[{"Name":"Introduction to Non Current Assets","TopicPlaylistFirstVideoID":0,"Duration":null,"Videos":[{"Watched":false,"Name":"Noncurrent assets introduction","Duration":"9m 42s","ChapterTopicVideoID":26633,"CourseChapterTopicPlaylistID":254924,"HasSubtitles":true,"ThumbnailPath":"https://www.proprep.uk/Images/Videos_Thumbnails/26633.jpeg","UploadDate":"2021-10-03T11:27:52.0870000","DurationForVideoObject":"PT9M42S","Description":null,"MetaTitle":"Noncurrent assets introduction: Video + Workbook | Proprep","MetaDescription":" Non Current Assets - Introduction to Non Current Assets. Watch the video made by an expert in the field. Download the workbook and maximize your learning.","Canonical":"https://www.proprep.uk/general-modules/all/introduction-to-financial-accounting-and-reporting/-non-current-assets/introduction-to-non-current-assets/vid28566","VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.940","Text":"In this introduction and overview,"},{"Start":"00:02.940 ","End":"00:07.980","Text":"we will distinguish between current and non-current assets and"},{"Start":"00:07.980 ","End":"00:13.065","Text":"also look at some examples of the various types of non-current assets."},{"Start":"00:13.065 ","End":"00:18.360","Text":"In order to understand the difference between a current and non-current asset,"},{"Start":"00:18.360 ","End":"00:21.060","Text":"we have to look at the accounting rules and"},{"Start":"00:21.060 ","End":"00:25.105","Text":"accounting rules in fact, define current assets."},{"Start":"00:25.105 ","End":"00:29.180","Text":"The accounting rules don\u0027t define non-current assets."},{"Start":"00:29.180 ","End":"00:30.905","Text":"What we see here is,"},{"Start":"00:30.905 ","End":"00:33.860","Text":"once we understand what is a current asset,"},{"Start":"00:33.860 ","End":"00:37.640","Text":"everything else becomes a non-current asset."},{"Start":"00:37.640 ","End":"00:40.700","Text":"Therefore, what is a current asset?"},{"Start":"00:40.700 ","End":"00:44.030","Text":"Well, accounting standards provide a number of"},{"Start":"00:44.030 ","End":"00:49.685","Text":"different scenarios which would identify an item as a current asset."},{"Start":"00:49.685 ","End":"00:51.605","Text":"Let\u0027s have a look at them now."},{"Start":"00:51.605 ","End":"00:57.320","Text":"The first one is if the entity expects to realize that asset."},{"Start":"00:57.320 ","End":"00:59.330","Text":"What does realized mean?"},{"Start":"00:59.330 ","End":"01:02.725","Text":"It means the entity intends to sell the asset,"},{"Start":"01:02.725 ","End":"01:06.935","Text":"so it could in fact be inventory which it bought to sell to customers,"},{"Start":"01:06.935 ","End":"01:12.725","Text":"inventory or stock, or realize also may may mean consume the asset."},{"Start":"01:12.725 ","End":"01:14.240","Text":"It could be, for example,"},{"Start":"01:14.240 ","End":"01:18.530","Text":"supplies which the entity purchases and those suppliers,"},{"Start":"01:18.530 ","End":"01:21.350","Text":"for example, paper or stationary,"},{"Start":"01:21.350 ","End":"01:23.495","Text":"which are used, consumed,"},{"Start":"01:23.495 ","End":"01:30.215","Text":"realized the same technology in the course of it\u0027s normal operating cycle."},{"Start":"01:30.215 ","End":"01:32.810","Text":"But what does an operating cycle mean?"},{"Start":"01:32.810 ","End":"01:37.310","Text":"An operating cycle refers to the length of time it takes"},{"Start":"01:37.310 ","End":"01:42.605","Text":"the business entity to effectively buy goods from suppliers,"},{"Start":"01:42.605 ","End":"01:44.870","Text":"sell those goods to customers,"},{"Start":"01:44.870 ","End":"01:49.570","Text":"collect the cash, and then pay the suppliers for those goods."},{"Start":"01:49.570 ","End":"01:53.000","Text":"Other words, what you can think of as being what it says,"},{"Start":"01:53.000 ","End":"01:56.315","Text":"the cycle of the businesses operations."},{"Start":"01:56.315 ","End":"02:00.424","Text":"Now clearly in a supermarket industry, for example,"},{"Start":"02:00.424 ","End":"02:04.160","Text":"the cycle will be much shorter than for example,"},{"Start":"02:04.160 ","End":"02:06.650","Text":"in an industry which sells motor cars."},{"Start":"02:06.650 ","End":"02:12.830","Text":"The 2nd part of the definition,"},{"Start":"02:12.830 ","End":"02:15.545","Text":"we want to call it that for current assets,"},{"Start":"02:15.545 ","End":"02:21.124","Text":"is if the entity holds the asset primarily for the purposes of trading."},{"Start":"02:21.124 ","End":"02:25.945","Text":"Now, we may say how does this number B differ from number A?"},{"Start":"02:25.945 ","End":"02:28.804","Text":"Well, what is the purposes of trading,"},{"Start":"02:28.804 ","End":"02:31.190","Text":"clearly here we\u0027ll be looking at inventory or stock."},{"Start":"02:31.190 ","End":"02:32.510","Text":"You may say that well,"},{"Start":"02:32.510 ","End":"02:36.095","Text":"in fact falls under number A, and it does,"},{"Start":"02:36.095 ","End":"02:40.660","Text":"but the importance of that ends up coming when we look at number C,"},{"Start":"02:40.660 ","End":"02:43.745","Text":"where it says the entity expects to realize"},{"Start":"02:43.745 ","End":"02:47.210","Text":"the asset and realize remember means sell or consume,"},{"Start":"02:47.210 ","End":"02:50.690","Text":"within 12 months after the reporting period."},{"Start":"02:50.690 ","End":"02:55.135","Text":"Other words, 12 months after the end of the entity\u0027s financial year."},{"Start":"02:55.135 ","End":"03:02.630","Text":"For example, if the reporting period ends on 31 December of Year 1,"},{"Start":"03:02.630 ","End":"03:06.320","Text":"if the item will be realized by 31 December,"},{"Start":"03:06.320 ","End":"03:11.000","Text":"Year 2, it would typically be regarded as a current asset."},{"Start":"03:11.000 ","End":"03:17.239","Text":"But now think of items of inventory such as wine or cheese,"},{"Start":"03:17.239 ","End":"03:21.140","Text":"which is stored for a long time before it is actually sold."},{"Start":"03:21.140 ","End":"03:25.260","Text":"Now, cheese or wine would be held for 2,"},{"Start":"03:25.260 ","End":"03:30.665","Text":"3 or many more years while it matures before it is sold."},{"Start":"03:30.665 ","End":"03:33.410","Text":"Therefore, the question comes about,"},{"Start":"03:33.410 ","End":"03:36.245","Text":"would that be a current or non-current asset?"},{"Start":"03:36.245 ","End":"03:39.305","Text":"Then we go back and look at number B."},{"Start":"03:39.305 ","End":"03:42.260","Text":"Because the cheese or wine,"},{"Start":"03:42.260 ","End":"03:44.525","Text":"if it\u0027s held for the purposes of trading,"},{"Start":"03:44.525 ","End":"03:46.415","Text":"will remain a current asset,"},{"Start":"03:46.415 ","End":"03:53.830","Text":"even if it will be realized beyond 12 months of the reporting period."},{"Start":"03:53.830 ","End":"04:00.070","Text":"Lastly, all cash or cash equivalents are current assets."},{"Start":"04:00.070 ","End":"04:02.290","Text":"Now, having looked at what is the current asset,"},{"Start":"04:02.290 ","End":"04:07.585","Text":"everything else is going to be a non-current asset."},{"Start":"04:07.585 ","End":"04:12.490","Text":"The intended use of an asset is what is also"},{"Start":"04:12.490 ","End":"04:17.380","Text":"very important in determining whether the asset is a current or non-current asset,"},{"Start":"04:17.380 ","End":"04:19.270","Text":"so look at a few examples,"},{"Start":"04:19.270 ","End":"04:23.229","Text":"if we think of a business entity as a computer retailer,"},{"Start":"04:23.229 ","End":"04:26.665","Text":"that business may have a desktop computer."},{"Start":"04:26.665 ","End":"04:31.615","Text":"If that computer is used in the office by the finance team,"},{"Start":"04:31.615 ","End":"04:34.660","Text":"it will therefore be a non-current asset."},{"Start":"04:34.660 ","End":"04:37.940","Text":"But that same model of desktop computer,"},{"Start":"04:37.940 ","End":"04:39.965","Text":"which is available for sale,"},{"Start":"04:39.965 ","End":"04:41.974","Text":"and therefore it will be inventory,"},{"Start":"04:41.974 ","End":"04:44.460","Text":"is classified as a current asset,"},{"Start":"04:44.460 ","End":"04:47.705","Text":"so there you will see that the use of the asset,"},{"Start":"04:47.705 ","End":"04:50.990","Text":"the same asset, determines it\u0027s classification."},{"Start":"04:50.990 ","End":"04:53.200","Text":"Another example is land,"},{"Start":"04:53.200 ","End":"04:57.180","Text":"now land is normally classified as a non-current asset,"},{"Start":"04:57.180 ","End":"05:00.844","Text":"but what happens if the entity is a property developer?"},{"Start":"05:00.844 ","End":"05:05.315","Text":"A property developer will be buying and selling land,"},{"Start":"05:05.315 ","End":"05:08.165","Text":"and that will therefore be a current asset"},{"Start":"05:08.165 ","End":"05:12.380","Text":"in the accounting records of a property developer."},{"Start":"05:12.380 ","End":"05:18.700","Text":"Here is an example of a car dealership selling vehicles,"},{"Start":"05:18.700 ","End":"05:20.600","Text":"BMWs in this case."},{"Start":"05:20.600 ","End":"05:26.479","Text":"It has 10 BMW 320 models and note these are used by staff."},{"Start":"05:26.479 ","End":"05:28.145","Text":"It has in addition,"},{"Start":"05:28.145 ","End":"05:31.955","Text":"20 new BMW 320 models,"},{"Start":"05:31.955 ","End":"05:34.925","Text":"which are available for sale in the showroom."},{"Start":"05:34.925 ","End":"05:37.715","Text":"How should this dealership S \u0026 J,"},{"Start":"05:37.715 ","End":"05:42.695","Text":"classify the 30 BMW 320s that it owns?"},{"Start":"05:42.695 ","End":"05:46.280","Text":"Well, you should realize by the previous discussion that"},{"Start":"05:46.280 ","End":"05:51.155","Text":"the 10 cars used by staff are non-current asset,"},{"Start":"05:51.155 ","End":"05:57.020","Text":"which will be referred to as property plant and equipment, or PPE,"},{"Start":"05:57.020 ","End":"06:02.450","Text":"whereas the 20 new cars will be classified as"},{"Start":"06:02.450 ","End":"06:09.425","Text":"a current asset and you refer to as inventory in the financial statements."},{"Start":"06:09.425 ","End":"06:14.514","Text":"This next slide now looks at various types of non-current assets."},{"Start":"06:14.514 ","End":"06:19.385","Text":"We can classify non-current assets as tangible assets"},{"Start":"06:19.385 ","End":"06:25.335","Text":"or as intangible assets or also as financial assets."},{"Start":"06:25.335 ","End":"06:29.530","Text":"Now, examples of tangible assets will be"},{"Start":"06:29.530 ","End":"06:34.540","Text":"items that you will probably realize and identify, land,"},{"Start":"06:34.540 ","End":"06:38.655","Text":"buildings, equipment, furniture,"},{"Start":"06:38.655 ","End":"06:44.650","Text":"machinery and those are all regarded collectively as property,"},{"Start":"06:44.650 ","End":"06:46.900","Text":"plant and equipment, PPE."},{"Start":"06:46.900 ","End":"06:52.350","Text":"Another type of tangible asset is known as an investment property,"},{"Start":"06:52.350 ","End":"06:55.885","Text":"and this could be land or buildings or both,"},{"Start":"06:55.885 ","End":"07:03.160","Text":"which the entity acquires for the purposes of capital appreciation or rental to others,"},{"Start":"07:03.160 ","End":"07:05.945","Text":"rather than for it\u0027s own use."},{"Start":"07:05.945 ","End":"07:10.714","Text":"Intangible assets refer to items such as patents,"},{"Start":"07:10.714 ","End":"07:14.955","Text":"copyrights, brands,"},{"Start":"07:14.955 ","End":"07:18.100","Text":"trademarks, goodwill, and so on."},{"Start":"07:18.100 ","End":"07:22.600","Text":"We will not be looking at in tangible assets in this section."},{"Start":"07:22.600 ","End":"07:28.220","Text":"Financial assets are long term investments in shares,"},{"Start":"07:28.220 ","End":"07:30.470","Text":"government and corporate bonds."},{"Start":"07:30.470 ","End":"07:35.645","Text":"Again, this section will not be examining financial assets."},{"Start":"07:35.645 ","End":"07:38.870","Text":"Looking at an overall characteristic of the"},{"Start":"07:38.870 ","End":"07:43.245","Text":"tangible compared to intangible and financial assets,"},{"Start":"07:43.245 ","End":"07:46.370","Text":"tangible assets have physical substance,"},{"Start":"07:46.370 ","End":"07:52.450","Text":"whereas the intangible and financial assets are without physical substance."},{"Start":"07:52.450 ","End":"07:55.580","Text":"All of the tangible, intangible,"},{"Start":"07:55.580 ","End":"07:59.120","Text":"and financial assets are typically long lived in"},{"Start":"07:59.120 ","End":"08:03.440","Text":"nature because they are all non-current assets."},{"Start":"08:03.440 ","End":"08:09.725","Text":"The tangible assets are consumed by the entity in the earning of income."},{"Start":"08:09.725 ","End":"08:15.520","Text":"That consumption of the benefits in the non-current assets is reflected by"},{"Start":"08:15.520 ","End":"08:18.360","Text":"a concept called depreciation which we will learn"},{"Start":"08:18.360 ","End":"08:21.770","Text":"about and also a concept called impairment,"},{"Start":"08:21.770 ","End":"08:24.305","Text":"which we will also learn about."},{"Start":"08:24.305 ","End":"08:30.215","Text":"All of the non-current assets are used in the course of operations of the business,"},{"Start":"08:30.215 ","End":"08:33.440","Text":"typically for several periods and without"},{"Start":"08:33.440 ","End":"08:38.315","Text":"intention to resale in the ordinary course of business."},{"Start":"08:38.315 ","End":"08:43.520","Text":"Now, for a very brief overview of the accounting treatment of non-current assets,"},{"Start":"08:43.520 ","End":"08:48.870","Text":"some of which we will go into more detail in later presentations,"},{"Start":"08:48.870 ","End":"08:54.260","Text":"there are different accounting rules applied to different types of assets and"},{"Start":"08:54.260 ","End":"08:59.915","Text":"these differences come about in respect of the measurement of the initial cost,"},{"Start":"08:59.915 ","End":"09:05.990","Text":"in other words, at what amount the asset will be recognized on the statement of"},{"Start":"09:05.990 ","End":"09:08.750","Text":"financial position at acquisition and"},{"Start":"09:08.750 ","End":"09:12.935","Text":"then subsequent measurements on each balance sheet date."},{"Start":"09:12.935 ","End":"09:18.200","Text":"This will get us involved in issues such as depreciation of"},{"Start":"09:18.200 ","End":"09:22.415","Text":"those non-current assets and then how do we recognize"},{"Start":"09:22.415 ","End":"09:27.830","Text":"any gain or loss when we ultimately sell the item?"},{"Start":"09:27.830 ","End":"09:31.690","Text":"There are also several measurement basis that could be used."},{"Start":"09:31.690 ","End":"09:33.770","Text":"These are historic cost,"},{"Start":"09:33.770 ","End":"09:38.255","Text":"by far the most common and also fair value,"},{"Start":"09:38.255 ","End":"09:39.680","Text":"which is applied to,"},{"Start":"09:39.680 ","End":"09:42.870","Text":"for example, investment properties."}],"ID":28566},{"Watched":false,"Name":"Exercise 1 - Introduction","Duration":"9m 21s","ChapterTopicVideoID":26378,"CourseChapterTopicPlaylistID":254924,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:06.360","Text":"Hello and welcome to another presentation in the series entitled non-current assets."},{"Start":"00:06.360 ","End":"00:08.400","Text":"My name is Kathy Service."},{"Start":"00:08.400 ","End":"00:11.520","Text":"Today we\u0027ll be doing an exercise in which we determine the cost of"},{"Start":"00:11.520 ","End":"00:15.420","Text":"an asset and we will look at the straight line depreciation."},{"Start":"00:15.420 ","End":"00:18.780","Text":"Now before we look at the question itself, now,"},{"Start":"00:18.780 ","End":"00:22.935","Text":"I\u0027d like us to get into the habit of looking at the required first."},{"Start":"00:22.935 ","End":"00:24.944","Text":"In this particular question,"},{"Start":"00:24.944 ","End":"00:27.105","Text":"we have to, in terms of A,"},{"Start":"00:27.105 ","End":"00:29.370","Text":"complete the transaction worksheet,"},{"Start":"00:29.370 ","End":"00:32.790","Text":"in terms of B, we\u0027re going to be doing an income statement."},{"Start":"00:32.790 ","End":"00:35.910","Text":"C, we\u0027ll look at the balance sheet and D,"},{"Start":"00:35.910 ","End":"00:38.490","Text":"we\u0027re going to prepare the note to the property,"},{"Start":"00:38.490 ","End":"00:39.895","Text":"plant, and equipment."},{"Start":"00:39.895 ","End":"00:42.109","Text":"Now looking at the question itself,"},{"Start":"00:42.109 ","End":"00:46.100","Text":"the company we are dealing with is ABB and we have been given"},{"Start":"00:46.100 ","End":"00:51.590","Text":"the balance sheet as at the 1st of January, 20, X1."},{"Start":"00:51.590 ","End":"00:54.815","Text":"All the figures here are in terms of currency units."},{"Start":"00:54.815 ","End":"00:59.210","Text":"You\u0027ll see we have non-current assets and"},{"Start":"00:59.210 ","End":"01:03.830","Text":"current assets and in terms of the non-current assets,"},{"Start":"01:03.830 ","End":"01:05.023","Text":"we\u0027ve got property, plant,"},{"Start":"01:05.023 ","End":"01:07.685","Text":"and equipment, and intangible assets."},{"Start":"01:07.685 ","End":"01:09.515","Text":"In terms of current assets,"},{"Start":"01:09.515 ","End":"01:12.655","Text":"we\u0027ve got cash at the bank and we\u0027ve got inventory."},{"Start":"01:12.655 ","End":"01:15.049","Text":"That then gives us our total assets."},{"Start":"01:15.049 ","End":"01:19.745","Text":"Then we\u0027ve been given non-current liabilities and current liabilities."},{"Start":"01:19.745 ","End":"01:24.380","Text":"Our non-current liabilities involves simply a long-term loan and"},{"Start":"01:24.380 ","End":"01:29.405","Text":"our current liabilities are a combination of accounts payable and a short-term loan."},{"Start":"01:29.405 ","End":"01:33.260","Text":"This thing gives us our total liabilities."},{"Start":"01:33.260 ","End":"01:40.505","Text":"That\u0027s the long-term loan of 11,000 and the total of the current liabilities of 4,500."},{"Start":"01:40.505 ","End":"01:44.720","Text":"These two together give us the total liabilities."},{"Start":"01:44.720 ","End":"01:46.805","Text":"We get our shareholders equity,"},{"Start":"01:46.805 ","End":"01:51.620","Text":"which is made up of simply share capital and retained earnings."},{"Start":"01:51.620 ","End":"01:54.455","Text":"This gives us our total equity."},{"Start":"01:54.455 ","End":"01:59.600","Text":"Notice that this particular layout of our balance sheet is given in"},{"Start":"01:59.600 ","End":"02:06.670","Text":"terms of assets minus liabilities equals owners equity."},{"Start":"02:06.670 ","End":"02:13.550","Text":"We have net assets being our assets minus our liabilities,"},{"Start":"02:13.550 ","End":"02:16.280","Text":"giving us our equity."},{"Start":"02:16.280 ","End":"02:22.864","Text":"Remember our net assets is made up of total assets less"},{"Start":"02:22.864 ","End":"02:31.510","Text":"the total liabilities and those two together give us the net assets of 13,500."},{"Start":"02:32.600 ","End":"02:35.780","Text":"That\u0027s information we\u0027ve been given in terms of"},{"Start":"02:35.780 ","End":"02:39.140","Text":"the balance sheet as at the 1st of January, X1."},{"Start":"02:39.140 ","End":"02:42.380","Text":"We\u0027re then given additional information."},{"Start":"02:42.380 ","End":"02:44.840","Text":"Let\u0027s work through them bit by bit."},{"Start":"02:44.840 ","End":"02:50.420","Text":"Now, the first piece of information we were given was that on the 2nd of January,"},{"Start":"02:50.420 ","End":"02:51.740","Text":"X1, that\u0027s important."},{"Start":"02:51.740 ","End":"02:57.815","Text":"It\u0027s the day after that last balance sheet we looked at had been drawn up."},{"Start":"02:57.815 ","End":"03:01.055","Text":"This is the next day."},{"Start":"03:01.055 ","End":"03:03.440","Text":"On the 2nd of January,"},{"Start":"03:03.440 ","End":"03:07.805","Text":"X1, ABB, which is the company we\u0027re looking at,"},{"Start":"03:07.805 ","End":"03:14.480","Text":"purchased a new piece of hydraulic equipment that was imported from an overseas supplier."},{"Start":"03:14.480 ","End":"03:21.185","Text":"The costs incurred include the supplier\u0027s invoice of 2,000 currency units."},{"Start":"03:21.185 ","End":"03:28.789","Text":"We also had to pay freight costs of 200 and installation costs of 300."},{"Start":"03:28.789 ","End":"03:31.385","Text":"All these costs were paid in cash."},{"Start":"03:31.385 ","End":"03:36.290","Text":"We\u0027re also then told this is information regarding depreciation that"},{"Start":"03:36.290 ","End":"03:42.380","Text":"the useful life of our equipment that we\u0027ve just bought is going to be 5 years,"},{"Start":"03:42.380 ","End":"03:46.030","Text":"and then it has a 0 salvage value."},{"Start":"03:46.030 ","End":"03:52.235","Text":"The salvage value is also referred to as residual value."},{"Start":"03:52.235 ","End":"03:55.475","Text":"Now when we calculate our depreciation,"},{"Start":"03:55.475 ","End":"03:57.665","Text":"when we\u0027re using straight line,"},{"Start":"03:57.665 ","End":"04:04.445","Text":"what we do is we take the cost and we subtract this residual value,"},{"Start":"04:04.445 ","End":"04:08.300","Text":"and we divide it over the useful life."},{"Start":"04:08.300 ","End":"04:13.150","Text":"Now, the equipment was ready for use on the 1st of July, X1,"},{"Start":"04:13.150 ","End":"04:19.225","Text":"and ABB\u0027s policy is to depreciate assets on the straight line basis."},{"Start":"04:19.225 ","End":"04:22.730","Text":"Notice this date here, the 1st of July, X1."},{"Start":"04:22.730 ","End":"04:27.515","Text":"Remember, we bought it on the 2nd of January, X1,"},{"Start":"04:27.515 ","End":"04:32.850","Text":"there was quite a period of time before the asset was available for use."},{"Start":"04:32.850 ","End":"04:39.200","Text":"Remember, we depreciate from the date on which it becomes available already for use."},{"Start":"04:39.200 ","End":"04:42.379","Text":"It doesn\u0027t get depreciated from the time it is purchased."},{"Start":"04:42.379 ","End":"04:48.195","Text":"Now what we were asked to do in terms of A is to fill in this transaction worksheet."},{"Start":"04:48.195 ","End":"04:53.650","Text":"Now, you can see I\u0027ve populated it already with the opening balances."},{"Start":"04:53.650 ","End":"04:58.100","Text":"The property, plant, and equipment cost was 20,000, the property, plant,"},{"Start":"04:58.100 ","End":"05:00.710","Text":"equipment accumulated depreciation was 5,000,"},{"Start":"05:00.710 ","End":"05:01.985","Text":"intangible assets was 2,"},{"Start":"05:01.985 ","End":"05:03.800","Text":"cash and bank was 8,000,"},{"Start":"05:03.800 ","End":"05:06.515","Text":"the inventory you were given was 4,000."},{"Start":"05:06.515 ","End":"05:09.505","Text":"We didn\u0027t have accounts receivable at that stage."},{"Start":"05:09.505 ","End":"05:11.890","Text":"The accounts payable on the bench was 3,000,"},{"Start":"05:11.890 ","End":"05:14.350","Text":"the short-term loan was 1,500, the long-term loan was 11."},{"Start":"05:14.350 ","End":"05:18.220","Text":"There was nothing in the income statement as there never is"},{"Start":"05:18.220 ","End":"05:23.320","Text":"at the last day of the year because it always gets closed off to your retained earnings."},{"Start":"05:23.320 ","End":"05:27.760","Text":"We had share capital of 10,000 and we had retained earnings to the 31st of December,"},{"Start":"05:27.760 ","End":"05:30.200","Text":"X1, of 3,500."},{"Start":"05:30.200 ","End":"05:34.115","Text":"Now that piece of information we were given in point 1,"},{"Start":"05:34.115 ","End":"05:39.635","Text":"we need to put into our worksheet. Let\u0027s get started."},{"Start":"05:39.635 ","End":"05:42.950","Text":"What are we dealing with? Its hydraulic equipment."},{"Start":"05:42.950 ","End":"05:45.245","Text":"This is obviously going to be an asset."},{"Start":"05:45.245 ","End":"05:50.045","Text":"Now, we\u0027ve just bought it and in terms of the suppliers invoice,"},{"Start":"05:50.045 ","End":"05:54.790","Text":"there was an amount that we paid and we were told it was paid in cash."},{"Start":"05:54.790 ","End":"05:59.000","Text":"We\u0027re going to put 2,000 into the property, plant,"},{"Start":"05:59.000 ","End":"06:04.010","Text":"and equipment cost column because our cost of our assets has gone up and we\u0027re going to"},{"Start":"06:04.010 ","End":"06:09.635","Text":"reduce the amount of cash in our bank account because we are told we paid in cash."},{"Start":"06:09.635 ","End":"06:12.290","Text":"The next piece of information within additional information,"},{"Start":"06:12.290 ","End":"06:15.935","Text":"number 1, was that we had freight and installation costs."},{"Start":"06:15.935 ","End":"06:18.375","Text":"The 2 together, there was 1,"},{"Start":"06:18.375 ","End":"06:20.805","Text":"was 200 and the other was 300."},{"Start":"06:20.805 ","End":"06:23.915","Text":"That\u0027s 500 and remember,"},{"Start":"06:23.915 ","End":"06:27.890","Text":"the cost that you capitalize to the asset accounts,"},{"Start":"06:27.890 ","End":"06:30.950","Text":"capitalized means to recognize as an asset."},{"Start":"06:30.950 ","End":"06:36.260","Text":"The additional costs that go into the property, plant,"},{"Start":"06:36.260 ","End":"06:41.855","Text":"and equipment cost account must include the costs necessary"},{"Start":"06:41.855 ","End":"06:44.420","Text":"to get the asset to a location and"},{"Start":"06:44.420 ","End":"06:48.995","Text":"a condition that enables it to be used as intended by management."},{"Start":"06:48.995 ","End":"06:53.420","Text":"The freight was the cost of getting it to the location and"},{"Start":"06:53.420 ","End":"06:55.460","Text":"the installation costs were obviously necessary to"},{"Start":"06:55.460 ","End":"06:58.010","Text":"get it into condition that made it actually usable."},{"Start":"06:58.010 ","End":"07:00.415","Text":"If you couldn\u0027t install it, you couldn\u0027t use it."},{"Start":"07:00.415 ","End":"07:03.350","Text":"Those 2 have to be capitalized and you see therefore,"},{"Start":"07:03.350 ","End":"07:04.520","Text":"we\u0027ve put it in the property, plant,"},{"Start":"07:04.520 ","End":"07:07.910","Text":"and equipment cost account column and because we paid it in cash,"},{"Start":"07:07.910 ","End":"07:11.390","Text":"we subtract it from the cash in our bank account."},{"Start":"07:11.390 ","End":"07:14.120","Text":"Our bank account balance is dropping."},{"Start":"07:14.120 ","End":"07:19.010","Text":"The next piece of information related to our depreciation."},{"Start":"07:19.010 ","End":"07:20.720","Text":"In terms of depreciation,"},{"Start":"07:20.720 ","End":"07:22.565","Text":"we need to still work it out."},{"Start":"07:22.565 ","End":"07:28.355","Text":"We now know that we spent 2,000 rand that was the supplier\u0027s invoice."},{"Start":"07:28.355 ","End":"07:34.920","Text":"There was freight cost of 200 and there was the installation cost of 300."},{"Start":"07:36.140 ","End":"07:42.540","Text":"The cost of this equipment is 2,500,"},{"Start":"07:42.540 ","End":"07:49.895","Text":"the depreciation is equal to the depreciable amount divided by the useful life."},{"Start":"07:49.895 ","End":"07:57.995","Text":"The depreciable amount is the cost less the residual value divided by the useful life."},{"Start":"07:57.995 ","End":"08:03.020","Text":"The cost is 2,500 and the useful life we"},{"Start":"08:03.020 ","End":"08:08.795","Text":"are told is 5 years and the residual value we\u0027re told is 0."},{"Start":"08:08.795 ","End":"08:12.845","Text":"That means it\u0027s 500 per annum."},{"Start":"08:12.845 ","End":"08:16.460","Text":"Now, the equipment was ready for use on the 1st of July."},{"Start":"08:16.460 ","End":"08:19.430","Text":"From the 1st of July, X1,"},{"Start":"08:19.430 ","End":"08:22.255","Text":"through to the end of our year of 31st,"},{"Start":"08:22.255 ","End":"08:24.095","Text":"December, X1,"},{"Start":"08:24.095 ","End":"08:26.030","Text":"that\u0027s only 6 months."},{"Start":"08:26.030 ","End":"08:28.190","Text":"In other words, half a year."},{"Start":"08:28.190 ","End":"08:35.825","Text":"Therefore, our depreciation for this year ending 31st December, X1,"},{"Start":"08:35.825 ","End":"08:42.260","Text":"is going to be half a year times what would have been full year\u0027s depreciation of 500,"},{"Start":"08:42.260 ","End":"08:44.335","Text":"so it\u0027ll only be 250."},{"Start":"08:44.335 ","End":"08:50.570","Text":"That is our depreciation charge or depreciation expense for the year."},{"Start":"08:50.570 ","End":"08:53.555","Text":"Now let\u0027s put that into our worksheet."},{"Start":"08:53.555 ","End":"08:56.660","Text":"Now we need to put this depreciation into the worksheet."},{"Start":"08:56.660 ","End":"08:58.640","Text":"We\u0027re sitting with the depreciation here,"},{"Start":"08:58.640 ","End":"09:00.740","Text":"we\u0027re going to put 250 into"},{"Start":"09:00.740 ","End":"09:05.750","Text":"the accumulated depreciation column to increase our accumulated depreciation,"},{"Start":"09:05.750 ","End":"09:09.710","Text":"and we\u0027re going to put 250 into the income statement column."},{"Start":"09:09.710 ","End":"09:14.130","Text":"You\u0027ll see that\u0027s decreasing the amount in our income statement."},{"Start":"09:14.130 ","End":"09:16.865","Text":"In other words, it\u0027s going to reduce our profit."},{"Start":"09:16.865 ","End":"09:20.420","Text":"That was additional information, number 1, dealt with."},{"Start":"09:20.420 ","End":"09:22.650","Text":"Let\u0027s look at number 2."}],"ID":28568},{"Watched":false,"Name":"Exercise 1 - Part a","Duration":"7m 46s","ChapterTopicVideoID":26379,"CourseChapterTopicPlaylistID":254924,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:03.810","Text":"Now that we\u0027ve done additional information Number 1,"},{"Start":"00:03.810 ","End":"00:07.140","Text":"let\u0027s move on to the information point Number 2."},{"Start":"00:07.140 ","End":"00:11.340","Text":"The beginning balance of PP\u0026E,"},{"Start":"00:11.340 ","End":"00:17.700","Text":"that\u0027s the beginning balance of PP\u0026E of 15,000 relates to a pressing machine and is"},{"Start":"00:17.700 ","End":"00:24.270","Text":"comprised of the original cost of 20,000 and accumulated depreciation of 5,000."},{"Start":"00:24.270 ","End":"00:26.970","Text":"This means that at the beginning of the year,"},{"Start":"00:26.970 ","End":"00:29.220","Text":"we only had 1 asset."},{"Start":"00:29.220 ","End":"00:31.395","Text":"You can see from point Number 1,"},{"Start":"00:31.395 ","End":"00:33.645","Text":"the previous information we dealt with,"},{"Start":"00:33.645 ","End":"00:37.185","Text":"we now have 2 assets with board hydraulic equipment,"},{"Start":"00:37.185 ","End":"00:40.320","Text":"but we only had one piece of property plant and"},{"Start":"00:40.320 ","End":"00:43.430","Text":"equipment at the beginning of the year and the cost was 20,000"},{"Start":"00:43.430 ","End":"00:46.790","Text":"and the accumulated depreciation was 5,000"},{"Start":"00:46.790 ","End":"00:51.424","Text":"and that\u0027s where we got to this carrying amount of 15,000."},{"Start":"00:51.424 ","End":"00:54.830","Text":"Now we\u0027re told that the annual depreciation expense"},{"Start":"00:54.830 ","End":"00:58.565","Text":"for this machine is 2,500 currency units."},{"Start":"00:58.565 ","End":"01:01.925","Text":"We need to put this into our worksheet."},{"Start":"01:01.925 ","End":"01:03.935","Text":"We\u0027re looking at the pressing machine."},{"Start":"01:03.935 ","End":"01:05.510","Text":"You can see, for example,"},{"Start":"01:05.510 ","End":"01:09.260","Text":"that the opening balance relating to the pressing machine there was the cost"},{"Start":"01:09.260 ","End":"01:13.220","Text":"we\u0027re told about and the accumulated depreciation that we\u0027ve just been told about."},{"Start":"01:13.220 ","End":"01:15.610","Text":"It\u0027s already in there, you didn\u0027t have to do anything."},{"Start":"01:15.610 ","End":"01:17.360","Text":"But what we do have to deal with is"},{"Start":"01:17.360 ","End":"01:21.050","Text":"the depreciation charge or the depreciation expense for the year."},{"Start":"01:21.050 ","End":"01:25.240","Text":"The depreciation is going to be 2,500"},{"Start":"01:25.240 ","End":"01:30.010","Text":"is going to be put into the property plant and equipment accumulated depreciation column."},{"Start":"01:30.010 ","End":"01:33.400","Text":"The accumulated depreciation relating to property plant and"},{"Start":"01:33.400 ","End":"01:37.520","Text":"equipment is going to increase by another 2,500."},{"Start":"01:37.520 ","End":"01:39.925","Text":"Then if you go to the income statement,"},{"Start":"01:39.925 ","End":"01:45.030","Text":"you can see we\u0027ve put 2,500 in here as a negative figure."},{"Start":"01:45.030 ","End":"01:46.750","Text":"In other words, it\u0027s going to reduce the amount"},{"Start":"01:46.750 ","End":"01:49.120","Text":"of funds allocated in the income statement."},{"Start":"01:49.120 ","End":"01:53.374","Text":"In other words, what it\u0027s doing is reducing the profit because it\u0027s an expense."},{"Start":"01:53.374 ","End":"01:56.804","Text":"That\u0027s all we had to do for additional information Number 2."},{"Start":"01:56.804 ","End":"01:59.780","Text":"Let\u0027s move on to additional information Number 3."},{"Start":"01:59.780 ","End":"02:02.935","Text":"We\u0027re then told that we spent 300"},{"Start":"02:02.935 ","End":"02:06.630","Text":"on maintenance and repairs of property plant and equipment."},{"Start":"02:06.630 ","End":"02:09.350","Text":"Let\u0027s put that into our worksheet."},{"Start":"02:09.350 ","End":"02:12.135","Text":"Under maintenance and repairs, well,"},{"Start":"02:12.135 ","End":"02:16.280","Text":"maintenance and repairs are considered to be day-to-day servicing,"},{"Start":"02:16.280 ","End":"02:18.935","Text":"if you recall, those are always expensed."},{"Start":"02:18.935 ","End":"02:23.900","Text":"If you expense it, it\u0027s going to be in the income statement as a negative figure."},{"Start":"02:23.900 ","End":"02:26.345","Text":"The expense is going to reduce our profit."},{"Start":"02:26.345 ","End":"02:28.115","Text":"It was paid in cash,"},{"Start":"02:28.115 ","End":"02:32.270","Text":"so we put it into the cash and bank account as a negative figure."},{"Start":"02:32.270 ","End":"02:36.650","Text":"In other words, it\u0027s reducing our balance of cash in our bank account."},{"Start":"02:36.650 ","End":"02:39.445","Text":"Let\u0027s move on to additional information Number 4."},{"Start":"02:39.445 ","End":"02:41.320","Text":"Additional information Number 4,"},{"Start":"02:41.320 ","End":"02:47.635","Text":"we\u0027re told that the company purchased 22,000 currency units worth of inventory."},{"Start":"02:47.635 ","End":"02:50.495","Text":"This time we bought it on credit,"},{"Start":"02:50.495 ","End":"02:52.195","Text":"so we have not paid cash."},{"Start":"02:52.195 ","End":"02:53.825","Text":"Looking at our worksheet,"},{"Start":"02:53.825 ","End":"02:55.820","Text":"we have purchase of inventory."},{"Start":"02:55.820 ","End":"02:59.150","Text":"We need to put this into our inventory account."},{"Start":"02:59.150 ","End":"03:02.090","Text":"We\u0027ve got more inventory so we increase"},{"Start":"03:02.090 ","End":"03:06.950","Text":"our inventory asset to show that we have more inventory and we didn\u0027t pay cash."},{"Start":"03:06.950 ","End":"03:08.690","Text":"We\u0027re not going to affect our cash at bank."},{"Start":"03:08.690 ","End":"03:12.050","Text":"We\u0027re going to put the 22,000 into our accounts payable."},{"Start":"03:12.050 ","End":"03:14.885","Text":"Something I could\u0027ve mentioned earlier perhaps,"},{"Start":"03:14.885 ","End":"03:18.080","Text":"is just to remind you that at the top here we\u0027ve got assets,"},{"Start":"03:18.080 ","End":"03:22.190","Text":"liabilities, and equity but this is in fact your accounting equation."},{"Start":"03:22.190 ","End":"03:26.530","Text":"It\u0027s assets equal liabilities plus owner\u0027s equity."},{"Start":"03:26.530 ","End":"03:28.080","Text":"You can see here,"},{"Start":"03:28.080 ","End":"03:33.095","Text":"we have 20,000 on the left-hand side of that line,"},{"Start":"03:33.095 ","End":"03:37.850","Text":"so assets of 22,000 and the right-hand side of the line we have 22,000."},{"Start":"03:37.850 ","End":"03:41.188","Text":"Our accounting equation balances."},{"Start":"03:41.188 ","End":"03:42.770","Text":"The same thing applies here."},{"Start":"03:42.770 ","End":"03:44.630","Text":"For example the supplier\u0027s invoice,"},{"Start":"03:44.630 ","End":"03:48.725","Text":"we increased our PPE cost and we decrease our cash at bank."},{"Start":"03:48.725 ","End":"03:50.660","Text":"Our assets went up and down."},{"Start":"03:50.660 ","End":"03:53.720","Text":"Our assets had no change and therefore there\u0027s"},{"Start":"03:53.720 ","End":"03:57.260","Text":"nothing on the right-hand side of this squiggly line."},{"Start":"03:57.260 ","End":"04:00.140","Text":"Same thing here up and down."},{"Start":"04:00.140 ","End":"04:03.185","Text":"This one went down and this side went down."},{"Start":"04:03.185 ","End":"04:06.415","Text":"This side went down and this side went down."},{"Start":"04:06.415 ","End":"04:09.390","Text":"This side went down and this side went down."},{"Start":"04:09.390 ","End":"04:12.110","Text":"You can see in each of those transactions so far,"},{"Start":"04:12.110 ","End":"04:13.850","Text":"they\u0027re all still in balance."},{"Start":"04:13.850 ","End":"04:17.840","Text":"Let\u0027s move on to the next piece of information. Number 5."},{"Start":"04:17.840 ","End":"04:23.105","Text":"The company sold inventory which cost 18,000,"},{"Start":"04:23.105 ","End":"04:27.530","Text":"and it\u0027s sold it for 15,000 in cash and 10,000 on credit."},{"Start":"04:27.530 ","End":"04:31.910","Text":"In other words, the inventory was sold for a total of 25,000,"},{"Start":"04:31.910 ","End":"04:35.435","Text":"15,000 cash, and 10,000 credit,"},{"Start":"04:35.435 ","End":"04:39.544","Text":"giving us this 25,000 total sales."},{"Start":"04:39.544 ","End":"04:43.115","Text":"Now this piece of information is interesting because we have 2 aspects."},{"Start":"04:43.115 ","End":"04:46.280","Text":"We\u0027ve also got to deal with the fact that the inventory that"},{"Start":"04:46.280 ","End":"04:49.429","Text":"was sold cost us originally 18,000."},{"Start":"04:49.429 ","End":"04:55.400","Text":"We\u0027re going to record the fact that we have sales of 25,000 but we must also record"},{"Start":"04:55.400 ","End":"05:02.945","Text":"the fact that we have a cost of that sale and that was 18,000."},{"Start":"05:02.945 ","End":"05:07.640","Text":"Another way of looking at that cost of sale is that our inventory"},{"Start":"05:07.640 ","End":"05:12.650","Text":"of 18,000 no longer exists because it\u0027s gone."},{"Start":"05:12.650 ","End":"05:14.375","Text":"It\u0027s been sold to our customers."},{"Start":"05:14.375 ","End":"05:16.580","Text":"Let\u0027s look at this on our worksheet."},{"Start":"05:16.580 ","End":"05:20.360","Text":"Now remember we\u0027ve got 2 transactions is the sale of the inventory."},{"Start":"05:20.360 ","End":"05:22.670","Text":"We\u0027re going to record the fact that we\u0027ve actually got income"},{"Start":"05:22.670 ","End":"05:26.060","Text":"and how much was received in cash and how much they"},{"Start":"05:26.060 ","End":"05:29.510","Text":"actually owe us and then the other aspect to this transaction is that we\u0027ve"},{"Start":"05:29.510 ","End":"05:33.800","Text":"actually lost some of our inventory and we\u0027re going to record it as a cost of a sale."},{"Start":"05:33.800 ","End":"05:35.300","Text":"Let\u0027s look at that."},{"Start":"05:35.300 ","End":"05:37.760","Text":"Let\u0027s do the sale of the inventory first."},{"Start":"05:37.760 ","End":"05:40.850","Text":"We were told that we sold it for a total amount of 25,000."},{"Start":"05:40.850 ","End":"05:43.384","Text":"Notice this goes into our income statement."},{"Start":"05:43.384 ","End":"05:49.325","Text":"We were told that 15,000 was received in cash and 10,000 was still owing."},{"Start":"05:49.325 ","End":"05:51.965","Text":"It goes to our accounts receivable account."},{"Start":"05:51.965 ","End":"05:54.819","Text":"Remember they had no balance at the beginning of the year."},{"Start":"05:54.819 ","End":"05:58.160","Text":"That\u0027s the first part of this piece of information."},{"Start":"05:58.160 ","End":"06:01.640","Text":"The next one was to record the fact that there\u0027s actually inventory that\u0027s now"},{"Start":"06:01.640 ","End":"06:05.555","Text":"disappeared from our books and that\u0027s going to be recorded as a cost of a sale."