Tag (SQ): Depreciation

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  • 6 Marks

FA – L1 – Q18 – Non-current assets and depreciation

Calculate annual depreciation for Avery’s van using straight-line and reducing balance methods.

Avery purchased a van for GH₵800 cash. He estimates that in four years it will have a scrap value of GH₵104.

Required
(a) Calculate the annual depreciation charge on the straight-line method.
(b) Calculate the annual depreciation charge on the reducing instalment method (you will need to calculate the rate).

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  • 4 Marks

FA – L1 – Q17 – Non-current assets and depreciation

Calculate depreciation for a non-current asset and a building using the straight-line method.

(a) The financial year of a company is 1st January to 31st December. A non-current asset was purchased on 1st May for GH₵60,000. Its expected useful life is five years and its expected residual value is zero. It is depreciated by the straight-line method.

Required
Calculate the charge for depreciation in the year of acquisition if a proportion of a full year’s depreciation is charged, according to the period for which the asset has been held. (2 marks)

(b) An office property cost GH₵5 million, of which the land value is GH₵2 million and the cost of the building is GH₵3 million. The building has an estimated life of 50 years.

Required
Calculate the annual depreciation charge on the property, using the straight-line method.

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  • 24 Marks

AA – L2 – Q61 – Audit Evidence

Verify ownership, assess depreciation, list asset register contents, and explain revaluation for Prime Rentals' non-current assets.

You are an employee of Brighton & Co, a firm of Chartered Accountants. One of the firm’s clients is Prime Rentals, a car rental company whose shares are not traded on a stock exchange. The company has a large fleet of vehicles which it hires out on a contract basis.
The duration of a contract varies from one day to three months. Anybody wishing to hire a car must possess a valid driving licence. In addition, they must take out insurance with Prime Rentals.
You are involved in the audit of non-current assets for the year ended 31 December 20X8.
The company’s main non-current assets are:

  • Freehold buildings
  • Office equipment (mainly computers for office staff)
  • Motor vehicles
    The company was formed ten years ago and all non-current assets (except for buildings) are maintained on a non-current asset register. The company depreciates non-current assets at the following rates:
  • Freehold buildings – 2% on cost
  • Office equipment – 20% on cost
  • Motor vehicles – 50% on cost
    The company has recently revalued its buildings upwards by €2 million. The directors believe that they have fallen victim to a fraudster who has disappeared with a number of the company’s vehicles.
    Required:
    (a) Describe how you would verify the ownership of:
    (i) Freehold buildings
    (ii) Computers
    (iii) Motor vehicles.

    (b) Comment on the appropriateness of the depreciation rates of the non-current assets and their respective effect on the income statement.

    (c) List the contents of a non-current asset register and describe its usefulness for Prime Rentals.

    (d) Explain the accounting effect of the revaluation of the buildings to the financial statements and the audit work you would perform in this matter.

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  • 20 Marks

AA – L2 – Q53 – Audit Procedures for Non-Current Assets

Audit procedures for verifying property, plant, and equipment schedules, additions, revaluation, and depreciation correction for Oakwood Enterprises.

As a staff member of Reed and Spencer Chartered Accountants, you are assigned the audit of tangible non-current assets of Oakwood Enterprises for the year ended 31 March 20X8. Reed and Spencer have been the auditors of Oakwood Enterprises for many years. You obtain the following schedule of movements on property, plant, and equipment and analysis of additions from the company’s accountant.

Property Plant and machinery Total
Cost or valuation C’000 C’000 C’000
1 April 20X7 340 275 615
Additions – 123 123
Disposals – (72) (72)
Revaluations 120 – 120
31 March 20X8 460 326 786
Accumulated depreciation
1 April 20X7 24 213 237
Provision 5 30 35
Written back on disposal – (65) (65)
Adjustment on revaluation (24) – (24)
31 March 20X8 5 178 183
Carrying amount
31 March 20X7 455 148 603
31 March 20X8 316 62 378

Schedule of additions (plant and machinery)

Supplier Description Cost
New Models Milling machine Model 38 55,000
Drill Suppliers Power drill Type 45C 34,000
Hoist Co Electric hoist no 722 18,000
Sundry below $1000 16,000
Total 123,000

The company’s accountant also advises you that the property was revalued following a valuation by the company’s property manager who is a professionally qualified valuer.
During your verification of depreciation, you discover that most plant and machinery is fully depreciated. Moreover, you discover that, due to oversight, depreciation has continued to be provided on fully depreciated items. As at the beginning of the year, the amount of overstatement was $43,000. The accountant suggests the correction be made by reducing the current year’s charge for depreciation.

Required:
(a) State, with reasons, the initial audit procedures you would perform on the schedules provided by the company’s accountant. (3 marks)
(b) Outline the substantive audit procedures you would apply in verifying additions to plant and machinery. Your answer should identify procedures applicable to each of the financial statement assertions. (8 marks)
(c) Describe the audit procedures applicable to verifying the revaluation of property. (5 marks)
(d) With respect to the correction to accumulated depreciation, and assuming the amount to be material, discuss the accountant’s proposed treatment. If you disagree with the accountant’s proposal, state, with reasons, the correct accounting treatment. (4 marks)

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  • 20 Marks

AA – L2 – Q44 – Audit Evidence

List and explain audit tests to verify completeness and accuracy of revenue in Tandem Logistics' financial statements. List and describe audit work to verify the statement of financial position figure for vehicles in Tandem Logistics' financial statements.

You are the external auditor of Tandem Logistics, a public limited company (TL). The company’s year-end is 31 March. You have been the auditor since the company was formed 19 years ago to take advantage of the increase in goods being transported by road. Many companies needed to transport their products but did not always have sufficient vehicles to move them. TL therefore purchased ten vehicles and hired these to haulage companies for amounts of time ranging from three days to six months.

The business has grown in size and profitability and now has over 550 vehicles on hire to many different companies. At any one time, between five and 20 vehicles are located at the company premises where they are being repaired; the rest could be anywhere on the extensive road network of the country it operates in. Full details of all vehicles are maintained in a non-current asset register.

Bookings for hire of vehicles are received either over the telephone or via e-mail in TL’s offices. A booking clerk checks the customer’s credit status on the receivables ledger and then the availability of vehicles using the Transport Management System (TMS) software on TL’s computer network. E-mails are filed electronically by customer name in the e-mail program used by TL. If the customer’s credit rating is acceptable and a vehicle is available, the booking is entered into the TMS and confirmed to the customer using the telephone or e-mail. Booking information is then transferred within the network from the TMS to the receivables ledger programme, where a sales invoice is raised. Standard rental amounts are allocated to each booking depending on the amount of time the vehicle is being hired for. Hard copy invoices are sent in the post for telephone orders or via e-mail for e-mail orders.

The main class of asset on TL’s statement of financial position is the vehicles. The net book value of the vehicles is $6 million out of total shareholders’ funds of $15 million as at 30 June 20X8.

Required:
(a) List and explain the reason for the audit tests you should perform to check the completeness and accuracy of the revenue figure in Tandem Logistics’ financial statements.

(b) List and describe the audit work you should perform on the statement of financial position figure for vehicles in Tandem Logistics’ financial statements for the year ended 30 June 20X8.

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