quipment (note 3). R3 000 000 Motor vehicles (note 4). R 645 715 Accumulated depreciation: - Factory and office buildings ? - Machinery and equipment
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
The following information was extracted from the accounting records of DilataLtd on 30 June 2020:
Land at cost (note 1). R 1 000 000
Factory and office buildings at cost (note 1 and 2). ?
Machinery and equipment (note 3). R3 000 000
Motor vehicles (note 4). R 645 715
- Factory and office buildings ?
- Machinery and equipment (30 June 2019). ( R1 080 000)
- Motor vehicles (30 June 2019). R235 715
Additional information
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Dilata Ltd acquired and occupied the land on which both the factory and office buildings were erected on 1 July 2017 at an amount of R1 000 000. The land was revalued for the first time on 29 June 2020 by Mr King, an independent sworn appraiser at a fair value of R1 500 000. The factory building was constructed on the land on 1 August 2017, and completed and available for use on 1 January 2018. The cost of this factory building amounted to R2 400 000.
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After expansion of operations, an office building was built. The office building was completed and available for use on 1 December 2019. The following expenses were incurred in building the offices:-Labour costs. R 450 00. Materials -R150 000
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The company withdrew its machinery and equipment from normal production for a period of 4 months during the current year, from 1 July 2019, and used it in the construction of the office building. No machinery or equipment were purchased or sold during the current financial year.
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On 1 February 2020, a motor vehicle with an original cost of R205 715 and on which R95 715 depreciation was already written off on 1 July 2019, was traded in for a new vehicle costing R336 000. The motor vehicle was acquired for business purposes, but the transaction has not yet been recorded in the accounting records of Dilata Ltd.
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Non-current assets are
depreciated as follows:-
- Motor vehicles: 20% per annum according to the straight-line method.
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- Factory and office buildings: 2% per annum according to the straight-line method.
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- Machinery and equipment: 20% per annum according to the
reducing balance method .
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6. Owner-occupied land is accounted for in accordance with the revaluation model and revaluations are made with sufficient regularity to ensure that the carrying amount does not differ materially from the fair value at year-end.
Owner-occupied buildings, machinery and equipment and motor vehicles are accounted for in accordance with the cost model.
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