},{"Start":"06:05.555 ","End":"06:11.450","Text":"Cost of sales, we\u0027re told that the inventory that we sold actually cost us 18,000."},{"Start":"06:11.450 ","End":"06:16.840","Text":"We pop 18,000 in the inventory column as a reduction,"},{"Start":"06:16.840 ","End":"06:20.540","Text":"so our inventory is reduced by 18,000 because it\u0027s not being sold and we"},{"Start":"06:20.540 ","End":"06:24.310","Text":"record that in our income statement as an expense."},{"Start":"06:24.310 ","End":"06:26.700","Text":"That\u0027s going to be reducing the profit."},{"Start":"06:26.700 ","End":"06:28.789","Text":"Let\u0027s move on to the next piece of information."},{"Start":"06:28.789 ","End":"06:35.035","Text":"We\u0027re told that the company paid its suppliers of inventory 17,000."},{"Start":"06:35.035 ","End":"06:38.400","Text":"This is the payment. Now we\u0027re not buying, don\u0027t get confused."},{"Start":"06:38.400 ","End":"06:39.965","Text":"We\u0027re not buying inventory here."},{"Start":"06:39.965 ","End":"06:44.120","Text":"We\u0027re actually just simply paying the people who supply us with inventory."},{"Start":"06:44.120 ","End":"06:45.890","Text":"The payment to suppliers."},{"Start":"06:45.890 ","End":"06:49.010","Text":"Obviously, our cash in our bank is going to be reduced by"},{"Start":"06:49.010 ","End":"06:51.950","Text":"17,000 and our accounts payable,"},{"Start":"06:51.950 ","End":"06:53.120","Text":"which was a liability,"},{"Start":"06:53.120 ","End":"06:55.625","Text":"is being reduced by the amount that we\u0027ve just paid off."},{"Start":"06:55.625 ","End":"06:59.540","Text":"Then the company settled it\u0027s short-term loan."},{"Start":"06:59.540 ","End":"07:01.505","Text":"When you get told that you settled it,"},{"Start":"07:01.505 ","End":"07:03.395","Text":"it means you\u0027ve paid it off in full."},{"Start":"07:03.395 ","End":"07:05.210","Text":"The repayment of our short-term loan."},{"Start":"07:05.210 ","End":"07:07.295","Text":"Well, what was our opening balance?"},{"Start":"07:07.295 ","End":"07:10.660","Text":"Our short-term loan had a balance of 1,500."},{"Start":"07:10.660 ","End":"07:13.145","Text":"Now what are we going to do with that?"},{"Start":"07:13.145 ","End":"07:16.940","Text":"We\u0027re going to reduce our short-term loan by 1,500 and we\u0027re"},{"Start":"07:16.940 ","End":"07:20.885","Text":"going to show that our cash at the bank decrease by 1,500."},{"Start":"07:20.885 ","End":"07:23.900","Text":"Then the last piece of information, Number 8."},{"Start":"07:23.900 ","End":"07:27.875","Text":"We paid 265 in interest expense."},{"Start":"07:27.875 ","End":"07:29.854","Text":"We record the interest expense."},{"Start":"07:29.854 ","End":"07:34.790","Text":"An expense is put into the income statement column and it\u0027s going to reduce"},{"Start":"07:34.790 ","End":"07:39.850","Text":"our profit and we paid it therefore it\u0027s reducing our cash at the bank."},{"Start":"07:39.850 ","End":"07:43.745","Text":"Now all that we have to do is total those columns."},{"Start":"07:43.745 ","End":"07:47.580","Text":"I won\u0027t do that at the moment. Let\u0027s just move on to the next stage."}],"ID":28569},{"Watched":false,"Name":"Exercise 1 - Part a continue","Duration":"1m 15s","ChapterTopicVideoID":26380,"CourseChapterTopicPlaylistID":254924,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:05.714","Text":"Now, all that we have to do is to total all of those columns."},{"Start":"00:05.714 ","End":"00:09.225","Text":"We have property planned equipment,"},{"Start":"00:09.225 ","End":"00:10.725","Text":"all of our assets,"},{"Start":"00:10.725 ","End":"00:13.895","Text":"I\u0027ve totaled them for you, you won\u0027t go through each of them individually."},{"Start":"00:13.895 ","End":"00:15.780","Text":"We have all of our liabilities,"},{"Start":"00:15.780 ","End":"00:18.400","Text":"the 8,000, 0, and 11,000."},{"Start":"00:18.400 ","End":"00:21.660","Text":"We have our equity, all these here."},{"Start":"00:21.660 ","End":"00:25.950","Text":"Interestingly, that 3,685, that income statement,"},{"Start":"00:25.950 ","End":"00:32.385","Text":"that needs to be transferred out and added into our retained earnings column."},{"Start":"00:32.385 ","End":"00:35.580","Text":"Let\u0027s do that. Here\u0027s our retention of our profit,"},{"Start":"00:35.580 ","End":"00:38.265","Text":"we take out that 3,685,"},{"Start":"00:38.265 ","End":"00:44.870","Text":"and we transfer it out by reducing it and we put it into our retained earnings column."},{"Start":"00:44.870 ","End":"00:46.550","Text":"Then our ending balance."},{"Start":"00:46.550 ","End":"00:49.280","Text":"All of those balances are identical."},{"Start":"00:49.280 ","End":"00:53.965","Text":"All of these are identical and the income statement you see is now 0."},{"Start":"00:53.965 ","End":"00:58.925","Text":"That\u0027s identical and then that balance has simply been increased by this year\u0027s profits."},{"Start":"00:58.925 ","End":"01:02.585","Text":"The total of our profits before this year was 3,500,"},{"Start":"01:02.585 ","End":"01:04.625","Text":"this year\u0027s profit is 3,685."},{"Start":"01:04.625 ","End":"01:06.500","Text":"Now we have accumulated profits,"},{"Start":"01:06.500 ","End":"01:11.085","Text":"otherwise known as retained earnings of 7,185."},{"Start":"01:11.085 ","End":"01:13.245","Text":"That\u0027s the end of part A,"},{"Start":"01:13.245 ","End":"01:15.850","Text":"let\u0027s move on to part B."}],"ID":28570},{"Watched":false,"Name":"Exercise 1 - Part b","Duration":"4m 9s","ChapterTopicVideoID":26381,"CourseChapterTopicPlaylistID":254924,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.190","Text":"All right, so looking at the required,"},{"Start":"00:02.190 ","End":"00:05.520","Text":"we\u0027ve done part a which was to complete the transaction worksheet."},{"Start":"00:05.520 ","End":"00:07.860","Text":"Now we\u0027re going to prepare the income statement."},{"Start":"00:07.860 ","End":"00:10.050","Text":"Now, when we prepare the income statement,"},{"Start":"00:10.050 ","End":"00:12.825","Text":"we prepare it for the year ended,"},{"Start":"00:12.825 ","End":"00:14.580","Text":"the 31st of December X1."},{"Start":"00:14.580 ","End":"00:17.760","Text":"That means it\u0027s all of the income and the expenses that"},{"Start":"00:17.760 ","End":"00:23.025","Text":"actually are earned and incurred respectively during that year."},{"Start":"00:23.025 ","End":"00:25.920","Text":"The information we need is in the worksheets,"},{"Start":"00:25.920 ","End":"00:30.450","Text":"so it\u0027s everything in that column called income statement."},{"Start":"00:30.450 ","End":"00:31.920","Text":"We go back to part a,"},{"Start":"00:31.920 ","End":"00:33.480","Text":"which we\u0027ve just done."},{"Start":"00:33.480 ","End":"00:37.290","Text":"If you recall in the equity section of our worksheet,"},{"Start":"00:37.290 ","End":"00:39.310","Text":"we\u0027ve got a column for income statement."},{"Start":"00:39.310 ","End":"00:43.685","Text":"You can see here all the items in purple and bold,"},{"Start":"00:43.685 ","End":"00:47.720","Text":"the income and expenses that are going to appear on our income statement."},{"Start":"00:47.720 ","End":"00:50.600","Text":"Negative figures are our expenses and the positive figure,"},{"Start":"00:50.600 ","End":"00:53.585","Text":"we only have one is our income."},{"Start":"00:53.585 ","End":"01:00.264","Text":"The net effect of all of those purple items is the profit."},{"Start":"01:00.264 ","End":"01:03.400","Text":"Our profit is going to be 3,685."},{"Start":"01:03.400 ","End":"01:08.195","Text":"Let\u0027s get started and start recording the amounts into our income statement."},{"Start":"01:08.195 ","End":"01:09.740","Text":"The one I would start with,"},{"Start":"01:09.740 ","End":"01:13.010","Text":"or the one we have to start with is obviously our revenue."},{"Start":"01:13.010 ","End":"01:15.455","Text":"We only have one item of revenue,"},{"Start":"01:15.455 ","End":"01:17.795","Text":"sale of inventory 25,000."},{"Start":"01:17.795 ","End":"01:22.165","Text":"That\u0027s the first item that appears in our income statement. Let\u0027s pop that in."},{"Start":"01:22.165 ","End":"01:30.440","Text":"Here is the income statement for the month ended 31st of December X1, sales of 25,000."},{"Start":"01:30.440 ","End":"01:32.105","Text":"Then the next item,"},{"Start":"01:32.105 ","End":"01:35.365","Text":"we\u0027ve got cost of sales 18,000."},{"Start":"01:35.365 ","End":"01:39.980","Text":"Now one would always put the cost of sales immediately after your sales"},{"Start":"01:39.980 ","End":"01:44.945","Text":"so that we can show our users the net effect of those two, which is gross profit."},{"Start":"01:44.945 ","End":"01:47.900","Text":"That\u0027s useful information for our users."},{"Start":"01:47.900 ","End":"01:50.300","Text":"We put the cost of sales next,"},{"Start":"01:50.300 ","End":"01:53.645","Text":"and we\u0027ve actually shown them the gross profit calculation."},{"Start":"01:53.645 ","End":"01:55.970","Text":"We don\u0027t have to technically show that gross profit,"},{"Start":"01:55.970 ","End":"01:59.300","Text":"it\u0027s not a requirement according to these standards but it\u0027s"},{"Start":"01:59.300 ","End":"02:03.395","Text":"typically something that one does just to help our users."},{"Start":"02:03.395 ","End":"02:07.234","Text":"Alternatively, you can leave that line out and the users can work it out themselves."},{"Start":"02:07.234 ","End":"02:10.160","Text":"After the gross profit, we put in our expenses."},{"Start":"02:10.160 ","End":"02:13.160","Text":"Our maintenance and repairs, you can see it there,"},{"Start":"02:13.160 ","End":"02:17.810","Text":"it\u0027s a 300 and you can see that appearing in our income statement,"},{"Start":"02:17.810 ","End":"02:19.745","Text":"maintenance and repairs, 300."},{"Start":"02:19.745 ","End":"02:22.460","Text":"You can see we\u0027ve got 2 months of depreciation,"},{"Start":"02:22.460 ","End":"02:25.340","Text":"the one related to the hydraulic equipment and"},{"Start":"02:25.340 ","End":"02:29.555","Text":"the one depreciation related to the pressing machine."},{"Start":"02:29.555 ","End":"02:37.010","Text":"The two together, the 250 plus the 2,500 is 2,750."},{"Start":"02:37.010 ","End":"02:41.075","Text":"You can see the 2,750 appearing in our income statement."},{"Start":"02:41.075 ","End":"02:42.740","Text":"All right, so that\u0027s the sales."},{"Start":"02:42.740 ","End":"02:46.390","Text":"The income lists our operating expenses."},{"Start":"02:46.390 ","End":"02:50.215","Text":"We\u0027ve now got an operating profit of 3,950,"},{"Start":"02:50.215 ","End":"02:53.055","Text":"so that\u0027s the 25,000 less the 18."},{"Start":"02:53.055 ","End":"02:57.155","Text":"7 less those two expenses gives us 3,950."},{"Start":"02:57.155 ","End":"03:00.890","Text":"The next item is the finance expense."},{"Start":"03:00.890 ","End":"03:03.710","Text":"You separate out the finance expense."},{"Start":"03:03.710 ","End":"03:07.910","Text":"It\u0027s not the same as an operating expense."},{"Start":"03:07.910 ","End":"03:11.180","Text":"It\u0027s how you financed your operations so we always separate it out."},{"Start":"03:11.180 ","End":"03:14.738","Text":"You can see our interest expense is 265."},{"Start":"03:14.738 ","End":"03:21.440","Text":"Notice that the profit for the period is 3,685,"},{"Start":"03:21.440 ","End":"03:26.750","Text":"which is exactly what we said was going to be when we looked at the worksheet."},{"Start":"03:26.750 ","End":"03:30.300","Text":"There\u0027s the 3,685."},{"Start":"03:31.670 ","End":"03:37.370","Text":"There is your income statement for the month ended 31st December X1."},{"Start":"03:38.580 ","End":"03:44.855","Text":"Sorry I believe that should be the income statement for the year ended 31st December X1."},{"Start":"03:44.855 ","End":"03:49.750","Text":"Students sorry, I believe there\u0027s an error in here that that should actually read"},{"Start":"03:49.750 ","End":"03:55.660","Text":"income statement for the year ended 31st of December X1."},{"Start":"03:55.660 ","End":"03:59.260","Text":"It doesn\u0027t make any difference to the entire solution that we\u0027ve just gone through,"},{"Start":"03:59.260 ","End":"04:01.060","Text":"but just check your solution."},{"Start":"04:01.060 ","End":"04:06.624","Text":"I\u0027m not sure if yours also has the same error in it or whether it is just my slides."},{"Start":"04:06.624 ","End":"04:10.430","Text":"All right, so let\u0027s move on to part c."}],"ID":28571},{"Watched":false,"Name":"Exercise 1 - Part c","Duration":"6m 25s","ChapterTopicVideoID":26382,"CourseChapterTopicPlaylistID":254924,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.340","Text":"Now we\u0027ve done part A,"},{"Start":"00:02.340 ","End":"00:03.810","Text":"which was the transaction worksheet,"},{"Start":"00:03.810 ","End":"00:06.090","Text":"and we\u0027ve done part B, which is the income statement."},{"Start":"00:06.090 ","End":"00:07.995","Text":"Now we can prepare the balance sheet."},{"Start":"00:07.995 ","End":"00:12.780","Text":"Notice that we say as at the 31st of December X1,"},{"Start":"00:12.780 ","End":"00:14.820","Text":"not for the year ended."},{"Start":"00:14.820 ","End":"00:16.905","Text":"When we say for the year ended,"},{"Start":"00:16.905 ","End":"00:22.890","Text":"it\u0027s everything that happened for that year."},{"Start":"00:22.890 ","End":"00:26.010","Text":"Preparing the balance sheet as at or at"},{"Start":"00:26.010 ","End":"00:29.880","Text":"a specific date means you\u0027re looking at a snapshot,"},{"Start":"00:29.880 ","End":"00:31.935","Text":"a photograph of, if you like,"},{"Start":"00:31.935 ","End":"00:34.605","Text":"of what the business looked like on that date."},{"Start":"00:34.605 ","End":"00:38.510","Text":"We\u0027re just looking at the closing balances."},{"Start":"00:38.510 ","End":"00:42.140","Text":"Let\u0027s have a look at that worksheet that we did in part a."},{"Start":"00:42.140 ","End":"00:45.640","Text":"Here are all the ending balances, and as I say,"},{"Start":"00:45.640 ","End":"00:48.260","Text":"when you do your balance sheet you are simply going"},{"Start":"00:48.260 ","End":"00:51.035","Text":"to be looking at these ending balances."},{"Start":"00:51.035 ","End":"00:55.040","Text":"We have assets balances,"},{"Start":"00:55.040 ","End":"00:56.600","Text":"we\u0027ve got liability balances,"},{"Start":"00:56.600 ","End":"00:58.644","Text":"and we\u0027ve equity balances."},{"Start":"00:58.644 ","End":"01:02.705","Text":"We\u0027re going to start by looking at the asset balances."},{"Start":"01:02.705 ","End":"01:04.250","Text":"These are the asset balances."},{"Start":"01:04.250 ","End":"01:07.700","Text":"We\u0027ve got property, plant, and equipment cost and accumulated depreciation,"},{"Start":"01:07.700 ","End":"01:09.905","Text":"the 2 get set off against each other."},{"Start":"01:09.905 ","End":"01:11.600","Text":"We\u0027ve got intangible assets,"},{"Start":"01:11.600 ","End":"01:14.710","Text":"cash at bank, inventory and accounts receivable."},{"Start":"01:14.710 ","End":"01:16.820","Text":"Those are all the closing balances."},{"Start":"01:16.820 ","End":"01:19.375","Text":"Let\u0027s pop that into our balance sheet."},{"Start":"01:19.375 ","End":"01:25.045","Text":"The property, plant and equipment 14,750."},{"Start":"01:25.045 ","End":"01:28.300","Text":"Let\u0027s go back to the worksheet."},{"Start":"01:28.300 ","End":"01:36.965","Text":"That was the cost of 22.5 minus the 7,750 accumulated depreciation."},{"Start":"01:36.965 ","End":"01:41.205","Text":"Then you see the intangible assets of 2,000."},{"Start":"01:41.205 ","End":"01:43.570","Text":"Let\u0027s all say a non-current asset."},{"Start":"01:43.570 ","End":"01:47.965","Text":"There\u0027s the 2,000 for your intangible assets."},{"Start":"01:47.965 ","End":"01:50.395","Text":"Now let\u0027s look at our current assets."},{"Start":"01:50.395 ","End":"01:55.068","Text":"Our current assets are cash at bank 1,435,"},{"Start":"01:55.068 ","End":"02:00.145","Text":"our inventory of 8,000 and our accounts receivable of 10,000. There they are."},{"Start":"02:00.145 ","End":"02:02.410","Text":"The cash at the bank are the 1,435,"},{"Start":"02:02.410 ","End":"02:05.065","Text":"the inventory, and accounts receivable."},{"Start":"02:05.065 ","End":"02:11.215","Text":"The next step is to total the non-current assets and total the current assets."},{"Start":"02:11.215 ","End":"02:13.570","Text":"There\u0027s a total of our non-current assets,"},{"Start":"02:13.570 ","End":"02:15.085","Text":"a total of our current assets,"},{"Start":"02:15.085 ","End":"02:19.675","Text":"and the together,16,7050 and the 19,435,"},{"Start":"02:19.675 ","End":"02:25.230","Text":"we add those 2 together and that gives us our total assets of 36,185."},{"Start":"02:25.230 ","End":"02:26.390","Text":"Now we\u0027re going to put in"},{"Start":"02:26.390 ","End":"02:30.470","Text":"the non-current liabilities and current liabilities to give us our total liabilities."},{"Start":"02:30.470 ","End":"02:31.925","Text":"Let\u0027s go back to our worksheet."},{"Start":"02:31.925 ","End":"02:36.020","Text":"In our worksheet, we\u0027ve got 3 columns of liabilities are accounts payable,"},{"Start":"02:36.020 ","End":"02:37.280","Text":"we\u0027ve got a short-term loan,"},{"Start":"02:37.280 ","End":"02:38.893","Text":"and we\u0027ve got a long-term loan."},{"Start":"02:38.893 ","End":"02:40.820","Text":"Remember we paid off our short-term loans."},{"Start":"02:40.820 ","End":"02:43.730","Text":"We actually not only have 2 items, accounts payable,"},{"Start":"02:43.730 ","End":"02:46.143","Text":"that\u0027s always a current liability,"},{"Start":"02:46.143 ","End":"02:48.050","Text":"and these are long-term languages,"},{"Start":"02:48.050 ","End":"02:49.970","Text":"obviously a non-current liability."},{"Start":"02:49.970 ","End":"02:54.320","Text":"We put the accounts payable of 8,000 and our current liabilities,"},{"Start":"02:54.320 ","End":"02:57.800","Text":"and the 11,000 loan and our non-current liabilities."},{"Start":"02:57.800 ","End":"02:59.510","Text":"We add those 2 together,"},{"Start":"02:59.510 ","End":"03:03.170","Text":"so we have total non-current liabilities of 11,000 and total"},{"Start":"03:03.170 ","End":"03:07.460","Text":"current liabilities of 8,000 coming to a total liabilities of 19,000."},{"Start":"03:07.460 ","End":"03:09.455","Text":"Those are the liabilities in now,"},{"Start":"03:09.455 ","End":"03:12.265","Text":"so we\u0027ll get back to the worksheet to have a look at our equity."},{"Start":"03:12.265 ","End":"03:14.819","Text":"Our equity, we\u0027ve got 3 columns as well,"},{"Start":"03:14.819 ","End":"03:19.910","Text":"but remember part of the equity is the income and expenses that occurred during the year."},{"Start":"03:19.910 ","End":"03:23.855","Text":"Now, those income and expenses don\u0027t appear separately in our balance sheet."},{"Start":"03:23.855 ","End":"03:26.120","Text":"Those income and expenses appear separately,"},{"Start":"03:26.120 ","End":"03:27.950","Text":"however, in the income statement,"},{"Start":"03:27.950 ","End":"03:34.550","Text":"and then that\u0027s profit of 3,685 that gets taken from our income statement,"},{"Start":"03:34.550 ","End":"03:38.510","Text":"and it gets transferred and accumulated into our retained earnings,"},{"Start":"03:38.510 ","End":"03:43.415","Text":"and that will be then included in the retained earnings balance of 7,185,"},{"Start":"03:43.415 ","End":"03:45.740","Text":"so they just go through that step-by-step."},{"Start":"03:45.740 ","End":"03:51.735","Text":"We\u0027ve got share capital of 10,000 and we\u0027ve got retained earnings,"},{"Start":"03:51.735 ","End":"03:55.655","Text":"in other words, accumulated profit at the end of the previous year,"},{"Start":"03:55.655 ","End":"04:00.320","Text":"3,500, and our income statement shows the income and expenses"},{"Start":"04:00.320 ","End":"04:05.360","Text":"that we earned and incurred respectively during this current year,"},{"Start":"04:05.360 ","End":"04:09.140","Text":"so we\u0027ve added a further profit of 3,685."},{"Start":"04:09.140 ","End":"04:14.180","Text":"We take that 3,685 out of the income statement and we transferred into the balance sheet."},{"Start":"04:14.180 ","End":"04:17.210","Text":"Now, our income statement has nothing in it,"},{"Start":"04:17.210 ","End":"04:20.585","Text":"and our retained earnings has 7,185 in it."},{"Start":"04:20.585 ","End":"04:23.090","Text":"Share capital remains unchanged."},{"Start":"04:23.090 ","End":"04:24.880","Text":"Those are our balances then."},{"Start":"04:24.880 ","End":"04:26.180","Text":"We only now have share capital and"},{"Start":"04:26.180 ","End":"04:29.210","Text":"retained earnings that appears in our balance sheet equity."},{"Start":"04:29.210 ","End":"04:35.015","Text":"Having the shareholders equity section of our balance sheet,"},{"Start":"04:35.015 ","End":"04:37.220","Text":"we\u0027ve got the share capital and retained earnings."},{"Start":"04:37.220 ","End":"04:41.925","Text":"Share capital was 10,000 and the retained earnings was now 7,185."},{"Start":"04:41.925 ","End":"04:44.890","Text":"The total equity is 17,185."},{"Start":"04:44.890 ","End":"04:48.435","Text":"Now, we add to that the total liabilities of 19,000,"},{"Start":"04:48.435 ","End":"04:52.835","Text":"and that gives us our total liabilities and equity of 36,185."},{"Start":"04:52.835 ","End":"04:55.010","Text":"Notice how this balance sheet balances."},{"Start":"04:55.010 ","End":"05:02.435","Text":"We\u0027re balancing the total assets equals liabilities plus equity."},{"Start":"05:02.435 ","End":"05:10.290","Text":"Total assets of 36,185 is equal to the total liabilities and equity of 36,185."},{"Start":"05:10.290 ","End":"05:13.025","Text":"Now, that was the horizontal presentation."},{"Start":"05:13.025 ","End":"05:15.410","Text":"I\u0027ll quickly flip through the vertical presentation,"},{"Start":"05:15.410 ","End":"05:17.465","Text":"but all the figures are absolutely identical."},{"Start":"05:17.465 ","End":"05:20.650","Text":"Now, this is the vertical presentation,"},{"Start":"05:20.650 ","End":"05:24.862","Text":"and the vertical presentation shows things slightly differently."},{"Start":"05:24.862 ","End":"05:29.360","Text":"Here we have assets minus liabilities equals equity."},{"Start":"05:29.360 ","End":"05:34.580","Text":"It\u0027s the self-same accounting equation that we use for the horizontal presentation,"},{"Start":"05:34.580 ","End":"05:40.715","Text":"except that it was written assets equals liabilities plus equity."},{"Start":"05:40.715 ","End":"05:47.255","Text":"The horizontal presentation used this formula to structure the balance sheet,"},{"Start":"05:47.255 ","End":"05:50.090","Text":"and the vertical presentation used this formula."},{"Start":"05:50.090 ","End":"05:51.710","Text":"Now, just bear in mind there are"},{"Start":"05:51.710 ","End":"05:55.280","Text":"so many different layouts of a balance sheet that are possible,"},{"Start":"05:55.280 ","End":"05:58.755","Text":"and we\u0027re just using 2 of them here."},{"Start":"05:58.755 ","End":"06:01.070","Text":"In this case here, just worked through it,"},{"Start":"06:01.070 ","End":"06:05.900","Text":"we\u0027ve got non-current assets and current assets giving us our total assets,"},{"Start":"06:05.900 ","End":"06:08.000","Text":"then we\u0027ve got our non-current liabilities and"},{"Start":"06:08.000 ","End":"06:10.864","Text":"current liabilities giving us our total liabilities."},{"Start":"06:10.864 ","End":"06:13.940","Text":"We have our net assets which, as it says,"},{"Start":"06:13.940 ","End":"06:16.445","Text":"your assets minus your liabilities,"},{"Start":"06:16.445 ","End":"06:19.840","Text":"and that then gives you your total equity of 17,185."},{"Start":"06:19.840 ","End":"06:21.629","Text":"All the figures are identical."},{"Start":"06:21.629 ","End":"06:22.995","Text":"That\u0027s part C done,"},{"Start":"06:22.995 ","End":"06:25.270","Text":"let\u0027s move on to part D."}],"ID":28573},{"Watched":false,"Name":"Exercise 1 - Part d","Duration":"6m 6s","ChapterTopicVideoID":26383,"CourseChapterTopicPlaylistID":254924,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:03.630","Text":"Now we have Part D which"},{"Start":"00:03.630 ","End":"00:07.320","Text":"requires us to prepare the note on property, plant, and equipment."},{"Start":"00:07.320 ","End":"00:10.844","Text":"You were given a table that you simply had to complete."},{"Start":"00:10.844 ","End":"00:13.080","Text":"This is the note that you were required to complete."},{"Start":"00:13.080 ","End":"00:17.130","Text":"You were given a column for pressing machine and a column for the hydraulic equipment"},{"Start":"00:17.130 ","End":"00:21.570","Text":"and then a total column for the 2 pieces of property, plant, and equipment."},{"Start":"00:21.570 ","End":"00:28.140","Text":"We then have the cost and the accumulated depreciation and when you subtract the 2,"},{"Start":"00:28.140 ","End":"00:30.130","Text":"you get to the carrying amount."},{"Start":"00:30.130 ","End":"00:32.450","Text":"Now, in your note to property,"},{"Start":"00:32.450 ","End":"00:33.620","Text":"plant, and equipment,"},{"Start":"00:33.620 ","End":"00:35.945","Text":"you\u0027re going to show the opening cost,"},{"Start":"00:35.945 ","End":"00:37.550","Text":"any movement in the cost."},{"Start":"00:37.550 ","End":"00:41.330","Text":"In this case, we bought something giving you the closing cost."},{"Start":"00:41.330 ","End":"00:47.060","Text":"Then the opening accumulated depreciation plus this year\u0027s depreciation charge,"},{"Start":"00:47.060 ","End":"00:48.860","Text":"or depreciation expense,"},{"Start":"00:48.860 ","End":"00:52.640","Text":"giving us the closing balance of our accumulated depreciation."},{"Start":"00:52.640 ","End":"00:55.730","Text":"We don\u0027t have to separate the carrying amount out into"},{"Start":"00:55.730 ","End":"00:59.125","Text":"the opening balance and the movement in the closing balance."},{"Start":"00:59.125 ","End":"01:00.964","Text":"Let\u0027s get started."},{"Start":"01:00.964 ","End":"01:02.420","Text":"If we look at our worksheet,"},{"Start":"01:02.420 ","End":"01:05.360","Text":"you can see we\u0027ve got 2 columns for our property, plant, and equipment."},{"Start":"01:05.360 ","End":"01:07.340","Text":"This is where we\u0027re going to get all of"},{"Start":"01:07.340 ","End":"01:09.530","Text":"our information for the property, plant, and equipment."},{"Start":"01:09.530 ","End":"01:12.980","Text":"Note, we\u0027ve got the opening balance of"},{"Start":"01:12.980 ","End":"01:18.500","Text":"20,000 and 5,000 for the cost and the accumulated depreciation respectively."},{"Start":"01:18.500 ","End":"01:20.585","Text":"Let\u0027s put that into our note."},{"Start":"01:20.585 ","End":"01:25.580","Text":"Now, remember that that 20,000 and the 5,000 related purely to the pressing machine."},{"Start":"01:25.580 ","End":"01:28.220","Text":"The reason I say that is because we were told that"},{"Start":"01:28.220 ","End":"01:32.300","Text":"the hydraulic equipment was bought on the second of January X1."},{"Start":"01:32.300 ","End":"01:36.080","Text":"Therefore, at the first of the first X1,"},{"Start":"01:36.080 ","End":"01:38.225","Text":"we only had a pressing machine."},{"Start":"01:38.225 ","End":"01:41.600","Text":"The opening balance related purely to the pressing machine,"},{"Start":"01:41.600 ","End":"01:44.255","Text":"so there\u0027s nothing relating the hydraulic equipment."},{"Start":"01:44.255 ","End":"01:47.900","Text":"In total, we therefore have 20,000 opening"},{"Start":"01:47.900 ","End":"01:51.800","Text":"cost and 5,000 opening accumulated depreciation."},{"Start":"01:51.800 ","End":"01:57.635","Text":"Then we go back to our worksheet and you can see we\u0027ve bought the hydraulic equipment"},{"Start":"01:57.635 ","End":"02:04.070","Text":"and it\u0027s 2,000 for the supplier\u0027s invoice and 500 for the freight and installation."},{"Start":"02:04.070 ","End":"02:06.995","Text":"Our cost went up by 2,500."},{"Start":"02:06.995 ","End":"02:08.945","Text":"Let\u0027s put that into our note."},{"Start":"02:08.945 ","End":"02:11.660","Text":"The hydraulic equipment, you can see we\u0027ve purchased,"},{"Start":"02:11.660 ","End":"02:14.270","Text":"it\u0027s an addition of 2,500."},{"Start":"02:14.270 ","End":"02:17.588","Text":"That gives us total additions for the year of 2,500"},{"Start":"02:17.588 ","End":"02:21.665","Text":"because we didn\u0027t buy another pressing machine and we didn\u0027t buy anything else."},{"Start":"02:21.665 ","End":"02:26.989","Text":"That then gives us the balance at 31st of December, X1 of cost."},{"Start":"02:26.989 ","End":"02:33.980","Text":"The closing balance at 31st of December X1 with regard to the cost account was 20,000 for"},{"Start":"02:33.980 ","End":"02:37.040","Text":"the pressing machine and we had 2,500 cost relating to"},{"Start":"02:37.040 ","End":"02:42.755","Text":"the hydraulic equipment and 22,500 total cost at the end of the year."},{"Start":"02:42.755 ","End":"02:46.490","Text":"Now let\u0027s look at our accumulated depreciation."},{"Start":"02:46.490 ","End":"02:50.060","Text":"Going back to the worksheet then, accumulated depreciation,"},{"Start":"02:50.060 ","End":"02:56.600","Text":"we depreciated the equipment by 250 and the machine by 2,500."},{"Start":"02:56.600 ","End":"02:58.370","Text":"We put that in here,"},{"Start":"02:58.370 ","End":"03:02.615","Text":"250 for the equipment and 2,500 for the machine."},{"Start":"03:02.615 ","End":"03:08.330","Text":"That then gives us our closing accumulated depreciation at the end of the year,"},{"Start":"03:08.330 ","End":"03:13.705","Text":"7,500, which is the opening balance plus the depreciation charge for the year."},{"Start":"03:13.705 ","End":"03:15.660","Text":"This was 250 being"},{"Start":"03:15.660 ","End":"03:21.725","Text":"the opening accumulated depreciation plus the depreciation charge for the year."},{"Start":"03:21.725 ","End":"03:28.000","Text":"In total, therefore, we got 7,750 accumulated depreciation at the end of the year."},{"Start":"03:28.000 ","End":"03:31.010","Text":"Our carrying amount then for the pressing machine,"},{"Start":"03:31.010 ","End":"03:32.840","Text":"is the total of the cost,"},{"Start":"03:32.840 ","End":"03:38.570","Text":"of 20,000, less the total of accumulated depreciation of 7,500."},{"Start":"03:38.570 ","End":"03:41.300","Text":"Both of those are closing balances,"},{"Start":"03:41.300 ","End":"03:44.435","Text":"so that gives us our carrying amount."},{"Start":"03:44.435 ","End":"03:46.945","Text":"Subtract the 2 gives you 12,500."},{"Start":"03:46.945 ","End":"03:48.800","Text":"Same thing for the hydraulic equipment;"},{"Start":"03:48.800 ","End":"03:51.650","Text":"cost of the equipment was 2,500."},{"Start":"03:51.650 ","End":"03:54.335","Text":"The depreciation to date is 250,"},{"Start":"03:54.335 ","End":"03:58.795","Text":"that gives us our carrying amount of 2,250."},{"Start":"03:58.795 ","End":"04:02.180","Text":"If you add these 2 carrying amounts up,"},{"Start":"04:02.180 ","End":"04:06.420","Text":"you get to the total property,"},{"Start":"04:06.420 ","End":"04:09.380","Text":"plant, and equipment of 14,750."},{"Start":"04:09.380 ","End":"04:11.825","Text":"Now, if you go back to the worksheet though,"},{"Start":"04:11.825 ","End":"04:15.020","Text":"you will see other figures as the total of"},{"Start":"04:15.020 ","End":"04:18.515","Text":"our cost and the total of our accumulated depreciation."},{"Start":"04:18.515 ","End":"04:25.850","Text":"The total of our cost is 22,500 and the total of accumulated depreciation is 7,750."},{"Start":"04:25.850 ","End":"04:29.720","Text":"You\u0027ll also see those figures in that same note. Let\u0027s have a look."},{"Start":"04:29.720 ","End":"04:33.165","Text":"There\u0027s the 2,250, the total of your cost,"},{"Start":"04:33.165 ","End":"04:39.035","Text":"2,250, and the total of your accumulated depreciation of 7,750."},{"Start":"04:39.035 ","End":"04:44.330","Text":"That gives you the total of your carrying amount of 14,750."},{"Start":"04:44.330 ","End":"04:48.245","Text":"You can work it out this way as well; 22,500 total cost,"},{"Start":"04:48.245 ","End":"04:52.730","Text":"subtract the total accumulated depreciation,"},{"Start":"04:52.730 ","End":"04:56.250","Text":"gives you that 14,750."},{"Start":"04:56.250 ","End":"04:59.855","Text":"That 14,750 also equals"},{"Start":"04:59.855 ","End":"05:03.710","Text":"the total in the balance sheet for property, plant, and equipment."},{"Start":"05:03.710 ","End":"05:05.900","Text":"Let\u0027s just have a look at that."},{"Start":"05:05.900 ","End":"05:12.350","Text":"That 14,750 actually supports a carrying amount that you see in the balance sheet."},{"Start":"05:12.350 ","End":"05:15.050","Text":"Because remember this is a note that supports the property,"},{"Start":"05:15.050 ","End":"05:18.110","Text":"plant, and equipment line item in the balance sheet."},{"Start":"05:18.110 ","End":"05:22.820","Text":"That 14,750 must appear in the balance sheet for PPE."},{"Start":"05:22.820 ","End":"05:26.675","Text":"Let\u0027s take a look and make sure that is indeed the case."},{"Start":"05:26.675 ","End":"05:32.375","Text":"Here we have our balance sheet on the horizontal presentation and the non-current assets."},{"Start":"05:32.375 ","End":"05:33.710","Text":"You find your property, plant,"},{"Start":"05:33.710 ","End":"05:36.380","Text":"and equipment are 14,750."},{"Start":"05:36.380 ","End":"05:41.965","Text":"That note that we have just done shows how that 14,750 was"},{"Start":"05:41.965 ","End":"05:45.470","Text":"calculated and we provide that information to our users"},{"Start":"05:45.470 ","End":"05:49.130","Text":"so they can get a better understanding of what happened within our property,"},{"Start":"05:49.130 ","End":"05:51.050","Text":"plant, and equipment line-item."},{"Start":"05:51.050 ","End":"05:53.900","Text":"We provide a note to that property, plant,"},{"Start":"05:53.900 ","End":"06:01.700","Text":"and equipment line-item to show our users how that 14,750 came about."},{"Start":"06:01.700 ","End":"06:06.720","Text":"That is the end of Part D and I hope that helped."}],"ID":28572},{"Watched":false,"Name":"What is PPE video","Duration":"1m 12s","ChapterTopicVideoID":26634,"CourseChapterTopicPlaylistID":254924,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:06.150","Text":"Hello. Welcome to another video presentation in the series on Property, Plant,"},{"Start":"00:06.150 ","End":"00:08.265","Text":"and Equipment brought to you by"},{"Start":"00:08.265 ","End":"00:12.870","Text":"proprep these video presentations on property, plant, and equipment."},{"Start":"00:12.870 ","End":"00:16.215","Text":"Apart of the series on non-current assets."},{"Start":"00:16.215 ","End":"00:18.990","Text":"My name is David [inaudible]."},{"Start":"00:18.990 ","End":"00:23.250","Text":"In this video, we will focus on what is property,"},{"Start":"00:23.250 ","End":"00:25.080","Text":"plant, and equipment."},{"Start":"00:25.080 ","End":"00:28.035","Text":"What is property, plant, and equipment?"},{"Start":"00:28.035 ","End":"00:31.020","Text":"Property, plant, and equipment, as you know,"},{"Start":"00:31.020 ","End":"00:33.930","Text":"often abbreviated as PP\u0026E,"},{"Start":"00:33.930 ","End":"00:38.775","Text":"our company is physical or tangible long-term assets."},{"Start":"00:38.775 ","End":"00:43.370","Text":"They have a life normally of more than 1 year and are"},{"Start":"00:43.370 ","End":"00:48.620","Text":"classified as non-current assets on the statement of financial position."},{"Start":"00:48.620 ","End":"00:53.200","Text":"Examples of PP\u0026E include land,"},{"Start":"00:53.200 ","End":"00:55.045","Text":"and old buildings,"},{"Start":"00:55.045 ","End":"01:03.145","Text":"machinery, office equipment, and shop fixtures and furniture, also vehicles."},{"Start":"01:03.145 ","End":"01:05.250","Text":"With the exception of land,"},{"Start":"01:05.250 ","End":"01:13.150","Text":"they are normally depreciated and may become obsolete owing to technological changes."}],"ID":28567},{"Watched":false,"Name":"The HC measurement basis video","Duration":"1m 37s","ChapterTopicVideoID":26635,"CourseChapterTopicPlaylistID":254924,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:05.130","Text":"Hello and welcome to another video presentation in the series on property,"},{"Start":"00:05.130 ","End":"00:08.685","Text":"plant, and equipment brought to you by Proprep."},{"Start":"00:08.685 ","End":"00:11.348","Text":"My name is Dave Kolitz."},{"Start":"00:11.348 ","End":"00:17.460","Text":"In this video, we will focus on the historical cost measurement basis."},{"Start":"00:17.460 ","End":"00:20.385","Text":"Using the historic cost basis,"},{"Start":"00:20.385 ","End":"00:23.910","Text":"the carrying amount of an asset in the balance sheet is"},{"Start":"00:23.910 ","End":"00:27.945","Text":"initially presented at the original cost of acquisition."},{"Start":"00:27.945 ","End":"00:30.585","Text":"This you will see in later examples,"},{"Start":"00:30.585 ","End":"00:33.840","Text":"also includes certain transaction costs,"},{"Start":"00:33.840 ","End":"00:40.590","Text":"such as the cost of transport or installation relating to the equipment."},{"Start":"00:40.590 ","End":"00:44.584","Text":"Then asset item of PPE is used."},{"Start":"00:44.584 ","End":"00:47.870","Text":"The carrying amount is reduced to reflect what\u0027s called the"},{"Start":"00:47.870 ","End":"00:52.585","Text":"consumption of the resources inherent in the asset."},{"Start":"00:52.585 ","End":"01:01.760","Text":"That reduction is expensed in the income statement with an expense known as depreciation."},{"Start":"01:01.760 ","End":"01:07.550","Text":"The carrying amount is also reduced if the recoverable amount,"},{"Start":"01:07.550 ","End":"01:11.195","Text":"a concept we will also learn in a later presentation,"},{"Start":"01:11.195 ","End":"01:12.980","Text":"but for time being,"},{"Start":"01:12.980 ","End":"01:17.180","Text":"you can understand the spot thinking of the recoverable amount as"},{"Start":"01:17.180 ","End":"01:22.835","Text":"the assets market value if that is in fact lower than the carrying amount."},{"Start":"01:22.835 ","End":"01:26.210","Text":"That implies that the benefits inherent in the asset"},{"Start":"01:26.210 ","End":"01:29.899","Text":"are lower than what the carrying amount is showing,"},{"Start":"01:29.899 ","End":"01:33.110","Text":"and that lead to the recognition of what is called an"},{"Start":"01:33.110 ","End":"01:37.799","Text":"impairment loss on the income statement."}],"ID":28574},{"Watched":false,"Name":"Components of initial cost of PPE video","Duration":"6m 48s","ChapterTopicVideoID":26636,"CourseChapterTopicPlaylistID":254924,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:04.920","Text":"Hello and welcome to another video presentation in the series on Property,"},{"Start":"00:04.920 ","End":"00:07.935","Text":"Plant, and Equipment brought to you by Proprep."},{"Start":"00:07.935 ","End":"00:12.000","Text":"My name is Dave Collets and in this video,"},{"Start":"00:12.000 ","End":"00:18.465","Text":"we will look at the components of the initial cost of property, plant, and equipment."},{"Start":"00:18.465 ","End":"00:26.445","Text":"The initial recognition of the cost of PPE often involves several different components."},{"Start":"00:26.445 ","End":"00:32.130","Text":"The cost includes all amounts paid to obtain the asset and bring it"},{"Start":"00:32.130 ","End":"00:38.780","Text":"towards what\u0027s called its location and condition necessary for its intended use."},{"Start":"00:38.780 ","End":"00:42.695","Text":"That rather long and complex definition,"},{"Start":"00:42.695 ","End":"00:47.090","Text":"the location and condition necessary for its intended use,"},{"Start":"00:47.090 ","End":"00:53.420","Text":"effectively bring in all costs incurred in getting that item of"},{"Start":"00:53.420 ","End":"01:01.030","Text":"PPE into what is referred to as the location and condition necessary for its use."},{"Start":"01:01.030 ","End":"01:07.100","Text":"Therefore, these costs include items such as the invoice price,"},{"Start":"01:07.100 ","End":"01:09.430","Text":"any site preparation costs."},{"Start":"01:09.430 ","End":"01:13.370","Text":"For example, this might be a particularly heavy item"},{"Start":"01:13.370 ","End":"01:17.660","Text":"of machinery and needs specialized base to be built."},{"Start":"01:17.660 ","End":"01:20.330","Text":"There could be delivery and handling costs,"},{"Start":"01:20.330 ","End":"01:22.850","Text":"which are typically the transport costs,"},{"Start":"01:22.850 ","End":"01:26.255","Text":"there might be installation costs as well."