PRC 4 Introduction to Accounting Topic 5: Depreciation Daniyal Zahid Butt, ACA

Non-current assets
(i) Assets that have a long useful life and are expected to provide future economic benefits
for the entity over a period of several years
(ii) Non-current assets may be intangible or tangible.

Intangible non-current assets Tangible non-current assets

These assets do not have a physical existence These assets have physical existence,
such as patent rights, licensing, software etc. such as land and buildings, plant and equipment,
office equipment, furniture and fixture and vehicles.
These are often referred to as ‘property, plant and
equipment’.

Property, Plant and equipment

Property, Plant and equipment are:
1 Tangible items
2 that are expected to be used during more than one accounting period; and
3 are held by the business for:
(i) Production and supply of goods or services,
(ii) For rental to others, or
(iii) for administrative purposes

Distinguish non-current assets and Inventory

(i) If an entity’s main business is selling machines, then that machine does not classify as non-current asset rather
the machinery used to produce the machines for sales is non-current asset. The machines manufactured for sale
are classified as inventory.
(ii) The same goes for real estate businesses. Their offices are non-current assets but the houses they sell are
inventory.
(iii) As a practical expedient, immaterial items are not recognised as non-current assets even if they
meet the definition criteria, for example, staplers and calculators etc.

Ex-1
State whether the items listed below can be recognised as property, plant and equipment and
reason if they cannot be so recognised:
1 Standby generator expected to be used 6 A factory including building and machinery.
for 7 years 7 A bus for pick-and-drop of staff members.
2 An office building 8 A generator given to another entity on rent
3 A trademark 9 Small tools & spare parts having low value
4 An office printer 10 Wastebasket
5 A plot of land held for resale

Multiple choice questions:

1 Which of the following cannot be classified as tangible non-current asset:
(a) A commercial generator held for use in factory in case of electricity shortage
(b) A commercial generator held for earning by renting to customers
(c) A commercial generator held for use in office in case of electricity shortage
(d) A commercial generator held for resale to customers

2 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

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PRC 4 Introduction to Accounting Topic 5: Depreciation Daniyal Zahid Butt, ACA
(a) (i) to (iv) all (c) (i), (iii) and (iv) only
(b) (i), (ii) and (iii) only (d) (ii), (iii) and (iv) only

3 Which of the following is not a property, plant and equipment?

(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

Initial Cost
All items of PPE shall be recorded at its COST
COST shall include:
1 Purchase price (after deducting trade discount & settlement discount)
2 Import duties & non refundable purchase taxes
3 Any directly attributable cost necessarily incurred to bring the asset into its intended
working condition

Examples of directly attributable costs are:

1 wages for the construction or acquisition;
2 costs of site preparation including material and labour costs;
3 initial delivery and handling costs (i.e. loading, unloading, carriage, freight);
4 installation and assembly costs;
5 costs of testing whether the asset is functioning properly; and
6 professional fees such as architect and surveyor fee.
Subsequent expenditure
Subsequent expenditure shall be capitalized if due to that there is an:
1 Increase in useful life
2 increase in capacity
3 improvement in product quality
4 reduction in running and operating cost
5 improvement in performance
Repairs are expensed:
(i) Expenditure on a non-current asset after acquisition is treated as revenue expenditure when it is
incurred to make a repair.
(ii) This is recognised as an expense in the statement of comprehensive income.

Multiple choice questions:

4 A building contractor decides to construct an office building to be occupied by his own staff.
Which TWO of the following costs incurred by the building contractor cannot be included as a
part of the cost of the office building?
(a) Cement, iron, sand and crushed stone bought for construction
(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
5 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
6 Which TWO of the following items should be capitalised within the initial carrying amount of an

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PRC 4 Introduction to Accounting Topic 5: Depreciation Daniyal Zahid Butt, ACA
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

7 An entity 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 entity 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 entity’s machinery account in the ledger?
(a) Rs. 48,500,000 (c) Rs. 46,000,000
(b) Rs. 46,900,000 (d) Rs. 50,300,000

8 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 entity’s statement of financial position
at 31 March 2015?
(a) Rs. 414,500,000 (c) Rs. 425,800,000
(b) Rs. 412,000,000 (d) Rs. 417,800,000

9 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 (c) Rs. 7,112,000
(b) Rs. 6,950,000 (d) Rs. 7,100,000

10 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

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PRC 4 Introduction to Accounting Topic 5: Depreciation Daniyal Zahid Butt, ACA
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% on remaining amount if payment for the
machine was received within one month of purchase. ML expected and paid for the plant on
25 March 2018.
On what amount, the plant should be initially measured on acquisition?
(a) Rs. 98,750,000 (c) Rs. 91,750,000
(b) Rs. 95,060,000 (d) Rs. 88,060,000

11 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 (c) Rs. 25,770,000
(b) Rs. 29,110,000 (d) Rs. 23,670,000

12 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
13 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 (c) Rs.1,045,000
(b) Rs.1,020,000 (d) Rs.1,065,000
14 Which of the following is not a component of cost of an asset?
(a) Purchase price (c) Refundable sales tax
(b) Import duties (d) Installation and assembly costs
15 Which of these cost is capitalised as cost of an asset?
(a) Professional fees (c) Initial operating losses
(b) General overheads (d) Administration expenses

16 Which of the following is not capitalised as a directly attributable cost of a machine?

(a) Site preparation (c) Carriage inwards for fuel for the machinery
(b) Initial testing cost (d) Installation and assembly costs

