(a) 2015 Depreciation expenses = $432,000 x 2,400/8,000 = $129, Depreciation expenses = $432,000 x (8,000 1,800 2,300 2,400)/8,000 = $81,000

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1 Depreciation HKDSE (2017, 3) (Depreciation and Cost Classification) Star Manufacturing Company acquired a production machine for $432,000 on 1 January The expected total production hours of the machine are 8,000 hours during its useful life of four years. No residual value is expected and annual depreciation is to be provided based on the usage of the machine. The actual annual hours used for production were as follows: Year Actual production hours , , , ,500 (a) Calculate the annual depreciation expenses of the machine for 2015 and (a) 2015 Depreciation expenses = $432,000 x 2,400/8,000 = $129, Depreciation expenses = $432,000 x (8,000 1,800 2,300 2,400)/8,000 = $81,000 HKDSE (2016, 6) (Depreciation) The following accounts have been extracted from the ledger of Sum Kee Logistic Company as at 1 January 2015: $ Motor vehicles 1,200,000 Accumulated depreciation motor vehicles 150,000 All motor vehicles were purchased on 1 January 2014 and the company depreciates its motor vehicles over eight years on a monthly basis using the straight-line method. During the year ended 31 December 2015, the following transactions regarding motor vehicles occurred: (i) On 1 March 2015, a motor vehicle costing $120,000 was sold for cash at a gain of $12,400. (ii) On 1 April 2015, another motor vehicle with accumulated depreciation of $28,000 at 1 January 2015 was totally scrapped in a car accident. On 1 November 2015, the insurance company agreed to pay 80% of the net book value of the motor vehicle on the date of the accidents as compensation in February For Sum Kee Logistic Company, prepare the following accounts for the year ended 31 December 2015: (a) Motor vehicles account Accumulated depreciation account motor vehicles Disposal account motor vehicles On 1 January 2016, the motor vehicles were modified so as to increase their efficiency. There was no change in their useful life after modification. The total payments made by cheque were $264,000, which included upgrading parts and components of $240,000, testing and inspection fees of $20,000 and an annual licence fee of $4,000. (d) Prepare the journal entry to record the above payments on 1 January Narration is not required. 25

2 (a) Motor vehicles 2015 $ 2015 $ Jan 1 Balance b/f 1,200,000 Mar 1 Disposal: Motor vehicles 120,000 Apr 1 Disposal: Motor vehicles (W1) 224,000 Dec 31 Balance c/f 856,000 1,200,000 1,200,000 W1: Cost of the scrapped motor vehicles as at 1 Apr 2015 = $28,000 x 8 = $224,000 Accumulated Depreciation: Motor vehicles 2015 $ 2015 $ Mar 1 Disposal: Motor vehicles (W2) 17,500 Jan 1 Balance b/f 150,000 Apr 1 Disposal: Motor vehicles (W3) 35,000 Dec 31 Depreciation (W3) 116,500 Dec 31 Balance c/f 214, , ,500 W2: 120,000 / 8 x 14/12 = 17,500 W3: 224,000 / 8 x 15/12 = 35,000 W3: 856,000 / ,000 / 8 x 2/ ,000 x 3/12 = 116,500 Disposal: Motor vehicles 2015 $ 2015 $ Mar 1 Motor vehicles 120,000 Mar 1 Accumulated Depreciation 17,500 Mar 1 Profit and Loss: profit on disposal 12,400 Mar 1 Cash 114, , ,400 Apr 1 Motor vehicles 224,000 Apr 1 Accumulated Depreciation 35,000 Nov 1 Insurance receivable (W4) 151,200 Nov 1 Profit and Loss: loss on disposal 37, , ,000 W4: (224,000 35,000) x 80% = 151,200 (d) Journal Debit Credit 2016 $ $ Jan 1 Licence fee 4,000 Motor vehicles 260,000 Bank 264,000 26