},{"Start":"01:26.255 ","End":"01:31.240","Text":"Again, if it\u0027s a highly technical item of machinery,"},{"Start":"01:31.240 ","End":"01:33.860","Text":"the entity may need to employ"},{"Start":"01:33.860 ","End":"01:40.160","Text":"specialist engineers for installation and then maybe professional fees."},{"Start":"01:40.160 ","End":"01:44.570","Text":"For example, architects and as I\u0027ve said, engineers."},{"Start":"01:44.570 ","End":"01:48.095","Text":"Let us now take a look at an example"},{"Start":"01:48.095 ","End":"01:52.730","Text":"of the initial costs of an item of property, plant, and equipment."},{"Start":"01:52.730 ","End":"01:57.275","Text":"This company, CCF, is a UK-based chocolate manufacturer."},{"Start":"01:57.275 ","End":"02:01.550","Text":"It purchases a chocolate molding machine on credit from"},{"Start":"02:01.550 ","End":"02:07.070","Text":"a German supplier and note the purchase price is 24,000 currency units."},{"Start":"02:07.070 ","End":"02:10.940","Text":"There are transport costs of 1,500 currency"},{"Start":"02:10.940 ","End":"02:16.235","Text":"units and a total of 5,000 paid for insurance."},{"Start":"02:16.235 ","End":"02:22.340","Text":"That insurance includes 2,000 while the machine was in transit from"},{"Start":"02:22.340 ","End":"02:29.420","Text":"Germany and the rest of it was for an annual fire and theft insurance."},{"Start":"02:29.420 ","End":"02:36.035","Text":"Then there were installation costs include engineer\u0027s fees of 2,500 paid in cash."},{"Start":"02:36.035 ","End":"02:40.820","Text":"Let\u0027s now examine how we will record the initial cost of"},{"Start":"02:40.820 ","End":"02:45.815","Text":"this item of PPE in the accounting records of this entity."},{"Start":"02:45.815 ","End":"02:53.090","Text":"Well, the invoice price of 24,000 is part of the initial cost."},{"Start":"02:53.090 ","End":"02:58.130","Text":"Remember, you now know that we need to include all costs incurred in"},{"Start":"02:58.130 ","End":"03:03.690","Text":"getting the item of PPE into location and condition ready for use."},{"Start":"03:03.690 ","End":"03:09.220","Text":"Therefore the transport costs of 1,500 are also included."},{"Start":"03:09.220 ","End":"03:14.840","Text":"Now relating to insurance of insurance of 5,000,"},{"Start":"03:14.840 ","End":"03:20.124","Text":"only 2,000 was paid for insurance in transit."},{"Start":"03:20.124 ","End":"03:25.040","Text":"The rest of the insurance is 3,000 is paid,"},{"Start":"03:25.040 ","End":"03:26.539","Text":"as you see in the question,"},{"Start":"03:26.539 ","End":"03:31.850","Text":"for fire and theft insurance after installation and that therefore does not"},{"Start":"03:31.850 ","End":"03:37.699","Text":"relate to getting this item into a condition ready for use for management."},{"Start":"03:37.699 ","End":"03:41.660","Text":"The installation costs are 2.5 thousand and"},{"Start":"03:41.660 ","End":"03:46.010","Text":"those are incurred in getting the plant ready for use."},{"Start":"03:46.010 ","End":"03:50.960","Text":"Therefore, the total cost associated with this item of property,"},{"Start":"03:50.960 ","End":"03:54.620","Text":"plant, and equipment, is 30,000."},{"Start":"03:54.620 ","End":"03:59.460","Text":"That will be the amount recognized as an asset,"},{"Start":"03:59.460 ","End":"04:07.540","Text":"specifically as a non-current asset on the statement of financial position."},{"Start":"04:07.540 ","End":"04:14.380","Text":"Let\u0027s now take a look at these transactions on an accounting equation worksheet."},{"Start":"04:14.380 ","End":"04:17.960","Text":"At the top, you see the familiar accounting equation."},{"Start":"04:17.960 ","End":"04:25.015","Text":"I\u0027ll write it, the n of assets equals liabilities plus equity."},{"Start":"04:25.015 ","End":"04:34.610","Text":"Now to record the invoice price of this machine of 24,000,"},{"Start":"04:34.610 ","End":"04:42.325","Text":"we record an increase in assets of 24,000 and since the machine was purchased on credit,"},{"Start":"04:42.325 ","End":"04:48.085","Text":"we record a corresponding increase in the liability accounts payable."},{"Start":"04:48.085 ","End":"04:51.805","Text":"Then there are the transport costs paid in cash,"},{"Start":"04:51.805 ","End":"04:56.545","Text":"so then asset cash decreases by 1,500."},{"Start":"04:56.545 ","End":"05:01.780","Text":"Those transport costs note are not recognized as an expense,"},{"Start":"05:01.780 ","End":"05:06.970","Text":"but there are in fact recognized as part of the cost of the asset."},{"Start":"05:06.970 ","End":"05:11.995","Text":"The same with insurance paid while the item was in transit."},{"Start":"05:11.995 ","End":"05:16.390","Text":"The 2,000 reduces the asset cash and the same with"},{"Start":"05:16.390 ","End":"05:22.580","Text":"the transport costs that 2,000 is recognized as part of the cost of the asset and again,"},{"Start":"05:22.580 ","End":"05:24.945","Text":"not as an expense."},{"Start":"05:24.945 ","End":"05:28.685","Text":"We now come to the annual fire and theft insurance."},{"Start":"05:28.685 ","End":"05:30.350","Text":"Now, remember together,"},{"Start":"05:30.350 ","End":"05:37.260","Text":"both of these insurance amounts were a total of"},{"Start":"05:37.260 ","End":"05:46.610","Text":"5,000 currency units and 3,000 of that belonged to the annual theft and fire insurance."},{"Start":"05:46.610 ","End":"05:51.710","Text":"This now is not added onto the cost of the asset,"},{"Start":"05:51.710 ","End":"05:55.820","Text":"but it is recognized in this case as"},{"Start":"05:55.820 ","End":"06:04.100","Text":"a prepayment because the amount is paid in advance for the following 12 months."},{"Start":"06:04.100 ","End":"06:08.525","Text":"As you\u0027ve learned in previous presentations,"},{"Start":"06:08.525 ","End":"06:16.175","Text":"this prepayment will ultimately be expensed when it is used over the period of time."},{"Start":"06:16.175 ","End":"06:21.568","Text":"The installation costs of 2,500 were also paid in cash,"},{"Start":"06:21.568 ","End":"06:27.350","Text":"and because they relate to getting the item ready for use,"},{"Start":"06:27.350 ","End":"06:33.575","Text":"the 2,500 is added onto the asset, the machinery."},{"Start":"06:33.575 ","End":"06:40.195","Text":"Therefore we see the 30,000 which is recorded as the machinery asset"},{"Start":"06:40.195 ","End":"06:42.460","Text":"in the accounting records and"},{"Start":"06:42.460 ","End":"06:48.090","Text":"initial measurement of the asset for the statement of financial position."}],"ID":28580},{"Watched":false,"Name":"Useful life residual value and depreciable amount video","Duration":"5m 3s","ChapterTopicVideoID":26637,"CourseChapterTopicPlaylistID":254924,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:05.280","Text":"Hello. Welcome to another video presentation in the series on property,"},{"Start":"00:05.280 ","End":"00:08.640","Text":"plant, and equipment, brought to you by Proprep."},{"Start":"00:08.640 ","End":"00:10.875","Text":"My name is Dave Colette."},{"Start":"00:10.875 ","End":"00:14.970","Text":"In this video, we will focus on the useful life,"},{"Start":"00:14.970 ","End":"00:21.840","Text":"residual value, and depreciable amount of items of property, plant, and equipment."},{"Start":"00:21.840 ","End":"00:25.190","Text":"The useful life, residual value,"},{"Start":"00:25.190 ","End":"00:29.180","Text":"and depreciable amount are 3 very important concepts to"},{"Start":"00:29.180 ","End":"00:33.905","Text":"understand in accounting for items of property, plant, and equipment."},{"Start":"00:33.905 ","End":"00:36.425","Text":"What then is depreciation?"},{"Start":"00:36.425 ","End":"00:40.880","Text":"Depreciation is the allocation of a concept called"},{"Start":"00:40.880 ","End":"00:46.730","Text":"the depreciable amount over the useful life of the item."},{"Start":"00:46.730 ","End":"00:49.940","Text":"It will be very important to understand that"},{"Start":"00:49.940 ","End":"00:55.160","Text":"the depreciable amount may in fact be different from the cost."},{"Start":"00:55.160 ","End":"00:58.730","Text":"We will talk about that as we go on."},{"Start":"00:58.730 ","End":"01:02.390","Text":"This process of depreciation results in"},{"Start":"01:02.390 ","End":"01:07.670","Text":"the recognition of a depreciation expense on the income statement,"},{"Start":"01:07.670 ","End":"01:09.545","Text":"while at the same time,"},{"Start":"01:09.545 ","End":"01:14.990","Text":"it reduces the carrying amount of that asset in the balance sheet."},{"Start":"01:14.990 ","End":"01:18.095","Text":"Each year, the income statement shows"},{"Start":"01:18.095 ","End":"01:23.990","Text":"a depreciation expense until the asset is finally sold or retired."},{"Start":"01:23.990 ","End":"01:25.715","Text":"Now as I\u0027ve mentioned,"},{"Start":"01:25.715 ","End":"01:31.580","Text":"depreciation is computed based on a concept called the depreciable amount."},{"Start":"01:31.580 ","End":"01:34.685","Text":"To understand the depreciable amount,"},{"Start":"01:34.685 ","End":"01:40.310","Text":"you can think of it as effectively the amount that will be depreciated."},{"Start":"01:40.310 ","End":"01:42.590","Text":"You may ask, well,"},{"Start":"01:42.590 ","End":"01:47.555","Text":"how will the amount that will be depreciated be different from the cost?"},{"Start":"01:47.555 ","End":"01:51.278","Text":"Well, the depreciable amount can be different from the cost,"},{"Start":"01:51.278 ","End":"01:54.845","Text":"if the asset has a residual value."},{"Start":"01:54.845 ","End":"01:59.270","Text":"The depreciable amount is the difference between"},{"Start":"01:59.270 ","End":"02:03.890","Text":"the original cost and the residual value."},{"Start":"02:03.890 ","End":"02:07.325","Text":"Then what is the residual value?"},{"Start":"02:07.325 ","End":"02:11.585","Text":"The residual value, sometimes called salvage value,"},{"Start":"02:11.585 ","End":"02:16.820","Text":"is simply an estimate of the amount that the entity expects to"},{"Start":"02:16.820 ","End":"02:23.060","Text":"receive from selling or disposing of the asset at the end of its life."},{"Start":"02:23.060 ","End":"02:26.119","Text":"Sometimes, and often in practice,"},{"Start":"02:26.119 ","End":"02:30.386","Text":"many firms use 0 for the residual value,"},{"Start":"02:30.386 ","End":"02:34.640","Text":"often because it is maybe difficult to estimate an amount."},{"Start":"02:34.640 ","End":"02:36.550","Text":"In that situation,"},{"Start":"02:36.550 ","End":"02:41.315","Text":"the cost will be equal to the depreciable amounts."},{"Start":"02:41.315 ","End":"02:45.385","Text":"We will see some examples of this in the next slide."},{"Start":"02:45.385 ","End":"02:49.040","Text":"Attending to our company CCF and"},{"Start":"02:49.040 ","End":"02:54.650","Text":"its chocolate molding machine which we purchased in an earlier example,"},{"Start":"02:54.650 ","End":"02:57.334","Text":"the machine, you recall,"},{"Start":"02:57.334 ","End":"03:00.560","Text":"cost the entity 30,000."},{"Start":"03:00.560 ","End":"03:06.410","Text":"If there is no residual value or the entity estimate is 0 residual value,"},{"Start":"03:06.410 ","End":"03:11.465","Text":"the depreciable amount will be equal to the cost of 30,000."},{"Start":"03:11.465 ","End":"03:17.495","Text":"However, if the residual value is anything other than 0, for example,"},{"Start":"03:17.495 ","End":"03:21.470","Text":"3,000, then the depreciable amount,"},{"Start":"03:21.470 ","End":"03:26.585","Text":"i.e the amount that will be depreciated will be 27,000."},{"Start":"03:26.585 ","End":"03:29.395","Text":"If the residual value is 6,000,"},{"Start":"03:29.395 ","End":"03:33.325","Text":"the depreciable amount will clearly be 24,000."},{"Start":"03:33.325 ","End":"03:36.365","Text":"Or if the residual value is 8,000,"},{"Start":"03:36.365 ","End":"03:41.080","Text":"the depreciable amount will therefore be 22,000."},{"Start":"03:41.080 ","End":"03:43.230","Text":"What you see, therefore,"},{"Start":"03:43.230 ","End":"03:48.530","Text":"is the higher depreciable amount or lower residual value"},{"Start":"03:48.530 ","End":"03:56.735","Text":"implies everything else will be equal to a higher depreciation expense in the period."},{"Start":"03:56.735 ","End":"04:02.405","Text":"The useful life itself can be measured in various different ways."},{"Start":"04:02.405 ","End":"04:06.539","Text":"The entity could use a time-based measurement,"},{"Start":"04:06.539 ","End":"04:13.085","Text":"and this is based on an estimate of the number of years the asset is expected to be used."},{"Start":"04:13.085 ","End":"04:17.390","Text":"When a time-based depreciation method is used,"},{"Start":"04:17.390 ","End":"04:21.260","Text":"the depreciation expense is allocated to"},{"Start":"04:21.260 ","End":"04:26.415","Text":"each year on some predetermined basis or schedule."},{"Start":"04:26.415 ","End":"04:31.115","Text":"We will see examples of this in following presentations."},{"Start":"04:31.115 ","End":"04:36.725","Text":"It could also be production or service-based type of depreciation,"},{"Start":"04:36.725 ","End":"04:42.500","Text":"where the number of product or service units that item is"},{"Start":"04:42.500 ","End":"04:48.830","Text":"expected to produce or the number of hours that the machine may operate,"},{"Start":"04:48.830 ","End":"04:51.630","Text":"are used to determine depreciation."},{"Start":"04:51.630 ","End":"04:56.570","Text":"Here, clearly, the depreciation expense will vary"},{"Start":"04:56.570 ","End":"05:03.780","Text":"each year based on the actual output or number of hours used."}],"ID":28584},{"Watched":false,"Name":"Depreciation methods video Part 1","Duration":"15m 52s","ChapterTopicVideoID":26638,"CourseChapterTopicPlaylistID":254924,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:04.140","Text":"Hello and welcome to another video presentation in the series"},{"Start":"00:04.140 ","End":"00:08.445","Text":"on property plant and equipment brought to you by proprep."},{"Start":"00:08.445 ","End":"00:12.135","Text":"My name is Dave Colettes and in this video,"},{"Start":"00:12.135 ","End":"00:17.685","Text":"we will focus on depreciation methods and the calculation."},{"Start":"00:17.685 ","End":"00:25.395","Text":"Now the depreciation expense is recorded from the date the asset is available for use."},{"Start":"00:25.395 ","End":"00:29.040","Text":"You will recall from an earlier presentation that"},{"Start":"00:29.040 ","End":"00:34.310","Text":"the costs are accumulated up until the date the asset"},{"Start":"00:34.310 ","End":"00:38.780","Text":"is in a condition and location ready for use for"},{"Start":"00:38.780 ","End":"00:44.120","Text":"management and that determines when it is available for use."},{"Start":"00:44.120 ","End":"00:49.895","Text":"Now, once it\u0027s available for use, depreciation expense starts."},{"Start":"00:49.895 ","End":"00:53.765","Text":"Now the asset may be available for use for example on"},{"Start":"00:53.765 ","End":"00:59.540","Text":"the 1st of May of a particular year but it\u0027s only used from the 1st of June."},{"Start":"00:59.540 ","End":"01:04.460","Text":"In that case, depreciation will in fact start from the 1st of"},{"Start":"01:04.460 ","End":"01:10.430","Text":"May and depreciation continues until retirement at our disposal,"},{"Start":"01:10.430 ","End":"01:14.505","Text":"even if the acid is temporarily idle."},{"Start":"01:14.505 ","End":"01:18.395","Text":"I have just given you an example of the assets"},{"Start":"01:18.395 ","End":"01:22.280","Text":"not being used for its first month after it was available for"},{"Start":"01:22.280 ","End":"01:25.730","Text":"use or even a few years down the line"},{"Start":"01:25.730 ","End":"01:30.515","Text":"the asset may be taken out of use for maintenance or repairs."},{"Start":"01:30.515 ","End":"01:33.350","Text":"The depreciation expense as we have said,"},{"Start":"01:33.350 ","End":"01:38.690","Text":"is recorded in the income statement and as balanced against an account called"},{"Start":"01:38.690 ","End":"01:46.990","Text":"the accumulated depreciation which is known as a contra asset or negative asset account."},{"Start":"01:46.990 ","End":"01:53.840","Text":"The journal entry as you see is a debit to depreciation expense and"},{"Start":"01:53.840 ","End":"02:01.630","Text":"a credit to this contra or negative asset account called the accumulated depreciation."},{"Start":"02:01.630 ","End":"02:06.200","Text":"We now take a look at a short example relating to the purchase"},{"Start":"02:06.200 ","End":"02:10.610","Text":"of the machine and the initial depreciation."},{"Start":"02:10.610 ","End":"02:16.430","Text":"This company purchases a machine for 30,000 currency units of which"},{"Start":"02:16.430 ","End":"02:24.440","Text":"24,000 is on 18 months credit and therefore presumably the rest is paid in cash."},{"Start":"02:24.440 ","End":"02:29.015","Text":"It records 4,000 depreciation in the first year."},{"Start":"02:29.015 ","End":"02:34.460","Text":"We\u0027re required to look at this entry on the transaction worksheet and determine"},{"Start":"02:34.460 ","End":"02:37.590","Text":"the carrying amount of the machine often called"},{"Start":"02:37.590 ","End":"02:41.985","Text":"its book value at the end of the first year."},{"Start":"02:41.985 ","End":"02:46.217","Text":"See how you see the county equation which you are familiar with,"},{"Start":"02:46.217 ","End":"02:50.045","Text":"assets equals liabilities plus equity."},{"Start":"02:50.045 ","End":"02:52.070","Text":"When the machine is purchased,"},{"Start":"02:52.070 ","End":"02:57.275","Text":"the asset machinery at cost increases by an amount of cost"},{"Start":"02:57.275 ","End":"03:04.350","Text":"30,000 as you were told 24,000 was on credit for 18 months."},{"Start":"03:04.350 ","End":"03:08.750","Text":"Therefore a liability called accounts payable increases and"},{"Start":"03:08.750 ","End":"03:14.155","Text":"the rest was paid in cash and therefore the asset cash decreases"},{"Start":"03:14.155 ","End":"03:20.810","Text":"and you see now that the accounting equation remains in balance because we have a net"},{"Start":"03:20.810 ","End":"03:24.729","Text":"24,000 on the left side of the equation"},{"Start":"03:24.729 ","End":"03:29.795","Text":"and we have 24,000 on the right side of the equation."},{"Start":"03:29.795 ","End":"03:33.920","Text":"When we record the depreciation expense for"},{"Start":"03:33.920 ","End":"03:39.545","Text":"the period the entry as you saw is a debit to depreciation expense,"},{"Start":"03:39.545 ","End":"03:44.420","Text":"which is recorded as a decrease in equity and expense on"},{"Start":"03:44.420 ","End":"03:51.124","Text":"the income statement and a decrease in the assets."},{"Start":"03:51.124 ","End":"03:54.200","Text":"Now remember, accumulated depreciation is"},{"Start":"03:54.200 ","End":"04:00.900","Text":"a negative asset and we looked at this or the effect of this on the assets category."},{"Start":"04:00.900 ","End":"04:06.700","Text":"The accounting equation balances because we have a subtraction on"},{"Start":"04:06.700 ","End":"04:13.660","Text":"the left side reducing the assets and a subtraction on the right side reducing equity."},{"Start":"04:13.660 ","End":"04:15.475","Text":"At the end of the period."},{"Start":"04:15.475 ","End":"04:19.840","Text":"The balance on the machinery at"},{"Start":"04:19.840 ","End":"04:25.750","Text":"cost account is 30,000 and the balance on the contra asset"},{"Start":"04:25.750 ","End":"04:30.510","Text":"or negative asset is 4,000 and looking at those 2"},{"Start":"04:30.510 ","End":"04:36.985","Text":"together gives us the 26,000 which is the carrying amount of the asset."},{"Start":"04:36.985 ","End":"04:39.715","Text":"At the end of this period."},{"Start":"04:39.715 ","End":"04:43.185","Text":"We are now going to focus on some examples."},{"Start":"04:43.185 ","End":"04:46.610","Text":"In applying the different depreciation methods."},{"Start":"04:46.610 ","End":"04:50.885","Text":"We will look at some time-based depreciation methods."},{"Start":"04:50.885 ","End":"04:52.730","Text":"Specifically a method called"},{"Start":"04:52.730 ","End":"04:59.915","Text":"the straight line depreciation method and some accelerated depreciation methods."},{"Start":"04:59.915 ","End":"05:06.290","Text":"We will then turn to some production or service depreciation methods and"},{"Start":"05:06.290 ","End":"05:12.720","Text":"look at 3 examples 1 based on production output,1 based on service output,"},{"Start":"05:12.720 ","End":"05:15.590","Text":"1 based on the number of hours."},{"Start":"05:15.590 ","End":"05:18.530","Text":"The acid is used in a period."},{"Start":"05:18.530 ","End":"05:21.065","Text":"For all of these examples,"},{"Start":"05:21.065 ","End":"05:24.500","Text":"let\u0027s have a look at the basic information we have."},{"Start":"05:24.500 ","End":"05:30.440","Text":"A machine is purchased for 30,000 currency units and it\u0027s available for"},{"Start":"05:30.440 ","End":"05:37.640","Text":"use and is in fact used from the 1st of January the X1 year."},{"Start":"05:37.640 ","End":"05:44.690","Text":"Useful life is determined to be 5 years and the machine has"},{"Start":"05:44.690 ","End":"05:54.635","Text":"a production potential of 30,000 tons of chocolate or 15,000 hours of use."},{"Start":"05:54.635 ","End":"05:58.610","Text":"It has an estimated residual or salvage value."},{"Start":"05:58.610 ","End":"06:04.565","Text":"In other words, the estimated value of the asset at the end of its useful life."},{"Start":"06:04.565 ","End":"06:10.080","Text":"Be that useful life 5 years or 30,000 tons produced or in fact"},{"Start":"06:10.080 ","End":"06:16.810","Text":"15,000 hours of use that estimate is 5,000 currency units."},{"Start":"06:16.810 ","End":"06:21.770","Text":"We will start off looking at the straight line depreciation method."},{"Start":"06:21.770 ","End":"06:25.940","Text":"Now here the depreciation expense is computed by taking"},{"Start":"06:25.940 ","End":"06:32.165","Text":"the depreciable amount and dividing it by the estimated life in years."},{"Start":"06:32.165 ","End":"06:36.410","Text":"Now you\u0027ll remember that depreciable amount is in fact"},{"Start":"06:36.410 ","End":"06:40.940","Text":"the cost of the item less the residual value."},{"Start":"06:40.940 ","End":"06:44.090","Text":"So therefore, in this particular example,"},{"Start":"06:44.090 ","End":"06:53.160","Text":"the annual depreciation expense is the cost of 30,000 less the residual value of 5,000"},{"Start":"06:53.160 ","End":"06:58.235","Text":"divided by the 5 years estimated useful life and that gives us"},{"Start":"06:58.235 ","End":"07:03.510","Text":"a depreciation expense of 5,000 per year."},{"Start":"07:03.510 ","End":"07:07.220","Text":"Let us now prepare a schedule recording"},{"Start":"07:07.220 ","End":"07:14.260","Text":"the straight line depreciation over the estimated useful life of 5 years for this asset."},{"Start":"07:14.260 ","End":"07:18.030","Text":"The asset as we know costs 30,000."},{"Start":"07:18.030 ","End":"07:20.134","Text":"In the first year,"},{"Start":"07:20.134 ","End":"07:26.890","Text":"the depreciation expense is an amount of 5,000."},{"Start":"07:26.890 ","End":"07:29.720","Text":"Therefore the end of the first year,"},{"Start":"07:29.720 ","End":"07:34.745","Text":"the accumulated depreciation is also 5,000."},{"Start":"07:34.745 ","End":"07:43.262","Text":"Remember the carrying amount is the cost less the accumulated depreciation."},{"Start":"07:43.262 ","End":"07:46.750","Text":"Therefore the carrying amount at the end of year 1,"},{"Start":"07:46.750 ","End":"07:50.065","Text":"is an amount of 25,000."},{"Start":"07:50.065 ","End":"07:53.290","Text":"Now because this is straight line depreciation,"},{"Start":"07:53.290 ","End":"07:57.400","Text":"the same depreciation expense applies to the second year."},{"Start":"07:57.400 ","End":"08:02.440","Text":"The accumulated depreciation does not get to 10,000,"},{"Start":"08:02.440 ","End":"08:07.840","Text":"and the carrying amount at the end of year 2 becomes 20,000."},{"Start":"08:07.840 ","End":"08:10.067","Text":"Much the same for year 3,"},{"Start":"08:10.067 ","End":"08:12.670","Text":"depreciation expense of 5,000,"},{"Start":"08:12.670 ","End":"08:16.825","Text":"the accumulated depreciation is now 15,000,"},{"Start":"08:16.825 ","End":"08:21.490","Text":"and the carrying amount is clearly 15,000."},{"Start":"08:21.490 ","End":"08:26.934","Text":"Fourth year, further 5,000 depreciation expense,"},{"Start":"08:26.934 ","End":"08:31.315","Text":"increasing the accumulated depreciation to 20,000,"},{"Start":"08:31.315 ","End":"08:36.505","Text":"and therefore reducing the carrying amount to 10,000."},{"Start":"08:36.505 ","End":"08:39.040","Text":"Note what happens in the 5th year,"},{"Start":"08:39.040 ","End":"08:43.690","Text":"we provide for the last 5,000 of depreciation,"},{"Start":"08:43.690 ","End":"08:49.960","Text":"the accumulated depreciation at the end of the 5th year increases to 25,000,"},{"Start":"08:49.960 ","End":"08:55.885","Text":"and the carrying amount at the end of the useful life of the asset ends up at 5,000."},{"Start":"08:55.885 ","End":"09:03.310","Text":"That 5,000 carrying amount is in fact the estimate of the residual value of this item."},{"Start":"09:03.310 ","End":"09:07.045","Text":"The second example we will look at,"},{"Start":"09:07.045 ","End":"09:11.620","Text":"examines the declining balance depreciation method."},{"Start":"09:11.620 ","End":"09:15.550","Text":"This method uses a depreciation rate,"},{"Start":"09:15.550 ","End":"09:19.240","Text":"and that rate is expressed as a percentage."},{"Start":"09:19.240 ","End":"09:27.370","Text":"That percentage is applied importantly to the opening carrying amount of the asset."},{"Start":"09:27.370 ","End":"09:30.550","Text":"It is not applied to"},{"Start":"09:30.550 ","End":"09:36.640","Text":"the depreciable amount of the asset as we saw with the straight line method,"},{"Start":"09:36.640 ","End":"09:40.750","Text":"and as you will see with other methods as well."},{"Start":"09:40.750 ","End":"09:42.415","Text":"Now, this may look like"},{"Start":"09:42.415 ","End":"09:48.115","Text":"a complicated formula to compute that depreciation rate percentage."},{"Start":"09:48.115 ","End":"09:52.660","Text":"Mostly in accounting exercises,"},{"Start":"09:52.660 ","End":"09:54.190","Text":"tests, and exams,"},{"Start":"09:54.190 ","End":"09:56.785","Text":"the percentage rate is given."},{"Start":"09:56.785 ","End":"09:59.815","Text":"But to understand how it is computed,"},{"Start":"09:59.815 ","End":"10:03.144","Text":"take a look at this formula."},{"Start":"10:03.144 ","End":"10:08.605","Text":"You\u0027ll see the formula is expressed as 1"},{"Start":"10:08.605 ","End":"10:15.115","Text":"less the nth root of the residual value,"},{"Start":"10:15.115 ","End":"10:18.715","Text":"divided by the original cost."},{"Start":"10:18.715 ","End":"10:25.540","Text":"N is in fact the estimate of the useful life of the asset."},{"Start":"10:25.540 ","End":"10:29.569","Text":"Again, just for the purposes of a calculation,"},{"Start":"10:29.569 ","End":"10:32.830","Text":"if that residual value happens to be 0,"},{"Start":"10:32.830 ","End":"10:37.270","Text":"it is set to 1 to make the formula to work."},{"Start":"10:37.270 ","End":"10:41.260","Text":"Let us now apply the formula,"},{"Start":"10:41.260 ","End":"10:45.234","Text":"and then the depreciation percentage to the example."},{"Start":"10:45.234 ","End":"10:47.305","Text":"Looking at the formula first,"},{"Start":"10:47.305 ","End":"10:51.310","Text":"we take 1 less the 5th root."},{"Start":"10:51.310 ","End":"10:57.562","Text":"Now, the 5 comes from the estimated useful life of the asset,"},{"Start":"10:57.562 ","End":"11:02.515","Text":"and that 5th root is of 5,000 divided by 30,000,"},{"Start":"11:02.515 ","End":"11:05.335","Text":"5,000 being the residual value,"},{"Start":"11:05.335 ","End":"11:08.095","Text":"and 30,000 being the cost."},{"Start":"11:08.095 ","End":"11:10.090","Text":"If you do the computation,"},{"Start":"11:10.090 ","End":"11:13.135","Text":"it comes out to 30,"},{"Start":"11:13.135 ","End":"11:17.060","Text":"1 percent or 0.301."},{"Start":"11:17.730 ","End":"11:20.665","Text":"That\u0027s 30.1 percent,"},{"Start":"11:20.665 ","End":"11:25.030","Text":"has been shown here to simply 1 decimal place."},{"Start":"11:25.030 ","End":"11:27.445","Text":"You will see in the calculations,"},{"Start":"11:27.445 ","End":"11:31.090","Text":"I have calculated these numbers to"},{"Start":"11:31.090 ","End":"11:36.880","Text":"5 or 6 decimal places just to ensure the accuracy of the numbers."},{"Start":"11:36.880 ","End":"11:40.480","Text":"Don\u0027t worry if you get slightly different numbers by"},{"Start":"11:40.480 ","End":"11:44.260","Text":"computing this with only 1 decimal place."},{"Start":"11:44.260 ","End":"11:50.215","Text":"Let\u0027s now look at the computation of the depreciation in this schedule."},{"Start":"11:50.215 ","End":"11:54.970","Text":"You will recall that the depreciation expense on"},{"Start":"11:54.970 ","End":"11:57.790","Text":"the declining balance method is based on"},{"Start":"11:57.790 ","End":"12:01.450","Text":"the opening balance at the beginning of the year."},{"Start":"12:01.450 ","End":"12:06.655","Text":"The opening balance at the beginning of the first year must be the cost."},{"Start":"12:06.655 ","End":"12:11.345","Text":"Note again, the depreciable amount is not used here."},{"Start":"12:11.345 ","End":"12:18.840","Text":"The 30,000 cost is multiplied by the depreciation rates of 30,1 percent,"},{"Start":"12:18.840 ","End":"12:26.445","Text":"which gives us a depreciation expense in the first year of 9,035."},{"Start":"12:26.445 ","End":"12:32.655","Text":"That therefore is the same as the accumulated depreciation 9,035,"},{"Start":"12:32.655 ","End":"12:34.335","Text":"at the end of the first year,"},{"Start":"12:34.335 ","End":"12:40.070","Text":"and a carrying amount of 20,965."},{"Start":"12:40.070 ","End":"12:41.980","Text":"Now for the second year,"},{"Start":"12:41.980 ","End":"12:46.270","Text":"the depreciation expense is computed based on"},{"Start":"12:46.270 ","End":"12:50.995","Text":"the opening balance at the beginning of the second year."},{"Start":"12:50.995 ","End":"12:53.065","Text":"Now for the second year,"},{"Start":"12:53.065 ","End":"12:56.200","Text":"the depreciation expense is based on"},{"Start":"12:56.200 ","End":"13:00.010","Text":"the opening balance at the beginning of the second year,"},{"Start":"13:00.010 ","End":"13:03.490","Text":"which is in fact tell you the closing balance or carrying"},{"Start":"13:03.490 ","End":"13:07.690","Text":"amount at the end of the first year, the 20,965."},{"Start":"13:07.690 ","End":"13:12.895","Text":"To that we apply the depreciation percentage of 30,1 percent,"},{"Start":"13:12.895 ","End":"13:22.000","Text":"which gives us a depreciation expense of 6,314 for the second year."},{"Start":"13:22.000 ","End":"13:25.210","Text":"We add the 6,314 to the"},{"Start":"13:25.210 ","End":"13:31.510","Text":"9,035 to get the accumulated depreciation at the end of the second year of"},{"Start":"13:31.510 ","End":"13:41.320","Text":"15,349 and therefore carrying amount of 14,651,"},{"Start":"13:41.320 ","End":"13:46.000","Text":"clearly the 30,000 less 15,349."},{"Start":"13:46.000 ","End":"13:47.740","Text":"Come to the third year,"},{"Start":"13:47.740 ","End":"13:49.389","Text":"we apply the same principle."},{"Start":"13:49.389 ","End":"13:52.375","Text":"We look at the carrying amount at the beginning of the third year,"},{"Start":"13:52.375 ","End":"13:57.505","Text":"which is the carrying amount at the end of the second year, 14651."},{"Start":"13:57.505 ","End":"14:02.455","Text":"To that we apply the depreciation percentage of 30,1 percent,"},{"Start":"14:02.455 ","End":"14:10.885","Text":"and the depreciation expense for year 3 is an amount of 4,413."},{"Start":"14:10.885 ","End":"14:13.855","Text":"We add that onto the opening balance of"},{"Start":"14:13.855 ","End":"14:21.505","Text":"accumulated depreciation to get a closing balance of 19,762."},{"Start":"14:21.505 ","End":"14:24.985","Text":"We subtract that from the cost to give us"},{"Start":"14:24.985 ","End":"14:32.110","Text":"a carrying amount of 10,328 at the end of year 3."},{"Start":"14:32.110 ","End":"14:34.885","Text":"We then repeat the process for the fourth year."},{"Start":"14:34.885 ","End":"14:38.035","Text":"We take the 10328,"},{"Start":"14:38.035 ","End":"14:43.225","Text":"and we multiply that by the depreciation rates of 30,1 percent,"},{"Start":"14:43.225 ","End":"14:50.320","Text":"which gives depreciation of 3,084 for the fourth year,"},{"Start":"14:50.320 ","End":"14:56.560","Text":"and accumulated depreciation of 22845,"},{"Start":"14:56.560 ","End":"15:01.885","Text":"and a carrying amount of 7,155."},{"Start":"15:01.885 ","End":"15:05.635","Text":"Which again is used as the amount upon which"},{"Start":"15:05.635 ","End":"15:09.595","Text":"to compute the depreciation expense for the 5th year,"},{"Start":"15:09.595 ","End":"15:16.735","Text":"7,155 multiplied by 0,301 percent,"},{"Start":"15:16.735 ","End":"15:23.305","Text":"depreciation comes out in an amount of 2,155."},{"Start":"15:23.305 ","End":"15:25.140","Text":"Note now, the accumulated."},{"Start":"15:25.140 ","End":"15:32.419","Text":"Because I\u0027ve used 5 or 6 decimal places in my computations,"},{"Start":"15:32.419 ","End":"15:39.095","Text":"the accumulated depreciation comes out at 25,000 at the end of the 5th year,"},{"Start":"15:39.095 ","End":"15:44.900","Text":"leaving a carrying amount of 5,000 which clearly"},{"Start":"15:44.900 ","End":"15:52.500","Text":"equals the residual value at the end of the useful life of this asset."}],"ID":28588},{"Watched":false,"Name":"Depreciation methods video Part 2","Duration":"13m 52s","ChapterTopicVideoID":26639,"CourseChapterTopicPlaylistID":254924,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:05.070","Text":"We now turn to another accelerated method"},{"Start":"00:05.070 ","End":"00:08.910","Text":"of depreciation called the Sum of Years\u0027 Digits,"},{"Start":"00:08.910 ","End":"00:11.565","Text":"often abbreviated to SYD."},{"Start":"00:11.565 ","End":"00:16.260","Text":"Now, note, even though this is an accelerated depreciation method,"},{"Start":"00:16.260 ","End":"00:20.235","Text":"the computation is based on the depreciable amount."},{"Start":"00:20.235 ","End":"00:26.085","Text":"Unlike the declining balance as an accelerated depreciation method,"},{"Start":"00:26.085 ","End":"00:31.260","Text":"where you have just seen that we compute the depreciation expense and apply"},{"Start":"00:31.260 ","End":"00:37.500","Text":"the percentage in the declining balance method to the opening carrying amount."},{"Start":"00:37.500 ","End":"00:41.300","Text":"For both accelerated depreciation method,"},{"Start":"00:41.300 ","End":"00:43.655","Text":"we have a slightly different way of computing it,"},{"Start":"00:43.655 ","End":"00:51.140","Text":"and it is only the declining balance method that uses the opening carrying amount."},{"Start":"00:51.140 ","End":"00:53.840","Text":"Now, look at the formula here."},{"Start":"00:53.840 ","End":"00:59.720","Text":"We compute the depreciation expense by looking at a ratio"},{"Start":"00:59.720 ","End":"01:03.380","Text":"of the remaining useful life at the beginning of"},{"Start":"01:03.380 ","End":"01:07.895","Text":"the year divided by this Sum of Years\u0027 Digits."},{"Start":"01:07.895 ","End":"01:11.075","Text":"Now, what does the Sum of Years\u0027 Digits mean?"},{"Start":"01:11.075 ","End":"01:15.550","Text":"We know that the useful life of the asset that we are looking at in"},{"Start":"01:15.550 ","End":"01:20.540","Text":"this example is equal to 5 years and the sum of"},{"Start":"01:20.540 ","End":"01:25.140","Text":"the digits is simply 1 plus 2 plus"},{"Start":"01:25.140 ","End":"01:31.860","Text":"3 plus 4 plus 5, which equals 15."},{"Start":"01:31.860 ","End":"01:37.550","Text":"At 15, becomes the Sum of Years\u0027 Digits."},{"Start":"01:37.550 ","End":"01:40.595","Text":"We then divide into the 15,"},{"Start":"01:40.595 ","End":"01:45.290","Text":"the remaining life at the beginning of each year, so clearly,"},{"Start":"01:45.290 ","End":"01:48.020","Text":"at the beginning of the 1st year,"},{"Start":"01:48.020 ","End":"01:50.930","Text":"the remaining life will be 5."},{"Start":"01:50.930 ","End":"01:52.865","Text":"At the beginning of the 2nd year,"},{"Start":"01:52.865 ","End":"01:56.195","Text":"the remaining life will be 4, and so on."},{"Start":"01:56.195 ","End":"02:02.389","Text":"We apply that ratio to the depreciable amount,"},{"Start":"02:02.389 ","End":"02:08.090","Text":"which in this case we know is the 30,000 cost of"},{"Start":"02:08.090 ","End":"02:14.035","Text":"the asset less the 5,000 residual value,"},{"Start":"02:14.035 ","End":"02:21.450","Text":"so we will apply the ratio to the 25,000 depreciable amount."},{"Start":"02:21.450 ","End":"02:27.455","Text":"Let\u0027s now complete this depreciation schedule using the Sum of Years\u0027 Digits."},{"Start":"02:27.455 ","End":"02:29.665","Text":"For the 1st year,"},{"Start":"02:29.665 ","End":"02:33.810","Text":"remember the depreciable amount is 25,000,"},{"Start":"02:33.810 ","End":"02:40.760","Text":"and we multiply that by the useful life at the beginning of the year divided by"},{"Start":"02:40.760 ","End":"02:44.727","Text":"the Sum of Years\u0027 Digits 5/15 and"},{"Start":"02:44.727 ","End":"02:54.305","Text":"the depreciation expense for the 1st year amounts to 8,333."},{"Start":"02:54.305 ","End":"02:58.190","Text":"Therefore, clearly, the accumulated depreciation at"},{"Start":"02:58.190 ","End":"03:01.970","Text":"the end of the 1st year is the same number 8,333,"},{"Start":"03:01.970 ","End":"03:07.480","Text":"and the carrying amount at the end of the 1st year is 21,667."},{"Start":"03:07.480 ","End":"03:09.900","Text":"Now, when we come to Year 2,"},{"Start":"03:09.900 ","End":"03:16.510","Text":"we don\u0027t look at the 21,667 as we did for the declining balance method,"},{"Start":"03:16.510 ","End":"03:20.270","Text":"we go back to the depreciable amount of 25,000"},{"Start":"03:20.270 ","End":"03:24.940","Text":"and multiply by the remaining useful life at the beginning of Year 2,"},{"Start":"03:24.940 ","End":"03:29.720","Text":"which must be 4 years divided by the sum of digits of 15,"},{"Start":"03:29.720 ","End":"03:35.410","Text":"which amounts to a depreciation expense of 6,667."},{"Start":"03:35.410 ","End":"03:37.390","Text":"Add it to the 8,333,"},{"Start":"03:37.390 ","End":"03:39.350","Text":"at the beginning of the year gives"},{"Start":"03:39.350 ","End":"03:44.135","Text":"an accumulated depreciation at the end of the 2nd year of 15,000,"},{"Start":"03:44.135 ","End":"03:48.875","Text":"and therefore clearly a carrying amount of 15,000 as well."},{"Start":"03:48.875 ","End":"03:51.185","Text":"The same pattern for the 3rd year,"},{"Start":"03:51.185 ","End":"03:57.380","Text":"the depreciable amount of 25,000 multiplied by from the beginning of Year 3,"},{"Start":"03:57.380 ","End":"04:00.665","Text":"3 remaining years over the 15,"},{"Start":"04:00.665 ","End":"04:05.300","Text":"which amounts to a depreciation of 5,000 for"},{"Start":"04:05.300 ","End":"04:12.375","Text":"the 3rd year and accumulated depreciation of 20,000 at the end of that year,"},{"Start":"04:12.375 ","End":"04:16.635","Text":"and a carrying amount of 10,000."},{"Start":"04:16.635 ","End":"04:19.170","Text":"Year 4, the same pattern,"},{"Start":"04:19.170 ","End":"04:24.860","Text":"25,000 depreciable amount at the beginning of Year 4,"},{"Start":"04:24.860 ","End":"04:28.445","Text":"2 remaining years now we are at Year 4 and Year 5,"},{"Start":"04:28.445 ","End":"04:35.800","Text":"2/15, which amounts to depreciation expense of 3,333."},{"Start":"04:35.800 ","End":"04:37.860","Text":"For the 4th year,"},{"Start":"04:37.860 ","End":"04:42.755","Text":"the accumulated depreciation 20,000 plus 3,333."},{"Start":"04:42.755 ","End":"04:45.830","Text":"It\u0027s clearly 23,333,"},{"Start":"04:46.200 ","End":"04:53.780","Text":"and the carrying amount at the end of the 4th year is 6,667."},{"Start":"04:53.780 ","End":"04:58.110","Text":"Going to Year 5, the last time, 25,000,"},{"Start":"04:58.110 ","End":"05:02.490","Text":"1 year remaining for the beginning year 5/15,"},{"Start":"05:02.490 ","End":"05:13.100","Text":"that gives us a depreciation expense of 1,667 and accumulated depreciation of now 25,000."},{"Start":"05:13.100 ","End":"05:15.815","Text":"As you\u0027ve seen in the previous examples,"},{"Start":"05:15.815 ","End":"05:20.720","Text":"the carrying amount at the end of the 5th year is 5,000,"},{"Start":"05:20.720 ","End":"05:25.475","Text":"which again is equal to the residual value."},{"Start":"05:25.475 ","End":"05:30.680","Text":"We now turn our attention to the output-based depreciation methods,"},{"Start":"05:30.680 ","End":"05:34.820","Text":"looking 1st at the units of production method."