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 = (R – R10 000)/5 years = R 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 R 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 R YearDepreciationBook value end of year 1R37 000R R23 310R R14 685R R9 252R R5 829R9 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 Question 9.1.docx Solution 9.3 Solution Question 9.3.docx 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: R Accumulated depreciation: R Revalued to R What is the effect on: Statement of Comprehensive Income? Statement of Financial Position?
Journals: Dt Accumulated depreciation (-) R Dt Building: Cost (+)R Ct Gains on revaluation (+)R Statement of Comprehensive Income: › Gains on revaluation:R Statement of Financial Position: Assets BuildingR Equity Other reserves (revaluation reserve)R
Statement of changes in equity Other reserves Opening balance- Gains on revaluation R Closing balanceR
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
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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