3 Longman Question Bank 19 (Depreciation) Mr Wong commenced his business on 1 January Information relating to the machinery for the year ended 31 December 2014 is as follows: (i) Machine 1 was acquired on 1 May Its depreciation charges for the years ended 31 December 2012 and 2013 were $45,000 and $36,000, respectively. (ii) Machine 2 was acquired on 1 June Its purchase price was $240,000. (iii) Machine 3 was acquired on 8 October Its purchase price was $315,000. (iv) On 1 March 2014, Machine 1 was replaced by Machine 4. The trade-in value of Machine 1 was $140,000, and the remaining balance was settled by cheque. Detail of Machine 4 was as follows: $ Purchase cost 185,000 Delivery of the machine to the business 5,000 Testing fee 10,000 Maintenance fee for ,000 Components installed to increase its productivity 20, ,000 (v) Machine 2 was defected and was sold for $160,000 cash on 31 May (vi) Machine 3 was stolen in a burglary on 1 July The insurance company agreed to pay $250,000 as compensation on 31 January (vii) On 1 October 2014, Machine 5 was bought for $300,000 by cheque. The company paid an extra $3,500 and $2,500 for installation and annual insurance, respectively. (viii) Depreciation was to be charged on a reducing-balance basis at a rate of 20% per annum. It is the company s policy to provide a full year s depreciation in the year of acquisition and no depreciation in the year of disposal. Required: (a) Calculate the cost of Machine 1. Write up the following accounts for Mr Wong for the year ended 31 December 2014: (i) Machinery (ii) Accumulated depreciation: Machinery (iii) Disposal: Machinery (a) Cost of Machine 1 20% = $45,000 Thus, cost of Machine 1 = $45,000 20% = $225,000 (i) Machinery 2014 $2014 $ Jan 1 Balance b/d (W1) 780,000Mar 1 Disposal: Machinery (Machine 1) 225,000 Mar 1 Disposal: Machinery Trade-in value 140,000May 31 Disposal: Machinery (Machine 2) 240,000 1 Bank (Machine 4) (W2) 80,000Jul 1 Disposal: Machinery (Machine 3) 315,000 Oct 1 Bank ($300,000 + $3,500) (Machine 5) 303,500Dec 31 Balance c/d 523,500 1,303,500 1,303,500 W1: Cost of machinery as at 1 January 2014:= Machine 1 + Machine 2 + Machine 3 W2: Capital expenditure related to the purchase of Machine 4: = 225, , ,000 = 780,000 = Purchase cost + Delivery of the machine + Testing fee + Components installed = 185, , , ,000 = 220,000 Thus, the remaining balance paid by cheque is = $220,000 $140,000 = $80,000(trade-in value of Machine 1) 27

4 (ii) Accumulated Depreciation: Machinery 2014 $2014 $ Mar 1 Disposal: Machinery (Machine 1) (W3) 81,000Jan 1 Balance b/d (W3) 230,400 May 31 Disposal: Machinery (Machine 2) (W3) 86,400Dec 31 Depreciation: Machinery (W4) 104,700 Jul 1 Disposal: Machinery (Machine 3) (W3) 63,000 Dec 31 Balance c/d 104, , ,100 (iii) Disposal: Machinery 2014 $2014 $ Mar 1 Machinery (Machine 1) 225,000Mar 1 Accumulated depreciation: Machinery (Machine 1) 81,000 May 31 Machinery (Machine 2) 240,000Mar 1 Machinery Trade-in value 140,000 Jul 1 Machinery (Machine 3) 315,000May 31Accumulated depreciation: Machinery (Machine 2) 86,400 Dec 31 Profit and loss Profit on disposal 400May 31Cash 160,000 Jul 1Accumulated depreciation: Machinery (Machine 3) 63,000 Jul 1Compensation receivable 250, , ,400 28

5 HKDSE (2014, 2) (Depreciation) Angel Company has its financial year ending on 31 December. It purchased a machine for $240,000 on 1 January The machine has been depreciated using the straight-line method based on an estimated useful life of 10 years and residual value of $4,000. The depreciation expense is calculated on monthly basis. On 1 January 2012, an amount of $180,000 was spent on the machine to increase its productivity. It was expected that after the improvement, the annual repair costs would be reduced by $13,500, with no change in the remaining useful life and residual value. Unfortunately, the machine was totally destroyed in an accident on 30 June On 15 October 2013, the insurance company agreed to pay compensation of $210,000 in January (a) Compute the depreciation expense for the machine for each of the three years of 2011, 2012 and Prepare the journal entries for recording the disposal of the machine in Narration is not required. (a) Year Calculation Depreciation 2011 ($240,000 $4,000) / 10 = $23,600 $23, $23,600 + $180,000 / 9 = $43,600 $43, $43,600 x 6/12 = $21,800 $21,800 Journal Debit Credit 2013 $ $ Oct 15 Accumulated depreciation ($23,600 + $43, ,800) 89,000 Insurance compensation receivable 210,000 Profit and loss Loss on disposal 121,000 Motor vehicle ($240,000 + $180,000) 420,000 29