},{"Start":"05:34.820 ","End":"05:37.700","Text":"Now, as you will see here,"},{"Start":"05:37.700 ","End":"05:41.930","Text":"we also use the depreciable amount in this method,"},{"Start":"05:41.930 ","End":"05:43.730","Text":"remembering again, it is"},{"Start":"05:43.730 ","End":"05:50.855","Text":"only the declining balance method of depreciation that uses the opening carrying amount."},{"Start":"05:50.855 ","End":"05:55.895","Text":"How do we determine the depreciation expense on the units of production method?"},{"Start":"05:55.895 ","End":"06:00.110","Text":"You will recall from the beginning of the example that"},{"Start":"06:00.110 ","End":"06:06.545","Text":"the total production capacity of this machine was 30,000 units."},{"Start":"06:06.545 ","End":"06:09.965","Text":"We then look at in order to compute"},{"Start":"06:09.965 ","End":"06:14.120","Text":"the depreciation expense for each year, how many units,"},{"Start":"06:14.120 ","End":"06:18.440","Text":"what quantity of units were in fact produced in"},{"Start":"06:18.440 ","End":"06:23.555","Text":"a particular period and we multiply that by the depreciable amount,"},{"Start":"06:23.555 ","End":"06:27.275","Text":"which we know in this case is the 25,000,"},{"Start":"06:27.275 ","End":"06:30.660","Text":"the cost less residual value."},{"Start":"06:30.670 ","End":"06:38.390","Text":"As we just said, the estimated production capacity is 30,000 tons or units,"},{"Start":"06:38.390 ","End":"06:46.230","Text":"and we now have a schedule of the amount of production in each year,"},{"Start":"06:46.230 ","End":"06:48.285","Text":"so 9,000 in Year 1,"},{"Start":"06:48.285 ","End":"06:51.275","Text":"6,000 in Year 2, and so on,"},{"Start":"06:51.275 ","End":"06:57.720","Text":"giving a total of 30,000 over the 5 years."},{"Start":"06:57.720 ","End":"07:04.100","Text":"Let us now prepare the depreciation schedule on this units of production method."},{"Start":"07:04.100 ","End":"07:05.890","Text":"For the 1st year,"},{"Start":"07:05.890 ","End":"07:09.905","Text":"we take the depreciable amount of 25,000"},{"Start":"07:09.905 ","End":"07:14.840","Text":"and look to how many units were produced in the 1st year."},{"Start":"07:14.840 ","End":"07:20.630","Text":"In this case, we know it is 9,000 tons or units divided by"},{"Start":"07:20.630 ","End":"07:27.885","Text":"the estimated total capacity of 30,000 tons or units,"},{"Start":"07:27.885 ","End":"07:35.810","Text":"and therefore the depreciation expense comes to an amount of 7,500."},{"Start":"07:35.810 ","End":"07:40.460","Text":"That is the accumulated depreciation at the end of the 1st year,"},{"Start":"07:40.460 ","End":"07:44.930","Text":"and the carrying amount clearly of 22,500."},{"Start":"07:44.930 ","End":"07:47.960","Text":"Going into the 2nd year, again,"},{"Start":"07:47.960 ","End":"07:51.180","Text":"we take the 25,000 depreciable amount,"},{"Start":"07:51.180 ","End":"07:55.940","Text":"we look at what quantity was produced in the 2nd year."},{"Start":"07:55.940 ","End":"07:58.790","Text":"That is 6,000 tons or units,"},{"Start":"07:58.790 ","End":"08:02.435","Text":"divided by the estimated total of 30,000,"},{"Start":"08:02.435 ","End":"08:08.240","Text":"which gives a depreciation of 5,000 for the 2nd year."},{"Start":"08:08.240 ","End":"08:11.390","Text":"That brings the accumulated depreciation up to"},{"Start":"08:11.390 ","End":"08:18.605","Text":"12,500 and takes the carrying amount down to 17,500."},{"Start":"08:18.605 ","End":"08:20.860","Text":"We go into Year 3,"},{"Start":"08:20.860 ","End":"08:26.360","Text":"where the depreciation expense is calculated by taking the 25,000 again,"},{"Start":"08:26.360 ","End":"08:29.105","Text":"looking at the output in Year 3,"},{"Start":"08:29.105 ","End":"08:31.520","Text":"which is also 6,000,"},{"Start":"08:31.520 ","End":"08:35.465","Text":"divided by the estimated total of 30,000,"},{"Start":"08:35.465 ","End":"08:41.365","Text":"and we clearly get the same depreciation expense as for the 2nd year of 5,000,"},{"Start":"08:41.365 ","End":"08:46.280","Text":"the accumulated depreciation increases to 17,500,"},{"Start":"08:46.280 ","End":"08:51.310","Text":"and the carrying amount obviously decreases to 12,500."},{"Start":"08:51.310 ","End":"08:54.110","Text":"Moving into Year 4, again,"},{"Start":"08:54.110 ","End":"08:58.120","Text":"depreciable amount multiplied by output in Year 4,"},{"Start":"08:58.120 ","End":"09:01.565","Text":"which is now 4,500 tons or units,"},{"Start":"09:01.565 ","End":"09:05.060","Text":"divided by the estimated total of 30,000,"},{"Start":"09:05.060 ","End":"09:12.160","Text":"which gives us a depreciation expense of 3,750."},{"Start":"09:12.160 ","End":"09:14.870","Text":"The accumulated depreciation increases to"},{"Start":"09:14.870 ","End":"09:24.730","Text":"21,250 and the carrying amount decreases to 8,750."},{"Start":"09:24.730 ","End":"09:26.910","Text":"Moving into the final year,"},{"Start":"09:26.910 ","End":"09:34.985","Text":"the 25,000 depreciable amount applied also to 4,500 units in the 5th year,"},{"Start":"09:34.985 ","End":"09:38.780","Text":"divided by the estimated total,"},{"Start":"09:38.780 ","End":"09:43.220","Text":"key the same number as the 4th year, 3,750."},{"Start":"09:43.220 ","End":"09:50.525","Text":"The accumulated depreciation ends up being 25,000 at the end of the 5th year."},{"Start":"09:50.525 ","End":"09:55.130","Text":"Once again, we get to a carrying amount at"},{"Start":"09:55.130 ","End":"10:00.355","Text":"the end of the 5th year equal to the residual value."},{"Start":"10:00.355 ","End":"10:02.580","Text":"For the final example,"},{"Start":"10:02.580 ","End":"10:06.800","Text":"and the 2nd example of an output-based depreciation method,"},{"Start":"10:06.800 ","End":"10:12.305","Text":"we will look at the life measured in the number of production hours."},{"Start":"10:12.305 ","End":"10:16.670","Text":"Now, you will recall from earlier on the question that"},{"Start":"10:16.670 ","End":"10:22.460","Text":"the estimated life of this asset based on hours is 15,000 hours."},{"Start":"10:22.460 ","End":"10:30.110","Text":"The question gives the amount of hours which this machine was used for in each year."},{"Start":"10:30.110 ","End":"10:35.285","Text":"So 3,000 hours in Year 1 and 3,600 hours in Year 2,"},{"Start":"10:35.285 ","End":"10:40.360","Text":"for example, of the total of the 15,000 hours."},{"Start":"10:40.360 ","End":"10:42.020","Text":"Let us now look at"},{"Start":"10:42.020 ","End":"10:47.690","Text":"the depreciation schedule for the depreciation method based on hours of operation."},{"Start":"10:47.690 ","End":"10:49.550","Text":"As you will recall,"},{"Start":"10:49.550 ","End":"10:53.870","Text":"we compute the depreciation based again on the depreciable amount,"},{"Start":"10:53.870 ","End":"10:59.090","Text":"and we look to see how many hours the machine was used in the 1st year."},{"Start":"10:59.090 ","End":"11:02.330","Text":"We see the machine was used for 3,000 hours in"},{"Start":"11:02.330 ","End":"11:08.270","Text":"the 1st year out of a total estimated hours of 15,000,"},{"Start":"11:08.270 ","End":"11:10.115","Text":"so these are all hours."},{"Start":"11:10.115 ","End":"11:14.375","Text":"The 3,000 divided by 15,000 hours gives us"},{"Start":"11:14.375 ","End":"11:19.490","Text":"a depreciation expense for the 1st year of 5,000,"},{"Start":"11:19.490 ","End":"11:23.705","Text":"again, that\u0027s the accumulated depreciation at the end of the 1st year,"},{"Start":"11:23.705 ","End":"11:28.275","Text":"and therefore a carrying amount of 25,000."},{"Start":"11:28.275 ","End":"11:30.495","Text":"Moving into the 2nd year,"},{"Start":"11:30.495 ","End":"11:37.070","Text":"the depreciable amount of 25,000 is applied to the number of hours in the 2nd year,"},{"Start":"11:37.070 ","End":"11:44.135","Text":"which is 3,600, divided by the 15,000 hours estimated total,"},{"Start":"11:44.135 ","End":"11:50.145","Text":"which gives a depreciation expense of 6,000."},{"Start":"11:50.145 ","End":"11:51.855","Text":"In that 2nd year,"},{"Start":"11:51.855 ","End":"11:55.820","Text":"the accumulated depreciation comes to an amount of"},{"Start":"11:55.820 ","End":"12:02.425","Text":"11,000 and the carrying amount at the end of the 2nd year, 19,000."},{"Start":"12:02.425 ","End":"12:04.680","Text":"Moving into the 3rd year,"},{"Start":"12:04.680 ","End":"12:09.790","Text":"the depreciable amount of 25,000 applied to the hours used,"},{"Start":"12:09.790 ","End":"12:16.780","Text":"which is 3,750 in the 3rd year over the estimated total of 15,000 hours,"},{"Start":"12:16.780 ","End":"12:23.560","Text":"which gives a depreciation expense of 6,250 in the 3rd year,"},{"Start":"12:23.560 ","End":"12:29.800","Text":"and accumulated depreciation of 17,250."},{"Start":"12:29.800 ","End":"12:35.490","Text":"The carrying amount is therefore 12,750,"},{"Start":"12:35.490 ","End":"12:39.110","Text":"at the end of the 3rd year."},{"Start":"12:39.110 ","End":"12:41.215","Text":"Moving into the 4th year,"},{"Start":"12:41.215 ","End":"12:48.710","Text":"the carrying amount of 25,000 a portion to the number of hours the machine worked,"},{"Start":"12:48.710 ","End":"12:56.630","Text":"which in the 4th year is 2,400 hours of the 15,000 total."},{"Start":"12:56.630 ","End":"13:05.160","Text":"That gives a depreciation expense of 4,000 hours or 4,000 expense,"},{"Start":"13:05.160 ","End":"13:12.845","Text":"4,000 currency units, and accumulated depreciation of 21,250,"},{"Start":"13:12.845 ","End":"13:17.650","Text":"and therefore a carrying amount of 8,750."},{"Start":"13:17.650 ","End":"13:21.945","Text":"Finally, the last year, 25,000,"},{"Start":"13:21.945 ","End":"13:28.755","Text":"multiplied by the hours of 2,250 of the 15,000"},{"Start":"13:28.755 ","End":"13:36.370","Text":"estimated total hours is a depreciation expense of 3,750."},{"Start":"13:36.680 ","End":"13:43.895","Text":"Once again, the accumulated depreciation end of the asset\u0027s life amounts to 25,000,"},{"Start":"13:43.895 ","End":"13:48.845","Text":"and the carrying amount at the end of the 5th year is 5,000,"},{"Start":"13:48.845 ","End":"13:52.140","Text":"which equals the residual value."}],"ID":28589},{"Watched":false,"Name":"Exercise 2 - Introduction","Duration":"2m 21s","ChapterTopicVideoID":26384,"CourseChapterTopicPlaylistID":254924,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:04.080","Text":"Today we\u0027re going to do an exercise in which we compare depreciation methods."},{"Start":"00:04.080 ","End":"00:05.610","Text":"Let\u0027s go through this together."},{"Start":"00:05.610 ","End":"00:11.970","Text":"The managers of ABB are considering purchasing a new piece of equipment costing 30,000."},{"Start":"00:11.970 ","End":"00:14.895","Text":"They ask for your advice as to how to depreciate it."},{"Start":"00:14.895 ","End":"00:20.250","Text":"They estimate that the useful life is 6 years and that at the end of its life,"},{"Start":"00:20.250 ","End":"00:22.740","Text":"the equipment can be sold for 6,000."},{"Start":"00:22.740 ","End":"00:27.660","Text":"Now, this 6,000 is what we refer to as its residual value."},{"Start":"00:27.660 ","End":"00:31.635","Text":"They are weighing up 3 possible depreciation methods."},{"Start":"00:31.635 ","End":"00:33.495","Text":"We\u0027ve got the straight-line method,"},{"Start":"00:33.495 ","End":"00:35.370","Text":"the reducing balance method,"},{"Start":"00:35.370 ","End":"00:37.395","Text":"and the sum of the years\u0027 digits."},{"Start":"00:37.395 ","End":"00:39.100","Text":"Now in terms of the required,"},{"Start":"00:39.100 ","End":"00:41.420","Text":"which we should always read first, of course,"},{"Start":"00:41.420 ","End":"00:48.250","Text":"a requires us to calculate the annual depreciation expense in each of the 6 years."},{"Start":"00:48.250 ","End":"00:54.850","Text":"The one thing we\u0027re doing is the depreciation expense in each of the 6 years and,"},{"Start":"00:54.850 ","End":"00:56.235","Text":"always watch out for this,"},{"Start":"00:56.235 ","End":"00:58.590","Text":"and the carrying amount,"},{"Start":"00:58.590 ","End":"01:01.155","Text":"another name for carrying amount is net book value,"},{"Start":"01:01.155 ","End":"01:03.315","Text":"at the end of each year."},{"Start":"01:03.315 ","End":"01:06.545","Text":"In this case, we\u0027re going to use the straight-line method."},{"Start":"01:06.545 ","End":"01:08.910","Text":"Let\u0027s quickly look at b, c, and d,"},{"Start":"01:08.910 ","End":"01:11.550","Text":"but we\u0027ll start with part a first."},{"Start":"01:11.550 ","End":"01:13.992","Text":"B is the same thing again,"},{"Start":"01:13.992 ","End":"01:17.615","Text":"we\u0027re looking at the annual depreciation expense"},{"Start":"01:17.615 ","End":"01:21.800","Text":"in each of the 6 years and the carrying amount at the end of each of those years,"},{"Start":"01:21.800 ","End":"01:25.175","Text":"but this time using the reducing balance method."},{"Start":"01:25.175 ","End":"01:27.365","Text":"Then c, we\u0027re going to do"},{"Start":"01:27.365 ","End":"01:29.180","Text":"the annual depreciation expense and"},{"Start":"01:29.180 ","End":"01:31.445","Text":"the carrying amount at the end of each of those years,"},{"Start":"01:31.445 ","End":"01:35.645","Text":"but using the sum of the years\u0027 digits method."},{"Start":"01:35.645 ","End":"01:37.115","Text":"Then finally d,"},{"Start":"01:37.115 ","End":"01:39.025","Text":"we\u0027re then going to give advice."},{"Start":"01:39.025 ","End":"01:42.860","Text":"We\u0027re asked, which method would you recommend if"},{"Start":"01:42.860 ","End":"01:48.140","Text":"your objective is to maximize the profit in the 2nd year,"},{"Start":"01:48.140 ","End":"01:53.548","Text":"or the 4th year, or maximize the profit over the life of the asset?"},{"Start":"01:53.548 ","End":"01:55.730","Text":"We\u0027re first going to look at a, b,"},{"Start":"01:55.730 ","End":"01:58.910","Text":"and c, the 3 different methods;"},{"Start":"01:58.910 ","End":"02:00.845","Text":"straight line, reducing balance,"},{"Start":"02:00.845 ","End":"02:03.650","Text":"and the sum of the years\u0027 digits method,"},{"Start":"02:03.650 ","End":"02:06.360","Text":"and then after we\u0027ve done all 3,"},{"Start":"02:06.360 ","End":"02:09.350","Text":"we\u0027re then going to compare them and"},{"Start":"02:09.350 ","End":"02:13.370","Text":"assume that we\u0027re trying to maximize profit in either the 2nd year,"},{"Start":"02:13.370 ","End":"02:17.960","Text":"the 4th year, or trying to maximize profit over the life of the asset."},{"Start":"02:17.960 ","End":"02:20.070","Text":"That\u0027s the question,"},{"Start":"02:20.070 ","End":"02:22.620","Text":"let\u0027s start with part a."}],"ID":28575},{"Watched":false,"Name":"Exercise 2 - Part a","Duration":"6m 23s","ChapterTopicVideoID":26385,"CourseChapterTopicPlaylistID":254924,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:03.030","Text":"Now we\u0027re doing part a, and remember,"},{"Start":"00:03.030 ","End":"00:08.880","Text":"we\u0027re looking at calculating the annual depreciation expense in each of the 6 years."},{"Start":"00:08.880 ","End":"00:12.990","Text":"Then we have to show the carrying amount at the end of each year."},{"Start":"00:12.990 ","End":"00:15.825","Text":"We\u0027re going to use a straight line method to begin with."},{"Start":"00:15.825 ","End":"00:19.920","Text":"The first thing we know is that the cost is 30,000."},{"Start":"00:19.920 ","End":"00:22.545","Text":"Let\u0027s pop that in, 30,000."},{"Start":"00:22.545 ","End":"00:25.755","Text":"We know that our residual value is 6,000."},{"Start":"00:25.755 ","End":"00:28.170","Text":"In other words, that\u0027s what we think we\u0027re going to get from"},{"Start":"00:28.170 ","End":"00:31.770","Text":"the disposal of our asset at the end of its useful life."},{"Start":"00:31.770 ","End":"00:35.910","Text":"That gives us what we call our depreciable amount."},{"Start":"00:35.910 ","End":"00:40.655","Text":"We\u0027re going to write off that depreciable amount, not the cost."},{"Start":"00:40.655 ","End":"00:44.360","Text":"We write off the depreciable amount over the useful life."},{"Start":"00:44.360 ","End":"00:47.240","Text":"Now, when we do the straight line method,"},{"Start":"00:47.240 ","End":"00:52.350","Text":"what we are looking at is calculating the rate based on the useful life."},{"Start":"00:52.350 ","End":"00:58.535","Text":"In other words, we\u0027re looking at taking 1/6 because our useful life is 6 years."},{"Start":"00:58.535 ","End":"01:02.945","Text":"We\u0027re taking 1/6 of that depreciable amount and we\u0027re going to expense it each year."},{"Start":"01:02.945 ","End":"01:09.560","Text":"Another way of looking at it is taking 100 percent of the asset and dividing it by 6,"},{"Start":"01:09.560 ","End":"01:11.570","Text":"in other words, over the useful life."},{"Start":"01:11.570 ","End":"01:15.525","Text":"That\u0027s 16, 66 recurring,"},{"Start":"01:15.525 ","End":"01:18.880","Text":"so 16, 667 if you like,"},{"Start":"01:18.880 ","End":"01:21.690","Text":"percent, or you could show that as a decimal,"},{"Start":"01:21.690 ","End":"01:26.220","Text":"0,16667 is in fact"},{"Start":"01:26.220 ","End":"01:32.655","Text":"0.16666 recurring so we\u0027re just rounding it to 0.1667."},{"Start":"01:32.655 ","End":"01:35.330","Text":"Then what we do is we take"},{"Start":"01:35.330 ","End":"01:41.210","Text":"our depreciable amount and we\u0027re dividing it by that useful life."},{"Start":"01:41.210 ","End":"01:48.740","Text":"Another way of putting this is 24,000 and multiplying it by the percentage,"},{"Start":"01:48.740 ","End":"01:51.770","Text":"or you can show it as simply a decimal,"},{"Start":"01:51.770 ","End":"02:00.045","Text":"0,1667 and that then gives you 4,000 per annum."},{"Start":"02:00.045 ","End":"02:04.310","Text":"4,000 of our depreciable amount,"},{"Start":"02:04.310 ","End":"02:05.810","Text":"which was 24,000,"},{"Start":"02:05.810 ","End":"02:08.780","Text":"4,000 gets expensed every year."},{"Start":"02:08.780 ","End":"02:12.665","Text":"That\u0027s your depreciation expense per year."},{"Start":"02:12.665 ","End":"02:16.159","Text":"Remember, we were asked to show the depreciation expense"},{"Start":"02:16.159 ","End":"02:20.030","Text":"and we were asked to show the carrying amount of the end of every year."},{"Start":"02:20.030 ","End":"02:21.500","Text":"Don\u0027t forget that."},{"Start":"02:21.500 ","End":"02:23.105","Text":"In the first year,"},{"Start":"02:23.105 ","End":"02:26.915","Text":"our opening carrying amount is in fact 30,0000."},{"Start":"02:26.915 ","End":"02:29.315","Text":"That is the cost."},{"Start":"02:29.315 ","End":"02:32.660","Text":"Now we just worked out that our depreciation expense is going"},{"Start":"02:32.660 ","End":"02:35.815","Text":"to be 4,000 every single year because it\u0027s straight line."},{"Start":"02:35.815 ","End":"02:38.495","Text":"The depreciation doesn\u0027t change from year to year."},{"Start":"02:38.495 ","End":"02:42.320","Text":"We\u0027re going to subtract the 4,000 and that gives us"},{"Start":"02:42.320 ","End":"02:48.290","Text":"26,000 That then becomes our opening carrying amount."},{"Start":"02:48.290 ","End":"02:53.555","Text":"Then we\u0027re going to expense 4,000 and that gives us 22,000."},{"Start":"02:53.555 ","End":"02:57.295","Text":"Then that becomes our opening carrying amount"},{"Start":"02:57.295 ","End":"03:00.500","Text":"and we subtract the depreciation for the third year."},{"Start":"03:00.500 ","End":"03:02.675","Text":"The end of the third year,"},{"Start":"03:02.675 ","End":"03:05.735","Text":"closing carrying amount is 18,000."},{"Start":"03:05.735 ","End":"03:08.150","Text":"That becomes our opening carrying amount."},{"Start":"03:08.150 ","End":"03:12.170","Text":"We then subtract 4,000 as the depreciation expense,"},{"Start":"03:12.170 ","End":"03:14.810","Text":"that becomes a 14,000 closing carrying amount."},{"Start":"03:14.810 ","End":"03:17.330","Text":"Then we have 14,000 opening carrying amount,"},{"Start":"03:17.330 ","End":"03:20.570","Text":"subtract the 4,000 depreciation for the fifth year."},{"Start":"03:20.570 ","End":"03:24.375","Text":"For the end of the 5th year, our carrying amount is 10,000."},{"Start":"03:24.375 ","End":"03:29.930","Text":"That becomes our opening carrying amount for the beginning of the 6th year,"},{"Start":"03:29.930 ","End":"03:32.525","Text":"we subtract the depreciation for the 6th year,"},{"Start":"03:32.525 ","End":"03:34.790","Text":"and we get our closing carrying amount."},{"Start":"03:34.790 ","End":"03:38.150","Text":"Now notice that that closing carrying amount is"},{"Start":"03:38.150 ","End":"03:43.160","Text":"our residual value that we had decided this asset had."},{"Start":"03:43.160 ","End":"03:48.575","Text":"We\u0027re told that it had a salvage value of 6,000 at the end of its useful life."},{"Start":"03:48.575 ","End":"03:52.260","Text":"Now, just before you panic,"},{"Start":"03:52.260 ","End":"03:54.600","Text":"this format of the table,"},{"Start":"03:54.600 ","End":"03:56.900","Text":"does not appear in your solution."},{"Start":"03:56.900 ","End":"03:59.840","Text":"I\u0027m going to show you the table that does appear in your solution."},{"Start":"03:59.840 ","End":"04:01.895","Text":"This would be the way I would\u0027ve said it out."},{"Start":"04:01.895 ","End":"04:08.295","Text":"There are a number of ways in which you can answer the question."},{"Start":"04:08.295 ","End":"04:09.890","Text":"This is 1 table."},{"Start":"04:09.890 ","End":"04:12.350","Text":"This is the way I would prepare it but there is"},{"Start":"04:12.350 ","End":"04:15.965","Text":"another table that you\u0027ll see in your solution, which I\u0027ll go through now."},{"Start":"04:15.965 ","End":"04:20.646","Text":"Now, this table is in your solution and"},{"Start":"04:20.646 ","End":"04:26.090","Text":"the way it\u0027s been structured is showing cost at the beginning of every single year."},{"Start":"04:26.090 ","End":"04:29.090","Text":"Then in order to calculate your closing carrying amount,"},{"Start":"04:29.090 ","End":"04:32.945","Text":"you would then have to subtract your accumulated depreciation."},{"Start":"04:32.945 ","End":"04:35.400","Text":"At the end of year 1,"},{"Start":"04:35.400 ","End":"04:39.866","Text":"we\u0027ve only written off 4,000 by way of depreciation,"},{"Start":"04:39.866 ","End":"04:44.765","Text":"so our accumulated depreciation is only 4,000 and our closing carrying amount is 26."},{"Start":"04:44.765 ","End":"04:46.295","Text":"At the end of the second year,"},{"Start":"04:46.295 ","End":"04:49.515","Text":"we would have depreciated for 2 years."},{"Start":"04:49.515 ","End":"04:52.508","Text":"Each year was depreciated by 4,000,"},{"Start":"04:52.508 ","End":"04:57.980","Text":"so our accumulated depreciation at the end of the second year is now 8,000."},{"Start":"04:57.980 ","End":"05:00.755","Text":"Our closing carrying amount is 22,000."},{"Start":"05:00.755 ","End":"05:02.390","Text":"Then, in the third year,"},{"Start":"05:02.390 ","End":"05:06.200","Text":"our accumulated depreciation would have grown"},{"Start":"05:06.200 ","End":"05:10.520","Text":"to 12,000 because we would have depreciated 4,000 in year 1,"},{"Start":"05:10.520 ","End":"05:12.215","Text":"4,000 in year 2,"},{"Start":"05:12.215 ","End":"05:14.150","Text":"4,000 in year 3."},{"Start":"05:14.150 ","End":"05:17.755","Text":"So our accumulated depreciation by now is 12,000."},{"Start":"05:17.755 ","End":"05:21.600","Text":"The closing carrying amount is 18,000."},{"Start":"05:21.600 ","End":"05:22.935","Text":"At the end of year 4,"},{"Start":"05:22.935 ","End":"05:27.691","Text":"we would have depreciated 4,000 for 4 years,"},{"Start":"05:27.691 ","End":"05:30.740","Text":"so our accumulated depreciation would be 16,000."},{"Start":"05:30.740 ","End":"05:33.940","Text":"Our closing carrying amount is 14,000."},{"Start":"05:33.940 ","End":"05:35.695","Text":"Then at the end of year 5,"},{"Start":"05:35.695 ","End":"05:40.070","Text":"we would have depreciated for 5 years, 4,000 each year."},{"Start":"05:40.070 ","End":"05:44.000","Text":"Therefore, our accumulated depreciation would be 20,000 by now,"},{"Start":"05:44.000 ","End":"05:49.055","Text":"so our closing carrying amount at the end of year 5 is 10,000."},{"Start":"05:49.055 ","End":"05:50.810","Text":"Then in year 6,"},{"Start":"05:50.810 ","End":"05:55.105","Text":"our accumulated depreciation would be 24,000."},{"Start":"05:55.105 ","End":"05:59.835","Text":"In other words, 4,000 per annum for 6 years."},{"Start":"05:59.835 ","End":"06:02.805","Text":"Our closing carrying amount is 6,000."},{"Start":"06:02.805 ","End":"06:06.395","Text":"Notice that the residual value"},{"Start":"06:06.395 ","End":"06:10.595","Text":"is the closing carrying amount at the end of its useful life."},{"Start":"06:10.595 ","End":"06:12.980","Text":"The closing carrying amount of 26,"},{"Start":"06:12.980 ","End":"06:14.540","Text":"22, 18, 14,10,"},{"Start":"06:14.540 ","End":"06:17.060","Text":"and 6 is the same in this table as it"},{"Start":"06:17.060 ","End":"06:20.765","Text":"was in the previous table that I showed you a moment ago."},{"Start":"06:20.765 ","End":"06:23.880","Text":"That is the end of part a."}],"ID":28576},{"Watched":false,"Name":"Exercise 2 - Part b","Duration":"9m 19s","ChapterTopicVideoID":26386,"CourseChapterTopicPlaylistID":254924,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.440","Text":"Part B, we\u0027re now going to calculate"},{"Start":"00:02.440 ","End":"00:06.160","Text":"the annual depreciation expense in each of the 6 years."},{"Start":"00:06.160 ","End":"00:08.950","Text":"We then also going to calculate the carrying amount,"},{"Start":"00:08.950 ","End":"00:10.740","Text":"also known as a net book value,"},{"Start":"00:10.740 ","End":"00:13.030","Text":"at the end of each of those 6 years."},{"Start":"00:13.030 ","End":"00:16.435","Text":"This time we\u0027re using the reducing balance method."},{"Start":"00:16.435 ","End":"00:18.955","Text":"Now, using the reducing balance method,"},{"Start":"00:18.955 ","End":"00:21.370","Text":"we use this formula to calculate the rate."},{"Start":"00:21.370 ","End":"00:23.495","Text":"Now, before we get into this rate,"},{"Start":"00:23.495 ","End":"00:25.590","Text":"I just want to point out that you are"},{"Start":"00:25.590 ","End":"00:30.880","Text":"normally given the rate itself and that you\u0027re asked to calculate it."},{"Start":"00:30.880 ","End":"00:34.590","Text":"But if you need to calculate it is actually not as difficult as you think."},{"Start":"00:34.590 ","End":"00:38.590","Text":"The depreciation rate when using the reducing balance method is"},{"Start":"00:38.590 ","End":"00:45.650","Text":"1 minus the nth root of the residual value divided by the cost."},{"Start":"00:45.650 ","End":"00:48.890","Text":"In our particular situation,"},{"Start":"00:48.890 ","End":"00:50.720","Text":"it\u0027s 1 minus,"},{"Start":"00:50.720 ","End":"00:53.690","Text":"now that nth root is the useful life,"},{"Start":"00:53.690 ","End":"00:59.330","Text":"so we\u0027re going to put in here 6 because we\u0027re told that our useful life is 6 years."},{"Start":"00:59.330 ","End":"01:01.940","Text":"We then have to calculate the residual value"},{"Start":"01:01.940 ","End":"01:05.740","Text":"divided by the cost and put that inside that root sign."},{"Start":"01:05.740 ","End":"01:12.750","Text":"The residual value is 6,000 and the cost we were told is 30,000."},{"Start":"01:12.750 ","End":"01:16.660","Text":"This gives us a rate of"},{"Start":"01:16.850 ","End":"01:23.780","Text":"0,23528551."},{"Start":"01:23.780 ","End":"01:27.210","Text":"You can write this as 23.528551 percent."},{"Start":"01:31.640 ","End":"01:35.555","Text":"Now when you use the reducing balance method,"},{"Start":"01:35.555 ","End":"01:38.990","Text":"that rate is applied to a reducing balance."},{"Start":"01:38.990 ","End":"01:41.450","Text":"In other words, you\u0027re taking that rate"},{"Start":"01:41.450 ","End":"01:49.490","Text":"of 0,23528551 and instead of multiplying it by cost,"},{"Start":"01:49.490 ","End":"01:54.645","Text":"which is what we did in Part A when we did the straight line method,"},{"Start":"01:54.645 ","End":"01:57.655","Text":"we multiply it by the carrying amount,"},{"Start":"01:57.655 ","End":"02:04.970","Text":"where the carrying amount is the cost minus the accumulated depreciation"},{"Start":"02:04.970 ","End":"02:13.025","Text":"to date so you multiply this rate by the opening carrying amount in each of the years."},{"Start":"02:13.025 ","End":"02:15.545","Text":"When we use the straight line method,"},{"Start":"02:15.545 ","End":"02:18.980","Text":"we calculated rate and in Part A,"},{"Start":"02:18.980 ","End":"02:27.560","Text":"it was 0,1666 recurring and we multiply that by cost."},{"Start":"02:27.560 ","End":"02:31.070","Text":"But when using the reducing balance method,"},{"Start":"02:31.070 ","End":"02:37.235","Text":"it is the rate multiplied by the opening carrying amount,"},{"Start":"02:37.235 ","End":"02:40.130","Text":"obviously the opening carrying amount."},{"Start":"02:40.130 ","End":"02:43.880","Text":"Let\u0027s work out the depreciation per year."},{"Start":"02:43.880 ","End":"02:47.690","Text":"Let\u0027s use this layout for our table, just for argument\u0027s sake."},{"Start":"02:47.690 ","End":"02:50.060","Text":"We start with our opening carrying amount,"},{"Start":"02:50.060 ","End":"02:54.230","Text":"30,000 and we\u0027re going to multiply this by the rate."},{"Start":"02:54.230 ","End":"02:58.340","Text":"The opening carrying amount in year 1 happens to be the cost,"},{"Start":"02:58.340 ","End":"03:02.670","Text":"so that gives us 7058.57."},{"Start":"03:05.000 ","End":"03:15.645","Text":"We subtract that from the 30,000 to give us our closing carrying amount of 22941.43."},{"Start":"03:15.645 ","End":"03:22.495","Text":"That becomes our opening carrying amount in year 2, 22941.43."},{"Start":"03:22.495 ","End":"03:25.910","Text":"We take that opening carrying amount and multiply it by the rate of"},{"Start":"03:25.910 ","End":"03:34.585","Text":"0,23528567 and we get 5397.79."},{"Start":"03:34.585 ","End":"03:41.450","Text":"We subtract the 5,397.79 from the 22,941.43 and we"},{"Start":"03:41.450 ","End":"03:48.525","Text":"get a closing carrying amount of 17,543.64."},{"Start":"03:48.525 ","End":"03:56.180","Text":"That then becomes our opening carrying amount 17,543.64 and so on."},{"Start":"03:56.180 ","End":"03:58.070","Text":"Now we would multiply that by the rate,"},{"Start":"03:58.070 ","End":"04:00.500","Text":"get our depreciation expense for year 3,"},{"Start":"04:00.500 ","End":"04:02.220","Text":"subtract from the opening carrying amount,"},{"Start":"04:02.220 ","End":"04:03.590","Text":"gives us our closing carrying amount,"},{"Start":"04:03.590 ","End":"04:06.710","Text":"and you see our closing carrying amount is going to get smaller and smaller."},{"Start":"04:06.710 ","End":"04:08.840","Text":"I won\u0027t go through in detail with you but let\u0027s have a look at"},{"Start":"04:08.840 ","End":"04:11.605","Text":"the total that the final table."},{"Start":"04:11.605 ","End":"04:14.585","Text":"Here\u0027s the full completed table."},{"Start":"04:14.585 ","End":"04:21.337","Text":"As you can see, here\u0027s our 30,000 opening carrying amount which starts off at cost,"},{"Start":"04:21.337 ","End":"04:23.540","Text":"then we subtract our depreciation,"},{"Start":"04:23.540 ","End":"04:26.240","Text":"if you like you can put brackets around those."},{"Start":"04:26.240 ","End":"04:29.582","Text":"Subtracting our depreciation gives us a closing carrying amount."},{"Start":"04:29.582 ","End":"04:33.973","Text":"Our carrying amount at the beginning of the next year is no longer cost,"},{"Start":"04:33.973 ","End":"04:37.820","Text":"it\u0027s a reduced amount because we\u0027ve depreciated it."},{"Start":"04:37.820 ","End":"04:40.575","Text":"We subtract our depreciation for year 2,"},{"Start":"04:40.575 ","End":"04:42.620","Text":"that gives us our closing carrying amount."},{"Start":"04:42.620 ","End":"04:45.155","Text":"You can see the carrying amount is getting smaller each year."},{"Start":"04:45.155 ","End":"04:48.245","Text":"The closing carrying amount becomes the opening carrying amount."},{"Start":"04:48.245 ","End":"04:50.900","Text":"You subtract the depreciation expense for the year,"},{"Start":"04:50.900 ","End":"04:52.261","Text":"gives you closing carrying amount,"},{"Start":"04:52.261 ","End":"04:54.260","Text":"becomes your opening carrying amount and so on."},{"Start":"04:54.260 ","End":"05:00.410","Text":"Notice that if we add the depreciation in each of those 6 years,"},{"Start":"05:00.410 ","End":"05:11.085","Text":"you come to 24,000.47 is obviously not exact because we aren\u0027t using the exact rate."},{"Start":"05:11.085 ","End":"05:15.260","Text":"Because we don\u0027t have an absolutely exact rate,"},{"Start":"05:15.260 ","End":"05:19.010","Text":"you can see that over the years we take our cost,"},{"Start":"05:19.010 ","End":"05:22.275","Text":"we depreciate in total."},{"Start":"05:22.275 ","End":"05:26.570","Text":"This is actually our accumulated depreciation of 24,000 over the 6 years,"},{"Start":"05:26.570 ","End":"05:30.275","Text":"that gives us a closing carrying amount which equals"},{"Start":"05:30.275 ","End":"05:36.570","Text":"our residual value and it\u0027s roughly 6,000."},{"Start":"05:36.570 ","End":"05:39.851","Text":"Now, you didn\u0027t have to use the exact rate,"},{"Start":"05:39.851 ","End":"05:41.713","Text":"you could have rounded off that rate to,"},{"Start":"05:41.713 ","End":"05:43.280","Text":"say,4 decimal places,"},{"Start":"05:43.280 ","End":"05:47.095","Text":"in which case your figures will all be slightly different to ours here."},{"Start":"05:47.095 ","End":"05:50.930","Text":"I\u0027m now going to show you another table where we show"},{"Start":"05:50.930 ","End":"05:54.860","Text":"the cost less accumulated depreciation."},{"Start":"05:54.860 ","End":"05:58.050","Text":"This is an alternative layout."},{"Start":"05:58.420 ","End":"06:02.900","Text":"I\u0027ve taken the liberty of just scribbling in the depreciation figures"},{"Start":"06:02.900 ","End":"06:06.830","Text":"that we used or calculated in the previous table."},{"Start":"06:06.830 ","End":"06:10.520","Text":"The 7,058.57, the 5,397.79,"},{"Start":"06:10.520 ","End":"06:13.190","Text":"the 4,127.76, the 3,156.56,"},{"Start":"06:13.190 ","End":"06:16.330","Text":"2,413.87, and the 1,845.92."},{"Start":"06:16.330 ","End":"06:19.610","Text":"Those were the depreciation expenses in each of the years."},{"Start":"06:19.610 ","End":"06:22.489","Text":"I\u0027ve just scribbled that in a case, just my workings."},{"Start":"06:22.489 ","End":"06:24.350","Text":"But using this table,"},{"Start":"06:24.350 ","End":"06:30.005","Text":"we\u0027ve start with cost and we subtract accumulated depreciation."},{"Start":"06:30.005 ","End":"06:35.695","Text":"Previous table we started with opening carrying amount less depreciation."},{"Start":"06:35.695 ","End":"06:41.918","Text":"The accumulated depreciation in year 1 equals the depreciation expense in year 1,"},{"Start":"06:41.918 ","End":"06:43.490","Text":"but in year 2,"},{"Start":"06:43.490 ","End":"06:51.270","Text":"the accumulated depreciation is obviously the total of the depreciation in year 1,"},{"Start":"06:51.270 ","End":"06:54.375","Text":"and the depreciation in year 2 together."},{"Start":"06:54.375 ","End":"06:57.570","Text":"Then the depreciation in year 3,"},{"Start":"06:57.570 ","End":"07:01.835","Text":"if you add that, you then get your accumulated depreciation in year 3."},{"Start":"07:01.835 ","End":"07:03.995","Text":"It\u0027s the combined 7,058,"},{"Start":"07:03.995 ","End":"07:09.140","Text":"5,397 and the 4,127 gives you the 16,584."},{"Start":"07:09.140 ","End":"07:13.560","Text":"Then if you look at the accumulated depreciation in year 4,"},{"Start":"07:13.560 ","End":"07:16.410","Text":"it\u0027s the depreciation in year 1,"},{"Start":"07:16.410 ","End":"07:17.865","Text":"2, 3,"},{"Start":"07:17.865 ","End":"07:19.425","Text":"and year 4,"},{"Start":"07:19.425 ","End":"07:22.795","Text":"added together gives you the 19,740."},{"Start":"07:22.795 ","End":"07:27.570","Text":"Then if we look at accumulated depreciation in year 5 of 22,154,"},{"Start":"07:27.570 ","End":"07:30.350","Text":"is the total of the depreciation of 7,058,"},{"Start":"07:30.350 ","End":"07:32.180","Text":"the 5,397, the 4,127,"},{"Start":"07:32.180 ","End":"07:37.540","Text":"the 3,156, and the 2,413.87 in year 5."},{"Start":"07:37.540 ","End":"07:41.135","Text":"Then if you look at the accumulated depreciation in year 6,"},{"Start":"07:41.135 ","End":"07:43.700","Text":"it is the depreciation in year 1,"},{"Start":"07:43.700 ","End":"07:44.825","Text":"year 2, year 3,"},{"Start":"07:44.825 ","End":"07:45.950","Text":"year 4, year 5,"},{"Start":"07:45.950 ","End":"07:51.120","Text":"and the 1,845.92 in year 6."},{"Start":"07:51.120 ","End":"07:55.940","Text":"Notice that the closing carrying amount gets"},{"Start":"07:55.940 ","End":"08:00.680","Text":"smaller each year as it gets depreciated until eventually you"},{"Start":"08:00.680 ","End":"08:09.941","Text":"get to the closing carrying amount which is equal to roughly our residual value,"},{"Start":"08:09.941 ","End":"08:15.195","Text":"because we\u0027ve now written off accumulated depreciation of 24,000."},{"Start":"08:15.195 ","End":"08:16.925","Text":"We started with the cost,"},{"Start":"08:16.925 ","End":"08:20.120","Text":"and we subtract accumulated depreciation,"},{"Start":"08:20.120 ","End":"08:23.030","Text":"and you eventually get the residual value of 6,000,"},{"Start":"08:23.030 ","End":"08:25.925","Text":"that\u0027s your closing carrying amount at the end of its useful life."},{"Start":"08:25.925 ","End":"08:30.170","Text":"This table just simply shows the cost in each of those years and instead of showing"},{"Start":"08:30.170 ","End":"08:31.910","Text":"the depreciation in each of the years"},{"Start":"08:31.910 ","End":"08:35.405","Text":"that we\u0027re going to show the accumulated depreciation."},{"Start":"08:35.405 ","End":"08:37.610","Text":"That figure gets bigger each year and"},{"Start":"08:37.610 ","End":"08:39.940","Text":"thus your closing carrying amount gets smaller each year,"},{"Start":"08:39.940 ","End":"08:42.800","Text":"so that\u0027s Part B."},{"Start":"08:42.800 ","End":"08:44.300","Text":"The only other thing I can say about"},{"Start":"08:44.300 ","End":"08:47.350","Text":"this particular table is if you do show it in this format,"},{"Start":"08:47.350 ","End":"08:49.950","Text":"these figures here, the depreciation,"},{"Start":"08:49.950 ","End":"08:51.830","Text":"remember you were asked to not only show"},{"Start":"08:51.830 ","End":"08:53.950","Text":"the closing carrying amount of the end of every year,"},{"Start":"08:53.950 ","End":"08:56.230","Text":"so you had to show the 22, the 17,"},{"Start":"08:56.230 ","End":"08:57.490","Text":"the 13, the 10,"},{"Start":"08:57.490 ","End":"08:59.717","Text":"the 7, and the 6,000,"},{"Start":"08:59.717 ","End":"09:03.580","Text":"but you also had to show the depreciation in each of those years."},{"Start":"09:03.580 ","End":"09:10.700","Text":"You have to show all of this information in another row somewhere."},{"Start":"09:10.700 ","End":"09:16.435","Text":"That is a downside to this particular layout for this particular question."},{"Start":"09:16.435 ","End":"09:20.380","Text":"Then we\u0027re going to move on to Part C."}],"ID":28577},{"Watched":false,"Name":"Exercise 2 - Part c","Duration":"14m 14s","ChapterTopicVideoID":27435,"CourseChapterTopicPlaylistID":254924,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.760","Text":"Let\u0027s look at part c. Here we\u0027re going to"},{"Start":"00:02.760 ","End":"00:06.360","Text":"calculate the annual depreciation expense in each of the 6 years,"},{"Start":"00:06.360 ","End":"00:08.905","Text":"just like we\u0027ve been doing for a and b,"},{"Start":"00:08.905 ","End":"00:11.490","Text":"and just like a and b we\u0027re going to calculate the carrying amount at"},{"Start":"00:11.490 ","End":"00:13.485","Text":"the end of each of those 6 years,"},{"Start":"00:13.485 ","End":"00:19.215","Text":"but this time using the sum of the years\u0027 digits method."},{"Start":"00:19.215 ","End":"00:20.925","Text":"The sum of the years\u0027 digits, what we do,"},{"Start":"00:20.925 ","End":"00:25.750","Text":"we\u0027ve got a useful life of 6 years."},{"Start":"00:33.470 ","End":"00:34.679","Text":"We have year 1, we have year 2, we have year 3 and 4 and 5 and 6."},{"Start":"00:34.679 ","End":"00:35.930","Text":"We add all of those years"},{"Start":"00:35.930 ","End":"00:39.395","Text":"together and we get to 21."},{"Start":"00:39.395 ","End":"00:46.550","Text":"The depreciation factors that we calculate the ratio is going to be"},{"Start":"00:46.550 ","End":"00:53.509","Text":"applied to the depreciable amount."