees 25

Surveyor's fees 15

Site overheads 300

Apportioned administrative overheads 150

Testing of fire alarms 10

Business rates for first year 12

7,112

What will be the total amount capitalised in respect of the factory?

(a) Rs. 6,112,000

(b) Rs. 6,950,000

(c) Rs. 7,112,000

(d) Rs. 7,100,000

CAF 1 – IAS 16


Page | 46

11. A motor vehicle cost Rs.400,000. It has an expected residual value after 5 years of Rs.40,000.

If the sum of the digits method of depreciation is used, what will be the carrying amount of the asset at the end of Year 2?

(a) Rs. 96,000

(b) Rs. 120,000

(c) Rs. 280,000

(d) Rs. 184,000

12. On 1 March 2018 Mercury Limited (ML) acquired a machine from Plant under the following terms:

Rs. 000 List price of machine 82,000 Import duty 1,500 Delivery fees 2,050 Electrical installation costs 9,500 Pre-production testing 4,900 Purchase of a five-year maintenance contract with Plant 7,000

In addition to the above information ML was granted a trade discount of 10% on the initial list price of the asset and a settlement discount of 5% if payment for the machine was received within one month of purchase. ML paid for the plant on 25 March 2018.

On what amount, the plant should be initially measured on 1 March?

(a) Rs. 98,750,000 (b) Rs. 95,060,000 (c) Rs. 91,750,000 (d) Rs. 88,060,000

13. Construction of Venice Limited’s new store began on 1 April 2019. The following costs were incurred on the construction:

Rs. 000 Freehold land 4,500 Architect fees 620 Site preparation 1,650 Materials 7,800 Direct labour costs 11,200 Legal fees 2,400 General overheads 940

The store was completed on 1 January 2020.

Calculate the amount to be included as property, plant and equipment in respect of the new store

(a) Rs. 28,170,000 (b) Rs. 29,110,000 (c) Rs. 25,770,000 (d) Rs. 23,670,000

CAF 1 – IAS 16

© kashifadeel.com

Page | 47

14. On 1 March 2010 Earth Limited (EL) purchased an upgrade package from Sun Limited at a cost of Rs. 18 million for the machine it originally purchased in 2008. The upgrade took a total of two days where new components were added to the machine. EL agreed to purchase the package as the new components would lead to a reduction in production time per unit of 15%. This will enable EL to increase production without the need to purchase a new machine.

What is appropriate accounting treatment?

(a) EL should expense this additional expenditure (b) EL should capitalise this additional expenditure in the cost of existing plant (c) EL should capitalise the 15% of Rs. 18 million in the cost of existing plant (d) None of the above is appropriate treatment 15. An item of plant was purchased on 1 April 2008 for Rs. 2,000,000 and is being depreciated at

25% on a reducing balance basis. What would be its residual value after its useful life of 5 years?

(a) Rs. 632,809

(b) Rs. NIL

(c) Rs. 474,609

(d) Rs. 400,000

16. On 1 April 2010 Mars Limited (ML) held non-current assets that cost Rs. 312 million and had accumulated depreciation of Rs. 66 million at this date.

During the year ended 31 March 2011, ML disposed of non-current assets which had originally cost Rs. 28 million and had a carrying amount of Rs. 11.2 million.

ML’s policy is to charge depreciation of 40% on the reducing balance basis, with no depreciation charged in the year of disposal

What is the depreciation charge to the statement of profit or loss for the year ended 31 March 2011?

Rs. ___________ 17. Jupiter Limited (JL) purchased a machine on 1 July 2017 for Rs. 500,000. It is being

depreciated on a straight line basis over its expected life of ten years. Residual value is estimated at Rs. 20,000. On 1 January 2018, following a change in legislation, JL fitted a safety guard to the machine. The safety guard cost Rs. 25,000 and has a useful life of five years with no residual value.

What amount will be charged to profit or loss for the year ended 31 March 2018 in respect of depreciation on this machine?

Rs. ___________ 18. A non-current asset cost Rs.96,000 and was purchased on 1 June Year 1. Its expected useful

life was five years and its expected residual value was Rs.16,000. The asset is depreciated by the straight-line method.

The asset was sold on 1 September Year 3 for Rs.68,000. There were no disposal costs. It is the company policy to charge depreciation on a monthly basis. The financial year runs from 1 January to 31 December.

What was the gain or loss on disposal?

Rs. ___________

CAF 1 – IAS 16


Page | 48

19. A non-current asset was purchased on 1 June Year 1 for Rs.216,000. Its expected life was 8 years and its expected residual value was Rs.24,000. The asset is depreciated by the straight-line method. The financial year is from 1 January to 31 December.

The asset was sold on 1 September Year 4 for Rs.163,000. Disposal costs were Rs.1,000.

It is the company policy to charge a proportionate amount of depreciation in the year of acquisition and in the year of disposal, in accordance with the number of months for which the asset was held.

