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BPP LEARNING MEDIA Sample FIA FFA/ACCA F 3 Financial Accounting For exams from February 2014.

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Presentation on theme: "BPP LEARNING MEDIA Sample FIA FFA/ACCA F 3 Financial Accounting For exams from February 2014."— Presentation transcript:

1 BPP LEARNING MEDIA Sample FIA FFA/ACCA F 3 Financial Accounting For exams from February 2014

2 BPP LEARNING MEDIA Sample Syllabus Technical content Question to consider Answer Past exam question Answer to past exam question Real world example Local example Diagram Key concept Tackling the exam Summary Case study Key to icons

3 BPP LEARNING MEDIA Sample Syllabus A The context and purpose of financial reporting B The qualitative characteristics of financial information C The use of double entry and accounting systems D Recording transactions and events E Preparing a trial balance F Preparing basic financial statements G Preparing simple consolidated financial statements H Interpretation of financial statements

4 BPP LEARNING MEDIA Sample Exam format 35 questions for 2 marks each 70 2 questions for 15 marks each 30 Total 100 Two hour exam – all questions are compulsory.

5 BPP LEARNING MEDIA Sample Tackling multiple choice questions 1 The MCQs in your exam contain four possible answers, you have to choose the option that best answers the question. The three incorrect options are called distractors, these are included to test your understanding of the syllabus. The following slides detail how best to avoid the common pitfalls that most students fall into.

6 BPP LEARNING MEDIA Sample Tackling multiple choice questions 2 Steps to follow when attempting MCQs: Step 1: Skim read all MCQs and identify what appear to be the easier questions. Step 2: Attempt each question: Start with the easier questions Read the question thoroughly Try to work out the answer before looking at the options OR you may prefer to look at the options at the beginning

7 BPP LEARNING MEDIA Sample Tackling multiple choice questions 3 Step 3: Read the four options and see if one matches your own answer. Be careful with numerical questions as the distractors are designed to match answers that incorporate common errors. Check your calculation is correct. Have you followed the requirement exactly? Have you included every stage calculation?

8 BPP LEARNING MEDIA Sample Tackling multiple choice questions 4 Step 4: What to do if your answer does not match the options? Re-read the question to ensure that you understand it and are answering the requirement Eliminate any obviously wrong answers Consider which of the remaining answers is the most likely to be correct and select the option

9 BPP LEARNING MEDIA Sample Tackling multiple choice questions 5 Step 5: If you are still unsure make a note and continue to the next question Step 6: Revisit unanswered questions. When you come back to a question after a break you often find you are able to answer it correctly straight away. If you are still unsure have a guess. You are not penalised for incorrect answers, so never leave a question unanswered!

10 BPP LEARNING MEDIA Sample Tackling multiple choice questions 6 After extensive question practice and revision of MCQs you may find that you recognise a question when you sit the exam. Be aware that the detail and/or requirement may be different. If the question seems familiar read the requirement and options carefully – do not assume that it is identical.

11 BPP LEARNING MEDIA Sample Chapter 8 Inventory Cost of goods sold Accounting for opening and closing inventories Counting inventories Valuing inventories IAS 2

12 BPP LEARNING MEDIA Sample Syllabus learning outcomes 1 Recognise the need for adjustments for inventory in preparing financial statements. Record opening and closing inventory.

13 BPP LEARNING MEDIA Sample Syllabus learning outcomes 2 Identify the alternative methods of valuing inventory. Understand and apply the IASB requirements for valuing inventories. Recognise which costs should be included in valuing inventories.

14 BPP LEARNING MEDIA Sample Syllabus learning outcomes 3 Calculate the value of closing inventory using 'first in, first out' and 'average cost'. Understand the use of continuous and period end inventory records.

15 BPP LEARNING MEDIA Sample Syllabus learning outcomes 4 Understand the impact of accounting concepts on the valuation of inventory. Identify the impact of inventory valuation methods on profit and on assets.