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PRC 4 Introduction to Accounting Topic 5: Depreciation Daniyal Zahid Butt, ACA
17 An entity just received civil work bill from their contractor of Rs. 580,000 for construction of a
new guard room and repair of sewerage system. It is estimated that 15% of total bill relates to
repair work. What amount should be capitalised and/or charged as an expense?
(a) Capitalise Rs. 580,000 (c) Capitalise Rs. 493,000 and Expense Rs. 87,000
(b) Expense Rs. 580,000 (d) Expense Rs. 493,000 and Capitalise Rs. 87,000

Advances & payables

When payment is made in cash Non-current assets Dr.
Cash / Bank Cr.
When payment is made in arrears When asset is received:
Non-current assets Dr.
Other Payable Cr.
When payment is made:
Other Payable Dr.
Cash / Bank Cr.
When payment is made in advance When payment is made:
Advance paid asset Dr.
Cash / Bank Cr.
When asset is received:
Non-current assets Dr.
Advance paid asset Cr.

18 On 22nd February an equipment was purchased for Rs. 800,000. It was delivered immediately.
The entity paid Rs. 500,000 immediately and remaining are to be paid on 4th March.
What journal entry should be recorded on 22nd February?
(a) Debit Equipment Rs. 800,000; Credit Bank Rs. 500,000; Credit Advance Rs. 300,000
(b) Debit Equipment Rs. 800,000; Credit Payables Rs. 500,000; Credit Bank Rs. 300,000
(c) Debit Equipment Rs. 800,000; Credit Bank Rs. 500,000; Credit Payables Rs. 300,000
(d) Debit Equipment Rs. 800,000; Credit Advance Rs. 500,000; Credit Payables Rs. 300,000
19 On 22nd February an equipment was ordered for Rs. 800,000 by paying 20% advance. It was
delivered on 4th March when the entity paid 50% of amount due and promised remaining to be
paid on 25th April.
What journal entry should be recorded on 4th March?
(a) Debit Equipment Rs. 800,000;
Credit Advance Rs. 160,000 & Bank Rs. 400,000 & Payables Rs. 240,000
(b) Debit Equipment Rs. 800,000;
Credit Advance Rs. 160,000 & Bank Rs. 740,000
(c) Debit Equipment Rs. 800,000;
Credit Advance Rs. 160,000 & Bank Rs. 320,000 & Payables Rs. 320,000
(d) Debit Equipment Rs. 800,000;
Credit Advance Rs. 160,000 & Payables Rs. 640,000
20 On 22nd February an equipment was ordered for Rs. 800,000 by paying 20% advance. It was
delivered on 4th March when the entity paid 50% of total bill and promised remaining to be paid
on 25th April.
What journal entry should be recorded on 4th March?
(a) Debit Equipment Rs. 800,000;
Credit Advance Rs. 160,000 & Bank Rs. 400,000 & Payables Rs. 240,000
(b) Debit Equipment Rs. 800,000;
Credit Advance Rs. 160,000 & Bank Rs. 740,000
(c) Debit Equipment Rs. 800,000;
Credit Advance Rs. 160,000 & Bank Rs. 320,000 & Payables Rs. 320,000
(d) Debit Equipment Rs. 800,000;
Credit Advance Rs. 160,000 & Payables Rs. 640,000

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PRC 4 Introduction to Accounting Topic 5: Depreciation Daniyal Zahid Butt, ACA

DEPRECIATION
Purpose of depreciation
1 Expenditure on non current asset helps business to generate benefit for several accounting
periods
2 The cost for the benefit received from the use of asset must be recognized in the same
period in which benefit was obtained
3 This cost is known as depreciation expense
4 depreciation expense for the period should be deducted from the cost of asset and
recorded as other operating expense in SOCI

Useful life
(i) the period over which an asset is expected to be available for use by an entity; or
(ii) the number of production or similar units expected to be obtained from the asset
by the business
Remember:All depreciation methods calculates depreciation over economic life useful life

Residual value/ scrap value

estimated amount that an entity would currently obtain from disposal of the asset
if the asset were already of the age and in the condition expected at the end of its useful life
Depreciable amount
The cost of asset less its residual value
Depreciation
Systematic allocation of depreciable amount of asset over its useful life
Accumulated depreciation
Total depreciation till date is known as accumulated depreciation

Net book value (NBV)

NBV is the remaining value of asset on a particular date
It can be calculated by following formulas
NBV = Cost - accumulated depreciation
NBV = Opening NBV - depreciation for the year
Multiple choice questions:
21 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

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 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

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PRC 4 Introduction to Accounting Topic 5: Depreciation Daniyal Zahid Butt, ACA
DEPRECIATION METHODS
Systematic allocation of depreciable amount can be done by different methods
(i) Straight line method
In this method, the depreciable amount is charged in equal amounts to each reporting period
over the expected useful life of the asset.
(distribute the depreciable amount equally over useful life)

Depreciation formula = Cost - residual value or Cost x dep rate

useful life
(Ans gives depreciation in Rs.)
Dep rate (SLM) = Depreciable amount
Cost x useful life
Ex-2a Ex-2b
Cost Rs. 600 Cost Rs. 1,200
Useful life 5 years Useful life 5 years
Residual value Rs. 50 Residual valueRs. 100
Dep method SLM Dep method SLM
Required: Required:
Calculate depreciation each year Calculate depreciation each year
Calculate depreciation rate Calculate depreciation rate
Ex-3a Ex-3b
Plant bought on 1 January 2021 for Rs. 100,000 Plant bought on 1 January 2021 for Rs. 200,000
expected useful life of 5 years expected useful life of 5 years
residual value of Rs. 10,000. residual value of Rs. 20,000.
The entity year ends on 31 December. The entity year ends on 31 December.
Required: Required:
Using straight line method, Using straight line method,
calculate the amount of annual depreciation and calculate the amount of annual depreciation and
carrying amount along with accumulated depreciation carrying amount along with accumulated depreciation
for the year 2021 to 2025. for the year 2021 to 2025.