What was the gain or loss on disposal?

Rs. ___________ 20. An asset was purchased on 1 July 2014 and it is being depreciated at 15% using reducing

balance method. It has carrying amount of Rs. 654,321 on June 30, 2019.

Work back and calculate the cost of the asset when purchased on 1 July 2014.

Rs. ___________ 21. Which of the following is not an asset that falls under the scope of IAS 16? (a) Tangible assets (b) Assets held for the production or supply of goods or services (c) Assets held for sale in the normal course of business (d) Assets expected to be used for more than one period

22. Depreciable amount means; (a) Cost of an asset + Residual value (b) Cost of an asset – Residual value (c) Cost of an asset – Residual value / useful life (d) Residual value – Cost of an asset

23. A machine price was Rs.1, 000,000 and was carried through a truck. The truck’s fares were Rs. 20, 000. The engineers charged Rs. 45,000 for the installation. The cost of the machine is?

(a) Rs.1,000,000 (b) Rs.1,020,000 (c) Rs.1,045,000 (d) Rs.1,065,000

24. Which of the following is not a component of cost of an asset? (a) Purchase price (b) Import duties (c) Refundable sales tax (d) Estimated dismantling costs

CAF 1 – IAS 16

© kashifadeel.com

Page | 49

25. A company purchases land with an office building. The building has a useful life of 20 years. How should the land be depreciated?

(a) Depreciate over 20 years (b) Depreciate over useful life of the land (c) Don’t depreciate the land (d) None of these

26. If an asset is idle then?

(a) Depreciation is paused

(b) Depreciation for the entire period

(c) Depreciation is ignored

(d) Depreciation continues

27. Huge Ltd. purchases the machine for Rs.6 million. It has an estimated salvage value of Rs.1 million and a useful life of five years.

What is the depreciation charged for the year under the straight line method?

(a) Rs.1,200,000

(b) Rs.1,000,000

(c) Rs.800,000

(d) None of the above

28. Small Ltd. purchases the equipment for Rs.600,000. It has an estimated salvage value of Rs.100,000 and a useful life of five years.

What is the book value of equipment under the reducing balance method at the end of its useful life?

(a) Rs.163,840

(b) Rs.165,000

(c) Rs.120,000

(d) Rs.100,000

29. Medium Ltd. purchases the car for Rs. 2,200,000. It has an estimated salvage value of Rs. 200,000 and a useful life of five years.

What is the depreciation charge for the first year under the sum-of-the-year digit method?

(a) Rs. 400,000

(b) Rs. 555,555

(c) Rs. 666,667

(d) None of the above

30. A change in depreciation method is a?

(a) Change in accounting policy

(b) Change in accounting estimate

(c) Change in accounting method

(d) Change in accounting standard

CAF 1 – IAS 16


Page | 50

31. Which of these cost is capitalised as cost of an asset?

(a) Professional fees

(b) General overheads

(c) Initial operating losses

(d) Administration expenses

32. When an asset is sold or disposed of, where is the gain or loss recognised?

(a) Asset disposal account

(b) Profit and loss

(c) Revaluation reserve

(d) Depreciation

33. What is the net amount an entity expects to obtain for an asset at the end of its useful life?

(a) Residual value

(b) Depreciated value

(c) Present value

(d) Fair value

34. How often should the useful life of an asset be reviewed?

(a) Every six months

(b) As and when the market value will significantly change

(c) At least at each financial year end

(d) Never

35. Which of the following is not allowable as a directly attributable cost of a machine?

(a) Site preparation

(b) Initial testing cost

(c) Carriage inwards for fuel for the machinery

(d) Estimated dismantling cost 36. The purpose of depreciation is to: [A19] (a) allocate the depreciable cost on a systematic basis over the asset’s useful life (b) write the asset down to its realisable value each period (c) accumulate a fund for asset replacement (d) recognise that assets lose value over time (01) 37. Which of the following is NOT an asset that falls under the scope of IAS 16 Property,

Plant and Equipment? [A19]

(a) Tangible assets (b) Assets held for the production or supply of goods or services (c) Assets held for sale in the normal course of business (d) Assets expected to be used for more than one period (01)

CAF 1 – IAS 16

© kashifadeel.com

Page | 51

OBJECTIVE BASED ANSWERS

01. (b) & (d) Direct costs relating to the acquisition of the asset can be included such as labour costs, interest on loans to acquire the asset and hire costs. The administration cost is not a direct cost. Also costs relating to errors or wastage cannot be capitalised.

02. (a) The depreciation is systematic allocation of depreciable amount of an asset over its useful life.

03. (d) Administration costs or share thereof cannot be capitalised.

04. (a) & (b) The maintenance costs should be expensed as incurred over three year. The residual value should be taken into account for the purposes of calculating depreciation, but not for the amount to be capitalised.