16 BPP LEARNING MEDIA Sample Overview Accounting adjustments Inventory Valuation Cost Effects on profit Net realisable value Methods of estimating cost FIFOAVCO

17 BPP LEARNING MEDIA Sample Cost of goods sold 1 Formula for the cost of goods sold $ Opening inventory valueX Add: purchases (or production costs) X X Less: closing inventory value (X) Cost of goods sold X

18 BPP LEARNING MEDIA Sample Cost of goods sold 2 Carriage inwards Cost paid by purchaser of having goods transported to his business Added to cost of purchases

19 BPP LEARNING MEDIA Sample Cost of goods sold 3 Carriage outwards Cost to the seller, paid by the seller, of having goods transported to customer Is a selling and distribution expense

20 BPP LEARNING MEDIA Sample Accounting for opening and closing inventories 1 Entries during the year During the year, purchases are recorded by the following entry. DEBIT Purchases$ amount bought CREDIT Cash or payables$ amount bought The inventory account is not touched at all.

21 BPP LEARNING MEDIA Sample Accounting for opening and closing inventories 2 Entries at year-end The first thing to do is to transfer the purchases account balance to the statement of profit or loss: DEBIT Statement of profit or loss$ total purchases CREDIT Purchases$ total purchases

22 BPP LEARNING MEDIA Sample Accounting for opening and closing inventories 3 The balance on the inventory account is still the opening inventory balance. This must also be transferred to the statement of profit or loss: DEBIT Statement of profit or loss$ opening inventory CREDIT Inventory$ opening inventory

23 BPP LEARNING MEDIA Sample Accounting for opening and closing inventories 4 The exact reverse entry is made for the closing inventory (which will be next year’s opening inventory): DEBIT Inventory$ closing inventory CREDITStatement of profit or loss$ closing inventory

24 BPP LEARNING MEDIA Sample Counting inventories 1 Counting inventories In order to make the entry for the closing inventory, we need to know what is held at the year-end. We find this out not from the accounting records, but by going into the warehouse and actually counting the boxes on the shelves.

25 BPP LEARNING MEDIA Sample Counting inventories 2 Some businesses keep detailed records of inventory coming in and going out, so as not to have to count everything on the last day of the year. These records are not part of the double entry system.

26 BPP LEARNING MEDIA Sample Valuing inventories 1 Valuation Inventories must be valued at the lower of: Cost Net realisable value (NRV)

27 BPP LEARNING MEDIA Sample Valuing inventories 2 Cost Can use per IAS 2: FIFO (First In Last Out) Average cost LIFO (Last In First Out) is not permitted

28 BPP LEARNING MEDIA Sample Valuing inventories 3 NRV Expected selling price X Less: costs to get items ready for sale (X) selling costs (X) X

29 BPP LEARNING MEDIA Sample Valuing inventories 4 Inventory forms a major part of the assets of some companies. So the value placed on the inventory can make a big difference to the profit or loss reported.

30 BPP LEARNING MEDIA Sample Valuing inventories in China In the 3 rd quarter of 2012, the Youngor Group Co had inventory valued at CNY 24 billion.

31 BPP LEARNING MEDIA Sample IAS 2 Inventories should be measured at the lower of cost and net realisable value – the comparison between the two should ideally be made separately for each item Cost is the cost incurred in the normal course of business in bringing the product to its present location and condition, including production overheads and costs of conversion

32 BPP LEARNING MEDIA Sample IAS 2 (cont’d) IAS 2 Inventory can include raw materials, work in progress, finished goods, goods purchased for resale FIFO and average cost are allowed LIFO is not allowed

33 BPP LEARNING MEDIA Sample IAS 2 (cont’d) Inventories are assets: Held for sale in the ordinary course of business In the process of production for such sale; or In the form of materials or supplies to be consumed in the production process or in the rendering of services

34 BPP LEARNING MEDIA Sample IAS 2 (cont’d) Net realisable value is the estimated selling price: In the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale

35 BPP LEARNING MEDIA Sample Tackling the exam Understanding IAS 2 is a very important and you will be expected to apply it in the exam.