Ex-4a Ex-4b
An item of equipment costs Rs. 1,260,000 An item of equipment costs Rs. 2,520,000
expected useful life of 6 years expected useful life of 6 years
expected residual value of Rs. 240,000. expected residual value of Rs. 480,000.
Required: Required:
Using the straight-line method of depreciation, Using the straight-line method of depreciation,
what is the annual depreciation charge what is the annual depreciation charge
what will be the NBV of the asset after 4 years? what will be the NBV of the asset after 4 years?

Multiple choice questions:

24 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 (c) Rs.800,000
(b) Rs.1,000,000 (d) None of the above

25 Small Limited purchased a machine for Rs. 8 million. It has an estimated residual value of
Rs. 1.5 million and useful life of seven years. Calculate depreciation percentage
(to be applied to cost) under straight line method.
(a) 7% (c) 11.60%
(b) 12.70% (d) 7.11%

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PRC 4 Introduction to Accounting Topic 5: Depreciation Daniyal Zahid Butt, ACA
(ii) Reducing balance method
In this method, the annual depreciation charge is
a fixed percentage of the NBV of the asset at the start of the period
which results in gradually lower depreciation charge as asset’s efficiency is reduced over its useful life.
𝑅𝑣
Depreciation formula = 1− 𝑛 n= useful life
𝑐𝑜𝑠𝑡
Rv= residual value
4 Depreciation calculation = Opening Net book value x Depreciation rate
Ex-5a Ex-5b
Accounting year Jan-Dec Accounting year Jan-Dec
########## ##########
Asset purchase Rs. 100,000 Asset purchase Rs. 200,000
Est useful life 5 years Est useful life 5 years
Est residual value Rs. 7,776 Est residual value Rs. 15,552
Dep method RBM Dep method RBM
Required: Required:
Calculate depreciation each year Calculate depreciation each year
Ex-6a Ex-6b
A non-current asset cost Rs. 64,000. A non-current asset cost Rs. 128,000.
It is depreciated by the reducing balance method, It is depreciated by the reducing balance method,
at the rate of 25% each year. at the rate of 25% each year.
Required Required
annual depreciation charge in Year 1, Year 2 and Year 3? annual depreciation charge in Year 1, Year 2 and Year 3?
Ex-7a Ex-7b
An item of equipment costs Rs. 1,260,000 An item of equipment costs Rs. 2,520,000
expected useful life of 6 years expected useful life of 6 years
expected residual value of Rs. 240,000. expected residual value of Rs. 480,000.
Required: Required:
Using the reducing balance method, Using the reducing balance method,
what will be the NBV of the asset after 4 years? what will be the NBV of the asset after 4 years?
Ex-8a Ex-8b
A non-current asset cost Rs. 64,000. A non-current asset cost Rs. 128,000.
It is depreciated by the reducing balance method, It is depreciated by the reducing balance method,
at the rate of 25% each year. at the rate of 25% each year.
Required Required
what will be the NBV of the asset after 2 years? what will be the NBV of the asset after 2 years?
Annual depreciation charge for year 3 Annual depreciation charge for year 3
Multiple choice questions:
26 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 (c) Rs. 474,609
(b) Rs. NIL (d) Rs. 400,000

27 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 (c) Rs.120,000
(b) Rs.165,000 (d) Rs.100,000
28 Small Limited purchased a machine for Rs. 8 million. It has an estimated residual value of Rs.
1.5 million and useful life of seven years. Calculate depreciation percentage (to be applied to cost)

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PRC 4 Introduction to Accounting Topic 5: Depreciation Daniyal Zahid Butt, ACA
under reducing balance method.
(a) 21.27% (c) 23.45%
(b) 22.63% (d) 24.55%
(iii) SUM of years' digit
Depreciation formula = cost - residual value (shall remain same until revision)
SUM of years' digit
SUM of years' digit n(n+1)
2 where n is useful life
Depreciation expense for the year = digit of current year x Ans as per formula
Ex 9a Ex 9b
Asset purchased on 1-Jan-21 200 Asset purchased on 1-Jan-21 400
Estimated residual value 40 Estimated residual value 80
Estimated useful life 4 years Estimated useful life 4 years
Dep method: Sum of years' digit Dep method: Sum of years' digit
Required: Required:
Calculate depreciation each year Calculate depreciation each year
Ex-10a Ex-10b
Plant bought on 1 January 2021 for Rs. 100,000 Plant bought on 1 January 2021 for Rs. 200,000
expected useful life of 5 years expected useful life of 5 years
residual value of Rs. 10,000. residual value of Rs. 20,000.
The entity year ends on 31 December. The entity year ends on 31 December.
Required: Required:
Using Sum of years' digit method, Using Sum of years' digit method,
calculate the amount of annual depreciation and calculate the amount of annual depreciation and
carrying amount along with accumulated depreciation carrying amount along with accumulated depreciation
for the year 2021 to 2025. for the year 2021 to 2025.
Ex-11a Ex-11b
An item of equipment costs Rs. 1,260,000 An item of equipment costs Rs. 2,520,000
expected useful life of 6 years expected useful life of 6 years
expected residual value of Rs. 240,000. expected residual value of Rs. 480,000.
Required: Required:
Using Sum of years' digit method, Using Sum of years' digit method,
what will be the NBV of the asset after 4 years? what will be the NBV of the asset after 4 years?
(iv) Production units method
Depreciation formula = cost - residual value
(Depreciation per unit) estimated total production
Depreciation expense for the year = No. of units produced in the year x Ans as per formula
Ex 12a Ex 12b
Asset purchased on 1-Jan-20 Rs. 200 Asset purchased on 1-Jan-20 Rs. 400
Residual value Rs. 40 Residual value Rs. 80
estimated total production 5000 units estimated total production 5000 units
Dep method is production method Dep method is production method
Actual production of Machine: Actual production of Machine:
Years Units produced Years Units produced
2020 2000 2020 2000
2021 1200 2021 1200
2022 0 2022 0
2023 1800 2023 1800
5000 5000
Calculate depreciation each year Calculate depreciation each year

