explain the purpose of depreciation calculate depreciation, and disclose depreciation per the afs ...

Explain the purpose of depreciation Calculate depreciation, and disclose

depreciation per the AFS Explain the function of share capital,

other reserves and retained earnings

Depreciation required, why? All non-current assets are ‘used up’

during their economic lives Except land, why? Land usually revalued over time

Income statement reflects the cost of using the non-current assets not the value of non-current assets purchased during the year.

2 reasons for this: Real loss = value of asset start of year –

value of asset end of the year Amount spent on non-current assets vary

year to year (expenditure distorts profits) So…Instead of reflecting expenditure

companies reflect depreciation over the year

So…Depreciation measures the amount of capital stock that has been used up during the year. Therefore…The purpose is to charge the purchase price of non-current asset in the I/S in a systemic way.Application of the matching concept

Straight line basis Reducing balance method

= (Cost – Estimated residual value) Estimated useful life

Depreciation per I/S = (R100 000 – R10 000)/5 years= R18 000 per annum

If no residual value: 20% of cost p.a. Intangible assets treated similar (example: right

to use name for 20 years at cost of R60 000 suffer depreciation of R3000 p/a - p4)

Method of charging fixed % of book value I will provide the rate to you!! Example: Depreciation rate = 37% of

book value which is R100 000

Year Depreciation Book value end of year

1 R37 000 R63 000

2 R23 310 R39 690

3 R14 685 R25 005

4 R9 252 R15 753

5 R5 829 R9 924

Reducing balance method:Depreciation charge higher when asset is new.

In practice, assume all asset classes will last a “standard” life (example vehicles 4 years and manufacturing plant 10 years)

Estimates of useful life and residual value

Disposals: negative depreciation: why? (p7)

Solution 9.1 Solution Question 9.1.docx

Solution 9.3 Solution Question 9.3.docx

Equity = Assets – Liabilities,The SH’s share in the business after all liabilities have been paid

Equity can arise by:› Issuing shares› Adjustments e.g. revaluation of assets› Retention of profit

Nominal (par) value as per Memorandum of Association

Differ from Market value – why? Share premium = Issuing price of shares –

nominal value Share premium – disclosed under ‘other

reserves’ per BS Example:

› Company Y’s shares has a nominal value of R1.15 and a 1,000 shares were issued at R1.50 per share. Effect on Statement of financial position?

Company X has a building. Cost: R300 000 Accumulated depreciation: R 70

000Revalued to R400 000. What is the effect on: Statement of Comprehensive Income? Statement of Financial Position?

Journals:Dt Accumulated depreciation (-) R 70 000Dt Building: Cost (+) R100 000Ct Gains on revaluation (+) R170 000

Statement of Comprehensive Income:› Gains on revaluation: R170 000

Statement of Financial Position:Assets

Building R400 000Equity

Other reserves (revaluation reserve) R170 000

Statement of changes in equityOther reserves

Opening balance -

Gains on revaluation

R170 000

Closing balance R170 000

After revaluation calculate depreciation on the ‘revalued balance’

VERY IMPORTANT! Check when the asset was revalued before calculating the depreciation…

3 main categories of investments:

• Held-to-maturity investments (example government bonds - valued historical cost)

• Available-for-sale investments (example property – valued at market value)

• Trading investments (listed investments – valued at market value)

Retained earnings = profits retained in the company – dividends paid to shareholders

Max dividend payable: Distributable reserves. (Retained earnings)

Why?To protect the interests of creditors (and lenders)

Question 9.6 p11 Fair value Question 9.7 p12 Revaluation reserve

John Jeff Malatji Please come and see me urgently after

class today!!!!

Please note that my consulting hours is available on clickUP and by appointment only.

Please e-mail me in advance to notify me with the time on a Wednesday morning or Thursday afternoon.

Venue: Centenary 1 and 2 Time: 16h00 Duration: 1hours Total: 40 marks Chapters 1,2,7,8 and 9 Learning areas 1,2,4,5 and 6