36 BPP LEARNING MEDIA Sample Lecture example 1 According to IAS 2: Inventories, which of the following should not be included in determining the cost of the inventories of an entity? (1) Labour costs (2) Transport costs to deliver goods to customers (3) Administrative overheads (4) Depreciation on factory machine

37 BPP LEARNING MEDIA Sample Lecture example 1 (cont’d) AAll four items B1 only C2 and 3 only D2, 3, and 4 only

38 BPP LEARNING MEDIA Sample Answer to lecture example 1 C Transport costs to deliver goods to customers are an example of carriage outwards and should not be included. Administrative overheads do not relate to production and cannot therefore be included. The depreciation of the factory machine is a production overhead and should be included.

39 BPP LEARNING MEDIA Sample Lecture example 2 Jessie is trying to value her inventory. She has the following information available: $ Selling price 35 Costs incurred to date 20 Cost of work to complete item 12 Selling costs per item 1 Required What is the net realisable value of Jessie's inventory?

40 BPP LEARNING MEDIA Sample Answer to lecture example 2 Net realisable value is: $ Estimated selling price 35 Less: costs of completion (12) Less: selling costs (1) 22

41 BPP LEARNING MEDIA Sample Lecture example 3 On 1 January 20X7 a company held 200 units of finished goods valued at $10 each. During January the following transactions took place: DateUnits purchasedCost per unit 10 January300$ January350$ January250$13.00

42 BPP LEARNING MEDIA Sample Lecture example 3 (cont’d) Sales during January were as follows: DateUnits purchasedCost per unit 14 January280$ January400$ January80$18.00

43 BPP LEARNING MEDIA Sample Lecture example 3 (cont’d) Required Determine the valuation of closing inventories and cost of sales using: (a) FIFO (b) Weighted average cost

44 BPP LEARNING MEDIA Sample Answer to lecture example 3 (a) Closing inventories (FIFO) Purchases Opening inventories 10 Jan20 Jan25 Jan Sales 14 Jan 21 Jan 26 Jan (200) Nil (80) (220) Nil (180) (80) $11.50 = $1,035 $13.00 = $3,250 $4,285

45 BPP LEARNING MEDIA Sample Answer to lecture example 3 (cont’d) Cost of sales (FIFO) $ Opening inventories (200 × $10)2,000 Purchases10,530 12,530 Less: closing inventories (4,285) 8,245

46 BPP LEARNING MEDIA Sample Answer to lecture example 3 (cont’d) (b) Closing inventories and cost of sales (AVCO) UnitsCost $ Average Unit Cost $ Total Cost $ Cost of Sales $ 1.1.X2b/f , X2Purchase (W1) ,255 5, X2Sales(280) (2,943) 2,312 2, X2Purchase (W2) ,025 6, X2Sales(400) (4,448) 1,889 4, X2Purchase (W3) ,250 5, X2Sale(80) (979) 4, ,370

47 BPP LEARNING MEDIA Sample Answer to lecture example 3 (cont’d) (W1) $5,255/500 = $10.51 (W2) $6,337/570 = $11.12 (W3) $5,139/420 = $12.24

48 BPP LEARNING MEDIA Sample Chapter summary 1 1Introduction  Inventories can be a significant figure in an entity’s accounts and will impact both the profit figure and the net asset position. It is important therefore that it is recorded correctly.

49 BPP LEARNING MEDIA Sample Chapter summary 2 2Accounting adjustment  As seen in chapter 6 the statement of profit or loss matches the sales revenue earned in a period with the cost of sales incurred to generate that revenue. There are therefore two inventory adjustments: the opening inventory adjustment and the closing inventory adjustment.

50 BPP LEARNING MEDIA Sample Chapter summary 3 3Valuation  Inventories should be valued at the lower of cost and net realisable value.