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PRC 4 Introduction to Accounting Topic 5: Depreciation Daniyal Zahid Butt, ACA
Ex-13
Plant bought on 1 January 2021 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. The entity year ends on 31 December. Actual production of units has
been 1500 units, 1800 units, 1200 units, 2000 units and 1000 units from year 2021 to 2025 respectively
Required:
Using units of production method, calculate the amount of annual depreciation and carrying amount along
with accumulated depreciation for the year 2021 to 2025

Note The depreciation method used should reflect the pattern in which the asset's economic benefits
are consumed by the entity

Multiple choice questions:

29 Under which of the following methods of depreciation the expense may be zero in the period in
which asset is not used at all?
(a) Straight line method (c) Sum of units’ method
(b) Reducing balance method (d) Sum of digits’ method

30 An aeroplane engine was acquired for Rs. 75 million and has life of 48000 flying hours. The plane
was flown 1800 hours during the year. What amount of depreciation should be charged in profit or loss?
(a) Rs. 2,812.5 (c) Rs. 2,500
(b) Rs. 2,500,000 (d) Rs. 2,812,500

31 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 (c) Rs. 280,000
(b) Rs. 120,000 (d) Rs. 184,000

32 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 (c) Rs. 666,667
(b) Rs. 555,555 (d) None of the above

33 Normal Limited purchased premises for Rs. 16 million with no salvage value and useful life of 45 years.
What is the depreciation charge for the fourth year under the sum-of-the-year digit method?
(a) Rs. 4,692,754 (c) Rs. 7,544,926
(b) Rs. 6,492,754 (d) Rs. 5,744,926

DEPRECIATION POLICY
A Full year basis
1 Full year depreciation in year in which asset is available for use
No depreciation in year when asset is not available for use
B Time basis
1 Depreciation is charged for number of months the asset is used in the year
3 Depreciation shall start from the month when the asset was available for use
e.g. Asset purchased for Rs. 100 on 1-Jan-2020
Asset was installed at a cost of Rs. 10 on 1-Mar-2020
Rule: depreciation shall start from 1-Mar-2020 (NOT from 1-Jan-2020)
because asset was available for use on 1-Mar-2020

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PRC 4 Introduction to Accounting Topic 5: Depreciation Daniyal Zahid Butt, ACA
Note: Depreciation shall also be charged on idle assets
e.g. Asset purchased for Rs. 100 on 1-Jan-2020
Asset was installed at a cost of Rs. 10 on 1-Mar-2020
Entity started using asset on 1-Jun-2020
Rule: depreciation shall start from 1-Mar-2020 (NOT from 1-Jun-2020 )
because asset was available for use on 1-Mar-2020
Ex-15a (time basis) Rs. Ex-15b (time basis) Rs.
Asset purchased on 1-Mar-20 190 Asset purchased on 1-Mar-20 380
Delivery cost 3 Delivery cost 6
Non refundable taxes 5 Non refundable taxes 10
Site preparation cost 7 Site preparation cost 14
Installation cost 20 Installation cost 40
Staff training 8 Staff training 16
Asset installed on 1-Jul-20 Asset installed on 1-Jul-20
Residual value Nil Residual value Nil
Useful life 15 years Useful life 15 years
Dep policy: Time basis Dep policy: Time basis
Required: Required:
Depreciation for 2020 and 2021 Depreciation for 2020 and 2021
if if
A SLM depreciation method is followed A SLM depreciation method is followed
B RBM of dep is followed B RBM of dep is followed
Note:
In time basis policy, Depreciation for the year under SLM shall be calculated as follows:
Depreciation for the year = Depreciation as per formula x n/12
In time basis policy, Depreciation for the year under RBM shall be calculated as follows:
Depreciation for the year = Opening NBV x Depreciation Rate as per formula x n/12
Remember: Land is not depreciated
Ex-16
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?
Ex-17
An entity constructed a building for its own use. The building was completed on 1 July 2008 and occupied on 1 September
2008. The entity used the building for a long time but then due to expansion in its business it decided on 1 July 2015 to
shift to new rented premises. The entity shifted to new premises on 1 August 2015 and disposed of the old building on 31
Required:
Identify the date from which depreciation should be commenced and date when depreciation charge should cease.
Multiple choice questions:
34 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
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.