},{"Start":"00:53.509 ","End":"00:56.030","Text":"I don\u0027t know what do that. The depreciation factors are going to be applied"},{"Start":"00:56.030 ","End":"00:59.359","Text":"to the depreciable amount."},{"Start":"00:59.359 ","End":"01:04.190","Text":"In other words, we\u0027re told that our cost is 30,000"},{"Start":"01:04.190 ","End":"01:10.370","Text":"and we\u0027re told that our residual value is 6,000,"},{"Start":"01:10.370 ","End":"01:15.309","Text":"so our depreciable amount is 24,000."},{"Start":"01:15.309 ","End":"01:22.514","Text":"We\u0027re going to be multiplying 24,000 by the sum of the years\u0027 digits ratio, if you like."},{"Start":"01:22.514 ","End":"01:25.005","Text":"Now just to compare so far,"},{"Start":"01:25.005 ","End":"01:27.360","Text":"in part a we did the straight line method."},{"Start":"01:27.360 ","End":"01:31.695","Text":"We took our rate or ratio we multiplied it by cost."},{"Start":"01:31.695 ","End":"01:35.450","Text":"In part b, we did the reducing balance method."},{"Start":"01:35.450 ","End":"01:41.570","Text":"In that case, we took the rate and we multiplied it by the carrying amount,"},{"Start":"01:41.570 ","End":"01:46.740","Text":"which was cost minus accumulated depreciation."},{"Start":"01:46.740 ","End":"01:50.010","Text":"In c, which is the sum of the years\u0027 digits method,"},{"Start":"01:50.010 ","End":"01:55.365","Text":"we\u0027re going to take our rate,"},{"Start":"01:55.365 ","End":"01:56.865","Text":"which will change it here,"},{"Start":"01:56.865 ","End":"02:00.605","Text":"and we\u0027re going to multiply it by the depreciable amount."},{"Start":"02:00.605 ","End":"02:05.535","Text":"That\u0027s cost less residual value."},{"Start":"02:05.535 ","End":"02:09.950","Text":"In part a, the rate multiplied by the cost,"},{"Start":"02:09.950 ","End":"02:11.585","Text":"so that stays the same every year."},{"Start":"02:11.585 ","End":"02:14.180","Text":"The cost doesn\u0027t change, it\u0027s 30,000."},{"Start":"02:14.180 ","End":"02:16.070","Text":"In part b,"},{"Start":"02:16.070 ","End":"02:18.110","Text":"when you use reducing balance method,"},{"Start":"02:18.110 ","End":"02:21.560","Text":"it\u0027s the rate multiplied by the carrying amount so the opening carrying amount each year."},{"Start":"02:21.560 ","End":"02:23.870","Text":"This one gets smaller every year,"},{"Start":"02:23.870 ","End":"02:28.110","Text":"so this doesn\u0027t stay constant, it reduces every year."},{"Start":"02:29.540 ","End":"02:34.605","Text":"Then using the sum of the years\u0027 digits method,"},{"Start":"02:34.605 ","End":"02:38.480","Text":"we\u0027re taking rate and we\u0027re multiplying it by the depreciable amount."},{"Start":"02:38.480 ","End":"02:42.640","Text":"The depreciable amount remains the same every year."},{"Start":"02:42.640 ","End":"02:46.420","Text":"This one, a and c,"},{"Start":"02:46.420 ","End":"02:50.120","Text":"you\u0027re multiplying it by a figure that doesn\u0027t change, so in this case,"},{"Start":"02:50.120 ","End":"02:53.230","Text":"you\u0027d multiply it by 30,000,"},{"Start":"02:53.230 ","End":"02:59.870","Text":"and in part c, we\u0027re going to be multiplying it by 24,000 in every single case."},{"Start":"02:59.870 ","End":"03:04.470","Text":"The depreciable amount being the cost less the residual value. Let\u0027s get to it."},{"Start":"03:07.430 ","End":"03:15.255","Text":"The factor or the ratio is in year 1 it\u0027s 6/21."},{"Start":"03:15.255 ","End":"03:17.445","Text":"We\u0027re working in reverse here,"},{"Start":"03:17.445 ","End":"03:21.000","Text":"and year 2 is going to be 5/21."},{"Start":"03:21.000 ","End":"03:23.145","Text":"Think about it like this, in year 1,"},{"Start":"03:23.145 ","End":"03:28.095","Text":"we\u0027ve got 6 years left out of the sum of the years\u0027 digits of 21."},{"Start":"03:28.095 ","End":"03:30.910","Text":"In year 2, we\u0027ve got 5 years left."},{"Start":"03:30.910 ","End":"03:35.040","Text":"That\u0027s calculated from the beginning of year 2 because only 1 year has gone by."},{"Start":"03:35.040 ","End":"03:37.845","Text":"We\u0027ve got 5 years left, divided by 21."},{"Start":"03:37.845 ","End":"03:41.063","Text":"Then we\u0027ve got 4 years left divided by 21,"},{"Start":"03:41.063 ","End":"03:43.665","Text":"3 years left divided by 21,"},{"Start":"03:43.665 ","End":"03:46.080","Text":"2 years left divided by 21,"},{"Start":"03:46.080 ","End":"03:49.570","Text":"and 1 year left divided by 21."},{"Start":"03:49.670 ","End":"03:57.855","Text":"In total over the 6 years you would have written off 21/21. How do I know that?"},{"Start":"03:57.855 ","End":"04:01.970","Text":"It\u0027s 6+5+4+3+2+1."},{"Start":"04:01.970 ","End":"04:05.765","Text":"The numerator adds up to 21 in total."},{"Start":"04:05.765 ","End":"04:08.195","Text":"Now the depreciable amount,"},{"Start":"04:08.195 ","End":"04:14.030","Text":"remember I said remains the same because your depreciable amount is"},{"Start":"04:14.030 ","End":"04:21.490","Text":"the cost of 30,000 less the residual value of 6,000, so that\u0027s 24,000."},{"Start":"04:21.490 ","End":"04:25.475","Text":"That stays the same in each of the years."},{"Start":"04:25.475 ","End":"04:29.045","Text":"What is the depreciation expense in each of these years?"},{"Start":"04:29.045 ","End":"04:34.370","Text":"If you multiply that ratio 6 divided by 21,"},{"Start":"04:34.370 ","End":"04:40.040","Text":"multiply that by 24,000, you get 6,857.14."},{"Start":"04:40.910 ","End":"04:46.760","Text":"In year 2 if you multiply this ratio of 5 divided by 21 and"},{"Start":"04:46.760 ","End":"04:53.705","Text":"multiply that by 24,000, you get 5,714.29."},{"Start":"04:53.705 ","End":"04:58.895","Text":"Then in year 3, if you take your factor or ratio of 4 divided by 21,"},{"Start":"04:58.895 ","End":"05:04.872","Text":"multiply it by 24,000, you get 4,571.43."},{"Start":"05:04.872 ","End":"05:06.525","Text":"In year 4,"},{"Start":"05:06.525 ","End":"05:09.930","Text":"3 divided by 21 multiplied by 24,000,"},{"Start":"05:09.930 ","End":"05:17.175","Text":"your depreciation expense will be 3,428.57."},{"Start":"05:17.175 ","End":"05:23.300","Text":"In year 5 it\u0027s 2 divided by 21 multiplied by 24,000."},{"Start":"05:23.300 ","End":"05:29.835","Text":"That gives you 2,285.71."},{"Start":"05:29.835 ","End":"05:32.190","Text":"Then in your final year,"},{"Start":"05:32.190 ","End":"05:34.625","Text":"your factor is 1 divided by 21,"},{"Start":"05:34.625 ","End":"05:36.365","Text":"multiplied by 24,000,"},{"Start":"05:36.365 ","End":"05:41.500","Text":"and that gives you 1,142.86."},{"Start":"05:41.500 ","End":"05:46.785","Text":"That\u0027s the depreciation expense in each of those 6 years."},{"Start":"05:46.785 ","End":"05:51.515","Text":"If you add that up you get to 24,000."},{"Start":"05:51.515 ","End":"05:55.250","Text":"That\u0027s your total depreciation over the 6 years."},{"Start":"05:55.250 ","End":"05:57.920","Text":"In other words, your accumulated depreciation at"},{"Start":"05:57.920 ","End":"06:07.275","Text":"the end of year 6."},{"Start":"06:07.275 ","End":"06:09.620","Text":"In part c, we were asked to calculate"},{"Start":"06:09.620 ","End":"06:12.650","Text":"depreciation expense in each one of those years, which we\u0027ve done."},{"Start":"06:12.650 ","End":"06:15.560","Text":"Then we also have to calculate the closing carrying"},{"Start":"06:15.560 ","End":"06:18.720","Text":"amount at the end of each of those years."},{"Start":"06:18.720 ","End":"06:24.339","Text":"Now I\u0027m showing you a table which I don\u0027t think it appears in your solution."},{"Start":"06:24.339 ","End":"06:27.845","Text":"Now you start with your opening carrying amount, 30,000."},{"Start":"06:27.845 ","End":"06:31.175","Text":"We subtract the depreciation expense for year 1,"},{"Start":"06:31.175 ","End":"06:34.260","Text":"which was 6,857.14,"},{"Start":"06:35.890 ","End":"06:42.905","Text":"and that gives you a closing carrying amount of 23,142.86."},{"Start":"06:42.905 ","End":"06:44.870","Text":"What we\u0027re trying to do here is calculate"},{"Start":"06:44.870 ","End":"06:47.600","Text":"the closing carrying amount at the end of every year."},{"Start":"06:47.600 ","End":"06:52.170","Text":"I put that in here is the opening carrying amount,"},{"Start":"06:53.750 ","End":"07:02.310","Text":"23,142.86, and we subtract the depreciation expense for year 2 which was 5,714.2."},{"Start":"07:02.370 ","End":"07:09.790","Text":"That gives us 1,748.57."},{"Start":"07:09.790 ","End":"07:15.055","Text":"That becomes my opening carrying amount, 1,7428.57,"},{"Start":"07:15.055 ","End":"07:22.840","Text":"then subtract the depreciation expense that happens in Year 3, 571.43."},{"Start":"07:22.840 ","End":"07:26.710","Text":"Our carrying amount at the beginning of the year is reduced"},{"Start":"07:26.710 ","End":"07:33.625","Text":"to 12,857.14 at the end of Year 3."},{"Start":"07:33.625 ","End":"07:39.890","Text":"That becomes our opening carrying amount, 12,857.14,"},{"Start":"07:39.890 ","End":"07:48.720","Text":"subtract the depreciation expense for Year 4 which was 3,428.57,"},{"Start":"07:48.720 ","End":"07:54.095","Text":"that gives us closing carrying amount 9,428.57."},{"Start":"07:54.095 ","End":"07:57.445","Text":"That becomes my opening balance in Year 5."},{"Start":"07:57.445 ","End":"08:07.855","Text":"That\u0027s 9,428.57, you subtract the depreciation expense for Year 5 2,285.71,"},{"Start":"08:07.855 ","End":"08:11.980","Text":"and that gives us 7,142.86,"},{"Start":"08:11.980 ","End":"08:16.235","Text":"and that becomes my opening balance in Year 6,"},{"Start":"08:16.235 ","End":"08:21.940","Text":"7,142.86 minus my depreciation expense for Year 6,"},{"Start":"08:21.940 ","End":"08:26.770","Text":"1,142.86, and that gives us 6,000."},{"Start":"08:26.770 ","End":"08:30.370","Text":"Notice that my closing carrying amount at the end of"},{"Start":"08:30.370 ","End":"08:34.675","Text":"the sixth-year equals my residual value."},{"Start":"08:34.675 ","End":"08:39.970","Text":"We started off with cost of 30,000,"},{"Start":"08:39.970 ","End":"08:41.830","Text":"we subtracted depreciation,"},{"Start":"08:41.830 ","End":"08:43.690","Text":"if you add all of this up here,"},{"Start":"08:43.690 ","End":"08:48.445","Text":"our total depreciation, all of these together,"},{"Start":"08:48.445 ","End":"08:54.280","Text":"the total depreciation, or accumulated depreciation is 24,000."},{"Start":"08:54.280 ","End":"09:01.885","Text":"Cost less accumulated depreciation of 24,000 gives us our residual value."},{"Start":"09:01.885 ","End":"09:03.640","Text":"That\u0027s the purpose of what we\u0027re doing."},{"Start":"09:03.640 ","End":"09:05.860","Text":"Notice that in A, and B,"},{"Start":"09:05.860 ","End":"09:09.670","Text":"and C, we start with the same figure, cost of 30,000."},{"Start":"09:09.670 ","End":"09:15.430","Text":"We eventually write off 24,000 in total and we eventually all get to,"},{"Start":"09:15.430 ","End":"09:17.095","Text":"doesn\u0027t matter which method we used,"},{"Start":"09:17.095 ","End":"09:21.580","Text":"we get to a closing carrying amount that equals the residual value of 6,000."},{"Start":"09:21.580 ","End":"09:22.900","Text":"The only difference is that"},{"Start":"09:22.900 ","End":"09:27.730","Text":"the depreciation expense in each one of those years is slightly different,"},{"Start":"09:27.730 ","End":"09:31.180","Text":"and thus the closing carrying amount in each one of"},{"Start":"09:31.180 ","End":"09:36.790","Text":"those 6 years is going to be slightly different depending on which method you used."},{"Start":"09:36.790 ","End":"09:41.290","Text":"Now I\u0027m going to go through the table layout that is in your solution."},{"Start":"09:41.290 ","End":"09:47.750","Text":"Now, in your solution I believe you\u0027ve got your table shown as follows."},{"Start":"09:48.090 ","End":"09:52.165","Text":"You show the cost in each of those years,"},{"Start":"09:52.165 ","End":"09:57.160","Text":"and notice that it stays the same because the cost doesn\u0027t change,"},{"Start":"09:57.160 ","End":"09:58.645","Text":"so that will be in your cost account,"},{"Start":"09:58.645 ","End":"10:01.690","Text":"then you have an accumulated depreciation account."},{"Start":"10:01.690 ","End":"10:10.150","Text":"In Year 1, our depreciation expense was 6,857.14."},{"Start":"10:10.150 ","End":"10:18.250","Text":"You subtract that from your cost and you get your closing carrying amount of 23,142.86."},{"Start":"10:18.250 ","End":"10:21.925","Text":"Now, how do we get the closing carrying amount at the end of Year 2?"},{"Start":"10:21.925 ","End":"10:27.205","Text":"We\u0027ve got to subtract from the cost of the accumulated depreciation at the end of Year 2."},{"Start":"10:27.205 ","End":"10:35.770","Text":"We also had depreciation in Year 2 of 5,714.29."},{"Start":"10:35.770 ","End":"10:37.585","Text":"That was the expense in Year 2."},{"Start":"10:37.585 ","End":"10:41.335","Text":"If you add the 6,857 plus the 5,714,"},{"Start":"10:41.335 ","End":"10:49.676","Text":"you get to total depreciation so far of 12,571.43,"},{"Start":"10:49.676 ","End":"10:55.405","Text":"so that gives us a carrying amount of 17,428.57."},{"Start":"10:55.405 ","End":"10:59.065","Text":"In Year 3, we need a closing carrying amount,"},{"Start":"10:59.065 ","End":"11:05.005","Text":"so we need to know what is the total depreciation we\u0027ve written off by the end of Year 3."},{"Start":"11:05.005 ","End":"11:07.690","Text":"What was our depreciation in Year 3?"},{"Start":"11:07.690 ","End":"11:09.625","Text":"That was the depreciation in Year 2,"},{"Start":"11:09.625 ","End":"11:11.965","Text":"and obviously that was depreciation in Year 1."},{"Start":"11:11.965 ","End":"11:17.695","Text":"I\u0027ll just write it down here, 6857.14."},{"Start":"11:17.695 ","End":"11:25.370","Text":"The depreciation in Year 3 was 4,571.43."},{"Start":"11:25.560 ","End":"11:28.705","Text":"That was depreciation in Year 1,"},{"Start":"11:28.705 ","End":"11:31.570","Text":"and that was accumulated depreciation in Year 1."},{"Start":"11:31.570 ","End":"11:35.495","Text":"Accumulated depreciation at the end of Year 2 is 12,571."},{"Start":"11:35.495 ","End":"11:38.830","Text":"Now all you have to do is add the depreciation for Year 3,"},{"Start":"11:38.830 ","End":"11:42.885","Text":"and we get to our accumulated depreciation at the end of Year 3,"},{"Start":"11:42.885 ","End":"11:47.645","Text":"which is now 17,142.86,"},{"Start":"11:47.645 ","End":"11:50.965","Text":"so it was the accumulated depreciation in end of Year 2,"},{"Start":"11:50.965 ","End":"11:54.280","Text":"plus the depreciation for Year 3."},{"Start":"11:54.280 ","End":"12:01.490","Text":"That gives us our closing carrying amount, 12,857.14."},{"Start":"12:01.490 ","End":"12:05.565","Text":"Then, we need to know what are we depreciating in Year 4."},{"Start":"12:05.565 ","End":"12:11.100","Text":"We depreciated 3,428.57."},{"Start":"12:11.100 ","End":"12:15.430","Text":"Now to get to our accumulated depreciation at the end of Year 4,"},{"Start":"12:15.430 ","End":"12:19.960","Text":"I\u0027m going to take the 17,142 accumulated depreciation at the end of Year 3,"},{"Start":"12:19.960 ","End":"12:23.845","Text":"add to that the depreciation I\u0027ve just put through in Year 4,"},{"Start":"12:23.845 ","End":"12:29.245","Text":"and that gives me 20,571.43,"},{"Start":"12:29.245 ","End":"12:35.590","Text":"and that gives me closing carrying amount of 9,428.57."},{"Start":"12:35.590 ","End":"12:40.135","Text":"Then, to calculate the accumulated depreciation in Year 5,"},{"Start":"12:40.135 ","End":"12:45.805","Text":"I need to know what depreciation did I process in year 5."},{"Start":"12:45.805 ","End":"12:51.040","Text":"The depreciation expense in Year 5 was 2,285.71."},{"Start":"12:51.040 ","End":"12:55.900","Text":"I add the accumulated depreciation at the end of Year 4,"},{"Start":"12:55.900 ","End":"13:00.670","Text":"to the depreciation that I experienced in Year 5,"},{"Start":"13:00.670 ","End":"13:06.625","Text":"and I get 22,857.14,"},{"Start":"13:06.625 ","End":"13:13.015","Text":"that gives me a carrying amount now of 7,142.86,"},{"Start":"13:13.015 ","End":"13:15.670","Text":"cost least accumulated depreciation."},{"Start":"13:15.670 ","End":"13:18.625","Text":"To get accumulated depreciation at the end of Year 6,"},{"Start":"13:18.625 ","End":"13:22.150","Text":"I take the accumulated depreciation at the end of Year 5,"},{"Start":"13:22.150 ","End":"13:25.690","Text":"and I must process and then I must add"},{"Start":"13:25.690 ","End":"13:29.080","Text":"to that the depreciation that I experienced in the Year 6,"},{"Start":"13:29.080 ","End":"13:33.610","Text":"which was 1,142.86,"},{"Start":"13:33.610 ","End":"13:37.855","Text":"so I add that figure to the 22,857,"},{"Start":"13:37.855 ","End":"13:41.200","Text":"and I get 24,000,"},{"Start":"13:41.200 ","End":"13:44.470","Text":"which gives me a closing carrying amount at the end of the sixth year,"},{"Start":"13:44.470 ","End":"13:48.655","Text":"which is the end of the useful life of 6,000."},{"Start":"13:48.655 ","End":"13:52.525","Text":"You can see here, there\u0027s your cost,"},{"Start":"13:52.525 ","End":"13:57.535","Text":"and in the final analysis you\u0027ve got accumulated depreciation,"},{"Start":"13:57.535 ","End":"14:01.465","Text":"has grown to 24,000 by the end of the sixth year,"},{"Start":"14:01.465 ","End":"14:05.055","Text":"which means that your final closing"},{"Start":"14:05.055 ","End":"14:10.460","Text":"carrying amount is going to equal your residual value,"},{"Start":"14:10.460 ","End":"14:12.745","Text":"so I hope you\u0027re getting the hang of this."},{"Start":"14:12.745 ","End":"14:15.830","Text":"Now, let\u0027s move on to part D."}],"ID":28578},{"Watched":false,"Name":"Exercise 2 - Part d","Duration":"10m 11s","ChapterTopicVideoID":27436,"CourseChapterTopicPlaylistID":254924,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:04.500","Text":"Part d. Now here we\u0027re asked to provide advice,"},{"Start":"00:04.500 ","End":"00:07.635","Text":"the company is trying to maximize profits."},{"Start":"00:07.635 ","End":"00:14.655","Text":"Let\u0027s compare the effect of the 3 methods on the depreciation expense in year 2,"},{"Start":"00:14.655 ","End":"00:20.160","Text":"and year 4, and then over the entire useful life."},{"Start":"00:20.160 ","End":"00:23.395","Text":"Now, remember we are told to maximize profit."},{"Start":"00:23.395 ","End":"00:29.885","Text":"Obviously, the lowest expense translates to the highest profit."},{"Start":"00:29.885 ","End":"00:34.620","Text":"What we need to do is compare the depreciation expense."},{"Start":"00:34.630 ","End":"00:38.060","Text":"What I\u0027ve done here is I\u0027ve created a little table."},{"Start":"00:38.060 ","End":"00:40.370","Text":"We\u0027re going to first look at year 2."},{"Start":"00:40.370 ","End":"00:42.840","Text":"Now using the straight line method,"},{"Start":"00:42.840 ","End":"00:45.150","Text":"what was our depreciation?"},{"Start":"00:45.150 ","End":"00:49.460","Text":"To know the depreciation using the straight line method,"},{"Start":"00:49.460 ","End":"00:53.210","Text":"we had to go back to part a. I\u0027m looking at"},{"Start":"00:53.210 ","End":"00:59.580","Text":"this particular table where we look at the year number 2."},{"Start":"00:59.630 ","End":"01:05.420","Text":"We pick up the depreciation expense in year 2."},{"Start":"01:05.420 ","End":"01:07.610","Text":"There\u0027s 4,000."},{"Start":"01:07.610 ","End":"01:14.030","Text":"Now go back to the table and we fill in 4,000."},{"Start":"01:14.030 ","End":"01:19.925","Text":"Now we need to know what is the depreciation using the reducing balance."},{"Start":"01:19.925 ","End":"01:23.925","Text":"We have to go back to part b."},{"Start":"01:23.925 ","End":"01:26.325","Text":"In part b,"},{"Start":"01:26.325 ","End":"01:30.220","Text":"here we have part b, we have year 2,"},{"Start":"01:30.220 ","End":"01:38.780","Text":"and we have our depreciation expense in year 2 was 5,397.79."},{"Start":"01:38.780 ","End":"01:42.390","Text":"We need to put that back into this table."},{"Start":"01:42.430 ","End":"01:51.580","Text":"Depreciation expense using the reducing balance in year 2, is 5,397.79."},{"Start":"01:51.580 ","End":"01:55.410","Text":"Now we need the sum of the year\u0027s digits."},{"Start":"01:55.410 ","End":"01:58.333","Text":"Go back to part c,"},{"Start":"01:58.333 ","End":"02:01.580","Text":"and pick up the depreciation for year 2."},{"Start":"02:01.580 ","End":"02:04.495","Text":"But here we have part c,"},{"Start":"02:04.495 ","End":"02:06.775","Text":"here is year 2."},{"Start":"02:06.775 ","End":"02:14.965","Text":"Here\u0027s our depreciation expense for year 2 was 5,714.29."},{"Start":"02:14.965 ","End":"02:20.550","Text":"Let\u0027s put that into the table in part d. We\u0027re going to put it into the table here for"},{"Start":"02:20.550 ","End":"02:29.615","Text":"part d. Here we have the depreciation, 5,714.29."},{"Start":"02:29.615 ","End":"02:32.780","Text":"Now, which of those methods,"},{"Start":"02:32.780 ","End":"02:36.470","Text":"depreciation methods gives us the highest profit?"},{"Start":"02:36.470 ","End":"02:38.930","Text":"Well, remember to get the highest profit,"},{"Start":"02:38.930 ","End":"02:41.195","Text":"you need the lowest expense."},{"Start":"02:41.195 ","End":"02:45.639","Text":"Which of the methods gave us the lowest depreciation expense?"},{"Start":"02:45.639 ","End":"02:47.765","Text":"Well, it\u0027s the straight line method,"},{"Start":"02:47.765 ","End":"02:51.400","Text":"giving us an expense of 4,000."},{"Start":"02:51.400 ","End":"02:56.910","Text":"Okay. The method that we would advise the company to use is"},{"Start":"02:56.910 ","End":"02:59.900","Text":"the straight line method because it gives us"},{"Start":"02:59.900 ","End":"03:04.325","Text":"the lowest depreciation expense and therefore it will give us the highest profit."},{"Start":"03:04.325 ","End":"03:06.100","Text":"That\u0027s for year 2."},{"Start":"03:06.100 ","End":"03:08.315","Text":"Now, we were then asked,"},{"Start":"03:08.315 ","End":"03:12.620","Text":"now imagine the company needs to maximize profit in year 4,"},{"Start":"03:12.620 ","End":"03:17.705","Text":"so they\u0027re not worried about year 2 but year 4\u0027s profit has to be the highest."},{"Start":"03:17.705 ","End":"03:21.395","Text":"We repeat this exercise basically."},{"Start":"03:21.395 ","End":"03:24.650","Text":"We now need to go back to part a,"},{"Start":"03:24.650 ","End":"03:28.820","Text":"straight line and pick up what the depreciation expense"},{"Start":"03:28.820 ","End":"03:33.455","Text":"was using that straight line method in year 4."},{"Start":"03:33.455 ","End":"03:35.345","Text":"Let\u0027s go back to part a."},{"Start":"03:35.345 ","End":"03:38.620","Text":"Now we are in part a, again."},{"Start":"03:38.620 ","End":"03:40.780","Text":"Year 4 this time,"},{"Start":"03:40.780 ","End":"03:43.413","Text":"and our depreciation expense was 4,000."},{"Start":"03:43.413 ","End":"03:45.900","Text":"That\u0027s obviously the case because it\u0027s straight line,"},{"Start":"03:45.900 ","End":"03:49.055","Text":"so the depreciation stays the same from year to year."},{"Start":"03:49.055 ","End":"03:54.375","Text":"Let\u0027s put that into the table in part d. We\u0027re looking at year 4,"},{"Start":"03:54.375 ","End":"04:01.920","Text":"in terms of the straight line method here is our 4,000."},{"Start":"04:01.920 ","End":"04:04.650","Text":"Now let\u0027s do that for the reducing balance."},{"Start":"04:04.650 ","End":"04:06.840","Text":"Go back to part b,"},{"Start":"04:06.840 ","End":"04:11.645","Text":"which is where we calculated the depreciation using the reducing balance."},{"Start":"04:11.645 ","End":"04:15.770","Text":"Look to see what the depreciation expense was in year 4."},{"Start":"04:15.770 ","End":"04:18.770","Text":"Here we are, part b."},{"Start":"04:18.770 ","End":"04:22.365","Text":"This is the reducing balance in year 4,"},{"Start":"04:22.365 ","End":"04:27.610","Text":"our depreciation expense was 3,156.56."},{"Start":"04:27.610 ","End":"04:32.730","Text":"Let\u0027s put that into our table in part d. We\u0027re now looking"},{"Start":"04:32.730 ","End":"04:40.780","Text":"at the reducing balance and there we have it, 3,156.56."},{"Start":"04:40.780 ","End":"04:44.525","Text":"Now we need to know what the depreciation was in year 4"},{"Start":"04:44.525 ","End":"04:48.530","Text":"using the sum of the year\u0027s digits method."},{"Start":"04:48.530 ","End":"04:51.730","Text":"Go back to part c. Part c,"},{"Start":"04:51.730 ","End":"04:59.210","Text":"year 4 and the depreciation expense was 3,428.57."},{"Start":"04:59.210 ","End":"05:05.310","Text":"Here we have sum of the year\u0027s digits, 3,428.57."},{"Start":"05:05.310 ","End":"05:07.615","Text":"Now, remember what are we being asked to do,"},{"Start":"05:07.615 ","End":"05:13.775","Text":"is to give advice as to which depreciation method would give us the highest profit."},{"Start":"05:13.775 ","End":"05:16.850","Text":"We have to pick something that will give us the highest profit,"},{"Start":"05:16.850 ","End":"05:19.310","Text":"which means we need to pick up the lowest expense."},{"Start":"05:19.310 ","End":"05:23.590","Text":"While the lowest expense here is the reducing balance method."},{"Start":"05:23.590 ","End":"05:28.790","Text":"Therefore, the reducing balance is the method that we would"},{"Start":"05:28.790 ","End":"05:31.460","Text":"recommend the company utilize because it has"},{"Start":"05:31.460 ","End":"05:35.560","Text":"the lowest depreciation expense and therefore the highest profit."},{"Start":"05:35.560 ","End":"05:40.275","Text":"Then the third part to part d,"},{"Start":"05:40.275 ","End":"05:43.245","Text":"is over the life of the asset."},{"Start":"05:43.245 ","End":"05:46.715","Text":"Look to see what would maximize profit over the life."},{"Start":"05:46.715 ","End":"05:52.415","Text":"Well, this was a trick question because in each of those exercises,"},{"Start":"05:52.415 ","End":"05:57.650","Text":"you could tell that the cost of the asset 30,000 was"},{"Start":"05:57.650 ","End":"06:04.330","Text":"depreciated to a carrying amount of 6,000 which was its residual value."},{"Start":"06:04.330 ","End":"06:08.900","Text":"That meant that our accumulated depreciation will total"},{"Start":"06:08.900 ","End":"06:13.925","Text":"depreciation expense over the life of the asset was 24,000."},{"Start":"06:13.925 ","End":"06:20.910","Text":"Being the 30,000 cost minus the residual value of 6,000."},{"Start":"06:20.910 ","End":"06:23.200","Text":"Let\u0027s go back and have a look."},{"Start":"06:23.200 ","End":"06:25.460","Text":"Part a straight line."},{"Start":"06:25.460 ","End":"06:27.545","Text":"If you have a look at this table here,"},{"Start":"06:27.545 ","End":"06:31.505","Text":"over the entire life,"},{"Start":"06:31.505 ","End":"06:34.475","Text":"what was our depreciation expense?"},{"Start":"06:34.475 ","End":"06:39.680","Text":"It was the 4,000 each year for 6 years."},{"Start":"06:39.680 ","End":"06:44.940","Text":"So 24,000 was expense 24k."},{"Start":"06:44.940 ","End":"06:46.860","Text":"That means 24,000."},{"Start":"06:46.860 ","End":"06:51.570","Text":"The cost was 30,000 we then wrote off a total of"},{"Start":"06:51.570 ","End":"06:59.870","Text":"24,000 giving us a total carrying amount at the end of its useful life of 6,000."},{"Start":"06:59.870 ","End":"07:01.775","Text":"Let\u0027s put that into our table."},{"Start":"07:01.775 ","End":"07:05.715","Text":"Here we have 24,000 or straight line,"},{"Start":"07:05.715 ","End":"07:09.730","Text":"then we look at our reducing balance. Go to part b."},{"Start":"07:09.730 ","End":"07:14.570","Text":"Part b, over the life of the asset 6 years,"},{"Start":"07:14.570 ","End":"07:18.515","Text":"if you add up all of that depreciation here,"},{"Start":"07:18.515 ","End":"07:21.230","Text":"depreciation in each of those years,"},{"Start":"07:21.230 ","End":"07:25.760","Text":"you get to your accumulated depreciation of 24,000."},{"Start":"07:25.760 ","End":"07:31.820","Text":"Was the cost of 30,000 minus your accumulated depreciation of"},{"Start":"07:31.820 ","End":"07:38.345","Text":"24,000 gives us our final carrying amount of 6,000 which was the residual value."},{"Start":"07:38.345 ","End":"07:42.985","Text":"So 24,000 was expensed over the life of the asset."},{"Start":"07:42.985 ","End":"07:44.985","Text":"Let\u0027s put that into the table."},{"Start":"07:44.985 ","End":"07:52.995","Text":"Reducing balance, 24,000 was the total expense and then the sum of the year\u0027s digits."},{"Start":"07:52.995 ","End":"07:58.010","Text":"Let\u0027s go to part c. Here we have part c. We"},{"Start":"07:58.010 ","End":"08:03.930","Text":"take the depreciation in each of those 6 years,"},{"Start":"08:06.380 ","End":"08:09.070","Text":"you add these up."},{"Start":"08:09.070 ","End":"08:11.420","Text":"We\u0027ve done it previously,"},{"Start":"08:11.420 ","End":"08:16.040","Text":"came to 24,000 was our accumulated depreciation or in other words,"},{"Start":"08:16.040 ","End":"08:18.260","Text":"our total depreciation expense,"},{"Start":"08:18.260 ","End":"08:19.700","Text":"so there we had it."},{"Start":"08:19.700 ","End":"08:23.060","Text":"The opening cost or opening carrying amount less"},{"Start":"08:23.060 ","End":"08:26.990","Text":"the total depreciation that was expensed over the life of the asset,"},{"Start":"08:26.990 ","End":"08:33.840","Text":"giving you total accumulated depreciation of 24,000 and 30,000 list the"},{"Start":"08:33.840 ","End":"08:41.645","Text":"24,000 gives us our closing carrying amount being our residual value."},{"Start":"08:41.645 ","End":"08:44.660","Text":"Let\u0027s put that into our table in part d."},{"Start":"08:44.660 ","End":"08:48.290","Text":"Now we\u0027re looking at the sum of the year\u0027s digits column,"},{"Start":"08:48.290 ","End":"08:52.610","Text":"put in the 24,000 there we have it."},{"Start":"08:52.610 ","End":"08:55.810","Text":"You can see that over the life of the asset,"},{"Start":"08:55.810 ","End":"08:59.565","Text":"all of them give us the self same answer."},{"Start":"08:59.565 ","End":"09:03.225","Text":"Straight line, we expense a total of 24,000."},{"Start":"09:03.225 ","End":"09:06.390","Text":"Reducing balance, we expense a total of 24,000 and"},{"Start":"09:06.390 ","End":"09:09.850","Text":"sum of the years\u0027 digits we expense 24,000."},{"Start":"09:09.850 ","End":"09:16.350","Text":"All methods eventually expense the entire depreciable amount of 24,000."},{"Start":"09:16.350 ","End":"09:20.120","Text":"Therefore, the total expense over the useful life,"},{"Start":"09:20.120 ","End":"09:22.895","Text":"and thus the overall effect on the profit,"},{"Start":"09:22.895 ","End":"09:27.635","Text":"is the same irrespective of the depreciation method used."},{"Start":"09:27.635 ","End":"09:31.070","Text":"If the company had to ask you for advice as to"},{"Start":"09:31.070 ","End":"09:34.640","Text":"which method to use because they want to maximize profit over the life of the asset,"},{"Start":"09:34.640 ","End":"09:37.460","Text":"you would tell them it doesn\u0027t matter which method you use."},{"Start":"09:37.460 ","End":"09:41.090","Text":"Because based on the residual value of 6,000,"},{"Start":"09:41.090 ","End":"09:43.700","Text":"all of those methods are going to expense"},{"Start":"09:43.700 ","End":"09:48.185","Text":"24,000 being the 30,000 lesser residual value of 6,000."},{"Start":"09:48.185 ","End":"09:56.100","Text":"The method chosen simply affects an individual period\u0027s results."},{"Start":"09:56.100 ","End":"09:59.210","Text":"In other words, an individual period\u0027s profit,"},{"Start":"09:59.210 ","End":"10:01.535","Text":"an individual year\u0027s profit."},{"Start":"10:01.535 ","End":"10:03.545","Text":"It doesn\u0027t affect it overall."},{"Start":"10:03.545 ","End":"10:12.090","Text":"I hope this has made the depreciation methods a little bit easier for you. Bye for now."}],"ID":28579},{"Watched":false,"Name":"Impairments Part 1","Duration":"17m 7s","ChapterTopicVideoID":26643,"CourseChapterTopicPlaylistID":254924,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:04.900","Text":"In this video, we will focus on the impairments of property,"},{"Start":"00:04.900 ","End":"00:06.700","Text":"plant, and equipment."},{"Start":"00:06.700 ","End":"00:12.415","Text":"What is the rationale behind the impairments of property, plant, and equipment?"},{"Start":"00:12.415 ","End":"00:15.685","Text":"Well, think back to definition of an asset,"},{"Start":"00:15.685 ","End":"00:18.925","Text":"which as you know is a present economic resource"},{"Start":"00:18.925 ","End":"00:23.890","Text":"controlled by the entity as a result of past events."},{"Start":"00:23.890 ","End":"00:27.550","Text":"The present economic resource is a right that has"},{"Start":"00:27.550 ","End":"00:31.659","Text":"the potential to produce future economic benefits."},{"Start":"00:31.659 ","End":"00:34.630","Text":"In that part of the definition,"},{"Start":"00:34.630 ","End":"00:36.265","Text":"the potential to produce"},{"Start":"00:36.265 ","End":"00:41.225","Text":"future economic benefits where the impairments issue comes about."},{"Start":"00:41.225 ","End":"00:48.890","Text":"If the capacity of the asset to produce those future benefits is somehow affected,"},{"Start":"00:48.890 ","End":"00:54.650","Text":"management needs to check if the carrying amount of the asset is in"},{"Start":"00:54.650 ","End":"01:01.354","Text":"fact higher than those potentially reduced future benefits."},{"Start":"01:01.354 ","End":"01:03.800","Text":"If the carrying amount of the asset,"},{"Start":"01:03.800 ","End":"01:06.995","Text":"which is the amount on the statement of financial position,"},{"Start":"01:06.995 ","End":"01:13.160","Text":"and therefore implying the future benefits that will be received from the asset."},{"Start":"01:13.160 ","End":"01:18.170","Text":"If those are higher than the potential future benefits,"},{"Start":"01:18.170 ","End":"01:23.510","Text":"then an impairment has incurred and the carrying amount"},{"Start":"01:23.510 ","End":"01:29.240","Text":"needs to be written down and an impairment loss recognized in the income statement."},{"Start":"01:29.240 ","End":"01:34.490","Text":"Now, impairments occur from a number of different situations."},{"Start":"01:34.490 ","End":"01:41.390","Text":"Examples include a decline in the demand for products that the firm sells."},{"Start":"01:41.390 ","End":"01:44.675","Text":"Maybe greater competition, which then depresses"},{"Start":"01:44.675 ","End":"01:49.175","Text":"prices and therefore will decrease future benefits."},{"Start":"01:49.175 ","End":"01:53.395","Text":"Alternative products coming onto the market, higher costs."},{"Start":"01:53.395 ","End":"01:58.415","Text":"Maybe a decision to shift resources to other activities,"},{"Start":"01:58.415 ","End":"02:02.390","Text":"or maybe even a loss of specialized personnel."},{"Start":"02:02.390 ","End":"02:08.240","Text":"The examples here focus on the impairment of an individual asset."},{"Start":"02:08.240 ","End":"02:10.820","Text":"If there\u0027s more than 1 asset impaired,"},{"Start":"02:10.820 ","End":"02:18.530","Text":"accounting principles tell us to focus on what\u0027s called a cash-generating unit or a CGU."},{"Start":"02:18.530 ","End":"02:23.404","Text":"Examples of a CGU include a factory,"},{"Start":"02:23.404 ","End":"02:27.065","Text":"an operating division, or foreign business units."},{"Start":"02:27.065 ","End":"02:29.390","Text":"But as I\u0027ve said the examples here,"},{"Start":"02:29.390 ","End":"02:33.920","Text":"we\u0027ll focus simply on the impairment of an individual asset."},{"Start":"02:33.920 ","End":"02:38.780","Text":"What are the steps required to determine if there is,"},{"Start":"02:38.780 ","End":"02:40.550","Text":"in fact, an impairment?"},{"Start":"02:40.550 ","End":"02:44.900","Text":"We need to look at the fair value of the asset."},{"Start":"02:44.900 ","End":"02:49.550","Text":"The fair value is the net selling price."},{"Start":"02:49.550 ","End":"02:52.025","Text":"Net selling price, meaning the selling price,"},{"Start":"02:52.025 ","End":"02:56.150","Text":"less any transaction costs involved in making the sale."},{"Start":"02:56.150 ","End":"03:01.685","Text":"Then we need to look at what\u0027s called the value in use of the asset."},{"Start":"03:01.685 ","End":"03:05.975","Text":"Now the value in use is the present value of"},{"Start":"03:05.975 ","End":"03:10.925","Text":"all future cash flows associated with that asset."},{"Start":"03:10.925 ","End":"03:14.810","Text":"This is quite a complex calculation and you will learn"},{"Start":"03:14.810 ","End":"03:19.625","Text":"about prison value techniques in the chapter on liabilities."},{"Start":"03:19.625 ","End":"03:24.890","Text":"Within determine which of the 2 values is higher."},{"Start":"03:24.890 ","End":"03:27.255","Text":"In other words, the 2 values."},{"Start":"03:27.255 ","End":"03:32.195","Text":"In Number 1, the effectively net selling price,"},{"Start":"03:32.195 ","End":"03:35.390","Text":"and Number 2 the value in use."},{"Start":"03:35.390 ","End":"03:39.710","Text":"Now the higher of the net selling price and value in"},{"Start":"03:39.710 ","End":"03:45.380","Text":"use is referred to as the recoverable amount of the asset."},{"Start":"03:45.380 ","End":"03:49.385","Text":"You may ask, why are we taking the higher of those 2?"},{"Start":"03:49.385 ","End":"03:52.760","Text":"It\u0027s basically a business reason because"},{"Start":"03:52.760 ","End":"03:58.265","Text":"the recoverable amount the amount entity expected to recover from the asset."},{"Start":"03:58.265 ","End":"04:03.170","Text":"If the asset has a net selling price or for example,"},{"Start":"04:03.170 ","End":"04:06.260","Text":"100 and a value in use."},{"Start":"04:06.260 ","End":"04:10.925","Text":"In other words, future net cash flows of only 80,"},{"Start":"04:10.925 ","End":"04:13.069","Text":"then from a business perspective,"},{"Start":"04:13.069 ","End":"04:16.520","Text":"it makes sense to actually dispose of the asset."},{"Start":"04:16.520 ","End":"04:18.560","Text":"Whereas other way around,"},{"Start":"04:18.560 ","End":"04:22.390","Text":"if the net selling price is in fact 80,"},{"Start":"04:22.390 ","End":"04:24.590","Text":"but the value in use,"},{"Start":"04:24.590 ","End":"04:29.335","Text":"the net cash flows from continuing to use it is, in fact, 100."},{"Start":"04:29.335 ","End":"04:35.495","Text":"Then it makes sense to carry on using the asset to generate those 100 of net cashflows."},{"Start":"04:35.495 ","End":"04:40.865","Text":"Within compare the carrying value to the recoverable amount."},{"Start":"04:40.865 ","End":"04:42.790","Text":"In other words, the carrying value,"},{"Start":"04:42.790 ","End":"04:44.980","Text":"the amount at which the asset is currently"},{"Start":"04:44.980 ","End":"04:48.235","Text":"sitting on the statement of financial position,"},{"Start":"04:48.235 ","End":"04:50.290","Text":"and the recoverable amount,"},{"Start":"04:50.290 ","End":"04:54.069","Text":"the amount of the potential future benefits."},{"Start":"04:54.069 ","End":"04:59.425","Text":"Now, if the carrying value is greater than the recoverable amount,"},{"Start":"04:59.425 ","End":"05:01.060","Text":"so putting numbers to it."},{"Start":"05:01.060 ","End":"05:04.495","Text":"If the carrying value is, for example,"},{"Start":"05:04.495 ","End":"05:08.020","Text":"an amount of 120,"},{"Start":"05:08.020 ","End":"05:12.715","Text":"whereas the recoverable amount is an amount of 100."},{"Start":"05:12.715 ","End":"05:17.650","Text":"It would make no sense to record the asset on the statement of financial position at"},{"Start":"05:17.650 ","End":"05:23.705","Text":"120 when the future benefits are in fact going to be only 100."},{"Start":"05:23.705 ","End":"05:32.470","Text":"In that case, an impairment has occurred and the entity recognizes an impairment loss,"},{"Start":"05:32.470 ","End":"05:37.494","Text":"an expense on the income statement at the difference between"},{"Start":"05:37.494 ","End":"05:44.500","Text":"the recoverable amount and clearly than the higher carrying amount."},{"Start":"05:44.500 ","End":"05:50.195","Text":"This slide here helps to put the previous discussion in the context of some numbers."},{"Start":"05:50.195 ","End":"05:52.190","Text":"There are 2 scenarios."},{"Start":"05:52.190 ","End":"05:53.650","Text":"In the first scenario,"},{"Start":"05:53.650 ","End":"05:57.228","Text":"the carrying amount of the asset is 1,200,"},{"Start":"05:57.228 ","End":"05:58.855","Text":"and the second scenario,"},{"Start":"05:58.855 ","End":"06:01.780","Text":"the carrying amount of the asset is 900."