51 BPP LEARNING MEDIA Sample Chapter summary 4 4Cost  The cost of inventory includes the cost of purchase, costs of conversion and any other costs necessary to bring the inventory to its present location and condition.

52 BPP LEARNING MEDIA Sample Chapter summary 5 5Net realisable value (NRV)  Net realisable value is the estimated selling price less the costs to completion and any selling and distribution costs.

53 BPP LEARNING MEDIA Sample Chapter summary 6 6Theoretical methods of estimating cost  Methods available to estimate the cost of inventories are first in, first out (FIFO) and average cost. Under FIFO the inventories held at the year end are the most recent purchases but under average cost the cost of all inventories purchased during the year is weighted to produce an average figure.

54 BPP LEARNING MEDIA Sample Chapter summary 7 7Valuation effects on profit  In times of rising prices, using FIFO will mean the financial statements show higher inventory values and higher profits.

55 BPP LEARNING MEDIA Sample Chapter 9 Tangible non current assets Capital and revenue expenditure IAS 16 Depreciation Non-current asset disposals Revaluations Disclosure

56 BPP LEARNING MEDIA Sample Syllabus learning outcomes 1 Define non-current assets and recognise the difference between current and non-current assets. Explain the difference between capital and revenue items and classify expenditure accordingly.

57 BPP LEARNING MEDIA Sample Syllabus learning outcomes 2 Prepare ledger entries to record the acquisition, disposal, depreciation and accumulated depreciation of noncurrent assets. Calculate and record profits or losses on disposal of non- current assets in the statement of profit or loss.

58 BPP LEARNING MEDIA Sample Syllabus learning outcomes 3 Record the revaluation of a non-current asset and calculate its subsequent depreciation and profit or loss on disposal.

59 BPP LEARNING MEDIA Sample Syllabus learning outcomes 4 Illustrate how non-current asset balances and movements are disclosed in company financial statements.

60 BPP LEARNING MEDIA Sample Syllabus learning outcomes 5 Explain the purpose and function of an asset register.

61 BPP LEARNING MEDIA Sample Syllabus learning outcomes 6 Understand and explain the purpose of depreciation. Calculate the charge for depreciation using the straight line and reducing methods, identifying when each is appropriate. Calculate the adjustments to depreciation necessary if changes are made in the estimated useful life and/or residual value of a non-current asset. Record depreciation in the statement of profit or loss and statement of financial position.

62 BPP LEARNING MEDIA Sample Overview Capital versus revenue expenditure Cost Tangible non-current assets DisposalsDepreciationRevaluations Straight line method Reducing balance method

63 BPP LEARNING MEDIA Sample Capital and revenue expenditure 1 What is capital expenditure? Capital expenditure results in the acquisition of non- current assets, or an increase in their earning capacity.

64 BPP LEARNING MEDIA Sample Capital and revenue expenditure 2 What is revenue expenditure? Revenue expenditure is incurred for the purpose of trade or to maintain the existing earning capacity of the non- current assets.

65 BPP LEARNING MEDIA Sample Tackling the exam It is highly likely that some questions in your exam will focus on the distinction between capital and revenue expenditure.

66 BPP LEARNING MEDIA Sample IAS 16 Initial measurement – at cost Components of cost — Purchase price (incl import duties, excl trade discount, recoverable sales tax) — Initial estimate of dismantling and restoration costs — Directly attributable costs, eg site preparation, delivery and handling costs installation, assembly costs, testing and professional fees

67 BPP LEARNING MEDIA Sample Tackling the exam Exam focus point: Only staff costs arising directly from the construction or acquisition of the asset can be capitalised as part of the cost of the asset. The costs of training staff to use a new asset cannot be capitalised because it is not probable that economic benefits will be generated from training the staff as we can’t guarantee that those staff will stay and use the asset. The costs of training staff should be expensed. Watch out for this in your exam!