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PRC 4 Introduction to Accounting Topic 5: Depreciation Daniyal Zahid Butt, ACA
At what amount will the non-current assets be shown in Hunza Limited’s statement of financial
position as at 31 March 2015?
(a) Rs. 15,625,000 (c) Rs. 15,585,000
(b) Rs. 15,250,000 (d) Rs. 15,600,000
35 An entity 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 (c) Do not depreciate the land
(b) Depreciate over useful life of the land (d) None of these
36 If an asset is idle then?
(a) Depreciation is paused (c) Depreciation is ignored
(b) Depreciation for the entire period (d) Depreciation continues
37 Tom Limited runs a sports equipment manufacturing business with a year end of 31 December 2019.
On 1 April 2019, Tom Limited acquired a delivery truck at a cost of Rs. 4,800,000. The expected life
of the truck is 8 years and residual value is expected to be nil. What is depreciation charge for
2019 on straight line basis?
(a) Rs. 600,000 (c) Rs. 450,000
(b) Rs. 800,000 (d) Rs. 500,000
Shortcut formulas to find NBV & Accumulated depreciation
Straight line method Reducing balance method
Acc dep = Dep/year x No. of years NBV = Cost x (1-r)ᶯ x (1- r x m/12)
NBV = Cost - Acc dep Acc dep = Cost - NBV
No of years = n + m/12
n= No. of complete year(s)
m= months of incomplete year
Ex-18a Ex-18b
Accounting year Jan - Dec Accounting year Jan - Dec
Plant bought on 1 January 2021 for Rs. 110,000 Plant bought on 1 January 2021 for Rs. 220,000
expected useful life of 5 years expected useful life of 5 years
residual value of Rs. 10,000. residual value of Rs. 20,000.
The entity year ends on 31 December. The entity year ends on 31 December.
Required: Required:
Using straight line method, Using straight line method,
calculate AD & NBV on 31 December 2023 calculate AD & NBV on 31 December 2023
Ex-19a Ex-19b
Accounting year Jan - Dec Accounting year Jan - Dec
Plant bought on 1 September 2021 for Rs. 110,000 Plant bought on 1 September 2021 for Rs. 220,000
expected useful life of 5 years expected useful life of 5 years
residual value of Rs. 10,000. residual value of Rs. 20,000.
The entity year ends on 31 December. The entity year ends on 31 December.
Required: Required:
Using straight line method, Using straight line method,
calculate the AD & NBV on 31 December 2023 calculate the AD & NBV on 31 December 2023
Ex-20a Ex-20b
Accounting year Jan - Dec Accounting year Jan - Dec
Plant A bought on 1 January 2021 for Rs. 60,000 Plant A bought on 1 January 2021 for Rs. 120,000
Plant B bought on 1 July 2022 for Rs. 80,000 Plant B bought on 1 July 2022 for Rs. 160,000
Depreciation rate 10% Depreciation rate 10%
Required: Required:
Using straight line method, Using straight line method,
calculate the AD & NBV on 31 December 2022 calculate the AD & NBV on 31 December 2022

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PRC 4 Introduction to Accounting Topic 5: Depreciation Daniyal Zahid Butt, ACA
Multiple choice questions:
38 An entity which makes up its accounts annually to 31 December provides for depreciation of its
machinery at the rate of 10% per annum using the straight line method.
On 31 December 2016, the machinery consisted of three items purchased as under:
On 1 January 2014 Machine A Cost Rs. 3,000,000
On 1 April 2015 Machine B Cost Rs. 2,000,000
On 1 July 2016 Machine C Cost Rs. 4,000,000
What would be depreciation charge for the year 2016?
(a) Rs. 600,000 (c) Rs. 700,000
(b) Rs. 628,000 (d) Rs. 900,000

Ex-21a Ex-21b
Accounting year Jan - Dec Accounting year Jan - Dec
Plant bought on 1 January 2021 for Rs. 100,000 Plant bought on 1 January 2021 for Rs. 200,000
Depreciation rate 10% Depreciation rate 10%
residual value of Rs. 10,000. residual value of Rs. 20,000.
The entity year ends on 31 December. The entity year ends on 31 December.
Required: Required:
Using reducing balance method, Using reducing balance method,
calculate AD & NBV on 31 December 2023 calculate AD & NBV on 31 December 2023

Ex-22a Ex-22b
Accounting year Jan - Dec Accounting year Jan - Dec
Plant bought on 1 September 2021 for Rs. 100,000 Plant bought on 1 September 2021 for Rs. 200,000
Depreciation rate 10% Depreciation rate 10%
residual value of Rs. 10,000. residual value of Rs. 20,000.
The entity year ends on 31 December. The entity year ends on 31 December.
Required: Required:
Using reducing balance method, Using reducing balance method,
calculate the AD & NBV on 31 December 2023 calculate the AD & NBV on 31 December 2023

Ex-23a Ex-23b
Accounting year Jan - Dec Accounting year Jan - Dec
Plant A bought on 1 January 2021 for Rs. 60,000 Plant A bought on 1 January 2021 for Rs. 120,000
Plant B bought on 1 July 2022 for Rs. 80,000 Plant B bought on 1 July 2022 for Rs. 160,000
Depreciation rate 10% Depreciation rate 10%
Required: Required:
Using reducing balance method, Using reducing balance method,
calculate the AD & NBV on 31 December 2022 calculate the AD & NBV on 31 December 2022

Multiple choice questions:

39 An entity which makes up its accounts annually to 31 December provides for depreciation of its
machinery at the rate of 10% per annum using the reducing balance method.
On 31 December 2016, the machinery consisted of three items purchased as under:
On 1 January 2014 Machine A Cost Rs. 3,000,000
On 1 April 2015 Machine B Cost Rs. 2,000,000
On 1 July 2016 Machine C Cost Rs. 4,000,000
What would be depreciation charge for the year 2016?
(a) Rs. 600,000 (c) Rs. 700,000
(b) Rs. 628,000 (d) Rs. 900,000

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PRC 4 Introduction to Accounting Topic 5: Depreciation Daniyal Zahid Butt, ACA
CHANGE IN DEPRECIATION FORMULA
General rule: Depreciation formulas does not change over asset's useful life
Exception: Depreciation formulas shall be changed in following circumstances
(i) Change in residual value
(ii) Change in useful life
(iii) Change in depreciation method

How to calculate depreciation in the year of change

Step # 1 Find NBV at start of the year
Step # 2 Apply New depreciation formula
SLM new Dep formula = NBV on date of change - new residual value
remaining useful life

RBM new Dep formula = 1 - 𝑟𝑒𝑚𝑎𝑖𝑛𝑖𝑛𝑔 𝑢𝑠𝑒𝑓𝑢𝑙 𝑙𝑖𝑓𝑒 𝑛𝑒𝑤 𝑅𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑣𝑎𝑙𝑢𝑒
𝑁𝐵𝑉 𝑜𝑛 𝑑𝑎𝑡𝑒 𝑜𝑓 𝑐ℎ𝑎𝑛𝑔𝑒
Step # 3 Depreciation after date of change shall be calculated using new depreciation formula

Notes: Remaining useful life

It is the remaining useful life of asset at start of the "year of change"

New residual value

If residual value is changed then we shall use new residual value as given in Qs
If residual value is NOT changed then original residual value shall be used

If date of change is ending date of current year:

then it shall be assumed that change occurred in the next year; and
current year depreciation shall be calculated using old formula

Ex-24a Ex-24b
Acc year ends on 31-Dec Acc year ends on 31-Dec
Dep method SLM Dep method SLM
Asset purchased for Rs. 400 on 01-01-18 Asset purchased for Rs. 800 on 01-01-18
estimated UL 10 years estimated UL 10 years
estimated RV Rs. 20 estimated RV Rs. 40
In 2020, RV was revised to Rs. 15 In 2020, RV was revised to Rs. 30
Required: Required:
depreciation for 2018, 2019, 2020 depreciation for 2018, 2019, 2020

Ex-25a Ex-25b
Acc year ends on 31-Dec Acc year ends on 31-Dec
Dep method: RBM Dep method: RBM
Asset purchased for Rs. 400 on 01-01-18 Asset purchased for Rs. 800 on 01-01-18
estimated UL 10 years estimated UL 10 years
estimated RV Rs. 20 estimated RV Rs. 40
Asset was installed on 01-07-2018 Asset was installed on 01-07-2018
RV was revised to Rs. 16 on 01-01-19 RV was revised to Rs. 32 on 01-01-19
Required: Required:
depreciation for 2018, 2019, 2020 depreciation for 2018, 2019, 2020

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PRC 4 Introduction to Accounting Topic 5: Depreciation Daniyal Zahid Butt, ACA
Ex-26a Ex-26b
Accounting year Jan-Dec Accounting year Jan-Dec
Dep method SLM Dep method SLM
01-01-18 Asset purchase Rs. 310 01-01-18 Asset purchase Rs. 620
Est useful life 10 years Est useful life 10 years
Est Residual value Rs. 10 Est Residual value Rs. 20
On 1-Jan-19 depreciation method changed to RBM On 1-Jan-19 depreciation method changed to RBM
Required: Required:
depreciation for 2018, 2019, 2020 depreciation for 2018, 2019, 2020

Ex-27a Ex-27b
Accounting year Jan-Dec Accounting year Jan-Dec
Dep method RBM Dep method RBM
01-01-18 Asset purchase Rs. 310 01-01-18 Asset purchase Rs. 620
Est useful life 10 years Est useful life 10 years
Est Residual value Rs. 10 Est Residual value Rs. 20
On 31-Dec-19 depreciation method changed to SLM On 31-Dec-19 depreciation method changed to SLM
Required: Required:
depreciation for 2018, 2019, 2020 depreciation for 2018, 2019, 2020

REVIEW OF USEFUL LIFE AND RESIDUAL VALUES

Useful life and residual value of tangible non-current assets should be reviewed at end of each reporting period
and revised if expectations are significantly different from previous estimates

Multiple choice questions:

40 An entity which makes up its accounts annually to 31 December provided for depreciation of its equipment
at the rate of 10% per annum using the reducing balance method since it was bought on 1 January 2018 for
On 1 January 2021, the entity concluded that straight line method would be more appropriate for this
equipment and estimated remaining useful life of 5 years with residual value of Rs. 500,000 at the end of
useful
What islife.
depreciation expense for the year ended 31 December 2021?
(a) Rs. 816,097 (c) Rs. 700,000
(b) Rs. 460,000 (d) Rs. 483,200

41 An entity which makes up its accounts annually to 31 December provided for depreciation of its equipment
at the rate of 10% per annum using straight line method since it was bought on 1 January 2018 for Rs.
On 31 December 2020, the entity concluded that reducing balance method would be more appropriate for
this equipment and estimated remaining useful life of 5 years with residual value of Rs. 500,000 at the end of
What is depreciation expense for the year ended 31 December 2021?
(a) Rs. 816,097 (c) Rs. 700,000
(b) Rs. 460,000 (d) Rs. 483,200