},{"Start":"06:01.780 ","End":"06:05.850","Text":"If there are indications that that asset is impaired,"},{"Start":"06:05.850 ","End":"06:10.070","Text":"the entity needs to compute the recoverable amount,"},{"Start":"06:10.070 ","End":"06:14.135","Text":"which is the higher of the fair value of the asset,"},{"Start":"06:14.135 ","End":"06:15.925","Text":"this case of 1,000,"},{"Start":"06:15.925 ","End":"06:22.820","Text":"and the value in use the present value of future cash flows in this case 1,100."},{"Start":"06:22.820 ","End":"06:27.395","Text":"The higher those 2 amounts is 1,100,"},{"Start":"06:27.395 ","End":"06:30.680","Text":"and that\u0027s taken to be the recoverable amount."},{"Start":"06:30.680 ","End":"06:33.245","Text":"In other words, in this situation over here,"},{"Start":"06:33.245 ","End":"06:37.100","Text":"it makes business sense for the entity to continue using"},{"Start":"06:37.100 ","End":"06:40.880","Text":"the asset for the remainder of its useful life to generate"},{"Start":"06:40.880 ","End":"06:44.930","Text":"cash flows of 1,100"},{"Start":"06:44.930 ","End":"06:51.845","Text":"rather than selling the asset today and receiving 1,000 for the asset."},{"Start":"06:51.845 ","End":"06:56.000","Text":"Given the recoverable amount at 1,100 and"},{"Start":"06:56.000 ","End":"07:01.010","Text":"comparing it to the carrying amount of 1,200 in the first scenario,"},{"Start":"07:01.010 ","End":"07:04.310","Text":"there\u0027s clearly not an impairment loss of"},{"Start":"07:04.310 ","End":"07:09.740","Text":"100 because the future benefits are less than the carrying amount."},{"Start":"07:09.740 ","End":"07:11.660","Text":"But in the second situation,"},{"Start":"07:11.660 ","End":"07:15.590","Text":"the second scenario with the carrying amount of the asset is"},{"Start":"07:15.590 ","End":"07:21.790","Text":"900 and the recoverable amount is 1,100,"},{"Start":"07:21.790 ","End":"07:24.890","Text":"there will be no impairment here because"},{"Start":"07:24.890 ","End":"07:30.140","Text":"the carrying amount in fact is less than the recoverable amount"},{"Start":"07:30.140 ","End":"07:33.410","Text":"the entity expects to recover more from the acid and"},{"Start":"07:33.410 ","End":"07:38.874","Text":"its carrying amount so no impairment is required in the second scenario."},{"Start":"07:38.874 ","End":"07:42.230","Text":"Turning into an example of impairments and"},{"Start":"07:42.230 ","End":"07:45.425","Text":"using the same information as in the previous examples,"},{"Start":"07:45.425 ","End":"07:49.940","Text":"the company buys this machine for 30,000 currency units."},{"Start":"07:49.940 ","End":"07:57.250","Text":"It has an estimated useful life of 5 years and a residual value of 5,000."},{"Start":"07:57.250 ","End":"08:01.310","Text":"Using a straight-line depreciation method."},{"Start":"08:01.310 ","End":"08:03.965","Text":"Come to the end of the second year."},{"Start":"08:03.965 ","End":"08:06.880","Text":"They are indicators of impairment."},{"Start":"08:06.880 ","End":"08:12.465","Text":"Management estimate that if it continue to use the machine,"},{"Start":"08:12.465 ","End":"08:15.020","Text":"so looking now at the value in use."},{"Start":"08:15.020 ","End":"08:21.020","Text":"The present value of cash flows over the remaining 3-year life totals"},{"Start":"08:21.020 ","End":"08:30.675","Text":"18,000.If it sold the machine now so the selling price management could generate 19,100."},{"Start":"08:30.675 ","End":"08:32.880","Text":"We are required to decide,"},{"Start":"08:32.880 ","End":"08:34.920","Text":"should the machine be impaired?"},{"Start":"08:34.920 ","End":"08:38.350","Text":"If so, by how much?"},{"Start":"08:39.610 ","End":"08:45.125","Text":"We need to look at the situation at the end of that second year."},{"Start":"08:45.125 ","End":"08:48.065","Text":"Based on our previous calculations,"},{"Start":"08:48.065 ","End":"08:51.770","Text":"we know the asset had a cost of 30,000."},{"Start":"08:51.770 ","End":"08:56.360","Text":"After 2 years at 5,000 depreciation per year,"},{"Start":"08:56.360 ","End":"08:59.660","Text":"the accumulated depreciation is 10,000,"},{"Start":"08:59.660 ","End":"09:04.590","Text":"and the carrying amount is 20,000."},{"Start":"09:05.850 ","End":"09:08.904","Text":"To compute the amount of the impairment,"},{"Start":"09:08.904 ","End":"09:12.835","Text":"we need to firstly determine the recoverable amount."},{"Start":"09:12.835 ","End":"09:17.110","Text":"The recoverable amount we know is the higher of 2 numbers,"},{"Start":"09:17.110 ","End":"09:21.280","Text":"the fair value less cost to sell and the value in use,"},{"Start":"09:21.280 ","End":"09:25.465","Text":"the present value of future net cash flows."},{"Start":"09:25.465 ","End":"09:27.820","Text":"In this scenario over here,"},{"Start":"09:27.820 ","End":"09:30.760","Text":"the fair value is an amount of"},{"Start":"09:30.760 ","End":"09:37.345","Text":"19,100 and there are no selling costs in this particular scenario."},{"Start":"09:37.345 ","End":"09:42.715","Text":"Therefore, the net selling price is the 19,100."},{"Start":"09:42.715 ","End":"09:46.530","Text":"The value in use, in other words,"},{"Start":"09:46.530 ","End":"09:52.575","Text":"the present value of future cash flows is given at an amount of 18,000."},{"Start":"09:52.575 ","End":"10:00.020","Text":"We take the higher of these 2 numbers, which is 19,100."},{"Start":"10:00.510 ","End":"10:03.760","Text":"From the perspective of the business entity,"},{"Start":"10:03.760 ","End":"10:05.751","Text":"would make sense to in fact,"},{"Start":"10:05.751 ","End":"10:11.050","Text":"sell the asset for cash flow of 19,100 today,"},{"Start":"10:11.050 ","End":"10:16.060","Text":"rather than continuing to use the asset for the remainder of its life and"},{"Start":"10:16.060 ","End":"10:22.040","Text":"generate a net present value today of 18,000."},{"Start":"10:22.620 ","End":"10:31.030","Text":"The carrying amount of this asset from the previous slide we know is an amount of 20,000."},{"Start":"10:31.030 ","End":"10:33.505","Text":"Therefore, to compute the impairment,"},{"Start":"10:33.505 ","End":"10:37.915","Text":"we compare the recoverable amount with the carrying amount."},{"Start":"10:37.915 ","End":"10:43.345","Text":"The asset therefore is impaired by an amount of 900."},{"Start":"10:43.345 ","End":"10:49.540","Text":"The journal entry to record the impairment is a debit to an expense account called"},{"Start":"10:49.540 ","End":"10:58.135","Text":"the impairment expense as an expense account in an amount of 900."},{"Start":"10:58.135 ","End":"11:05.335","Text":"The credit goes to the accumulated depreciation account because in fact,"},{"Start":"11:05.335 ","End":"11:11.080","Text":"the impairment is an accelerated depreciation"},{"Start":"11:11.080 ","End":"11:18.379","Text":"on the asset and additional usage of the asset caused by other factors."},{"Start":"11:19.380 ","End":"11:22.630","Text":"Now going forward into future years,"},{"Start":"11:22.630 ","End":"11:25.420","Text":"into years 3, 4, and 5,"},{"Start":"11:25.420 ","End":"11:32.215","Text":"the annual depreciation expense will now be computed at the new carrying amount,"},{"Start":"11:32.215 ","End":"11:42.040","Text":"which is the recoverable amount of 19,100 less clearly the estimated residual value"},{"Start":"11:42.040 ","End":"11:49.450","Text":"of 5,000 divided by the 3 remaining years and the depreciation per"},{"Start":"11:49.450 ","End":"12:02.440","Text":"year comes out to currency units of therefore 4,700."},{"Start":"12:02.440 ","End":"12:04.075","Text":"We now ask the question,"},{"Start":"12:04.075 ","End":"12:07.195","Text":"can impairments ever be reversed?"},{"Start":"12:07.195 ","End":"12:08.710","Text":"The answer is yes,"},{"Start":"12:08.710 ","End":"12:13.780","Text":"impairments can be reversed but there is a ceiling to that reversal."},{"Start":"12:13.780 ","End":"12:17.140","Text":"The ceiling is the net book value,"},{"Start":"12:17.140 ","End":"12:23.605","Text":"which means the carrying amount that would have been reported without the impairment."},{"Start":"12:23.605 ","End":"12:29.020","Text":"Now, the reason for that is and we will see this more clearly in a later presentation,"},{"Start":"12:29.020 ","End":"12:33.580","Text":"that if the reversal goes above what is now"},{"Start":"12:33.580 ","End":"12:38.440","Text":"called or will be called the historic carrying amount,"},{"Start":"12:38.440 ","End":"12:42.355","Text":"that gets the entity into the realm of a re-evaluation,"},{"Start":"12:42.355 ","End":"12:45.730","Text":"which we don\u0027t want to do under the cost model."},{"Start":"12:45.730 ","End":"12:48.745","Text":"To illustrate this, let\u0027s assume,"},{"Start":"12:48.745 ","End":"12:51.895","Text":"for example, that at the end of year 3,"},{"Start":"12:51.895 ","End":"12:56.680","Text":"which now is 1 year after the impairment took place at the end of year 2,"},{"Start":"12:56.680 ","End":"13:02.380","Text":"the recoverable amount is reassessed at 17,000."},{"Start":"13:02.380 ","End":"13:09.340","Text":"That means we have looked at the higher of those 2 values,"},{"Start":"13:09.340 ","End":"13:14.020","Text":"the higher of the selling price and the value in use."},{"Start":"13:14.020 ","End":"13:16.300","Text":"The higher of those 2 numbers,"},{"Start":"13:16.300 ","End":"13:21.680","Text":"comes to 17,000 which is the recoverable amount."},{"Start":"13:22.500 ","End":"13:25.720","Text":"We now need to take a look at what"},{"Start":"13:25.720 ","End":"13:33.110","Text":"the carrying amount would have been had the impairment not taken place."},{"Start":"13:33.110 ","End":"13:35.625","Text":"Let\u0027s see how we compute this."},{"Start":"13:35.625 ","End":"13:38.280","Text":"We can look at the cost of the asset,"},{"Start":"13:38.280 ","End":"13:43.027","Text":"which we know is an amount of 30,000,"},{"Start":"13:43.027 ","End":"13:49.720","Text":"and then we just have to subtract the accumulated depreciation for the 3 years."},{"Start":"13:49.720 ","End":"13:52.285","Text":"But the accumulated depreciation now,"},{"Start":"13:52.285 ","End":"13:58.520","Text":"we subtracted based on the historic cost calculation without the impairment."},{"Start":"13:59.820 ","End":"14:09.880","Text":"We know the accumulated depreciation will be the 30,000 cost less the 5,000 residual"},{"Start":"14:09.880 ","End":"14:15.235","Text":"value divided by the 5 year useful life"},{"Start":"14:15.235 ","End":"14:21.070","Text":"and multiplied by 3 years to the end of the third year."},{"Start":"14:21.070 ","End":"14:26.990","Text":"That amounts to an amount of 15,000."},{"Start":"14:27.840 ","End":"14:32.770","Text":"Therefore, you can see that the carrying amount at"},{"Start":"14:32.770 ","End":"14:41.350","Text":"the end of the third year had there been no revaluation would have amounted to 15,000."},{"Start":"14:41.350 ","End":"14:44.020","Text":"Keep that number in mind."},{"Start":"14:44.020 ","End":"14:50.125","Text":"Let\u0027s go now and look at the actual carrying amount at the end of the third year."},{"Start":"14:50.125 ","End":"14:56.020","Text":"The actual carrying amount in the third year is 14,400."},{"Start":"14:56.020 ","End":"14:58.165","Text":"How do we get that?"},{"Start":"14:58.165 ","End":"15:01.360","Text":"Well, we can take the starting point as"},{"Start":"15:01.360 ","End":"15:05.530","Text":"the carrying amount at the end of the second year."},{"Start":"15:05.530 ","End":"15:07.090","Text":"From the previous slide,"},{"Start":"15:07.090 ","End":"15:10.540","Text":"we saw the carrying amount at the end of the second year,"},{"Start":"15:10.540 ","End":"15:12.475","Text":"end of year 2,"},{"Start":"15:12.475 ","End":"15:17.020","Text":"which in fact is the recoverable amount,"},{"Start":"15:17.020 ","End":"15:20.785","Text":"is the amount of 19,000."},{"Start":"15:20.785 ","End":"15:27.205","Text":"We then look at the depreciation expense for year 3."},{"Start":"15:27.205 ","End":"15:30.625","Text":"The depreciation expense for year 3,"},{"Start":"15:30.625 ","End":"15:37.600","Text":"we computed on the previous slide as 4,700."},{"Start":"15:37.600 ","End":"15:42.115","Text":"Therefore the carrying amount at the end of year 3,"},{"Start":"15:42.115 ","End":"15:46.120","Text":"is the amount of 14,400."},{"Start":"15:46.120 ","End":"15:49.750","Text":"What you now see is that"},{"Start":"15:49.750 ","End":"15:58.225","Text":"the asset has a recoverable amount of this 17,000."},{"Start":"15:58.225 ","End":"16:04.090","Text":"Its current carrying amount is 14,400 but we"},{"Start":"16:04.090 ","End":"16:11.035","Text":"can\u0027t reverse the impairment from 14,400 all the way to 17,000."},{"Start":"16:11.035 ","End":"16:13.900","Text":"We are limited to reversing it to what"},{"Start":"16:13.900 ","End":"16:17.605","Text":"the historic cost would have been, which is 15,000."},{"Start":"16:17.605 ","End":"16:22.810","Text":"Therefore, the reversal of impairment is an amount of 600."},{"Start":"16:22.810 ","End":"16:24.985","Text":"To reverse the impairment,"},{"Start":"16:24.985 ","End":"16:28.300","Text":"we debit the accumulated depreciation,"},{"Start":"16:28.300 ","End":"16:34.750","Text":"the contra asset account with the amount of 600 and we"},{"Start":"16:34.750 ","End":"16:42.985","Text":"credit the impairment expense,"},{"Start":"16:42.985 ","End":"16:48.325","Text":"which in fact reverses the amount of 600."},{"Start":"16:48.325 ","End":"16:50.845","Text":"By crediting the impairment expense,"},{"Start":"16:50.845 ","End":"16:54.910","Text":"that in effect is the same as putting the account or"},{"Start":"16:54.910 ","End":"16:59.035","Text":"the credit to an impairment reversal."},{"Start":"16:59.035 ","End":"17:00.730","Text":"If you want to call it that as well,"},{"Start":"17:00.730 ","End":"17:05.960","Text":"that\u0027s also an acceptable term, an impairment reversal."}],"ID":28604},{"Watched":false,"Name":"Impairments Part 2","Duration":"8m 51s","ChapterTopicVideoID":26631,"CourseChapterTopicPlaylistID":254924,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.895","Text":"Turning to an example of impairments and"},{"Start":"00:02.895 ","End":"00:06.495","Text":"using the same information as in the previous examples,"},{"Start":"00:06.495 ","End":"00:11.010","Text":"the company buys this machine for 30,0000 currency units."},{"Start":"00:11.010 ","End":"00:15.030","Text":"It has a estimated useful life of 5 years and"},{"Start":"00:15.030 ","End":"00:21.810","Text":"a residual value of 5,000 using a straight line depreciation method."},{"Start":"00:21.810 ","End":"00:26.220","Text":"Come to the 2nd year there are indicators of impairments"},{"Start":"00:26.220 ","End":"00:31.110","Text":"and management estimate little bit continue to use the machine,"},{"Start":"00:31.110 ","End":"00:35.490","Text":"so looking now at the value in use the present value of"},{"Start":"00:35.490 ","End":"00:41.135","Text":"cash flows over the remaining 3 year life totals 18,000."},{"Start":"00:41.135 ","End":"00:43.250","Text":"If it sold the machine now,"},{"Start":"00:43.250 ","End":"00:49.475","Text":"so the selling price management could generate 19,100."},{"Start":"00:49.475 ","End":"00:56.680","Text":"We are required to decide should the machine be impaired and if so, by how much?"},{"Start":"00:56.680 ","End":"01:01.955","Text":"We need to look at the situation at the end of that 2nd year."},{"Start":"01:01.955 ","End":"01:04.895","Text":"Based on our previous calculations,"},{"Start":"01:04.895 ","End":"01:13.190","Text":"we know the asset had a cost of 30,000 and after 2 years at 5,000 depreciation per year,"},{"Start":"01:13.190 ","End":"01:20.955","Text":"the accumulated depreciation is 10,000 and the carrying amount is 20,000."},{"Start":"01:20.955 ","End":"01:23.555","Text":"To compute the amount of impairment,"},{"Start":"01:23.555 ","End":"01:27.470","Text":"we need to firstly determine the recoverable amount."},{"Start":"01:27.470 ","End":"01:31.760","Text":"The recoverable amount we know is the higher of 2 numbers,"},{"Start":"01:31.760 ","End":"01:34.325","Text":"the fair value less cost to sell,"},{"Start":"01:34.325 ","End":"01:35.930","Text":"and the value in use,"},{"Start":"01:35.930 ","End":"01:39.695","Text":"the present value of future net cash flows."},{"Start":"01:39.695 ","End":"01:41.615","Text":"In this scenario over here,"},{"Start":"01:41.615 ","End":"01:44.570","Text":"the fair value is an amount of"},{"Start":"01:44.570 ","End":"01:51.170","Text":"19,100 and there are no selling costs in this particular scenario."},{"Start":"01:51.170 ","End":"01:56.610","Text":"Therefore, the net selling price is the 19,100."},{"Start":"01:56.610 ","End":"01:59.240","Text":"Value in use, in other words,"},{"Start":"01:59.240 ","End":"02:05.300","Text":"the present value of future cash flows is given at an amount of 18,000."},{"Start":"02:05.300 ","End":"02:12.700","Text":"We take the higher of these 2 numbers, which is 19,100."},{"Start":"02:13.220 ","End":"02:16.460","Text":"For the perspective of the business entity,"},{"Start":"02:16.460 ","End":"02:23.750","Text":"would make sense to in fact sell the asset for cash flow of 19,100 today,"},{"Start":"02:23.750 ","End":"02:28.760","Text":"rather than continuing to use the asset for the remainder of its life and"},{"Start":"02:28.760 ","End":"02:34.355","Text":"generate a net present value today of 18,000."},{"Start":"02:34.355 ","End":"02:42.110","Text":"The carrying amount of this asset from the previous slide we know is an amount of 20,000."},{"Start":"02:42.110 ","End":"02:44.375","Text":"Therefore, to compute the impairments,"},{"Start":"02:44.375 ","End":"02:48.850","Text":"we compare the recoverable amount with the carrying amount."},{"Start":"02:48.850 ","End":"02:53.810","Text":"The asset therefore is impaired by an amount of 900."},{"Start":"02:53.810 ","End":"02:59.540","Text":"The journal entry to record the impairment is a debit to an expense account called"},{"Start":"02:59.540 ","End":"03:05.315","Text":"the impairment expense as an expense account,"},{"Start":"03:05.315 ","End":"03:08.150","Text":"in an amount of 900."},{"Start":"03:08.150 ","End":"03:15.350","Text":"The credit goes to the accumulated depreciation account because in fact,"},{"Start":"03:15.350 ","End":"03:21.105","Text":"the impairment is an accelerated depreciation"},{"Start":"03:21.105 ","End":"03:27.969","Text":"on the asset and additional usage of the asset caused by other factors."},{"Start":"03:27.969 ","End":"03:31.780","Text":"Now going forward into future years into years,"},{"Start":"03:31.780 ","End":"03:33.550","Text":"3, 4, and 5,"},{"Start":"03:33.550 ","End":"03:40.360","Text":"the annual depreciation expense will now be computed at the new carrying amount,"},{"Start":"03:40.360 ","End":"03:45.445","Text":"which is the recoverable amount of 19,100,"},{"Start":"03:45.445 ","End":"03:52.950","Text":"less clearly the estimated residual value of 5,000 divided by"},{"Start":"03:52.950 ","End":"03:57.100","Text":"the 3 remaining years and the depreciation per"},{"Start":"03:57.100 ","End":"04:04.275","Text":"year comes out to currency units of therefore 4,700."},{"Start":"04:04.275 ","End":"04:06.770","Text":"We now ask the question,"},{"Start":"04:06.770 ","End":"04:09.880","Text":"can impairments ever be reversed?"},{"Start":"04:09.880 ","End":"04:11.390","Text":"The answer is yes,"},{"Start":"04:11.390 ","End":"04:13.550","Text":"impairments can be reversed."},{"Start":"04:13.550 ","End":"04:16.510","Text":"But there is a ceiling of that reversal."},{"Start":"04:16.510 ","End":"04:19.835","Text":"The ceiling is the net book value,"},{"Start":"04:19.835 ","End":"04:26.285","Text":"which means the carrying amount that would have been reported without the impairment."},{"Start":"04:26.285 ","End":"04:28.340","Text":"Now the reason for that is,"},{"Start":"04:28.340 ","End":"04:31.700","Text":"and we will see this more clearly in a later presentation,"},{"Start":"04:31.700 ","End":"04:35.525","Text":"that if the reversal goes above,"},{"Start":"04:35.525 ","End":"04:40.040","Text":"what is now called the or will be called the historic carrying amount"},{"Start":"04:40.040 ","End":"04:45.020","Text":"that gets the entity into the realm of a re-evaluation,"},{"Start":"04:45.020 ","End":"04:47.870","Text":"which we don\u0027t want to do under the cost model."},{"Start":"04:47.870 ","End":"04:50.390","Text":"To illustrate this, let\u0027s assume,"},{"Start":"04:50.390 ","End":"04:53.515","Text":"for example, that at the end of year 3,"},{"Start":"04:53.515 ","End":"04:57.470","Text":"which now is 1 year after the payment took place at end of year"},{"Start":"04:57.470 ","End":"05:03.725","Text":"2 the recoverable amount is reassessed at 17,000."},{"Start":"05:03.725 ","End":"05:08.960","Text":"That means we have looked at the higher of those 2 values,"},{"Start":"05:08.960 ","End":"05:13.670","Text":"the higher of the selling price and the value in use,"},{"Start":"05:13.670 ","End":"05:18.110","Text":"and the higher those 2 numbers comes to 17,000,"},{"Start":"05:18.110 ","End":"05:20.750","Text":"which is the recoverable amount."},{"Start":"05:20.750 ","End":"05:25.235","Text":"We now need to take a look at what the carrying amount"},{"Start":"05:25.235 ","End":"05:29.840","Text":"would have been had the impairment not taken place."},{"Start":"05:29.840 ","End":"05:32.375","Text":"Let\u0027s see how we compute this."},{"Start":"05:32.375 ","End":"05:35.030","Text":"We can look at the cost of the asset,"},{"Start":"05:35.030 ","End":"05:39.530","Text":"which we know is an amount of 30,000."},{"Start":"05:39.530 ","End":"05:46.445","Text":"Then we start have to subtract the accumulated depreciation for the 3 years."},{"Start":"05:46.445 ","End":"05:49.040","Text":"But the accumulated depreciation now,"},{"Start":"05:49.040 ","End":"05:54.695","Text":"we subtract it based on the historic cost calculation without the impairment."},{"Start":"05:54.695 ","End":"06:00.905","Text":"We know the accumulated depreciation will be the 30,000 cost,"},{"Start":"06:00.905 ","End":"06:05.260","Text":"less the 5,000 residual value,"},{"Start":"06:05.260 ","End":"06:14.870","Text":"divided by the 5 year useful life and multiplied by 3 years to the end of the 3rd year,"},{"Start":"06:14.870 ","End":"06:20.420","Text":"and that amounts to an amount of 15,000."},{"Start":"06:20.420 ","End":"06:26.615","Text":"Therefore, you can see that the carrying amount at the end of the 3rd year,"},{"Start":"06:26.615 ","End":"06:32.330","Text":"had there been no revaluation would have amounted to 15,000."},{"Start":"06:32.330 ","End":"06:34.400","Text":"Keep that number in mind."},{"Start":"06:34.400 ","End":"06:40.580","Text":"Let\u0027s go now and look at the actual carrying amount at the end of the 3rd year."},{"Start":"06:40.580 ","End":"06:46.505","Text":"The actual carrying amount in the 3rd year is 14,400."},{"Start":"06:46.505 ","End":"06:48.625","Text":"How do we get that?"},{"Start":"06:48.625 ","End":"06:56.000","Text":"Well, we can take the starting point as the carrying amount at the end of the 2nd year."},{"Start":"06:56.000 ","End":"06:57.560","Text":"From the previous slide,"},{"Start":"06:57.560 ","End":"07:01.025","Text":"we saw the carrying amount at the end of the 2nd year,"},{"Start":"07:01.025 ","End":"07:02.950","Text":"end of year 2,"},{"Start":"07:02.950 ","End":"07:10.960","Text":"which in fact is the recoverable amount is the amount of 19,000."},{"Start":"07:10.960 ","End":"07:19.175","Text":"We then look at the depreciation expense for year 3,"},{"Start":"07:19.175 ","End":"07:26.125","Text":"we computed on the previous slide as 4,700."},{"Start":"07:26.125 ","End":"07:30.640","Text":"Therefore the carrying amount at the end of year 3,"},{"Start":"07:30.640 ","End":"07:34.570","Text":"thus the amount of 14,400."},{"Start":"07:34.570 ","End":"07:44.560","Text":"What you now see is that the asset has a recoverable amount of this 17,000."},{"Start":"07:44.560 ","End":"07:49.705","Text":"Its current carrying amount is 14,400."},{"Start":"07:49.705 ","End":"07:57.385","Text":"But we can\u0027t reverse the impairment from 14,400 all the way to 17,000."},{"Start":"07:57.385 ","End":"08:03.955","Text":"We\u0027re limited to reversing it to what the historic costs would\u0027ve been, which is 15,000."},{"Start":"08:03.955 ","End":"08:09.165","Text":"Therefore the reversal of impairment is an amount of 600."},{"Start":"08:09.165 ","End":"08:11.314","Text":"To reverse the impairment,"},{"Start":"08:11.314 ","End":"08:14.660","Text":"we debit the accumulated depreciation,"},{"Start":"08:14.660 ","End":"08:16.985","Text":"the contra asset account,"},{"Start":"08:16.985 ","End":"08:20.290","Text":"with the amount of 600,"},{"Start":"08:20.290 ","End":"08:28.115","Text":"and we credit the impairment expense,"},{"Start":"08:28.115 ","End":"08:33.005","Text":"which in fact reverses the amount of 600."},{"Start":"08:33.005 ","End":"08:35.509","Text":"But crediting the impairment expense."},{"Start":"08:35.509 ","End":"08:39.590","Text":"That in effect is the same as putting the account or"},{"Start":"08:39.590 ","End":"08:43.715","Text":"the credit to an impairment reversal."},{"Start":"08:43.715 ","End":"08:45.425","Text":"If you want to call it that as well,"},{"Start":"08:45.425 ","End":"08:50.640","Text":"that\u0027s also an acceptable turn, an impairment reversal."}],"ID":28605},{"Watched":false,"Name":"Exercise 3 - Introduction","Duration":"4m 38s","ChapterTopicVideoID":27437,"CourseChapterTopicPlaylistID":254924,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:03.840","Text":"Hello and welcome to another presentation in"},{"Start":"00:03.840 ","End":"00:08.340","Text":"this series on non-current assets brought to you by Proprep."},{"Start":"00:08.340 ","End":"00:11.340","Text":"My name is Kathy Service and today we\u0027re going to do"},{"Start":"00:11.340 ","End":"00:16.365","Text":"an exercise on impairments of those non-current assets."},{"Start":"00:16.365 ","End":"00:18.645","Text":"Let\u0027s read through this together."},{"Start":"00:18.645 ","End":"00:26.355","Text":"ABB purchased a new piece of equipment costing 30,000 on the 1.1.X1,"},{"Start":"00:26.355 ","End":"00:28.185","Text":"that\u0027s the 1st of January,"},{"Start":"00:28.185 ","End":"00:30.300","Text":"in the year X1."},{"Start":"00:30.300 ","End":"00:35.115","Text":"The equipment is depreciated straight-line over 6 years,"},{"Start":"00:35.115 ","End":"00:37.260","Text":"that\u0027s straight-line depreciation,"},{"Start":"00:37.260 ","End":"00:40.845","Text":"that\u0027s the method, 6 years that your useful life,"},{"Start":"00:40.845 ","End":"00:44.445","Text":"and the residual value is 6,000."},{"Start":"00:44.445 ","End":"00:48.875","Text":"Just to reinforce, this is the depreciation method."},{"Start":"00:48.875 ","End":"00:51.095","Text":"This is the useful life,"},{"Start":"00:51.095 ","End":"00:53.555","Text":"and this is the residual value."},{"Start":"00:53.555 ","End":"00:56.360","Text":"Now those are the 3 elements, if you like,"},{"Start":"00:56.360 ","End":"00:58.250","Text":"of depreciation that we need to"},{"Start":"00:58.250 ","End":"01:02.980","Text":"know in order to calculate the depreciation in any 1 year."},{"Start":"01:02.980 ","End":"01:05.980","Text":"On 31st of December X3,"},{"Start":"01:05.980 ","End":"01:09.045","Text":"so just note the date, it\u0027s now X3,"},{"Start":"01:09.045 ","End":"01:10.935","Text":"not X1 when we bought it,"},{"Start":"01:10.935 ","End":"01:13.140","Text":"and it\u0027s the 31st of December X3,"},{"Start":"01:13.140 ","End":"01:16.410","Text":"which means it\u0027s the end of that X3 year."},{"Start":"01:16.410 ","End":"01:18.205","Text":"This is 3 years down the line,"},{"Start":"01:18.205 ","End":"01:20.120","Text":"3 years after we bought it."},{"Start":"01:20.120 ","End":"01:22.310","Text":"On 31st of December X3,"},{"Start":"01:22.310 ","End":"01:26.730","Text":"the managers tested the assets for impairment."},{"Start":"01:26.730 ","End":"01:28.865","Text":"We we\u0027re doing depreciation."},{"Start":"01:28.865 ","End":"01:31.235","Text":"Now we\u0027re looking at the concepts of impairment."},{"Start":"01:31.235 ","End":"01:35.830","Text":"They tested the asset for impairment after recording the annual depreciation expense,"},{"Start":"01:35.830 ","End":"01:39.385","Text":"so the depreciation expense for 20 X1,"},{"Start":"01:39.385 ","End":"01:41.535","Text":"20 X2, and 20 X3."},{"Start":"01:41.535 ","End":"01:46.335","Text":"They estimate the asset can be sold for 16,000,"},{"Start":"01:46.335 ","End":"01:48.820","Text":"I guess we could sell it for 16,000."},{"Start":"01:48.820 ","End":"01:53.725","Text":"But if they keep the asset, it\u0027ll generate 15,000."},{"Start":"01:53.725 ","End":"01:55.505","Text":"If they sell the asset,"},{"Start":"01:55.505 ","End":"01:59.585","Text":"they will incur additional transaction costs of 400."},{"Start":"01:59.585 ","End":"02:01.385","Text":"Again, if they sell it,"},{"Start":"02:01.385 ","End":"02:04.115","Text":"there will be further costs of 400."},{"Start":"02:04.115 ","End":"02:06.660","Text":"There are basically 2 options,"},{"Start":"02:06.660 ","End":"02:11.830","Text":"1 is keep the asset and the other is sell the asset."},{"Start":"02:11.830 ","End":"02:13.130","Text":"If you keep the asset,"},{"Start":"02:13.130 ","End":"02:16.050","Text":"we\u0027re told will make 15,000,"},{"Start":"02:16.050 ","End":"02:17.535","Text":"and if we sell the asset,"},{"Start":"02:17.535 ","End":"02:19.545","Text":"we\u0027ll sell it for 16,000,"},{"Start":"02:19.545 ","End":"02:23.690","Text":"but you mustn\u0027t forget that there are also costs of selling,"},{"Start":"02:23.690 ","End":"02:26.440","Text":"so we\u0027ll have to subtract those."},{"Start":"02:26.440 ","End":"02:27.990","Text":"Those are our 2 options,"},{"Start":"02:27.990 ","End":"02:31.670","Text":"keep it for 15,000 or sell it for 15,600."},{"Start":"02:31.670 ","End":"02:36.170","Text":"Now, which option do you think you would choose if you were a business person."},{"Start":"02:36.170 ","End":"02:38.850","Text":"You would choose to sell it."},{"Start":"02:38.850 ","End":"02:46.340","Text":"We choose the higher of those 2 as what we call our recoverable amount."},{"Start":"02:46.340 ","End":"02:48.995","Text":"That\u0027s what we can recover from this asset."},{"Start":"02:48.995 ","End":"02:50.945","Text":"That\u0027s the most we can achieve,"},{"Start":"02:50.945 ","End":"02:54.275","Text":"either 15,000 or 15,600."},{"Start":"02:54.275 ","End":"02:56.300","Text":"That\u0027s, we\u0027re looking at the end of"},{"Start":"02:56.300 ","End":"03:02.250","Text":"the 31st of December, X3 and looking to see what value this asset holds to us,"},{"Start":"03:02.250 ","End":"03:03.945","Text":"and those are the 2 options."},{"Start":"03:03.945 ","End":"03:09.165","Text":"It\u0027s either going to make us 15,000 from that point onwards or 15,600."},{"Start":"03:09.165 ","End":"03:14.945","Text":"We\u0027re going to assume that the business would choose the most logical option,"},{"Start":"03:14.945 ","End":"03:21.415","Text":"the selling value of 15,600 net."},{"Start":"03:21.415 ","End":"03:24.675","Text":"Now the required: There are 2 parts to this required,"},{"Start":"03:24.675 ","End":"03:27.885","Text":"this goes through Part 1. Part 1a."},{"Start":"03:27.885 ","End":"03:30.810","Text":"What will the impairment loss be,"},{"Start":"03:30.810 ","End":"03:34.635","Text":"if the managers decide to keep the asset?"},{"Start":"03:34.635 ","End":"03:40.625","Text":"Then b, what will the annual depreciation expense be in"},{"Start":"03:40.625 ","End":"03:46.465","Text":"X4-X6 following the impairment recorded in a."},{"Start":"03:46.465 ","End":"03:55.490","Text":"Then Part 2, at"},{"Start":"03:55.490 ","End":"03:57.470","Text":"the end of X4,"},{"Start":"03:57.470 ","End":"04:02.370","Text":"the conditions that lead to the impairment of the end of X3 improved,"},{"Start":"04:02.370 ","End":"04:06.170","Text":"and the managers assess future cashflows from using"},{"Start":"04:06.170 ","End":"04:11.250","Text":"the machine as having increased to 20,000."},{"Start":"04:11.320 ","End":"04:17.030","Text":"The cashflows from having used the machine is having increased to 20,000,"},{"Start":"04:17.030 ","End":"04:24.335","Text":"so presumably the value in selling the asset net has remained the same."},{"Start":"04:24.335 ","End":"04:28.100","Text":"Can the managers report the carrying amount, net book value,"},{"Start":"04:28.100 ","End":"04:32.440","Text":"in other words, of the assets at 20,000."},{"Start":"04:32.440 ","End":"04:34.475","Text":"In other words, at the end of X4,"},{"Start":"04:34.475 ","End":"04:39.000","Text":"can we increase the carrying amount to 20,000."}],"ID":28581},{"Watched":false,"Name":"Exercise 3 - Part a","Duration":"15m 59s","ChapterTopicVideoID":27438,"CourseChapterTopicPlaylistID":254924,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:03.315","Text":"Let\u0027s have a look at Part 1 a,"},{"Start":"00:03.315 ","End":"00:05.685","Text":"and just to remind you, what are we looking for?"},{"Start":"00:05.685 ","End":"00:11.085","Text":"We need to calculate the impairment loss if we decided to keep the assets,"},{"Start":"00:11.085 ","End":"00:18.480","Text":"so we were given information regarding its value at the end of 20X3."},{"Start":"00:18.480 ","End":"00:22.804","Text":"This is for an asset that we bought in 20X1."},{"Start":"00:22.804 ","End":"00:25.260","Text":"If we bought it in 20X1,"},{"Start":"00:25.260 ","End":"00:28.510","Text":"the first of the first 20X1,"},{"Start":"00:29.030 ","End":"00:31.640","Text":"and you look on a timeline,"},{"Start":"00:31.640 ","End":"00:39.005","Text":"we\u0027re being asked to calculate the impairment loss at the 31st of December, X3."},{"Start":"00:39.005 ","End":"00:42.065","Text":"That\u0027s after depreciation for X1,"},{"Start":"00:42.065 ","End":"00:44.510","Text":"and depreciation for X2,"},{"Start":"00:44.510 ","End":"00:46.745","Text":"and depreciation for X3."},{"Start":"00:46.745 ","End":"00:50.150","Text":"X1 depreciation, X2 depreciation,"},{"Start":"00:50.150 ","End":"00:54.371","Text":"and X3 depreciation would have been processed."},{"Start":"00:54.371 ","End":"00:57.349","Text":"Let\u0027s start it off at cost."},{"Start":"00:57.349 ","End":"01:02.135","Text":"We put through depreciation for each of those 3 years and then at that point there,"},{"Start":"01:02.135 ","End":"01:05.210","Text":"we need to work out what the carrying amount actually is,"},{"Start":"01:05.210 ","End":"01:10.025","Text":"and then we\u0027re going to check to see whether it should be impaired,"},{"Start":"01:10.025 ","End":"01:12.785","Text":"and if so, by how much."},{"Start":"01:12.785 ","End":"01:15.100","Text":"Solution to Part 1."},{"Start":"01:15.100 ","End":"01:17.990","Text":"This is just a bit of the information setup so"},{"Start":"01:17.990 ","End":"01:21.685","Text":"that we can work out our depreciation expense."},{"Start":"01:21.685 ","End":"01:28.535","Text":"Our cost is 30,000 and we\u0027re told that the residual value is 6,000."},{"Start":"01:28.535 ","End":"01:34.535","Text":"That means that we need to depreciate over the life of the asset in amount of 24,000."},{"Start":"01:34.535 ","End":"01:36.170","Text":"At the end of the useful life,"},{"Start":"01:36.170 ","End":"01:41.500","Text":"the carrying amount has got to be 6,000 to represent its residual value,"},{"Start":"01:41.500 ","End":"01:45.320","Text":"so we\u0027re only going to depreciate 24,000."},{"Start":"01:45.320 ","End":"01:48.815","Text":"Now we\u0027re told that the useful life was 6 years."},{"Start":"01:48.815 ","End":"01:51.695","Text":"We\u0027re going to write off 1/6 of"},{"Start":"01:51.695 ","End":"01:58.510","Text":"the depreciable amount every year as a percentage or a fraction."},{"Start":"01:58.510 ","End":"02:04.309","Text":"That\u0027s how you would show 16.66 recurring percent."},{"Start":"02:04.309 ","End":"02:07.685","Text":"Now, if you take 16.66 recurring percent of your"},{"Start":"02:07.685 ","End":"02:12.925","Text":"24,000 or take your 24,000 and divide by 6,"},{"Start":"02:12.925 ","End":"02:18.260","Text":"you get the straight line depreciation expense of 4,000 a year."},{"Start":"02:18.260 ","End":"02:22.950","Text":"That\u0027s 24,000 divide by 6,"},{"Start":"02:22.950 ","End":"02:29.175","Text":"or 24,000 multiplied by 16.667 percent."},{"Start":"02:29.175 ","End":"02:32.175","Text":"That gives you the 4,000 a year."},{"Start":"02:32.175 ","End":"02:35.960","Text":"Let\u0027s have a look at what this does to the carrying amount of our asset."},{"Start":"02:35.960 ","End":"02:38.150","Text":"We\u0027ve got the opening carrying amount,"},{"Start":"02:38.150 ","End":"02:41.420","Text":"which obviously starts off at the cost of 30,000."},{"Start":"02:41.420 ","End":"02:44.555","Text":"We then depreciate it by 4,000,"},{"Start":"02:44.555 ","End":"02:46.840","Text":"this is in year 1."},{"Start":"02:46.840 ","End":"02:48.555","Text":"At the end of year 1,"},{"Start":"02:48.555 ","End":"02:51.750","Text":"our closing carrying amount will be 26,000."},{"Start":"02:51.750 ","End":"02:54.415","Text":"Then in year 2,"},{"Start":"02:54.415 ","End":"02:59.945","Text":"we have an opening carrying amount of 26,000 and we depreciate it by 4,000."},{"Start":"02:59.945 ","End":"03:03.310","Text":"We have a closing carrying amount of 22,000."},{"Start":"03:03.310 ","End":"03:06.500","Text":"That then becomes our opening carrying amount and we"},{"Start":"03:06.500 ","End":"03:10.880","Text":"subtract the 4,000 depreciation for the third year,"},{"Start":"03:10.880 ","End":"03:13.415","Text":"and that brings us to 18,000."},{"Start":"03:13.415 ","End":"03:15.770","Text":"Now, we could analyze this as follows,"},{"Start":"03:15.770 ","End":"03:18.230","Text":"and this is what the information would be"},{"Start":"03:18.230 ","End":"03:20.855","Text":"in terms of your property plant and equipment note,"},{"Start":"03:20.855 ","End":"03:26.135","Text":"you would show the cost of 30,000 in each of those years."},{"Start":"03:26.135 ","End":"03:30.125","Text":"Then in year 1 your accumulated depreciation because it\u0027s"},{"Start":"03:30.125 ","End":"03:33.890","Text":"only 1 year that\u0027s gone by so far, would be 4,000."},{"Start":"03:33.890 ","End":"03:37.045","Text":"The closing carrying amount is 26,000."},{"Start":"03:37.045 ","End":"03:39.830","Text":"In X2, our cost is 30,000,"},{"Start":"03:39.830 ","End":"03:43.700","Text":"but the accumulated depreciation is now 8,000 because we would have"},{"Start":"03:43.700 ","End":"03:49.115","Text":"depreciated it by 4,000 in X1 and 4,000 in X2."},{"Start":"03:49.115 ","End":"03:52.590","Text":"We now have a carrying amount of 22,000."},{"Start":"03:52.590 ","End":"03:57.200","Text":"Then in X3 our costs is 30,000 but our accumulated depreciation would have"},{"Start":"03:57.200 ","End":"04:02.170","Text":"grown to 12,000 because that\u0027s 4,000 for 3 years."},{"Start":"04:02.170 ","End":"04:05.070","Text":"4,000 expense in each of those 3 years."},{"Start":"04:05.070 ","End":"04:09.020","Text":"That gives you the closing carrying amount of 18,000,"},{"Start":"04:09.020 ","End":"04:13.500","Text":"so 2 different ways of showing the same information."},{"Start":"04:13.690 ","End":"04:16.460","Text":"As I had said to you earlier,"},{"Start":"04:16.460 ","End":"04:19.295","Text":"we\u0027d bought the asset on the first of the first X1"},{"Start":"04:19.295 ","End":"04:23.060","Text":"and we\u0027d put through the cost where the cost was 30,000."},{"Start":"04:23.060 ","End":"04:24.730","Text":"We recorded that."},{"Start":"04:24.730 ","End":"04:29.885","Text":"Then this is the 31st of December X1,"},{"Start":"04:29.885 ","End":"04:32.960","Text":"and then this is the 31st of December X2,"},{"Start":"04:32.960 ","End":"04:36.860","Text":"and this is the 31st of December X3."},{"Start":"04:36.860 ","End":"04:41.300","Text":"We depreciate it by 4,000 depreciation,"},{"Start":"04:41.300 ","End":"04:44.075","Text":"then by another 4,000,"},{"Start":"04:44.075 ","End":"04:47.780","Text":"and then by another 4,000."},{"Start":"04:47.780 ","End":"04:52.310","Text":"Our cost list of depreciation gives us a carrying amount"},{"Start":"04:52.310 ","End":"04:57.445","Text":"of 26,000 and then a carrying amount of 22,000,"},{"Start":"04:57.445 ","End":"05:00.040","Text":"and then a carrying amount of 18,000."},{"Start":"05:00.040 ","End":"05:04.205","Text":"Those are the figures that we had in the table on the previous slide."},{"Start":"05:04.205 ","End":"05:08.480","Text":"Now what we are having to work out is look at the carrying amount on"},{"Start":"05:08.480 ","End":"05:12.740","Text":"the 31st of December X3 when they think they might have been a problem with this asset,"},{"Start":"05:12.740 ","End":"05:15.790","Text":"so they calculated it\u0027s recoverable amount."},{"Start":"05:15.790 ","End":"05:19.170","Text":"You\u0027ve got to compare this with the recoverable amount."