68 BPP LEARNING MEDIA Sample IAS 16 (cont’d) Subsequent expenditure — added to carrying amount if improves condition beyond previous performance Repairs and maintenance costs are expensed.

69 BPP LEARNING MEDIA Sample Specimen exam question

70 BPP LEARNING MEDIA Sample Specimen exam answer

71 BPP LEARNING MEDIA Sample Depreciation 1 Depreciation – accruals concept Is a process of spreading the original cost of a non-current asset over the accounting periods in which its benefit will be felt

72 BPP LEARNING MEDIA Sample Depreciation 2 Two methods Straight line dep’n = Reducing balance dep’n = cost × RB%

73 BPP LEARNING MEDIA Sample Depreciation 3 The double entry for depreciation is as follows: DEBIT Depreciation expense (SPL) CREDIT Accumulated depreciation (SOFP)

74 BPP LEARNING MEDIA Sample Depreciation 4 Change in expected life If after a period of an asset’s life it is realised that the original useful life has been changed, then the depreciation charge needs to be adjusted. The revised charge from that date becomes: CV at revised date Remaining useful life

75 BPP LEARNING MEDIA Sample Tackling the exam Exam focus point: If an exam question gives you the purchase date of a non- current asset which is part way through an accounting period, you should generally assume that depreciation should be calculated in this way as a ‘part year’ amount, unless the question states otherwise.

76 BPP LEARNING MEDIA Sample Non-current asset disposals 1 Disposal On disposal of an asset a profit or loss will arise depending on whether disposal proceeds are greater or less than the carrying value of the asset. If proceeds > CV = profit If proceeds < CV = loss

77 BPP LEARNING MEDIA Sample Non-current asset disposals 2 Double entry for a disposal Eliminate cost DEBIT Disposals CREDIT Non-current assets Eliminate accumulated depreciation DEBITProvision for depreciation CREDIT Disposals

78 BPP LEARNING MEDIA Sample Non-current asset disposals 3 Account for sales proceeds DEBIT Cash CREDIT Disposals or if part exchange deal DEBIT Non-current assets CREDIT Disposals with part exchange value Transfer balance on disposals account to the statement of profit or loss

79 BPP LEARNING MEDIA Sample Revaluations 1 IAS 16 allows a choice between Keeping asset at cost Revaluing to fair value Fair value may give fairer view on business.

80 BPP LEARNING MEDIA Sample Revaluations 2 Accounting for a revaluation A revaluation is recorded as follows: DEBIT Non-current asset (revalued amount less original cost) DEBIT Accumulated depreciation (total depreciation to date) CREDIT Revaluation surplus (revalued amount less carrying value)

81 BPP LEARNING MEDIA Sample Disclosure With regard to disclosure, a proforma non-current asset note is shown here. TotalLand and buildings Plan and equipment $ 000 Cost or valuation At January 20X Revaluation surplus20 - Additions in year Disposals in year (45)(15)(30) At 31 December 20X Depreciation At 1 January 20X Charge for year752 Eliminated on disposals(3)- At 31 December 20X Carrying value At 31 December 20X At 1 January 20X

82 BPP LEARNING MEDIA Sample Tackling the exam 1 Exam focus point: There was a question on revaluations in the December 2012 exam. This asked for the depreciation charge and balance on the revaluation reserve at the end of the financial year, following a revaluation at the beginning of the year. The examiner commented that this was one of the questions with the lowest pass rates that session. Students correctly calculated the balance on the revaluation reserve but failed to identify the correct depreciation charge for the year.

83 BPP LEARNING MEDIA Sample Tackling the exam 2 As the revaluation took place at the beginning of the year, a whole year’s depreciation had to be calculated using the revalued amount over the remaining useful economic life. The remaining useful life needed to be calculated by working out the original depreciation charge and comparing this to the accumulated depreciation brought forward to find out how long the asset had been held. Students who answered the question wrongly had used the original useful economic life rather than the remaining useful economic life figure.