6 HKDSE (2013, 2) (Depreciation) Mr Chan commenced his retail business on 1 January 2011 and acquired five pieces of equipment costing $135,000 each on that date. No other addition and disposal were made during Information relating to the equipment for the year ended 31 December 2012 is as follows: $ Payments for new equipment Purchase cost 280,000 Testing fees 12,500 Repairs and maintenance fees for ,600 Proceeds from sale of two pieces of equipment purchased in ,500 Depreciation on equipment is to be provided at a rate of 20% per annum using the reducing balance method. Full year depreciation is calculated in the year of purchase but none in the year of sale. For the retail business of Mr Chan, prepare the following accounts for the year ended 31 December 2012: (a) Equipment account Accumulated depreciation account Equipment Mr Chan decides to apply different depreciation methods to calculate the depreciation expense on equipment in different years in order to show continuously stable operating results. State and explain the accounting principle or concept violated in the above situation. (a) Equipment 2012 $ 2012 $ Jan 1 Balance b/f (135,000 x 5) 675,000 Dec 31 Disposal: Equipment (135,000 x 2) 270,000 Dec 31 Bank (280, ,500) 292, Balance c/f 697, , ,500 Accumulated Depreciation: Equipment 2012 $ 2012 $ Dec 31 Disposal: Equipment (W2) 54,000 Jan 1 Balance b/f (W1) 135, Balance c/f 204,300 Dec 31 Depreciation (W3) 123, , ,300 W1: 675,000 x 20% = 135,000 W2: 270,000 x 20% = 54,000 W3: (675, ,000) x 80% x 20% + 292,500 x 20% = 123,300 Accounting principle concept violated: consistency concept Explanations: Same accounting policy should be applied on liked items across years A change in depreciation method is allowed when it will result in a more true and fair presentation the firm's financial position. To stabilize operating results over year is not a justifiable reason for the change in depreciation method 30

7 HKDSE (2012, 2) (Depreciation) The non-current assets of Moody Company as at 31 December 2010 were as follows: Cost Accumulated depreciation $ $ Machinery (all purchased in 2007) Lorries (all purchased in 2008) The following were transactions relating to the non-current assets of the company during 2011: (i) On 1 March 2011, a piece of machinery was bought at a price of $ On the same date, a component costing $ was installed into the machinery to increase its productivity over the coming four years. (ii) On 1 January 2011, a lorry was bought at a price of $ The price included an insurance premium of $36,000 covering the year ended 31 December It is the company s policy to depreciate machinery at a rate of 25% per annum on cost, and lorries at a rate of 20% per annum using the reducing balance method. (a) For Moody Company, (1) calculate the depreciation expenses of the machinery for the year ended 31 December 2011; and (2) prepare the accumulated depreciation account of lorries for the year ended 31 December Different methods are used to depreciate the non-current assets of Moody Company. Explain whether such a difference in accounting treatments violates the consistency principle. (a) (1) Depreciation expenses = ($ $ ) + ($ $60 000) x 0.25 x 10/12 = = (a) (2) Accumulated Depreciation lorries 2011 $ 2011 $ Dec 31 Balance c/d Jan 1 Balance b/d Dec 31 Depreciation (W1) 502, W1: Depreciation for lorries = ($ ) x 20% + ($ $36,000) x 20% = $ It does not violate the consistency concept Reasons: consumption pattern is different for different types of non-current assets the company is consistently applying the same depreciation method for the same type of non-current assets. 31

8 HKDSE (Practice, 3) (Depreciation) Subsequent checking of the records by the accountant of Easy Company revealed that no entries had been made for the following items: (i) Loan interest of $5050 incurred in 2011 remains unpaid as at 31 December (ii) A motor vehicle costing $ with an accumulated depreciation of $ as at 31 December 2011 was sold for $ in cash on the same date. Prepare the journal entries to record the above transactions for the year ended 31 December (Narrations are not required.) Explain the accounting treatment of item (i) using a relevant accounting concept. Journal 2011 Debit Credit December $ $ (i) Loan interest 5050 Accrued loan interest 5050 (ii) Accumulated depreciation Motor vehicles Cash Motor vehicles Profit and loss Profit on disposal of motor vehicles Accrual concept Unpaid loan interest should be credited to accrued loan interest account to represent an increase in current liability in The loan interest incurred should be debited in the profit and loss account as an increase in operating expenses of