},{"Start":"05:19.170 ","End":"05:23.180","Text":"If the recoverable amount is less than the carrying amount,"},{"Start":"05:23.180 ","End":"05:24.995","Text":"then you have to impair it."},{"Start":"05:24.995 ","End":"05:27.740","Text":"What is this recoverable amount?"},{"Start":"05:27.740 ","End":"05:29.540","Text":"Now, as I said to you before,"},{"Start":"05:29.540 ","End":"05:30.920","Text":"you\u0027ve got 2 options."},{"Start":"05:30.920 ","End":"05:36.325","Text":"The options are you sell the asset or you keep the asset."},{"Start":"05:36.325 ","End":"05:38.445","Text":"Those are the 2 options."},{"Start":"05:38.445 ","End":"05:40.460","Text":"Let\u0027s have a look at that recoverable amount."},{"Start":"05:40.460 ","End":"05:42.605","Text":"This is value in use."},{"Start":"05:42.605 ","End":"05:45.193","Text":"That\u0027s if you choose to keep the asset."},{"Start":"05:45.193 ","End":"05:49.025","Text":"We were told that that was 15,000."},{"Start":"05:49.025 ","End":"05:52.130","Text":"Then in terms of the selling price lists, the transaction costs,"},{"Start":"05:52.130 ","End":"05:55.555","Text":"we were told that we could sell it for 16,000."},{"Start":"05:55.555 ","End":"05:58.520","Text":"The transaction costs though would be 400,"},{"Start":"05:58.520 ","End":"06:04.825","Text":"so the value to us would be 15,600 if we were to sell it."},{"Start":"06:04.825 ","End":"06:09.985","Text":"You got 2 options, selling is 15,600, keeping is 15,000."},{"Start":"06:09.985 ","End":"06:11.675","Text":"What would you logically do?"},{"Start":"06:11.675 ","End":"06:13.885","Text":"You would therefore choose to sell it."},{"Start":"06:13.885 ","End":"06:16.130","Text":"We say the recoverable amount,"},{"Start":"06:16.130 ","End":"06:20.495","Text":"the higher of the 2 is 15,600."},{"Start":"06:20.495 ","End":"06:24.275","Text":"If you have a look at this little timeline of the asset,"},{"Start":"06:24.275 ","End":"06:30.230","Text":"we can now see that our recoverable amount is less than our carrying amount of 18,000."},{"Start":"06:30.230 ","End":"06:33.620","Text":"Let\u0027s put this into better structure in terms"},{"Start":"06:33.620 ","End":"06:39.110","Text":"of if you wanted to be marked and get the most marks out of it."},{"Start":"06:39.110 ","End":"06:41.630","Text":"We would rather show and serve showing that timeline."},{"Start":"06:41.630 ","End":"06:46.300","Text":"We would show the carrying amount as 18,000."},{"Start":"06:46.300 ","End":"06:50.175","Text":"Remember we picked that figure up from that table,"},{"Start":"06:50.175 ","End":"06:54.770","Text":"list the recoverable amount of 15,600,"},{"Start":"06:54.770 ","End":"06:59.880","Text":"so the impairment loss is 2,400."},{"Start":"07:00.230 ","End":"07:05.330","Text":"That is the answer to Part 1 a."},{"Start":"07:05.330 ","End":"07:07.795","Text":"But going back to our timeline,"},{"Start":"07:07.795 ","End":"07:11.060","Text":"let me just show you what\u0027s happened to our carrying amount."},{"Start":"07:11.060 ","End":"07:13.520","Text":"At the 31st December X3,"},{"Start":"07:13.520 ","End":"07:18.575","Text":"after depreciating the asset by 12,000 so far,"},{"Start":"07:18.575 ","End":"07:20.760","Text":"being the 4,000, 4,000,"},{"Start":"07:20.760 ","End":"07:25.000","Text":"4,000 we get a carrying amount of 18 and the recoverable amount is"},{"Start":"07:25.000 ","End":"07:31.875","Text":"15,600 so we have to impair this by 2,400."},{"Start":"07:31.875 ","End":"07:34.525","Text":"Our carrying amount going forward,"},{"Start":"07:34.525 ","End":"07:37.210","Text":"in terms of the rest of the useful life of the asset,"},{"Start":"07:37.210 ","End":"07:42.005","Text":"our carrying amount is now going to be 15,600."},{"Start":"07:42.005 ","End":"07:46.440","Text":"Our carrying amount is dropped to equal the recoverable amount."},{"Start":"07:46.440 ","End":"07:52.230","Text":"We depreciate, depreciate, depreciate, impair."},{"Start":"07:52.230 ","End":"07:55.140","Text":"You start with a cost of 30, depreciate, depreciate,"},{"Start":"07:55.140 ","End":"07:58.032","Text":"depreciate by 444, impair it by 24,"},{"Start":"07:58.032 ","End":"08:02.310","Text":"so our new carrying amount after impairing it is 15,600."},{"Start":"08:02.310 ","End":"08:04.980","Text":"We\u0027re going to use that going forward to"},{"Start":"08:04.980 ","End":"08:10.185","Text":"calculate depreciation in the years X4, X5, X6."},{"Start":"08:10.185 ","End":"08:13.470","Text":"Another way of summarizing"},{"Start":"08:13.470 ","End":"08:18.269","Text":"the information to date about this asset at the 31st December X3,"},{"Start":"08:18.269 ","End":"08:22.155","Text":"rather than using the perhaps messy timeline and"},{"Start":"08:22.155 ","End":"08:26.896","Text":"perhaps better way to score the most marks in a test situation,"},{"Start":"08:26.896 ","End":"08:28.320","Text":"it\u0027s to sit it out like this."},{"Start":"08:28.320 ","End":"08:36.270","Text":"Accumulated depreciation at 31st of December X3 is obviously 4,000 times 3,"},{"Start":"08:36.270 ","End":"08:38.415","Text":"that gives you 12,000."},{"Start":"08:38.415 ","End":"08:42.255","Text":"Then we have the accumulated impairment loss at 31st December X3,"},{"Start":"08:42.255 ","End":"08:44.250","Text":"which we showed on the previous slide."},{"Start":"08:44.250 ","End":"08:47.280","Text":"That was 2,400."},{"Start":"08:47.280 ","End":"08:50.010","Text":"Our total accumulated depreciation and"},{"Start":"08:50.010 ","End":"08:55.485","Text":"accumulated impairment losses at 31st December X3 are 14,400."},{"Start":"08:55.485 ","End":"08:58.819","Text":"If you compare that with original cost,"},{"Start":"08:58.819 ","End":"09:01.550","Text":"we had a cost of 30,000."},{"Start":"09:01.550 ","End":"09:03.830","Text":"What we have experienced so far,"},{"Start":"09:03.830 ","End":"09:08.810","Text":"accumulated expenses so far against that asset are 14,400."},{"Start":"09:08.810 ","End":"09:11.380","Text":"You know your carrying amount"},{"Start":"09:11.380 ","End":"09:21.420","Text":"at 31st December X3 is 15,600."},{"Start":"09:21.420 ","End":"09:27.945","Text":"What will the annual depreciation expense be in the years after the impairment,"},{"Start":"09:27.945 ","End":"09:29.760","Text":"in other words, X4, X5, X6?"},{"Start":"09:29.760 ","End":"09:34.845","Text":"The revised carrying amount on the 31st of December X3 was 15,600."},{"Start":"09:34.845 ","End":"09:37.995","Text":"That was our cost, less our total."},{"Start":"09:37.995 ","End":"09:42.660","Text":"Now, before we move on to part b of part 1,"},{"Start":"09:42.660 ","End":"09:44.640","Text":"I want to just point out something that,"},{"Start":"09:44.640 ","End":"09:47.895","Text":"that 15,600 is this carrying amount,"},{"Start":"09:47.895 ","End":"09:52.230","Text":"31st December X3, and it equals the recoverable amount at that date."},{"Start":"09:52.230 ","End":"09:53.850","Text":"But in terms of that recoverable amount,"},{"Start":"09:53.850 ","End":"09:57.225","Text":"just remember, we were given 2 options, which was,"},{"Start":"09:57.225 ","End":"09:58.650","Text":"we could keep it and use it,"},{"Start":"09:58.650 ","End":"10:02.535","Text":"and we were told that that would render us 15,000."},{"Start":"10:02.535 ","End":"10:09.555","Text":"We were also told that we could sell it and that would give us 15,600."},{"Start":"10:09.555 ","End":"10:12.435","Text":"Now, in the question part a,"},{"Start":"10:12.435 ","End":"10:20.975","Text":"we were asked what the impairment loss would be if management intended to keep the asset."},{"Start":"10:20.975 ","End":"10:24.920","Text":"Just notice that we ignored that piece of information and we determined that"},{"Start":"10:24.920 ","End":"10:29.075","Text":"the recoverable amount was going to be 15,600,"},{"Start":"10:29.075 ","End":"10:30.410","Text":"being the higher of the 2,"},{"Start":"10:30.410 ","End":"10:35.010","Text":"so it does not matter what management\u0027s intention is."},{"Start":"10:35.010 ","End":"10:38.820","Text":"Even though management intends to go with keeping the asset,"},{"Start":"10:38.820 ","End":"10:40.350","Text":"from an accounting perspective,"},{"Start":"10:40.350 ","End":"10:47.100","Text":"you assume that the company or business would choose the higher of the 2."},{"Start":"10:47.100 ","End":"10:52.365","Text":"It does not matter that management intended to keep that asset."},{"Start":"10:52.365 ","End":"10:56.370","Text":"We still choose a recoverable amount being the higher of those 2 options."},{"Start":"10:56.370 ","End":"11:01.020","Text":"You ignore the fact that you are told that management want to keep the asset."},{"Start":"11:01.020 ","End":"11:05.715","Text":"That\u0027s irrelevant information and was intended to throw you off."},{"Start":"11:05.715 ","End":"11:08.460","Text":"It was a trick. Now,"},{"Start":"11:08.460 ","End":"11:10.620","Text":"let\u0027s have a look at part 1b."},{"Start":"11:10.620 ","End":"11:12.885","Text":"The required for part 1,"},{"Start":"11:12.885 ","End":"11:14.460","Text":"we\u0027ve just done a,"},{"Start":"11:14.460 ","End":"11:17.910","Text":"which is where we calculated the impairment loss,"},{"Start":"11:17.910 ","End":"11:20.475","Text":"assuming managers decided to keep the asset,"},{"Start":"11:20.475 ","End":"11:24.405","Text":"but we now know that when you calculate an impairment loss,"},{"Start":"11:24.405 ","End":"11:29.415","Text":"you disregard management\u0027s intentions."},{"Start":"11:29.415 ","End":"11:38.940","Text":"The recoverable amount is simply the higher of the option to keep it and use it,"},{"Start":"11:38.940 ","End":"11:41.760","Text":"or the option to sell it."},{"Start":"11:41.760 ","End":"11:45.570","Text":"It\u0027s always the higher, does not matter what management\u0027s intentions are."},{"Start":"11:45.570 ","End":"11:47.280","Text":"Now let us look at b."},{"Start":"11:47.280 ","End":"11:54.083","Text":"What will the annual depreciation expense be in the years X4 - X6,"},{"Start":"11:54.083 ","End":"11:57.180","Text":"in each of those years, X4, X5, X6,"},{"Start":"11:57.180 ","End":"12:02.280","Text":"other words, after the impairment that was recorded in part a?"},{"Start":"12:02.280 ","End":"12:09.300","Text":"Accumulated depreciation and accumulated impairment losses are 14,400."},{"Start":"12:09.300 ","End":"12:15.315","Text":"The revised carrying amount at the end of X3 was 15,600 after impairing it."},{"Start":"12:15.315 ","End":"12:19.820","Text":"We then subtract the residual value of 6,000."},{"Start":"12:19.820 ","End":"12:21.304","Text":"That remains unchanged."},{"Start":"12:21.304 ","End":"12:25.370","Text":"Now, our depreciable amount has dropped to 9,600,"},{"Start":"12:25.370 ","End":"12:27.545","Text":"so we need to get rid of, in other words,"},{"Start":"12:27.545 ","End":"12:31.300","Text":"the 9,600, over the remaining useful life."},{"Start":"12:31.300 ","End":"12:35.100","Text":"We need to depreciate it away so that we\u0027ve got an amount"},{"Start":"12:35.100 ","End":"12:39.450","Text":"of 6,000 leftover as our carrying amount at the end of its useful life."},{"Start":"12:39.450 ","End":"12:41.220","Text":"What is the remaining useful life?"},{"Start":"12:41.220 ","End":"12:45.870","Text":"Well, we originally had a useful life of 6 years and 3 years had"},{"Start":"12:45.870 ","End":"12:50.850","Text":"gone by to the 31st of December X3 when we impaired the asset,"},{"Start":"12:50.850 ","End":"12:55.325","Text":"so that means that we have a remaining useful life of 3 years."},{"Start":"12:55.325 ","End":"13:00.454","Text":"Our annual depreciation expense thereafter for the X4, X5,"},{"Start":"13:00.454 ","End":"13:03.770","Text":"X6 years is going to be 9,600,"},{"Start":"13:03.770 ","End":"13:05.440","Text":"being our depreciable amount,"},{"Start":"13:05.440 ","End":"13:08.685","Text":"divided by the remaining useful life of 3 years."},{"Start":"13:08.685 ","End":"13:11.805","Text":"That gives you 3,200."},{"Start":"13:11.805 ","End":"13:15.255","Text":"That is the answer to part 1b."},{"Start":"13:15.255 ","End":"13:20.130","Text":"However, I\u0027m going to quickly show you a summary of the situation."},{"Start":"13:20.130 ","End":"13:25.395","Text":"In other words, how it\u0027s going to pan out over the next 3 years."},{"Start":"13:25.395 ","End":"13:29.025","Text":"The opening carrying amount is 15,600."},{"Start":"13:29.025 ","End":"13:32.430","Text":"The depreciation expense is going to be 3,200,"},{"Start":"13:32.430 ","End":"13:33.765","Text":"as we\u0027ve just worked out."},{"Start":"13:33.765 ","End":"13:37.005","Text":"That gives us 12,400."},{"Start":"13:37.005 ","End":"13:42.735","Text":"That means our opening carrying amount in X5 is going to be 12,400."},{"Start":"13:42.735 ","End":"13:45.405","Text":"We subtract the 3,200."},{"Start":"13:45.405 ","End":"13:48.600","Text":"That\u0027s going to give us 9,200."},{"Start":"13:48.600 ","End":"13:53.355","Text":"That then becomes our opening balance in X6."},{"Start":"13:53.355 ","End":"13:56.150","Text":"Subtract the 3,200,"},{"Start":"13:56.150 ","End":"13:59.805","Text":"and that gives us 6,000."},{"Start":"13:59.805 ","End":"14:04.080","Text":"In terms of how it could be analyzed in a different way,"},{"Start":"14:04.080 ","End":"14:05.790","Text":"we could sit it out this way,"},{"Start":"14:05.790 ","End":"14:09.570","Text":"showing the cost at the beginning of each 1 of those years and we"},{"Start":"14:09.570 ","End":"14:13.410","Text":"show then the accumulated depreciation and impairment losses."},{"Start":"14:13.410 ","End":"14:16.680","Text":"Now, remember, at the end of X3,"},{"Start":"14:16.680 ","End":"14:24.375","Text":"our accumulated depreciation and accumulated impairment losses was 14,400."},{"Start":"14:24.375 ","End":"14:33.465","Text":"Now, we\u0027ve just depreciated in X4 another amount of 3,200."},{"Start":"14:33.465 ","End":"14:36.540","Text":"That gives you 17,600."},{"Start":"14:36.540 ","End":"14:42.300","Text":"That then gives you 12,400 as our closing carrying amount, notice it\u0027s the same."},{"Start":"14:42.300 ","End":"14:48.857","Text":"Then in X5, what would our accumulated depreciation and impairment loss be at end of X5?"},{"Start":"14:48.857 ","End":"14:57.720","Text":"Well, you add another depreciation for X5 of 3,200."},{"Start":"14:57.720 ","End":"15:03.300","Text":"Your accumulated depreciation and impairment loss before depreciation in"},{"Start":"15:03.300 ","End":"15:09.825","Text":"X5 was 17,600 as you calculated there."},{"Start":"15:09.825 ","End":"15:13.515","Text":"That gives us 20,800."},{"Start":"15:13.515 ","End":"15:17.010","Text":"That gives you carrying amount of 9,200."},{"Start":"15:17.010 ","End":"15:19.875","Text":"Notice it\u0027s the same, doesn\u0027t matter which layout you show."},{"Start":"15:19.875 ","End":"15:25.339","Text":"Then in X6, just before you process the depreciation in X6,"},{"Start":"15:25.339 ","End":"15:29.600","Text":"accumulated depreciation and impairment losses was 2,800,"},{"Start":"15:29.600 ","End":"15:30.890","Text":"as you worked out there."},{"Start":"15:30.890 ","End":"15:35.245","Text":"Then you add the depreciation for X6 of 3,200."},{"Start":"15:35.245 ","End":"15:37.515","Text":"That gives you 24,000."},{"Start":"15:37.515 ","End":"15:39.380","Text":"Oops, I left off a zero there."},{"Start":"15:39.380 ","End":"15:43.480","Text":"That gives you the closing carrying amount of 6,000."},{"Start":"15:43.480 ","End":"15:49.040","Text":"That\u0027s the predicted carrying amount in each of those years."},{"Start":"15:49.040 ","End":"15:54.120","Text":"You can see how we are predicting that\u0027s going to decrease to each of these figures."},{"Start":"15:54.120 ","End":"15:56.280","Text":"Going to decrease to 12,400 at the end of X4,"},{"Start":"15:56.280 ","End":"15:59.260","Text":"then to 92, and then to 6,000."}],"ID":28582},{"Watched":false,"Name":"Exercise 3 - Part b","Duration":"5m 18s","ChapterTopicVideoID":27439,"CourseChapterTopicPlaylistID":254924,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.410 ","End":"00:04.598","Text":"Part 2. At the end of X4,"},{"Start":"00:04.598 ","End":"00:10.020","Text":"the conditions that led to the impairment at the end of X3 improved."},{"Start":"00:10.020 ","End":"00:14.340","Text":"The managers assess future cashflows from using"},{"Start":"00:14.340 ","End":"00:20.235","Text":"the machine as having increased to 20,000."},{"Start":"00:20.235 ","End":"00:24.648","Text":"The question is, can the managers report the carrying amount,"},{"Start":"00:24.648 ","End":"00:26.205","Text":"in other words, the net book value,"},{"Start":"00:26.205 ","End":"00:29.160","Text":"of the asset of being 20,000?"},{"Start":"00:29.160 ","End":"00:35.430","Text":"Now remember, what they\u0027re telling you here is half of the facts."},{"Start":"00:35.430 ","End":"00:38.155","Text":"You have 2 options always."},{"Start":"00:38.155 ","End":"00:43.120","Text":"You\u0027ve got the option to keep your asset and use it."},{"Start":"00:43.120 ","End":"00:45.690","Text":"They\u0027re saying that now looks like it\u0027s going to be 20,000."},{"Start":"00:45.690 ","End":"00:47.610","Text":"Remember in Part 1,"},{"Start":"00:47.610 ","End":"00:50.370","Text":"we thought that would be 15,000."},{"Start":"00:50.370 ","End":"00:51.930","Text":"At the end of X3,"},{"Start":"00:51.930 ","End":"00:57.290","Text":"our prediction of keeping and using the asset would render the company 15,000."},{"Start":"00:57.290 ","End":"00:58.760","Text":"Now that has changed."},{"Start":"00:58.760 ","End":"01:00.750","Text":"It\u0027s now no longer 15,000."},{"Start":"01:00.750 ","End":"01:04.350","Text":"At X4, we now think it should be 20,000."},{"Start":"01:04.350 ","End":"01:07.083","Text":"That\u0027s how much we\u0027re going to make if we keep it and use it,"},{"Start":"01:07.083 ","End":"01:09.005","Text":"so things have improved."},{"Start":"01:09.005 ","End":"01:12.320","Text":"The other option that we have is to sell it."},{"Start":"01:12.320 ","End":"01:15.080","Text":"They don\u0027t tell us anything about the selling here."},{"Start":"01:15.080 ","End":"01:18.800","Text":"But we know from Part 1 that to sell it was 16,000 selling"},{"Start":"01:18.800 ","End":"01:22.665","Text":"price and there were 400 selling costs."},{"Start":"01:22.665 ","End":"01:25.410","Text":"That was 15,600."},{"Start":"01:25.410 ","End":"01:26.995","Text":"That\u0027s why in X3,"},{"Start":"01:26.995 ","End":"01:30.160","Text":"we said our recoverable amount was the higher of those 2."},{"Start":"01:30.160 ","End":"01:32.520","Text":"We chose 15,600."},{"Start":"01:32.520 ","End":"01:34.343","Text":"They don\u0027t say that that has changed,"},{"Start":"01:34.343 ","End":"01:36.765","Text":"so that must have remained the same."},{"Start":"01:36.765 ","End":"01:40.185","Text":"That\u0027s 15,600 is our other option."},{"Start":"01:40.185 ","End":"01:45.405","Text":"The recoverable amount in X4 is the higher of those 2."},{"Start":"01:45.405 ","End":"01:49.245","Text":"Our recoverable amount is now 20,000."},{"Start":"01:49.245 ","End":"01:51.555","Text":"Last year at the end of X3,"},{"Start":"01:51.555 ","End":"01:54.410","Text":"our recoverable amount was 15,600."},{"Start":"01:54.410 ","End":"01:59.855","Text":"Things are looking up. The recoverable amount has improved at the end of X4."},{"Start":"01:59.855 ","End":"02:03.545","Text":"This is 31st of December, X4."},{"Start":"02:03.545 ","End":"02:09.275","Text":"Can the managers report the carrying amount of the asset at 20,000?"},{"Start":"02:09.275 ","End":"02:16.775","Text":"What we need to know is what is the carrying amount at the 31st of December X4."},{"Start":"02:16.775 ","End":"02:21.500","Text":"From Part b of Part 1 to be exact,"},{"Start":"02:21.500 ","End":"02:24.980","Text":"we worked out that at the end of X4,"},{"Start":"02:24.980 ","End":"02:30.995","Text":"our closing carrying amount at 31st December X4 was 12,400."},{"Start":"02:30.995 ","End":"02:33.805","Text":"You could have looked at it using this layout."},{"Start":"02:33.805 ","End":"02:36.045","Text":"12,400."},{"Start":"02:36.045 ","End":"02:43.575","Text":"Our carrying amount of 31st December X4 is 12,400."},{"Start":"02:43.575 ","End":"02:49.025","Text":"Can we increase it to the new recoverable amount of 20,000?"},{"Start":"02:49.025 ","End":"02:50.780","Text":"We compare these 2 figures."},{"Start":"02:50.780 ","End":"02:54.935","Text":"Now we cannot go up without checking"},{"Start":"02:54.935 ","End":"02:59.660","Text":"what the carrying amount would have been had we never impaired the asset."},{"Start":"02:59.660 ","End":"03:02.455","Text":"If we hadn\u0027t impaired the asset before,"},{"Start":"03:02.455 ","End":"03:05.295","Text":"our cost would have been 30,000."},{"Start":"03:05.295 ","End":"03:12.225","Text":"Our depreciation in X1 would\u0027ve been 4,000,"},{"Start":"03:12.225 ","End":"03:18.360","Text":"X2 4,000, X3 4,000,"},{"Start":"03:18.360 ","End":"03:22.875","Text":"and X4 would have been 4,000 because we wouldn\u0027t have impaired."},{"Start":"03:22.875 ","End":"03:28.395","Text":"Our carrying amount would have been 14,000."},{"Start":"03:28.395 ","End":"03:35.245","Text":"That is the upper limit beyond which we may not increase our carrying amount."},{"Start":"03:35.245 ","End":"03:38.035","Text":"Our carrying amount is currently 12,400."},{"Start":"03:38.035 ","End":"03:45.205","Text":"We would like to increase it to 20,000 that we may not increase it beyond 14,000."},{"Start":"03:45.205 ","End":"03:50.970","Text":"The answer is, we can only reverse the impairment up to 14,000."},{"Start":"03:50.970 ","End":"03:58.350","Text":"Our impairment loss reversal would be 1,600."},{"Start":"03:58.350 ","End":"04:05.610","Text":"Our carrying amount after"},{"Start":"04:05.610 ","End":"04:10.050","Text":"the reversal would be 14,000."},{"Start":"04:10.050 ","End":"04:15.560","Text":"That\u0027s the answer. Can manager report the carrying amount of the asset at 20,000?"},{"Start":"04:15.560 ","End":"04:22.620","Text":"No. The maximum carrying amount is 14,000."},{"Start":"04:22.620 ","End":"04:27.440","Text":"Just to recap, you had to calculate your recoverable amount"},{"Start":"04:27.440 ","End":"04:33.570","Text":"and realized it was 20,000 to keep and use."},{"Start":"04:33.570 ","End":"04:36.815","Text":"That is the bit of information that had changed."},{"Start":"04:36.815 ","End":"04:38.555","Text":"There was the option to sell it,"},{"Start":"04:38.555 ","End":"04:41.270","Text":"which we\u0027re not reminded about,"},{"Start":"04:41.270 ","End":"04:43.810","Text":"but we had to reconsider that."},{"Start":"04:43.810 ","End":"04:47.960","Text":"From Part 1 we were told that to sell the asset would be 15,600."},{"Start":"04:47.960 ","End":"04:49.670","Text":"Only with that information,"},{"Start":"04:49.670 ","End":"04:53.615","Text":"you need both pieces of information to determine what the recoverable amount is."},{"Start":"04:53.615 ","End":"04:56.565","Text":"The recoverable amount is indeed 20,000 and"},{"Start":"04:56.565 ","End":"05:02.020","Text":"the carrying amount at 31st December X4 is 12,400."},{"Start":"05:02.020 ","End":"05:05.490","Text":"That was calculated in Part 1."},{"Start":"05:05.490 ","End":"05:11.900","Text":"You compare those 2 and realize that you may only reverse the impairment"},{"Start":"05:11.900 ","End":"05:18.840","Text":"by 1,600 to give you a carrying amount of 14,000. I hope that helped."}],"ID":28583},{"Watched":false,"Name":"Exercise 4 - Introduction","Duration":"2m 14s","ChapterTopicVideoID":26387,"CourseChapterTopicPlaylistID":254924,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:03.570","Text":"Hello and welcome to another presentation"},{"Start":"00:03.570 ","End":"00:07.475","Text":"in this series on non-current assets brought to you by Proprep."},{"Start":"00:07.475 ","End":"00:12.450","Text":"My name is Kathy Service and today we\u0027ll be doing another exercise on impairments."},{"Start":"00:12.450 ","End":"00:17.550","Text":"BBA Incorporated purchased a new piece of equipment costing"},{"Start":"00:17.550 ","End":"00:23.445","Text":"30,000 currency units and the date of the purchase was the 1st of January, X1."},{"Start":"00:23.445 ","End":"00:27.210","Text":"The equipment is depreciated using the sum of"},{"Start":"00:27.210 ","End":"00:34.875","Text":"the year\u0027s digits method over a 4-year useful life with a residual value of 3,000."},{"Start":"00:34.875 ","End":"00:36.830","Text":"Now before we continue,"},{"Start":"00:36.830 ","End":"00:42.560","Text":"let me just remind you that there are 3 variables always when we calculate depreciation."},{"Start":"00:42.560 ","End":"00:44.745","Text":"One is, we need to know the method."},{"Start":"00:44.745 ","End":"00:46.055","Text":"There you have the method."},{"Start":"00:46.055 ","End":"00:48.470","Text":"We\u0027re using the sum of the year\u0027s digits method."},{"Start":"00:48.470 ","End":"00:50.830","Text":"We need to know what the useful life is."},{"Start":"00:50.830 ","End":"00:54.420","Text":"Here we\u0027ve got it denoted in years as 4 years."},{"Start":"00:54.420 ","End":"00:57.035","Text":"We need to know what the residual value was,"},{"Start":"00:57.035 ","End":"00:58.210","Text":"and we\u0027re given that too."},{"Start":"00:58.210 ","End":"01:03.785","Text":"There are the 3 variables that we need in order to be able to calculate our depreciation."},{"Start":"01:03.785 ","End":"01:06.400","Text":"On 31st December, X2,"},{"Start":"01:06.400 ","End":"01:09.332","Text":"the managers have tested the asset for impairment"},{"Start":"01:09.332 ","End":"01:12.895","Text":"after recording the annual depreciation expense."},{"Start":"01:12.895 ","End":"01:17.480","Text":"They decided to impair the asset by 2,000."},{"Start":"01:17.480 ","End":"01:21.860","Text":"Notice we\u0027re impairing it by an amount of 2,000."},{"Start":"01:21.860 ","End":"01:27.205","Text":"We\u0027re not impairing it to an amount of 2,000."},{"Start":"01:27.205 ","End":"01:31.730","Text":"Required; answer the questions below. Part a."},{"Start":"01:31.730 ","End":"01:37.775","Text":"What was the recoverable amount of the asset on 31st of December, X2?"},{"Start":"01:37.775 ","End":"01:39.620","Text":"Now, if you recall, I\u0027ve just said to you,"},{"Start":"01:39.620 ","End":"01:44.150","Text":"we are impairing it to an amount of 2,000 and that was"},{"Start":"01:44.150 ","End":"01:49.565","Text":"important information because normally we impair it to a recoverable amount."},{"Start":"01:49.565 ","End":"01:54.355","Text":"But here we\u0027re impairing it by an amount of 2,000."},{"Start":"01:54.355 ","End":"01:56.840","Text":"We\u0027re not given the recoverable,"},{"Start":"01:56.840 ","End":"02:00.385","Text":"we have to work that out."},{"Start":"02:00.385 ","End":"02:07.190","Text":"Part B. Then we need to pass the necessary journal entries to record the impairment."},{"Start":"02:07.190 ","End":"02:11.519","Text":"They\u0027re not asking for general entries to record the depreciation,"},{"Start":"02:11.519 ","End":"02:15.300","Text":"just the impairment journal is required."}],"ID":28585},{"Watched":false,"Name":"Exercise 4 - Part a","Duration":"6m 39s","ChapterTopicVideoID":26388,"CourseChapterTopicPlaylistID":254924,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:06.495","Text":"Let\u0027s look at Part A."},{"Start":"00:06.495 ","End":"00:12.360","Text":"What was the recoverable amount of the asset on 31st December X2?"},{"Start":"00:12.360 ","End":"00:15.105","Text":"Let\u0027s start with the cost."},{"Start":"00:15.105 ","End":"00:17.340","Text":"The cost was 30,000,"},{"Start":"00:17.340 ","End":"00:21.315","Text":"the residual value we were told was 3,000."},{"Start":"00:21.315 ","End":"00:26.190","Text":"That means the depreciable amount is 27,000."},{"Start":"00:26.190 ","End":"00:30.795","Text":"Now, the sum of the year\u0027s digits method is being used,"},{"Start":"00:30.795 ","End":"00:33.408","Text":"which means we need to know what the useful life is,"},{"Start":"00:33.408 ","End":"00:36.524","Text":"and the useful life we\u0027re told is 4 years."},{"Start":"00:36.524 ","End":"00:44.700","Text":"The sum of the year\u0027s digits is 1 plus 2 plus 3 plus 4."},{"Start":"00:44.700 ","End":"00:46.830","Text":"That gives us 10."},{"Start":"00:46.830 ","End":"00:50.550","Text":"Sum of the year\u0027s digits is 10."},{"Start":"00:50.550 ","End":"00:54.240","Text":"That means the depreciation factors are then calculated as follows,"},{"Start":"00:54.240 ","End":"00:56.780","Text":"so in Year 1 we start the year and we say,"},{"Start":"00:56.780 ","End":"00:59.605","Text":"how many years do we have left?"},{"Start":"00:59.605 ","End":"01:01.785","Text":"That\u0027s at the beginning of Year 1."},{"Start":"01:01.785 ","End":"01:05.186","Text":"We\u0027ve got 4 years left so 4/10,"},{"Start":"01:05.186 ","End":"01:09.110","Text":"means we\u0027re going to take 40 percent of the depreciable amount,"},{"Start":"01:09.110 ","End":"01:11.375","Text":"and that will be our depreciation."},{"Start":"01:11.375 ","End":"01:14.135","Text":"In Year 2, we say to ourselves,"},{"Start":"01:14.135 ","End":"01:16.370","Text":"well, how many years are left?"},{"Start":"01:16.370 ","End":"01:17.660","Text":"1 year is gone-by,"},{"Start":"01:17.660 ","End":"01:19.510","Text":"so we\u0027ve got 3 years left."},{"Start":"01:19.510 ","End":"01:22.865","Text":"3/10 means we\u0027re going to take"},{"Start":"01:22.865 ","End":"01:28.759","Text":"30 percent of the depreciable amount and account for that as the depreciation expense."},{"Start":"01:28.759 ","End":"01:32.705","Text":"In Year 3, we\u0027re going to say that there are 2 years left."},{"Start":"01:32.705 ","End":"01:34.735","Text":"This is at the beginning of Year 3."},{"Start":"01:34.735 ","End":"01:38.340","Text":"2 out of 10 is 20 percent."},{"Start":"01:38.340 ","End":"01:40.980","Text":"Finally in Year 4, at the beginning of Year 4,"},{"Start":"01:40.980 ","End":"01:42.900","Text":"we say there is 1 year left,"},{"Start":"01:42.900 ","End":"01:45.555","Text":"so 1 over 10 is 10 percent."},{"Start":"01:45.555 ","End":"01:49.795","Text":"Notice that that adds up to 100 percent."},{"Start":"01:49.795 ","End":"01:54.320","Text":"Each year we take 40 percent of 27,000 and 30 percent of 27,000,"},{"Start":"01:54.320 ","End":"01:55.919","Text":"and 20 percent of 27,000,"},{"Start":"01:55.919 ","End":"02:03.128","Text":"and 10 percent of 27,000 to calculate the depreciation expense in each of those years."},{"Start":"02:03.128 ","End":"02:06.975","Text":"Then if we put this into our table,"},{"Start":"02:06.975 ","End":"02:11.980","Text":"we start in Year 1 with an opening carrying amount of 30,000."},{"Start":"02:11.980 ","End":"02:18.545","Text":"Our depreciation expense in Year 1 is going to be 40 percent of the depreciable amount."},{"Start":"02:18.545 ","End":"02:24.015","Text":"Now remember the depreciable amount is not 30,000, it is 27,000."},{"Start":"02:24.015 ","End":"02:28.250","Text":"40 percent of 27,000 gives us 10,800,"},{"Start":"02:28.250 ","End":"02:32.930","Text":"and that gives us a carrying amount at the end of Year 1 of 19,200."},{"Start":"02:32.930 ","End":"02:39.060","Text":"That then becomes our opening carrying amount in Year 2, 19,200."},{"Start":"02:39.060 ","End":"02:43.140","Text":"Now remember the depreciation in"},{"Start":"02:43.140 ","End":"02:48.475","Text":"Year 2 is going to be worked out at 30 percent of 27,0000."},{"Start":"02:48.475 ","End":"02:52.120","Text":"30 percent of 27,000 is 8,100."},{"Start":"02:52.120 ","End":"02:55.865","Text":"That gives you 11,100."},{"Start":"02:55.865 ","End":"02:58.465","Text":"That\u0027s actually as far as we need to go,"},{"Start":"02:58.465 ","End":"03:02.020","Text":"to calculate that closing carrying amount of 11,100."},{"Start":"03:02.020 ","End":"03:07.540","Text":"However, I\u0027m going to simply complete this table purely for purposes of,"},{"Start":"03:07.540 ","End":"03:09.025","Text":"however, if you\u0027re in a rush,"},{"Start":"03:09.025 ","End":"03:12.030","Text":"you can stop here and go to the next slide."},{"Start":"03:12.030 ","End":"03:13.390","Text":"Our closing carrying amount,"},{"Start":"03:13.390 ","End":"03:18.123","Text":"the end of X2 becomes our opening carrying amount in X3."},{"Start":"03:18.123 ","End":"03:23.235","Text":"In X3, our depreciation rate was 20 percent of 27,000."},{"Start":"03:23.235 ","End":"03:31.160","Text":"That\u0027s 5,400, and that then gives us a closing carrying amount of 5,700."},{"Start":"03:31.160 ","End":"03:34.570","Text":"That then becomes our opening carrying amount in Year 4,"},{"Start":"03:34.570 ","End":"03:40.670","Text":"and in Year 4 our depreciation was 10 percent of the depreciable amount."},{"Start":"03:40.670 ","End":"03:45.800","Text":"That then gives us depreciation of 2,700 in Year 4,"},{"Start":"03:45.800 ","End":"03:52.100","Text":"carrying amount less the depreciation gives us our closing carrying amount of 3,000."},{"Start":"03:52.100 ","End":"03:55.400","Text":"Notice that our closing carrying amount of 3,000 equals"},{"Start":"03:55.400 ","End":"03:59.735","Text":"the residual value at the end of the useful life."},{"Start":"03:59.735 ","End":"04:04.460","Text":"Now, we can also analyze what we\u0027ve just done in a slightly different format"},{"Start":"04:04.460 ","End":"04:09.529","Text":"where we put in the cost in each of the years is 30,000,"},{"Start":"04:09.529 ","End":"04:12.515","Text":"and then we simply subtract our accumulated depreciation."},{"Start":"04:12.515 ","End":"04:17.795","Text":"In Year 1, our accumulated depreciation is only 10,800."},{"Start":"04:17.795 ","End":"04:21.500","Text":"That gives us a closing carrying amount of 19,200."},{"Start":"04:21.500 ","End":"04:22.954","Text":"Looks identical."},{"Start":"04:22.954 ","End":"04:24.890","Text":"By the end of Year 2,"},{"Start":"04:24.890 ","End":"04:30.470","Text":"we have depreciated not only by 10,800 but also by 8,100."},{"Start":"04:30.470 ","End":"04:33.110","Text":"Those two added together,"},{"Start":"04:33.110 ","End":"04:38.640","Text":"gives us our accumulated depreciation of 18,900."},{"Start":"04:39.100 ","End":"04:44.190","Text":"Our closing carrying amount is now 11,100."},{"Start":"04:44.190 ","End":"04:46.150","Text":"Notice it\u0027s still the same."},{"Start":"04:46.150 ","End":"04:52.300","Text":"In Year 3, our accumulated depreciation would therefore be the depreciation in X1,"},{"Start":"04:52.300 ","End":"04:53.905","Text":"the depreciation in X2,"},{"Start":"04:53.905 ","End":"04:56.535","Text":"and the depreciation in X3."},{"Start":"04:56.535 ","End":"05:01.070","Text":"That gives us 24,300."},{"Start":"05:01.070 ","End":"05:07.250","Text":"That gives us accumulated depreciation of 24,300."},{"Start":"05:07.590 ","End":"05:15.510","Text":"Our closing carrying amount is 5,700, same."},{"Start":"05:15.510 ","End":"05:22.780","Text":"Then in Year 4 our accumulated depreciation is the total depreciation process in X1,"},{"Start":"05:22.780 ","End":"05:24.874","Text":"X2, X3, and X4."},{"Start":"05:24.874 ","End":"05:26.775","Text":"We add all of them together."},{"Start":"05:26.775 ","End":"05:30.070","Text":"That comes to 27,000."},{"Start":"05:30.070 ","End":"05:34.010","Text":"You can see that our closing carrying amount is 3,000,"},{"Start":"05:34.010 ","End":"05:40.400","Text":"the same as it was using the other format and remember that equals your residual value."},{"Start":"05:40.400 ","End":"05:41.945","Text":"But as I was saying,"},{"Start":"05:41.945 ","End":"05:44.240","Text":"all we needed was this figure here."},{"Start":"05:44.240 ","End":"05:49.430","Text":"We needed to work out what our closing carrying amount was at the end of X2 because"},{"Start":"05:49.430 ","End":"05:54.845","Text":"we\u0027re trying to work out what the recoverable amount is at the 31st of December X2,"},{"Start":"05:54.845 ","End":"05:56.615","Text":"which is this column here."},{"Start":"05:56.615 ","End":"05:59.990","Text":"What was the carrying amount at 31st December X2?"},{"Start":"05:59.990 ","End":"06:02.585","Text":"It was 11,100."},{"Start":"06:02.585 ","End":"06:06.065","Text":"However, instead, what we\u0027ve been given in this question"},{"Start":"06:06.065 ","End":"06:10.340","Text":"is the carrying amount before impairment and the impairment loss."},{"Start":"06:10.340 ","End":"06:12.500","Text":"We\u0027re going to have to work out then what"},{"Start":"06:12.500 ","End":"06:16.610","Text":"the recoverable amount is, that\u0027s balancing item."},{"Start":"06:16.610 ","End":"06:18.770","Text":"The carrying amount before impairments,"},{"Start":"06:18.770 ","End":"06:23.015","Text":"we\u0027ve just worked it out in it\u0027s larger table, on the previous slide."},{"Start":"06:23.015 ","End":"06:26.915","Text":"11,100 was the carrying amount at the end of X2."},{"Start":"06:26.915 ","End":"06:30.140","Text":"We were told that we impaired it by 2,000,"},{"Start":"06:30.140 ","End":"06:33.170","Text":"which means we reduce the carrying amount by 2,000."},{"Start":"06:33.170 ","End":"06:40.440","Text":"That then means that our recoverable amount must have been 9,100."}],"ID":28586},{"Watched":false,"Name":"Exercise 4 - Part b","Duration":"7m 52s","ChapterTopicVideoID":26389,"CourseChapterTopicPlaylistID":254924,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:05.115","Text":"Part b is to pass the necessary journal entries to record the impairment."},{"Start":"00:05.115 ","End":"00:06.705","Text":"This is quick and easy."},{"Start":"00:06.705 ","End":"00:08.850","Text":"You simply debit the expense,"},{"Start":"00:08.850 ","End":"00:13.200","Text":"which we call an impairment loss expense or asset impairment loss,"},{"Start":"00:13.200 ","End":"00:17.670","Text":"if you like, and then we credit the accumulated impairment loss."},{"Start":"00:17.670 ","End":"00:18.870","Text":"Now here we\u0027ve combined"},{"Start":"00:18.870 ","End":"00:23.595","Text":"the accumulated impairment losses with the accumulated depreciation,"},{"Start":"00:23.595 ","End":"00:25.455","Text":"and that\u0027s perfectly okay."},{"Start":"00:25.455 ","End":"00:26.850","Text":"The amount was given to us,"},{"Start":"00:26.850 ","End":"00:28.335","Text":"so we simply pop that in."},{"Start":"00:28.335 ","End":"00:32.420","Text":"Now that is in fact the end of the question, part b."},{"Start":"00:32.420 ","End":"00:37.460","Text":"However, let\u0027s consider just for argument\u0027s sake and if you don\u0027t have time,"},{"Start":"00:37.460 ","End":"00:40.070","Text":"you can log off right now and move on to"},{"Start":"00:40.070 ","End":"00:43.595","Text":"the next exercise or get onto whatever else you need to do."},{"Start":"00:43.595 ","End":"00:46.745","Text":"But if you\u0027re interested, ask yourself,"},{"Start":"00:46.745 ","End":"00:52.760","Text":"what would the depreciation be in a X3 and X4 and how to calculate it?"},{"Start":"00:52.760 ","End":"00:55.175","Text":"This is the table we\u0027ve gone through,"},{"Start":"00:55.175 ","End":"00:57.980","Text":"X1 and X2 already, but I will recap."},{"Start":"00:57.980 ","End":"01:01.100","Text":"Notice that I\u0027m saying here it is not required."},{"Start":"01:01.100 ","End":"01:02.705","Text":"This is not required."},{"Start":"01:02.705 ","End":"01:04.895","Text":"You have in fact finished this question."},{"Start":"01:04.895 ","End":"01:08.780","Text":"This is purely an exercise in completeness so"},{"Start":"01:08.780 ","End":"01:12.955","Text":"that you also know how to calculate the depreciation in X3 and X4."},{"Start":"01:12.955 ","End":"01:15.440","Text":"Your opening carrying amount was 30,000."},{"Start":"01:15.440 ","End":"01:18.515","Text":"The depreciation expense in year 1 was 10,800."},{"Start":"01:18.515 ","End":"01:21.995","Text":"That was 40 percent of the depreciable amount of 27,000."},{"Start":"01:21.995 ","End":"01:25.490","Text":"That then gave us a closing carrying amount of 19,200,"},{"Start":"01:25.490 ","End":"01:28.510","Text":"which became our opening carrying amount in X2,"},{"Start":"01:28.510 ","End":"01:33.980","Text":"we then depreciated the asset by 30 percent of the depreciable amount of"},{"Start":"01:33.980 ","End":"01:41.050","Text":"27,000 which gave us depreciation expense of 8,100."},{"Start":"01:41.090 ","End":"01:49.685","Text":"If you remember, 19,200 less 8,100 gave us the 11,100 carrying amount at the end of X2,"},{"Start":"01:49.685 ","End":"01:52.640","Text":"which we\u0027d work out in the previous table in a previous slide."},{"Start":"01:52.640 ","End":"01:57.770","Text":"But then we were told that the end of X2 that then impaired the asset."},{"Start":"01:57.770 ","End":"02:00.440","Text":"We also impair the asset by 2,000."},{"Start":"02:00.440 ","End":"02:05.990","Text":"The closing carrying around at the end of X2 is not left at 11,100,"},{"Start":"02:05.990 ","End":"02:09.590","Text":"but will appear in the books as 9,100,"},{"Start":"02:09.590 ","End":"02:11.795","Text":"which equals the recoverable amount."