84 BPP LEARNING MEDIA Sample Lecture example 1 Required What examples of tangible non-current assets can you identify?

85 BPP LEARNING MEDIA Sample Answer to lecture example 1 Examples include: (a)Land and buildings (b)Plant and equipment (c)Motor vehicles (d)Furniture and fittings, computers

86 BPP LEARNING MEDIA Sample Lecture example 2 On 10 December 20X7 an entity bought a machine. The breakdown on the invoice showed: $ Cost of machine 20,000 Delivery costs 200 One-year maintenance contract ,100 Further installation costs of $500 were also incurred.

87 BPP LEARNING MEDIA Sample Lecture example 2 (cont’d) Required At what amount should the machine be capitalised in the entity's records? A$20,000 B$20,700 C$20,200 D$21,600

88 BPP LEARNING MEDIA Sample Answer to lecture example 2 B The cost capitalised should include the purchase price ($20,000) plus all directly attributable costs (delivery and installation). The cost of the maintenance contract should be shown as an expense in the statement of profit or loss.

89 BPP LEARNING MEDIA Sample Lecture example 3 A business buys a machine for $2,500. It is expected to have a useful life of three years after which time it will have a scrap value of $250. Required (a) Calculate the annual depreciation charge. (b) Calculate the cost, accumulated depreciation and net book value (NBV) for each year of the asset's life. Note: NBV = cost – accumulated depreciation to date.

90 BPP LEARNING MEDIA Sample Answer to lecture example 3 Straight line method: 2,500 ─ years = $750 per annum Depreciation charge=

91 BPP LEARNING MEDIA Sample Answer to lecture example 3 (cont’d) YearCost Accumulated depreciation NBV 1 2, , ,5001,5001, ,5002,250250

92 BPP LEARNING MEDIA Sample Answer to lecture example 3 (cont’d) Graphical representation $ 2, Year NBV

93 BPP LEARNING MEDIA Sample Lecture example 4 A business buys a machine costing $6,000. The depreciation rate is 40% on a reducing balance basis. Required Calculate depreciation expense, accumulated depreciation and net book value of the asset for the first three years.

94 BPP LEARNING MEDIA Sample Answer to lecture example 4 Year Dep’n rate Dep’n expense Acc’d dep’n NBV 1 40%2,400 3, %1,4403,8402, %8644,7041,296

95 BPP LEARNING MEDIA Sample Answer to lecture example 4 (cont’d) Graphical representation $ 6, Year NBV 3,600 2,160 1,296

96 BPP LEARNING MEDIA Sample Lecture example 5 Required Using the information in Lecture example 3, show: (a) The journal entry which would have been written at the end of the first year. (b) The treatment of depreciation for all years in the relevant ledger accounts. (c) The relevant statement of profit or loss and statement of financial position extracts for each year.

97 BPP LEARNING MEDIA Sample Answer to lecture example 5 ( a) Journal entry Debit Credit $ $ Depreciation expense 750 Accumulated depreciation 750 Being annual depreciation charged on machine

98 BPP LEARNING MEDIA Sample Answer to lecture example 5 (cont’d) (b) Accounting for depreciation: Machine (SOFP) $$ Cash2,500Bal c/d2,500 Bal b/d2,500

99 BPP LEARNING MEDIA Sample Answer to lecture example 5 (cont’d) Depreciation expense (SPL) $ $ Year 1 Accumulated dep’n Year 2 Accumulated dep’n Year 3 Accumulated dep’n 750 Year 1 SPL Year 2 SPL Year 3 SPL 750

100 BPP LEARNING MEDIA Sample Answer to lecture example 5 (cont’d) Accumulated depreciation (SOFP) $ $ Bal c/d 750 1,500 2,250 Year 1 Depreciation expense Year 2 Bal b/d Depreciation expense Year 3 Bal b/d Depreciation expense 750 1, ,250