42 How often should the residual value of an asset be reviewed?

(a) Every six months
(b) As and when the market value will significantly change
(c) At the end of each reporting period
(d) Never

43 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 the end of each reporting period
(d) Never

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PRC 4 Introduction to Accounting Topic 5: Depreciation Daniyal Zahid Butt, ACA
Dep expense for the year on additions and opening assets

Dep exp for the year - SLM Dpe exp for the year - RBM
On additions X On additions X
(Dep as per formula x n/12) (Cost/Opening NBV x Dep rate x n/12)

On opening assets X On opening assets X

(Dep as per formula) (Opening NBV x Dep rate)
Total dep exp fty XX Total dep exp fty XX

Multiple choice questions:

44 At financial year end of 31 December 2020, an entity reported the following in its statement
of financial position:
Rs. in million
Property, plant and equipment – Cost 860
– Accumulated depreciation (260)
600
On 31 August 2021, the entity purchased another item of equipment for Rs. 100 million.
Depreciation is charged at 20% per annum on pro rata basis using straight line method.
What is the depreciation charge for the year ended 31 December 2021?
(a) Rs. 192 million (c) Rs. 140 million
(b) Rs. 178.67 million (d) Rs. 126.67 million

45 At financial year end of 31 December 2020, an entity reported the following in its statement of
financial position:
Rs. in million
Property, plant and equipment – Cost 860
– Accumulated depreciation (260)
600
On 31 August 2021, the entity purchased another item of equipment for Rs. 100 million.
Depreciation is charged at 20% per annum on pro rata basis using reducing balance method.
What is the depreciation charge for the year ended 31 December 2021?
(a) Rs. 192 million (c) Rs. 140 million
(b) Rs. 178.67 million (d) Rs. 126.67 million

46 At financial year end of 31 December 2020, an entity reported the following in its statement of
financial position:
Rs. in million
Property, plant and equipment – Cost 860
– Accumulated depreciation (260)
600
The cost amount of Rs. 860 million includes Rs. 150 million relating to freehold land.
On 31 August 2021, the entity purchased another item of equipment for Rs. 100 million.
Depreciation is charged at 20% per annum on pro rata basis using reducing balance method.
What is the depreciation charge for the year ended 31 December 2021?
(a) Rs. 96.67 million (c) Rs. 116.67 million
(b) Rs. 106.67 million (d) Rs. 126.67 million
47 A non-current asset was bought for Rs. 1,400,000 on 1 January 2019. It has estimated useful life
of 3 years and residual value of Rs. 200,000. The entity uses reducing balance method of
depreciation. What would be carrying amount of this asset on 31 December 2021?
(a) Rs. 100,000 (c) Rs. 300,000
(b) Rs. 200,000 (d) Rs. 400,000

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PRC 4 Introduction to Accounting Topic 5: Depreciation Daniyal Zahid Butt, ACA
48 A non-current asset was bought for Rs. 1,400,000 on 1 January 2019. It has estimated useful life
of 3 years and residual value of Rs. 200,000. The entity uses reducing balance method of
depreciation. Calculate the total depreciation to be charged throughout the useful life of the asset?
(a) Rs. 1,000,000 (c) Rs. 1,200,000
(b) Rs. 1,100,000 (d) Rs. 1,300,000

49 The following are details for two entities as at 30 June 2021:

Entity A Entity B
Property, plant and equipment Rs. (000) Rs. (000)
Cost 100,000 25,000
Less: Accumulated depreciation (80,000) (5,000)
20,000 20,000

Which TWO of the following statements are correct?

(a) The details above do not provide any comparable information.
(b) Entity A has initially invested more in non-current assets as compared to Entity B
(c) Entity A has older assets as compared to Entity B
(d) Entity A profitability must be higher than Entity B

50 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. ___________

HOW TO FIND COST

Given in Question Method

NBV of current year Solve the equation and find cost
Total useful life & Residual value / Dep rate Let Cost be 'X'
No. of years passed If Straight line method is followed
X = NBV - (X-RV) x No. of years passed
Total UL
If reducing balance method is followed
NBV = X (1-r)ᶯ (1- r x m/12)

Ex-28a NBV of equipment is Rs. 40 Ex-28b NBV of equipment is Rs. 80

It was purchased 3 years ago It was purchased 3 years ago
Useful life is 5 years Useful life is 5 years
Residual value is Rs. 10 Residual value is Rs. 20
Method: SLM Method: SLM
Find cost Find cost

Ex-29a NBV of equipment is Rs. 6,000 Ex-29b NBV of equipment is Rs. 12,000
It was purchased 4 years ago It was purchased 4 years ago
Depreciation rate is 10% Depreciation rate is 10%
Method: SLM Method: SLM
Find cost Find cost

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PRC 4 Introduction to Accounting Topic 5: Depreciation Daniyal Zahid Butt, ACA
Ex-30a NBV of equipment is Rs. 7,290 Ex-30b NBV of equipment is Rs. 14,580
It was purchased 3 years ago It was purchased 3 years ago
Depreciation rate is 10% Depreciation rate is 10%
Residual value Rs. 270 Residual value Rs. 540
Method: RBM Method: RBM
Find cost Find cost
Remember:
If depreciation rate is given, RV is not used while calculating depreciation

Multiple choice questions:

51 Net book value of machinery is Rs. 16.5 million at 31 December 2021. While machine was purchased 3 years
ago, Useful life and residual value were estimated 8 years and 4 million. Using straight line method,
calculate depreciation expense of year 2021
(a) Rs. 2.2 million (c) Rs. 2.5 million
(b) Rs. 2.4 million (d) Rs. 2.7 million

RELATION SHIP BETWEEN ELEMENTS

There is an inverse relationship between
(i) Depreciation & Useful life
(ii) Depreciation & Residual value
(iii) Useful life & Residual value
(iv) Net book value & Accumulated depreciation

DEPRECIATION PATTERN
(i) Sum of year's digit Higher depreciation in earlier years &
Reducing balance method Lower depreciation in later years

(ii) Straight line method Same depreciation in all years

(iii) Sum of units method Depreciation depends upon No. of units produced

(iv) No depreciation method Lower depreciation in earlier years &

Higher depreciation in later years
600 500
50
500 400
40
400
300
300 30
200 20
200
100 100 10
0 0 0
1 2 3 4 1 2 3 4 1 2 3 4

Reducing balance method Sum of years' digit Straight line

x axis No. of years

y axis Depreciation

Multiple choice questions:

52 Which of the following statements are correct
1 Sum of digits method and reducing balance method gives higher depreciation in early years
2 Straight line method and sum of years digit method compute depreciation over economic life
(a) Only 1 (c) Both
(b) Only 2 (d) None

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PRC 4 Introduction to Accounting Topic 5: Depreciation Daniyal Zahid Butt, ACA
53 At the end of useful life, accumulated depreciation is:
(a) Same in straight line and reducing balance method
(b) Less in straight line as compared to reducing balance method
(c) Less in reducing balance as compared to straight line method
(d) None of these

54 Which of the following would decrease depreciation in straight line method?

(a) Increase in residual value and increase in useful life
(b) Decrease in residual value and decrease in useful life
(c) Increase in residual value and decrease in useful life
(d) Decrease in residual value and increase in useful life

55 Which of the following statements are correct

1 Depreciation commence in straight line method and sum of years' digit method when the asset is available for use
2 All items of property, plant and equipment must be depreciated
(a) Only 1 (c) Both
(b) Only 2 (d) None

56 Cost of asset is Rs. 25 million whereas residual value is Rs. 2 milion. Initially company adopted reducing balance
method with depreciation rate of 10%.
After two years, company decided to change the depreciation method to straight line method with revised residual
value of Rs. 3 million and remaining useful life of 6 years.
What shall be the depreciation expense in the third year?
(a) Rs. 5,000,000 (c) Rs. 4,000,000
(b) Rs. 2,166,667 (d) Rs. 3,200,000

57 The purpose of depreciation is to:

(a) Recognise the asset lose value overtime
(b) Write the asset down to its realizable value at the end of each period
(c) Allocate the depreciable cost on a systematic basis over the asset's useful life
(d) Allocate the depreciable cost on a systematic basis over the asset's economic life

58 Depreciation is best described as:

(a) A means of estimating amount needed to replace the assets
(b) A means of spreading the net cost of non-current assets over their estimated useful life
(c) A means of spreading the net cost of current assets over their estimated useful life
(d) None of these

59 In depreciation formula, as we decrease useful life, depreciation value will

(a) Increase (c) Constant
(b) Decrease (d) All of these depending on circumstances

60 A company uses the reducing balance method to depreciate its fixed assets. The annual rate is 20%.
After three years the proportion of original cost still undepreciated will be:
(a) 51.20% (c) 48.80%
(b) 40.00% (d) None of these

61 If an asset remains idle throughout the year, then under sum of digit method, the depreciation will be:
(a) Zero (c) Charged
(b) Constant (d) None of these

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PRC 4 Introduction to Accounting Topic 5: Depreciation Daniyal Zahid Butt, ACA
62 During the year 2019, an entity purchased a machine for Rs. 20 million to be used for 6 years. Which of the
following would represent residual value of this machine in 2019?
(a) Rs. 15 million can be currently obtained from disposal of machine in present condition
(b) Rs. 4 million can be currently obtained from disposal of a 6 year old similar machine
(c) Rs. 18 million can be obtained in 2025 from disposal of machine
(d) Rs. 6 million can be obtained in 2025 from disposal of 6 years old similar machine

63 Consider this graph and choose the correct option

(a) The graph represents depreciation of an asset under reducing balance method
(b) The graph represents book value of asset under straight line method
(c) Both are correct
(d) None is correct

64 What is the relationship between useful life and scrap value in deprciation expense formula
(a) Direct (c) Inverse
(b) Constant (d) No relation

65 A business purchases a vehicle for taking employees from home to office and back to their homes and
sometimes it is used for owner family members' personal visits. This vehiocle can be classified in which TWO
of the following categories
(a) Inventory held by business for resale purpose
(b) Inventory held in stock for own use
(c) Asset held for office use and employees beneit
(d) Asset held for personal use of owner

66 Accumulated depreciation affects calculation of depreciation under which method?

(a) Straight line method (c) Production units method
(b) Reducing balance method (d) Sum of years' digit method

67 A business is involved on trading of furniture. Which of the following are Capital expenditure?
(Tick two statements)
(a) 5 Delivery vehicles purchased for the use of its employees. The useful life of each vehicle is 7 years
(b) Purchased furniture for the use of admin staff. The useful life of furniture is 3 years
(c) Purchased furniture for office display and sale.
(d) Delivery vehicle purchased to sell it in ordinary course of business. The useful life of each vehicle
is 7 years

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