05. (a) Six months’ depreciation is required on the building structure and air conditioning system. Rs. 000 Land (not depreciated) 2,000 Building structure (10,000 – (10,000/25 × 6/12)) 9,800 Air conditioning system (4,000 – (3,500/10 × 6/12)) 3,825 15,625

06. (c) Plot of land held for resale is inventory and not PPE.

07. (d) Fair value of asset given up + cash paid = Rs. 750,000 + 55,000 = Rs. 805,000

08. (d)

Cost of machinery: Rs. 000 Cost 46,000

Cost of delivery 900

Modification cost 3,400

Total 50,300

09. (a) Cost of premises: Rs. 000 Cost 400,000

Adaptation 12,000

Legal fees 2,500

Total 414,500

10. (b) Rs. 000 Land 1,200 Materials 2,400 Labour 3,000 Architects fees 25 Surveyors fees 15 Site overheads 300 Testing fire alarms 10 6,950

CAF 1 – IAS 16


Page | 52

11. (d) Sum of digits = 5 + 4 + 3 + 2 + 1 = 15 Rs. Cost of asset 400,000

Year 1 Depreciation (400,000 – 40,000) x 5/15 (120,000)

Carrying amount at the end of year 1 280,000

Year 2 Depreciation (400,000 – 40,000) x 4/15 (96,000)

Carrying amount at the end of year 2 184,000

12. (c) Rs. 000 List price of machine 82,000

Less: trade discount 10% (8,200)

Import duty 1,500

Delivery fees 2,050

Electrical installation costs 9,500

Pre-production testing 4,900

91,750

13. (a) Rs. 000 Freehold land 4,500 Architect fees 620 Site preparation 1,650 Materials 7,800 Direct labour costs 11,200 Legal fees 2,400 28,170

14. (b) The additional amount should be capitalised as it is probable that economic

benefits would increase.

15. (c) Rs. 2,000,000 x (0.75)5 = 474,609

16. Rs. 93.92 million

Rs. m Carrying amount at 1 April 2010 (Rs. 312 – 66) 246 Carrying amount of disposal (11.2) Carrying amount at 31 March 2011 234.8 Depreciation at 40% 93.92

.. 17. Rs. 37,250

Rs. '000 Machine ((500,000 – 20,000) / 10 × 9/12) 36,000 Safety guard ((25,000/5) × 3/12) 1,250 37,250

CAF 1 – IAS 16

© kashifadeel.com

Page | 53

18. Rs. 8,000 gain

Rs. Sale proceeds on disposal (Cash received) 68,000

Less: Disposal costs and cash paid 0


Asset at cost 96,000

Less: Acc. depreciation 80,000/ 5 years x 2.25 (36,000)

Carrying amount at date of disposal (60,000)

GAIN (LOSS) ON DISPOSAL 8,000

19. Rs. 24,000 gain

Rs. Sale proceeds on disposal (Cash received) 163,000

Less: Disposal costs and cash paid (1,000)


Asset at cost 216,000

Less: Accumulated depreciation W1 (78,000)

Carrying amount at date of disposal 138,000

GAIN (LOSS) ON DISPOSAL 24,000 W1 Rs. Depreciation year 1 (Rs. 216,000 – 24,000) / 8 years = 24,000 x 7/12

14,000

Depreciation year 2 Rs. 24,000 x 12/12 24,000



78,000

20. Rs.1,474,675 654,321 / (0.85)5 = Rs. 1,474,675

21. (c) Assets held for sale in the normal course of business are inventories.

22. (b) Depreciable amount = Cost less residual value

23. (d) Rs. 1,000,000 + 20,000 + 45,000 = Rs. 1,065,000

24. (c) Refundable sales tax is not a cost as it would be received back.

25. (c) Land is not depreciated because it has indefinite life.

26. (d) Depreciation continues even if the asset is not in use.

CAF 1 – IAS 16


Page | 54

27. (b) (Rs. 6m – 1m) / 5 years = Rs. 1 million

28. (d) The carrying amount of an asset is equal to its residual value at the end of useful life, under any depreciation method.

29. (c) (Rs. 2,200,000 – 200,000) x 5/15 = Rs. 666,667

30. (b) Change in depreciation method is change in accounting estimate.

31. (a) Professional fees are directly attributable expenditure. Other items are not.

32. (b) Gain or loss is recognised in profit or loss

33. (a) Residual value is amount expected at the end of useful life.

34. (c) Useful life is reviewed annually at each financial year end, at least.

35. (c) Carriage inwards for fuel for the machinery are revenue expenditure.

36. (a) allocate the depreciable cost on a systematic basis over the asset’s useful

37. (c) Assets held for sale in the normal course of business

Documents

CAF 1 – IAS 16 IAS 16 Property, Plant & Equipment 06kashifadeel.com/wp-content/uploads/2020/05/06-IAS-16-PPE.pdf · 2020-05-06 · CAF 1 – IAS 16 Latest update: April 2020 Page