101 BPP LEARNING MEDIA Sample Answer to lecture example 5 (cont’d) Statement of profit or loss (extracts): Year 1 Year 2 Year 3 $ $ $ Expenses Depreciation Statement of financial position (extracts): Cost Accumulated Net Book Depreciation Value $ $ $ (Year 1) Machine 2,500 (750) 1,750 (Year 2) Machine 2,500 (1,500) 1,000 (Year 3) Machine 2,500 (2,250) 250

102 BPP LEARNING MEDIA Sample Lecture example 6 The machine costing $6,000 in Lecture example 4 is sold in year 3 for $3,000. No depreciation is charged in the year of disposal. Required (a)Calculate the profit or loss on disposal of the machine. (b)Complete the ledger accounts to show how the disposal would be accounted for.

103 BPP LEARNING MEDIA Sample Answer to lecture example 6 (a) $ Sales proceeds 3,000 NBV at end of year 2 (2,160) 840

104 BPP LEARNING MEDIA Sample Answer to lecture example 6 (cont’d) (b) Machine (SOFP) Bal b/d $ 6,000(a) Disposal account $ 6,000 Accumulated depreciation (SOFP) (b) Disposal account $ 3,840Bal b/d $ 3,840

105 BPP LEARNING MEDIA Sample Answer to lecture example 6 (cont’d) Disposal account (SPL) (a) Machine Balance = profit on disposal (SPL) $ 6, ,840 (c) Cash (b) Accumulated dep’n $ 3,000 3,840 6,840

106 BPP LEARNING MEDIA Sample Lecture example 7 Assume in Lecture example 6 that instead of cash proceeds of $3,000, there is a part exchange allowance of $3,000 on a replacement machine costing $10,000. Required (a) Calculate the profit or loss on disposal of the machine. (b) Calculate the amount of cash paid for the new machine. (c) Complete the ledger accounts to show both the disposal and the acquisition.

107 BPP LEARNING MEDIA Sample Answer to lecture example 7 (a)The profit on disposal is still $840, the only difference is that the proceeds were not received in cash, but in the form of a part exchange allowance. (b)Cash paid for the new machine is $7,000 ($10,000 – $3,000)

108 BPP LEARNING MEDIA Sample Answer to lecture example 7 (cont’d) Old machine (SOFP) Bal b/d $ 6,000(a) Disposal account $ 6,000 Accumulated depreciation (SOFP) (b) Disposal account $ 3,840Bal b/d $ 3,840

109 BPP LEARNING MEDIA Sample Answer to lecture example 7 (cont’d) New machine (SOFP) (c) Disposal account Cash Bal b/d $ 3,000 7,000 10,000 Bal c/d $ 10,000

110 BPP LEARNING MEDIA Sample Answer to lecture example 7 (cont’d) Disposal account (SPL) (a) Machine Profit disposal (SPL) $ 6, ,840 (c) New machine (part exchange) (b) Accumulated depreciation $ 3,000 3,840 6,840

111 BPP LEARNING MEDIA Sample Lecture example 8 A building costing $100,000 on which depreciation of $20,000 has been charged is to be revalued to $150,000. Required (a) Show the double entry to record the revaluation and make the postings to the ledger accounts. (b) What would be the depreciation charge for the year if the building has a remaining useful life of 40 years?

112 BPP LEARNING MEDIA Sample Answer to lecture example 8 (a) The double entry is $ $ Dr Non-current asset – building (150 – 100) 50,000 Dr Accumulated depreciation – building 20,000 Cr Revaluation reserve (β) 70,000

113 BPP LEARNING MEDIA Sample Answer to lecture example 8 (cont’d) Building (SOFP) $ $ Bal b/d100,000 Revaluation reserve 50,000Bal c/d150,000

114 BPP LEARNING MEDIA Sample Answer to lecture example 8 (cont’d) Accumulated depreciation (SOFP ) $ $ Revaluation reserve20,000Bal b/d20,000 Revaluation reserve (SOFP) $ $ Building50,000 Revaluation reserve70,000Accumulated depreciation 20,000 70,000 Bal b/d70,000

115 BPP LEARNING MEDIA Sample Answer to lecture example 8 (cont’d) (b) Depreciation charge is $150,000 / 40 years = $3,750

116 BPP LEARNING MEDIA Sample Lecture example X1 Asset cost $40,000 Estimated useful life five years No residual value 1.1.X3 Total useful life revised to four years. Required Calculate the depreciation charge, accumulated depreciation and NBV for each year of the asset's life (year end 31 December).

117 BPP LEARNING MEDIA Sample Answer to lecture example 9 Review of useful life: YearDepreciation charge $ Accumulated depreciation $ NBV $ 20X140,000/5=8,000 32,000 20X240,000/5=8,00016,00024,000 20X324,000/2=12,00028,00012,000 20X424,000/2=12,000 40,000 0

118 BPP LEARNING MEDIA Sample Lecture example X1 Asset cost $40,000 Residual value $1,500 Useful life five years Depreciation: 25% reducing balance 1.1.X3 Change depreciation method to straight line Required Calculate the depreciation charge, accumulated depreciation and NBV for each year of the asset’s life (year ended 31 December).

119 BPP LEARNING MEDIA Sample Answer to lecture example 10 Change in method of depreciation: Dep’n charge $ Accumulated depreciation $ NBV $ 20X140,000 × 25%10,000 30,000 20X230,000 × 25%7,50017,50022,500 20X3(22,500-1,500)/37,00024,50015,500 20X47,00031,5008,500 20X5 7,000 38,500 1,500

120 BPP LEARNING MEDIA Sample Chapter summary 1 1Introduction  Expenditure on non-current assets is often significant and it is important therefore that it is accounted for appropriately.

121 BPP LEARNING MEDIA Sample Chapter summary 2 2Non-current assets  Capital expenditure results in a non-current asset being shown on the statement of financial position. Revenue expenditure, such as repairs and maintenance, is shown as an expense in the statement of profit or loss.  Tangible non-current assets should initially be recorded at cost. This includes the purchase price of the item plus any directly attributable costs to bring the item to its intended location and ready to use.

122 BPP LEARNING MEDIA Sample Chapter summary 3 3Depreciation  Depreciation is an expense charged in relation to the asset each year to reflect the using up of the asset. Land usually has an unlimited useful life and so is not depreciated.

123 BPP LEARNING MEDIA Sample Chapter summary 4 4Methods of depreciation  Depreciation is usually calculated on a straight line or reducing balance basis.

124 BPP LEARNING MEDIA Sample Chapter summary 5 5Straight line method  This method is suitable for assets which are used up evenly during their life time. The depreciation expense is the same each year.

125 BPP LEARNING MEDIA Sample Chapter summary 6 6Reducing balance method  This method is suitable for assets which generate more revenue in the earlier years of their life. The depreciation expense is higher in the initial years.

126 BPP LEARNING MEDIA Sample Chapter summary 7 7Accounting for depreciation  Depreciation is recorded by way of a journal entry. The expense is recorded as a debit entry and reduces profit. The credit is made to the accumulated depreciation account and reduces the carrying value of the asset in the statement of financial position.

127 BPP LEARNING MEDIA Sample Chapter summary 8 8Disposal of non-current assets  On disposal of a non-current asset the sales proceeds are compared to the net book value of the asset in order to calculate the profit or loss on disposal. Where an asset is given in part exchange for another asset, the part exchange allowance takes the place of the sales proceeds.

128 BPP LEARNING MEDIA Sample Chapter summary 9 9Revaluations  An entity may choose to revalue its assets rather than hold them at cost – this is a choice of accounting policy. Where an entity revalues, it must revalue all assets in the same class and the depreciation charge is based on the revalued amount.

129 BPP LEARNING MEDIA Sample Chapter summary Depreciation revisited  If an entity changes the method of depreciation used from straight line to reducing balance (or vice versa) or revises the useful life of an asset it should write off the asset’s net book value using the revised method or useful life.


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