},{"Start":"02:11.795 ","End":"02:13.340","Text":"This could also be analyzed,"},{"Start":"02:13.340 ","End":"02:15.230","Text":"so we just stopping at the end of X2."},{"Start":"02:15.230 ","End":"02:16.880","Text":"This could be also analyze as follows,"},{"Start":"02:16.880 ","End":"02:20.330","Text":"where we show the cost less the accumulated depreciation."},{"Start":"02:20.330 ","End":"02:21.980","Text":"The cost line stays the same and"},{"Start":"02:21.980 ","End":"02:26.605","Text":"the accumulated depreciation line is the only amount that changes."},{"Start":"02:26.605 ","End":"02:28.425","Text":"In year 1,"},{"Start":"02:28.425 ","End":"02:31.970","Text":"the accumulated depreciation is the same as the depreciation expense"},{"Start":"02:31.970 ","End":"02:35.975","Text":"because there\u0027s only 1 year\u0027s with expense that\u0027s been processed,"},{"Start":"02:35.975 ","End":"02:39.275","Text":"giving us the closing carrying amount of 19,200."},{"Start":"02:39.275 ","End":"02:40.910","Text":"Then in year 2,"},{"Start":"02:40.910 ","End":"02:45.580","Text":"notice that we\u0027ve got depreciation expense in year 1 and in"},{"Start":"02:45.580 ","End":"02:50.660","Text":"year 2 and also we\u0027ve got the impairment loss that we\u0027re adding to that."},{"Start":"02:50.660 ","End":"02:53.270","Text":"If we add those 3 items together,"},{"Start":"02:53.270 ","End":"02:58.625","Text":"you get 20,900 as our accumulated depreciation."},{"Start":"02:58.625 ","End":"03:01.500","Text":"Although it\u0027s not just accumulated depreciation, is it?"},{"Start":"03:01.500 ","End":"03:05.090","Text":"Is not accumulated depreciation and impairment losses"},{"Start":"03:05.090 ","End":"03:09.230","Text":"because we\u0027ve got 2,000 added in the 15,800 depreciation,"},{"Start":"03:09.230 ","End":"03:12.140","Text":"8,100 depreciation, and 2,000,"},{"Start":"03:12.140 ","End":"03:13.670","Text":"which is the impairment loss."},{"Start":"03:13.670 ","End":"03:16.100","Text":"That\u0027s what gives us the 20,900."},{"Start":"03:16.100 ","End":"03:19.520","Text":"Now, before we can continue with X3 and X4,"},{"Start":"03:19.520 ","End":"03:24.830","Text":"we have to think carefully about what our depreciation expense will be in X3 and X4."},{"Start":"03:24.830 ","End":"03:29.680","Text":"The reason for that is that our depreciable amount has not changed."},{"Start":"03:29.680 ","End":"03:31.490","Text":"At the end of X2,"},{"Start":"03:31.490 ","End":"03:32.885","Text":"we impaired the assets."},{"Start":"03:32.885 ","End":"03:34.370","Text":"Now following the impairment,"},{"Start":"03:34.370 ","End":"03:38.090","Text":"the depreciable amount is going to be 6,100."},{"Start":"03:38.090 ","End":"03:41.720","Text":"It was previously 27,000 because it was previously"},{"Start":"03:41.720 ","End":"03:45.770","Text":"30,000 less the residual value of 3,000."},{"Start":"03:45.770 ","End":"03:48.710","Text":"Now the way we work it out using the sum of"},{"Start":"03:48.710 ","End":"03:53.210","Text":"the year\u0027s digits method is we take the opening carrying amount in X3,"},{"Start":"03:53.210 ","End":"03:55.342","Text":"in other words, immediately after the impairment."},{"Start":"03:55.342 ","End":"03:56.960","Text":"What is the opening carrying amount?"},{"Start":"03:56.960 ","End":"04:01.625","Text":"It\u0027s 9,100 and we subtract the residual value from that."},{"Start":"04:01.625 ","End":"04:05.705","Text":"We\u0027ve got a depreciable amount which is substantially reduced,"},{"Start":"04:05.705 ","End":"04:09.330","Text":"its 6,100 at that moment."},{"Start":"04:09.330 ","End":"04:11.315","Text":"At the beginning of X3,"},{"Start":"04:11.315 ","End":"04:14.600","Text":"we have a remaining useful life of only 2 years,"},{"Start":"04:14.600 ","End":"04:16.940","Text":"so X1 and X2 have gone by."},{"Start":"04:16.940 ","End":"04:19.760","Text":"We only have 2 years left, X3 and X4."},{"Start":"04:19.760 ","End":"04:24.125","Text":"At the beginning of X3 we\u0027ve got a remaining useful half of 2 years."},{"Start":"04:24.125 ","End":"04:26.300","Text":"What is the sum of the year\u0027s digits?"},{"Start":"04:26.300 ","End":"04:30.995","Text":"Well, it\u0027s 1 plus 2, giving us 3."},{"Start":"04:30.995 ","End":"04:39.930","Text":"What is the predicted depreciation expense going to be in X3 and X4, let\u0027s look at X3."},{"Start":"04:40.010 ","End":"04:45.210","Text":"The depreciable amount of 6,100,"},{"Start":"04:45.210 ","End":"04:50.360","Text":"multiply it by the sum of the year\u0027s digits, depreciation ratio."},{"Start":"04:50.360 ","End":"04:54.545","Text":"Now remember at the beginning of X3 we say how many years are left?"},{"Start":"04:54.545 ","End":"04:56.365","Text":"There are 2 years left."},{"Start":"04:56.365 ","End":"04:59.600","Text":"We divide it by the sum of the year\u0027s digits,"},{"Start":"04:59.600 ","End":"05:01.520","Text":"which is now 3."},{"Start":"05:01.520 ","End":"05:05.725","Text":"That gives us 4,067."},{"Start":"05:05.725 ","End":"05:11.355","Text":"In 20X4, the depreciable amount is 6,100,"},{"Start":"05:11.355 ","End":"05:16.940","Text":"multiply it by the sum of the digits depreciation ratio of and how do we work this out?"},{"Start":"05:16.940 ","End":"05:21.390","Text":"It\u0027s 1/3, but it\u0027s 1 being the number of"},{"Start":"05:21.390 ","End":"05:26.475","Text":"years left as determined on the 1st day of that 4th year."},{"Start":"05:26.475 ","End":"05:29.520","Text":"At the beginning of 20X4 so how many years are left?"},{"Start":"05:29.520 ","End":"05:32.490","Text":"Well, there\u0027s 1 year left divide by the sum of"},{"Start":"05:32.490 ","End":"05:38.040","Text":"the year\u0027s digits and that\u0027s 3 and so that gives us 2,033."},{"Start":"05:38.040 ","End":"05:41.760","Text":"Remember there\u0027s 2 depreciation figures,"},{"Start":"05:41.760 ","End":"05:45.460","Text":"4,067 and 2,033,"},{"Start":"05:45.460 ","End":"05:47.510","Text":"and we\u0027ll pop that into our table."},{"Start":"05:47.510 ","End":"05:53.058","Text":"Our closing carrying amount at the end of X2 becomes our opening carrying amount in X3,"},{"Start":"05:53.058 ","End":"05:58.580","Text":"we then subtract the depreciation expense of 4,067."},{"Start":"05:58.580 ","End":"06:03.845","Text":"That then gives us a closing carrying amount of 5,033."},{"Start":"06:03.845 ","End":"06:07.790","Text":"That then becomes our opening carrying amount in X4,"},{"Start":"06:07.790 ","End":"06:12.320","Text":"we then subtract our depreciation expense in X4 of"},{"Start":"06:12.320 ","End":"06:18.935","Text":"2,033 and that gives us our closing carrying amount of 3,000."},{"Start":"06:18.935 ","End":"06:22.474","Text":"Now if we put it into the other format,"},{"Start":"06:22.474 ","End":"06:27.595","Text":"where we have the cost line which remains unchanged as you can see here"},{"Start":"06:27.595 ","End":"06:33.920","Text":"and then we subtract the accumulated depreciation and impairment losses."},{"Start":"06:33.920 ","End":"06:38.220","Text":"The balance in our accumulated depreciation and impairments loss account"},{"Start":"06:38.220 ","End":"06:43.850","Text":"the last time we looked was 20,900 at the end of X2."},{"Start":"06:43.850 ","End":"06:50.360","Text":"We\u0027ve now depreciated it further in X3 by another 4,067."},{"Start":"06:50.360 ","End":"06:57.530","Text":"You add that now to the last known accumulated figure of 20,900 and"},{"Start":"06:57.530 ","End":"07:05.790","Text":"you get 24,967 and that then gives you your closing carrying amount of 5,033."},{"Start":"07:05.790 ","End":"07:10.180","Text":"Notice it is the same using either format."},{"Start":"07:10.180 ","End":"07:15.670","Text":"Then in X4, what will our accumulated depreciation and impairment loss be?"},{"Start":"07:15.670 ","End":"07:21.055","Text":"At the end of week 3, the accumulated depreciation and impairment losses is 24,967."},{"Start":"07:21.055 ","End":"07:24.310","Text":"We depreciate by further 2,033."},{"Start":"07:24.310 ","End":"07:31.045","Text":"That gives us 27,000 accumulated depreciation and impairment losses at the end of X4,"},{"Start":"07:31.045 ","End":"07:34.330","Text":"leaving us with our closing carrying amount of 3,000,"},{"Start":"07:34.330 ","End":"07:38.405","Text":"which remember, equals our residual value."},{"Start":"07:38.405 ","End":"07:43.750","Text":"Remember it\u0027s obviously the same irrespective of the format used."},{"Start":"07:43.750 ","End":"07:47.020","Text":"That was just a little bit of value added."},{"Start":"07:47.020 ","End":"07:50.845","Text":"Just remember this part here was not required."},{"Start":"07:50.845 ","End":"07:53.270","Text":"I hope that helped."}],"ID":28587},{"Watched":false,"Name":"Costs incurred after initial recognition video","Duration":"11m 28s","ChapterTopicVideoID":26641,"CourseChapterTopicPlaylistID":254924,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:01.100 ","End":"00:05.670","Text":"Hello and welcome to another video presentation in the series"},{"Start":"00:05.670 ","End":"00:09.795","Text":"on Property Plant and Equipment brought to you by appropriate."},{"Start":"00:09.795 ","End":"00:17.460","Text":"In this video, we will focus on the costs incurred after initial recognition."},{"Start":"00:17.460 ","End":"00:21.240","Text":"Once the asset is in place and operative, now,"},{"Start":"00:21.240 ","End":"00:26.775","Text":"the words the asset is in a condition and location as intended by management."},{"Start":"00:26.775 ","End":"00:32.010","Text":"To deep look incur various costs, including,"},{"Start":"00:32.010 ","End":"00:34.545","Text":"for example, maintenance and cleaning,"},{"Start":"00:34.545 ","End":"00:39.010","Text":"prepares, power and modifications then improvements."},{"Start":"00:39.010 ","End":"00:44.585","Text":"Now, some of these costs will be recognized as an expense in the income statement,"},{"Start":"00:44.585 ","End":"00:49.655","Text":"whereas others are recognized as an asset on the balance sheet."},{"Start":"00:49.655 ","End":"00:54.950","Text":"The issue is to decide which costs on curred as an expense,"},{"Start":"00:54.950 ","End":"00:58.100","Text":"and which will be recognized as an asset."},{"Start":"00:58.100 ","End":"01:00.530","Text":"To summarize the issue,"},{"Start":"01:00.530 ","End":"01:07.520","Text":"we have a debit and a credit as part of our entry will incurring subsequent costs."},{"Start":"01:07.520 ","End":"01:10.460","Text":"Now, the critical key to go to bank,"},{"Start":"01:10.460 ","End":"01:17.210","Text":"if the costs are paid in cash or the credit may go to accounts payable if in fact,"},{"Start":"01:17.210 ","End":"01:19.340","Text":"the costs incurred on credit."},{"Start":"01:19.340 ","End":"01:22.025","Text":"That\u0027s the easy side of transactions."},{"Start":"01:22.025 ","End":"01:23.780","Text":"The issue for the debit side,"},{"Start":"01:23.780 ","End":"01:29.235","Text":"the issue for the debit side should the cost be regarded"},{"Start":"01:29.235 ","End":"01:36.410","Text":"as debit an expense or should the cost be recognized as an asset,"},{"Start":"01:36.410 ","End":"01:40.560","Text":"debit an asset those are 2 very different alternatives,"},{"Start":"01:40.560 ","End":"01:44.585","Text":"and we need to understand the accounting principles to decide which"},{"Start":"01:44.585 ","End":"01:51.680","Text":"subsequent costs are recognized as an expense and which are recognized as an asset."},{"Start":"01:51.680 ","End":"01:58.730","Text":"Accounting principles tell us the costs incurred that improve the asset"},{"Start":"01:58.730 ","End":"02:02.615","Text":"and increase the asset\u0027s capacity to generate"},{"Start":"02:02.615 ","End":"02:07.775","Text":"future economic benefits will be added to the cost of the asset."},{"Start":"02:07.775 ","End":"02:13.519","Text":"In other words, that will end up being a debit to the asset itself."},{"Start":"02:13.519 ","End":"02:18.650","Text":"However, standards tell us that day-to-day servicing costs,"},{"Start":"02:18.650 ","End":"02:21.545","Text":"often referred to as repairs and maintenance,"},{"Start":"02:21.545 ","End":"02:24.275","Text":"are expensed when incurred."},{"Start":"02:24.275 ","End":"02:29.165","Text":"These ones are debited to the expense account."},{"Start":"02:29.165 ","End":"02:33.290","Text":"They may ask, why is that the situation?"},{"Start":"02:33.290 ","End":"02:36.095","Text":"Why do accounting principles tell us this?"},{"Start":"02:36.095 ","End":"02:38.450","Text":"Because you may argue that"},{"Start":"02:38.450 ","End":"02:43.280","Text":"day-to-day servicing costs also maybe generate future not only benefits."},{"Start":"02:43.280 ","End":"02:47.060","Text":"Well, in fact, they do day-to-day servicing costs such as repairs"},{"Start":"02:47.060 ","End":"02:51.110","Text":"and maintenance will carry generate future economic benefits,"},{"Start":"02:51.110 ","End":"02:55.400","Text":"but the senators had to be practical and realize it would not"},{"Start":"02:55.400 ","End":"03:00.245","Text":"be an option to capitalize, in other words,"},{"Start":"03:00.245 ","End":"03:05.675","Text":"adds the cost of the asset ongoing day-to-day servicing costs,"},{"Start":"03:05.675 ","End":"03:09.745","Text":"for example, on a vehicle of all machine."},{"Start":"03:09.745 ","End":"03:17.510","Text":"Therefore, it\u0027s only the costs incurred other than day-to-day servicing costs that"},{"Start":"03:17.510 ","End":"03:20.420","Text":"improve the asset\u0027s capacity and generate"},{"Start":"03:20.420 ","End":"03:26.105","Text":"future economic benefits don\u0027t fit or in fact added to the cost of the asset."},{"Start":"03:26.105 ","End":"03:31.265","Text":"To look at an example of costs incurred after initial recognition,"},{"Start":"03:31.265 ","End":"03:35.540","Text":"we return to the example you\u0027ve seen a couple of times before of"},{"Start":"03:35.540 ","End":"03:40.025","Text":"the company which purchased the machine for 30,000 currency units."},{"Start":"03:40.025 ","End":"03:44.430","Text":"The estimated useful life of 5 years,"},{"Start":"03:44.430 ","End":"03:47.535","Text":"and the 5,000 residual value."},{"Start":"03:47.535 ","End":"03:52.785","Text":"Using the straight-line method of depreciation in the previous examples,"},{"Start":"03:52.785 ","End":"03:54.840","Text":"you saw at the end of year 3,"},{"Start":"03:54.840 ","End":"04:02.150","Text":"the asset head clear the cost of 30,000 and accumulated depreciation of 15,000,"},{"Start":"04:02.150 ","End":"04:05.540","Text":"and a carrying amount of 15,000."},{"Start":"04:05.540 ","End":"04:10.299","Text":"We will pick up on those numbers as an example progresses."},{"Start":"04:10.299 ","End":"04:13.500","Text":"During the 4th year, in year 4,"},{"Start":"04:13.500 ","End":"04:15.530","Text":"you told the company experienced number of"},{"Start":"04:15.530 ","End":"04:20.035","Text":"breakdowns in the chocolate molding machine that required repairs,"},{"Start":"04:20.035 ","End":"04:23.225","Text":"so to sounded effort to upgrade the machine,"},{"Start":"04:23.225 ","End":"04:25.745","Text":"expecting the face fewer breakdowns,"},{"Start":"04:25.745 ","End":"04:29.530","Text":"extend its useful life by 3 years."},{"Start":"04:29.530 ","End":"04:34.280","Text":"Other words not to 8 years from the 5 years and to increase"},{"Start":"04:34.280 ","End":"04:40.395","Text":"the residual value to 6,000 as opposed the original 5,000."},{"Start":"04:40.395 ","End":"04:45.005","Text":"This adware was completed at the end of the 4th year"},{"Start":"04:45.005 ","End":"04:50.695","Text":"and the upgraded machine was fully operative at the start of year 5."},{"Start":"04:50.695 ","End":"04:53.000","Text":"In the table below,"},{"Start":"04:53.000 ","End":"04:57.875","Text":"we see here the costs incurred in that 4thyear."},{"Start":"04:57.875 ","End":"05:01.055","Text":"There were maintenance costs, repair costs,"},{"Start":"05:01.055 ","End":"05:04.655","Text":"power costs, and upgrade cost."},{"Start":"05:04.655 ","End":"05:11.000","Text":"You\u0027re required to complete the transaction worksheet for the 4th year and then compute"},{"Start":"05:11.000 ","End":"05:17.670","Text":"the depreciation expense for the 4th year up until the 8th year."},{"Start":"05:17.670 ","End":"05:23.300","Text":"Looking at the solution to this example and looking at the accounting equation,"},{"Start":"05:23.300 ","End":"05:27.170","Text":"which one\u0027s actions worksheet we have as always, in this case,"},{"Start":"05:27.170 ","End":"05:31.550","Text":"a simplified worksheet of assets equals owner\u0027s equity,"},{"Start":"05:31.550 ","End":"05:34.370","Text":"there are no liabilities in this case."},{"Start":"05:34.370 ","End":"05:37.489","Text":"Remember the machine is an asset,"},{"Start":"05:37.489 ","End":"05:44.375","Text":"whereas the accumulated depreciation on the machine is a negative or contra asset."},{"Start":"05:44.375 ","End":"05:48.680","Text":"Having said that, you can start recording the detail, the balance,"},{"Start":"05:48.680 ","End":"05:54.920","Text":"the machine cost us 50,000 that we know from the previous slide or slides and we"},{"Start":"05:54.920 ","End":"05:58.370","Text":"also know that the accumulated depreciation negative or"},{"Start":"05:58.370 ","End":"06:02.315","Text":"contra asset at the end of year 2,"},{"Start":"06:02.315 ","End":"06:05.735","Text":"we also know that the accumulated depreciation,"},{"Start":"06:05.735 ","End":"06:07.715","Text":"the negative or contra asset,"},{"Start":"06:07.715 ","End":"06:12.895","Text":"at the end of year 3 is an amount of 15,000."},{"Start":"06:12.895 ","End":"06:16.105","Text":"Looking at the cost for the 4th year,"},{"Start":"06:16.105 ","End":"06:21.050","Text":"the maintenance cost must be recognized as an expense,"},{"Start":"06:21.050 ","End":"06:23.120","Text":"so therefore it is paid in cash."},{"Start":"06:23.120 ","End":"06:25.550","Text":"We reduce the cash for 500."},{"Start":"06:25.550 ","End":"06:30.020","Text":"This is regarded as a day-to-day servicing cost, and therefore,"},{"Start":"06:30.020 ","End":"06:34.415","Text":"it\u0027s recognized as an expense on the income statement which reduces equity"},{"Start":"06:34.415 ","End":"06:39.885","Text":"through repairs are also regarded as a day-to-day servicing costs."},{"Start":"06:39.885 ","End":"06:42.720","Text":"Cash is paid reduces the asset cash,"},{"Start":"06:42.720 ","End":"06:48.040","Text":"and also it is recognized as an expense which decreases equity."},{"Start":"06:48.040 ","End":"06:53.635","Text":"Power costs are Caelian expense without any debate about"},{"Start":"06:53.635 ","End":"06:57.010","Text":"future economic benefits and therefore"},{"Start":"06:57.010 ","End":"07:00.830","Text":"these are recorded in the income statement as well."},{"Start":"07:00.830 ","End":"07:05.255","Text":"But looking at the upgrade of 6,000,"},{"Start":"07:05.255 ","End":"07:11.530","Text":"that upgrade is still not day-to-day servicing or repairs and maintenance and therefore,"},{"Start":"07:11.530 ","End":"07:16.420","Text":"as it also produces and will contribute to future economic benefits,"},{"Start":"07:16.420 ","End":"07:21.100","Text":"this amount is capitalized and remember the word capitalized means simply"},{"Start":"07:21.100 ","End":"07:27.080","Text":"edit the cost of the asset on the statement of financial position."},{"Start":"07:27.080 ","End":"07:32.785","Text":"The depreciation expense for the current year,"},{"Start":"07:32.785 ","End":"07:37.145","Text":"year 4 note, is not affected by the upgrade,"},{"Start":"07:37.145 ","End":"07:41.525","Text":"because upgrade was only completed at the end of the 4th year,"},{"Start":"07:41.525 ","End":"07:43.910","Text":"and therefore any benefits from that will"},{"Start":"07:43.910 ","End":"07:48.410","Text":"only come about from the beginning of the 5th year."},{"Start":"07:48.410 ","End":"07:54.245","Text":"The depreciation expense for the 4th year is based on our original calculation,"},{"Start":"07:54.245 ","End":"07:59.355","Text":"which you will recall there\u0027s an amount of"},{"Start":"07:59.355 ","End":"08:07.935","Text":"5,000 that is also clearly an expense and with no balance the worksheet,"},{"Start":"08:07.935 ","End":"08:14.255","Text":"the asset column won\u0027t be used by put them in a total here anyhow, of 7,800."},{"Start":"08:14.255 ","End":"08:16.250","Text":"What is important now in fact,"},{"Start":"08:16.250 ","End":"08:22.490","Text":"is the balance in the machinery at cost account of 36,000 and the balance in"},{"Start":"08:22.490 ","End":"08:26.225","Text":"the machinery accumulated depreciation account"},{"Start":"08:26.225 ","End":"08:29.915","Text":"of 20,000 years is going to be the important balances."},{"Start":"08:29.915 ","End":"08:35.660","Text":"Moving forward to the next part of this solution, while we here,"},{"Start":"08:35.660 ","End":"08:44.855","Text":"we might as well put in the total of the income statement costs for the year of 6,800."},{"Start":"08:44.855 ","End":"08:48.320","Text":"It has now take a look at the computation of"},{"Start":"08:48.320 ","End":"08:52.705","Text":"the revised depreciable amount at the end of year 4,"},{"Start":"08:52.705 ","End":"08:54.940","Text":"or the beginning of year 5,"},{"Start":"08:54.940 ","End":"09:00.290","Text":"and then the depreciation expense for years 5 to 8."},{"Start":"09:00.290 ","End":"09:02.765","Text":"What you saw on the previous slide,"},{"Start":"09:02.765 ","End":"09:06.850","Text":"the revised cost was an amount of 36,000,"},{"Start":"09:06.850 ","End":"09:11.660","Text":"the 30,000 plus the 6,000 improvement,"},{"Start":"09:11.660 ","End":"09:18.350","Text":"and the accumulated depreciation at the end of the 4th year was 20,000,"},{"Start":"09:18.350 ","End":"09:23.555","Text":"which gave us a carrying amount of 16,000."},{"Start":"09:23.555 ","End":"09:27.110","Text":"Now, the revised salvage value or"},{"Start":"09:27.110 ","End":"09:33.200","Text":"residual value is now 6,000 compared to the original 5,000,"},{"Start":"09:33.200 ","End":"09:35.840","Text":"and with the concept of depreciable amount,"},{"Start":"09:35.840 ","End":"09:39.919","Text":"other words, the month that will be depreciated in the future,"},{"Start":"09:39.919 ","End":"09:46.670","Text":"is now taken to be the carrying amount less the residual value,"},{"Start":"09:46.670 ","End":"09:50.240","Text":"rather than the cost less the residual value,"},{"Start":"09:50.240 ","End":"09:54.950","Text":"and the depreciable amount at the end of year 4 or"},{"Start":"09:54.950 ","End":"10:00.215","Text":"beginning of year 5 is therefore clearly an amount of 10,000."},{"Start":"10:00.215 ","End":"10:04.399","Text":"But now we have to compute the amount of remaining years."},{"Start":"10:04.399 ","End":"10:08.180","Text":"How many years life does this assets have."},{"Start":"10:08.180 ","End":"10:11.225","Text":"Let\u0027s look at the calculation of this."},{"Start":"10:11.225 ","End":"10:18.380","Text":"Well, we know that the original useful life was a life period of"},{"Start":"10:18.380 ","End":"10:23.135","Text":"5 years and from years"},{"Start":"10:23.135 ","End":"10:29.330","Text":"1 to years 4 Katie took up 4 years of this asset\u0027s useful life,"},{"Start":"10:29.330 ","End":"10:36.625","Text":"which in fact gave us a 1 year remaining useful life at the end of year 4,"},{"Start":"10:36.625 ","End":"10:43.040","Text":"but now you are told that the new estimate of the useful life is,"},{"Start":"10:43.040 ","End":"10:44.975","Text":"in fact, 8 years."},{"Start":"10:44.975 ","End":"10:48.915","Text":"If a new estimate is 8 years in total,"},{"Start":"10:48.915 ","End":"10:52.505","Text":"and the original estimate was 5 years,"},{"Start":"10:52.505 ","End":"10:59.525","Text":"clearly now there has been an increase in 3 years of this asset\u0027s life."},{"Start":"10:59.525 ","End":"11:04.505","Text":"We add on those 3 years to the remaining 1 year and get not"},{"Start":"11:04.505 ","End":"11:13.475","Text":"a remaining useful life of 4 years as from the end of year 4 or beginning of year 5."},{"Start":"11:13.475 ","End":"11:16.610","Text":"Remaining useful life is 4 years,"},{"Start":"11:16.610 ","End":"11:20.540","Text":"the depreciation expense for each of years, 5,"},{"Start":"11:20.540 ","End":"11:22.070","Text":"6, 7, and 8,"},{"Start":"11:22.070 ","End":"11:28.110","Text":"must equal to 2,500 currency units."}],"ID":28600},{"Watched":false,"Name":"Recognition of gain or loss on disposal video","Duration":"12m 21s","ChapterTopicVideoID":26642,"CourseChapterTopicPlaylistID":254924,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.830 ","End":"00:05.550","Text":"Hello and welcome to another video presentation in the series on property,"},{"Start":"00:05.550 ","End":"00:08.790","Text":"plant, and equipment brought to you by Proprep."},{"Start":"00:08.790 ","End":"00:15.660","Text":"In this video, we will focus on the recognition of the gain or loss on disposal."},{"Start":"00:15.660 ","End":"00:18.840","Text":"When an asset is disposed of,"},{"Start":"00:18.840 ","End":"00:24.895","Text":"the income statement needs to show a profit or loss on that disposal."},{"Start":"00:24.895 ","End":"00:29.660","Text":"Now, the profit or loss on disposal is different to the proceeds."},{"Start":"00:29.660 ","End":"00:35.795","Text":"Proceeds being the cash the entity receives from selling the asset."},{"Start":"00:35.795 ","End":"00:38.194","Text":"If we look at the cash received,"},{"Start":"00:38.194 ","End":"00:41.390","Text":"the proceeds from selling the asset net of"},{"Start":"00:41.390 ","End":"00:46.415","Text":"any transaction costs and we subtract from that,"},{"Start":"00:46.415 ","End":"00:48.770","Text":"the carrying amount of the asset,"},{"Start":"00:48.770 ","End":"00:53.795","Text":"and importantly must be the carrying amount at the date of disposal."},{"Start":"00:53.795 ","End":"00:59.435","Text":"You will see in some examples going forward that if we have"},{"Start":"00:59.435 ","End":"01:01.820","Text":"a carrying amount at the end of"},{"Start":"01:01.820 ","End":"01:07.115","Text":"a particular year and the asset is then sold 6 months into the following year,"},{"Start":"01:07.115 ","End":"01:10.730","Text":"we will need to update the accumulated depreciation to"},{"Start":"01:10.730 ","End":"01:15.185","Text":"get an updated carrying amount at the date of sale."},{"Start":"01:15.185 ","End":"01:17.090","Text":"That gives us, as I said,"},{"Start":"01:17.090 ","End":"01:19.910","Text":"the profit or loss on disposal."},{"Start":"01:19.910 ","End":"01:24.515","Text":"Now there are 4 distinct steps which need to be"},{"Start":"01:24.515 ","End":"01:30.605","Text":"processed in order to account for the profit loss on disposal of an asset."},{"Start":"01:30.605 ","End":"01:34.580","Text":"One, we need to remove the cost as an asset,"},{"Start":"01:34.580 ","End":"01:38.670","Text":"so to take away the cost as an asset because"},{"Start":"01:38.670 ","End":"01:42.635","Text":"the asset is no longer going to be existing in the entity\u0027s accounting records."},{"Start":"01:42.635 ","End":"01:44.390","Text":"Secondly, we have to remove"},{"Start":"01:44.390 ","End":"01:49.775","Text":"the accumulated depreciation on the asset at the date of disposal."},{"Start":"01:49.775 ","End":"01:53.885","Text":"Thirdly, record the proceeds and sale."},{"Start":"01:53.885 ","End":"01:58.190","Text":"Finally, from there determine the profit or loss."},{"Start":"01:58.190 ","End":"02:01.085","Text":"The gain or loss on disposal."},{"Start":"02:01.085 ","End":"02:03.685","Text":"Looking now at an example,"},{"Start":"02:03.685 ","End":"02:08.480","Text":"and again it\u0027s the similar example you\u0027ve seen in previous sections."},{"Start":"02:08.480 ","End":"02:12.755","Text":"The company buys this machine for 30,000 currency units."},{"Start":"02:12.755 ","End":"02:16.680","Text":"It has the useful life of 5 years,"},{"Start":"02:16.680 ","End":"02:22.370","Text":"a residual value of 5,000 and we use the straight-line depreciation method."},{"Start":"02:22.370 ","End":"02:26.540","Text":"Now if the machine is sold halfway through year 3,"},{"Start":"02:26.540 ","End":"02:35.240","Text":"the date will be important and the proceeds of sale are 20,500 currency units and"},{"Start":"02:35.240 ","End":"02:39.050","Text":"the company had to pay engineers an amount of 1,000 to"},{"Start":"02:39.050 ","End":"02:44.240","Text":"dismantle the asset and prepare it for transportation."},{"Start":"02:44.240 ","End":"02:54.125","Text":"Clearly, the net selling price would be the 20,500 less the 1,000 cost of disposal."},{"Start":"02:54.125 ","End":"03:01.610","Text":"We\u0027d have a 19.5 thousand net selling price."},{"Start":"03:01.610 ","End":"03:06.350","Text":"This slide simply summarizes the calculation of"},{"Start":"03:06.350 ","End":"03:12.385","Text":"the cost of the asset and the depreciation up to the end of the 2nd year."},{"Start":"03:12.385 ","End":"03:15.140","Text":"The end of the 2nd year of the asset\u0027s life,"},{"Start":"03:15.140 ","End":"03:21.905","Text":"the carrying amount was an amount of 20,000 which was the cost of 30,000,"},{"Start":"03:21.905 ","End":"03:26.225","Text":"and 2 years of depreciation of 5,000 each,"},{"Start":"03:26.225 ","End":"03:29.480","Text":"so an accumulated depreciation of 10,000."},{"Start":"03:29.480 ","End":"03:35.450","Text":"Therefore, a carrying amount at the end of the 2nd year of 20,000."},{"Start":"03:35.450 ","End":"03:42.305","Text":"Looking at the calculations required to account for the gain or loss on disposal,"},{"Start":"03:42.305 ","End":"03:48.680","Text":"we need to record the depreciation expense for the 3rd year and"},{"Start":"03:48.680 ","End":"03:50.660","Text":"this case for 6 months into"},{"Start":"03:50.660 ","End":"03:55.205","Text":"the 3rd year because the machine is sold halfway through the year."},{"Start":"03:55.205 ","End":"03:57.740","Text":"Now we know that the depreciation expense per"},{"Start":"03:57.740 ","End":"04:01.940","Text":"year is an amount of 5,000 and therefore for"},{"Start":"04:01.940 ","End":"04:09.745","Text":"6 months of the year the depreciation expense is an amount of 2,500."},{"Start":"04:09.745 ","End":"04:13.924","Text":"We then calculate the gain or loss on disposal."},{"Start":"04:13.924 ","End":"04:20.810","Text":"The proceeds net of transaction costs we\u0027ve already computed at 19,500."},{"Start":"04:20.810 ","End":"04:31.115","Text":"Remember it was the selling price of 20,500 less the cost of disposal of 1.5 thousand."},{"Start":"04:31.115 ","End":"04:34.050","Text":"The carrying amount of the asset."},{"Start":"04:34.050 ","End":"04:39.190","Text":"This is the carrying amount of the asset not at the date of disposal,"},{"Start":"04:39.190 ","End":"04:42.715","Text":"not at the end of the previous year."},{"Start":"04:42.715 ","End":"04:45.175","Text":"That\u0027s important to remember."},{"Start":"04:45.175 ","End":"04:48.265","Text":"What is the carrying amount of data disposal?"},{"Start":"04:48.265 ","End":"04:52.825","Text":"You saw on the previous slide that the carrying amount at the end"},{"Start":"04:52.825 ","End":"04:57.575","Text":"of the 2nd year was an amount of 20,000."},{"Start":"04:57.575 ","End":"05:05.379","Text":"We didn\u0027t subtract the 2.5 thousand depreciation for the first 6 months of the 3rd year,"},{"Start":"05:05.379 ","End":"05:09.354","Text":"so we subtract an amount of 2.5 thousand,"},{"Start":"05:09.354 ","End":"05:14.230","Text":"which gives us the carrying amount at the date of disposal,"},{"Start":"05:14.230 ","End":"05:16.980","Text":"which is 17.5 thousand."},{"Start":"05:16.980 ","End":"05:20.210","Text":"We can then take the proceeds less"},{"Start":"05:20.210 ","End":"05:24.890","Text":"the carrying amount as the proceeds are greater than the carrying amount there is,"},{"Start":"05:24.890 ","End":"05:25.970","Text":"in fact here again,"},{"Start":"05:25.970 ","End":"05:29.850","Text":"on disposal of 2,000."},{"Start":"05:30.160 ","End":"05:37.654","Text":"Let\u0027s take a look at the transactions worksheet and how this will be recorded,"},{"Start":"05:37.654 ","End":"05:43.670","Text":"so the end of the 2nd year we know the machine had a cost of 30,000"},{"Start":"05:43.670 ","End":"05:51.260","Text":"and the accumulated depreciation at that date into the 2nd year was an amount of 10,000."},{"Start":"05:51.260 ","End":"05:53.930","Text":"We\u0027ve just computed depreciation for"},{"Start":"05:53.930 ","End":"06:03.170","Text":"the first 6 months of the 3rd year that you recall came to the amount of 2.5 thousand,"},{"Start":"06:03.170 ","End":"06:06.290","Text":"which therefore increases the accumulated depreciation,"},{"Start":"06:06.290 ","End":"06:12.545","Text":"the negative asset and that\u0027s recorded as an expense of 2.5 thousand."},{"Start":"06:12.545 ","End":"06:18.605","Text":"There\u0027s a dismantling cost of 1,000 paid in cash,"},{"Start":"06:18.605 ","End":"06:25.250","Text":"which is recognized as an expense and we now account for the disposal."},{"Start":"06:25.250 ","End":"06:28.700","Text":"Now, look carefully what\u0027s happening over here."},{"Start":"06:28.700 ","End":"06:36.094","Text":"Cash coming in is an amount of 20,500 that is the proceeds on disposal."},{"Start":"06:36.094 ","End":"06:41.150","Text":"The asset is removed from the accounting records."},{"Start":"06:41.150 ","End":"06:44.815","Text":"Remove the asset from the accounting record of 30"},{"Start":"06:44.815 ","End":"06:50.630","Text":"and I remove the accumulated depreciation of 12.5."},{"Start":"06:50.630 ","End":"06:54.530","Text":"Now, remember, because the asset and"},{"Start":"06:54.530 ","End":"07:00.255","Text":"the accumulated depreciation as a negative asset or record on the worksheet,"},{"Start":"07:00.255 ","End":"07:02.240","Text":"clearly both as assets."},{"Start":"07:02.240 ","End":"07:07.010","Text":"In fact, the cash machinery and the accumulated depreciation sit on"},{"Start":"07:07.010 ","End":"07:12.455","Text":"the asset side of the worksheet we\u0027ll now reduce or remove the asset."},{"Start":"07:12.455 ","End":"07:14.915","Text":"We have to subtract it over here."},{"Start":"07:14.915 ","End":"07:19.550","Text":"But when I remove the negative accumulated depreciation,"},{"Start":"07:19.550 ","End":"07:24.830","Text":"[inaudible] has to be added in order to achieve a 0 amount for the asset that"},{"Start":"07:24.830 ","End":"07:30.650","Text":"cost and a 0 amount for the accumulated depreciation."},{"Start":"07:30.650 ","End":"07:35.640","Text":"We will see the account entries for this on the next slide."},{"Start":"07:35.830 ","End":"07:39.290","Text":"Let us now take a look at the accounting entries"},{"Start":"07:39.290 ","End":"07:43.190","Text":"relating to the gain or loss on disposal."},{"Start":"07:43.190 ","End":"07:47.540","Text":"Firstly, have to record that initial 2.5 thousand"},{"Start":"07:47.540 ","End":"07:52.240","Text":"depreciation for the first 6 months of the current year."},{"Start":"07:52.240 ","End":"07:54.440","Text":"Therefore, the debit clearly goes to"},{"Start":"07:54.440 ","End":"08:00.395","Text":"a depreciation expense for the amount of 2.5 thousand."},{"Start":"08:00.395 ","End":"08:02.450","Text":"The credit goes to"},{"Start":"08:02.450 ","End":"08:10.685","Text":"the accumulated depreciation account as a negative asset of 2.5 thousand."},{"Start":"08:10.685 ","End":"08:14.360","Text":"Then on each record the dismantling costs."},{"Start":"08:14.360 ","End":"08:18.080","Text":"We can simply call these things dismantling costs."},{"Start":"08:18.080 ","End":"08:21.770","Text":"Could use another name if you want to, removal costs."},{"Start":"08:21.770 ","End":"08:26.300","Text":"Dismantling costs as an expense and these amounted"},{"Start":"08:26.300 ","End":"08:32.260","Text":"to 1,000 and there were paid for out of the bank account,"},{"Start":"08:32.260 ","End":"08:39.875","Text":"which is an asset, so I credit the bank account to reduce it by 1,000."},{"Start":"08:39.875 ","End":"08:45.170","Text":"We now come to the actual recording of the gain or loss on"},{"Start":"08:45.170 ","End":"08:51.665","Text":"disposal and the removal of the asset and the associated accumulated depreciation."},{"Start":"08:51.665 ","End":"08:54.920","Text":"Because the accumulated depreciation is"},{"Start":"08:54.920 ","End":"08:58.400","Text":"a contra asset and therefore has a credit balance,"},{"Start":"08:58.400 ","End":"09:02.180","Text":"to remove it requires a debit."},{"Start":"09:02.180 ","End":"09:03.710","Text":"We debit, therefore,"},{"Start":"09:03.710 ","End":"09:08.405","Text":"the accumulated depreciation with the total,"},{"Start":"09:08.405 ","End":"09:13.490","Text":"which remember was the 10,000 balance at the end of the previous year,"},{"Start":"09:13.490 ","End":"09:18.755","Text":"plus the 2.5 thousand depreciation of the first 6 months, the current year."},{"Start":"09:18.755 ","End":"09:23.450","Text":"We, therefore, debit the accumulated depreciation for 12.5 thousand."},{"Start":"09:23.450 ","End":"09:26.370","Text":"Now pay attention to those journal entry."},{"Start":"09:26.370 ","End":"09:33.595","Text":"We\u0027re going to have 5 entries comprising this 1 journal entry and they will all balance."},{"Start":"09:33.595 ","End":"09:37.420","Text":"You will see the total debits will equal total credits."},{"Start":"09:37.420 ","End":"09:45.670","Text":"We need to record the cash coming in and we know we received cash of 20,500."},{"Start":"09:45.670 ","End":"09:52.240","Text":"Now we need to record the cash coming in at 20,500 even though we\u0027ve paid out,"},{"Start":"09:52.240 ","End":"09:56.095","Text":"as we know, 1,000 cash for dismantling costs,"},{"Start":"09:56.095 ","End":"10:00.645","Text":"we need to record the correct amount of cash coming in to the business."},{"Start":"10:00.645 ","End":"10:04.895","Text":"Then we need to remove the asset itself,"},{"Start":"10:04.895 ","End":"10:08.715","Text":"so we need to credit the machinery account,"},{"Start":"10:08.715 ","End":"10:11.615","Text":"which is an asset that has a debit balance."},{"Start":"10:11.615 ","End":"10:15.110","Text":"Therefore, to remove it requires a credit balance of"},{"Start":"10:15.110 ","End":"10:17.390","Text":"the original cost now not the carrying amount"},{"Start":"10:17.390 ","End":"10:20.585","Text":"because the original cost is still sitting inside that account,"},{"Start":"10:20.585 ","End":"10:26.750","Text":"so the cost is reduced down to 0 by 30,000."},{"Start":"10:26.750 ","End":"10:30.800","Text":"The dismantling costs would not be"},{"Start":"10:30.800 ","End":"10:35.000","Text":"shown separately on the income statement or statement of profit and"},{"Start":"10:35.000 ","End":"10:38.960","Text":"loss because they are set off in computing"},{"Start":"10:38.960 ","End":"10:43.325","Text":"the amount of the profit loss on sale of this particular asset."},{"Start":"10:43.325 ","End":"10:46.370","Text":"Therefore, it\u0027s happening over here so we\u0027ll not"},{"Start":"10:46.370 ","End":"10:50.585","Text":"credit the dismantling cost of 1,000 in this journal entry."},{"Start":"10:50.585 ","End":"10:56.000","Text":"We are in fact offsetting the 1,000 expense from entry number 2"},{"Start":"10:56.000 ","End":"11:01.745","Text":"against this atom over here in order to get the correct gain or loss on disposal."},{"Start":"11:01.745 ","End":"11:04.925","Text":"Which effect now is the final part of this entry."},{"Start":"11:04.925 ","End":"11:08.180","Text":"We credit the gain on disposal,"},{"Start":"11:08.180 ","End":"11:10.730","Text":"which is an income account,"},{"Start":"11:10.730 ","End":"11:13.595","Text":"and the gain on disposal,"},{"Start":"11:13.595 ","End":"11:16.605","Text":"there\u0027s an amount of 2,000."},{"Start":"11:16.605 ","End":"11:19.150","Text":"Looking at this journal entry,"},{"Start":"11:19.150 ","End":"11:24.110","Text":"it is important to note that what we\u0027re doing here is no different to"},{"Start":"11:24.110 ","End":"11:30.500","Text":"the calculation of the gain on disposal as we did in the previous slide."},{"Start":"11:30.500 ","End":"11:33.065","Text":"In the previous slide,"},{"Start":"11:33.065 ","End":"11:37.610","Text":"we took the net proceeds of 19.5"},{"Start":"11:37.610 ","End":"11:44.865","Text":"thousand and net proceeds of 19.5 thousand was in fact the 20,000,"},{"Start":"11:44.865 ","End":"11:45.990","Text":"I\u0027ll just put a tick against it,"},{"Start":"11:45.990 ","End":"11:51.040","Text":"the 20,000 bank less the dismantling cost of 1,000."},{"Start":"11:51.040 ","End":"11:55.520","Text":"We then compare that to the carrying amount of the asset,"},{"Start":"11:55.520 ","End":"12:02.265","Text":"which you will recall was an amount of 17.5 thousand and the 17.5 thousand,"},{"Start":"12:02.265 ","End":"12:09.230","Text":"in fact, is the cost of 30,000 and the accumulated depreciation of 12.5 thousand."},{"Start":"12:09.230 ","End":"12:16.010","Text":"That net proceeds there\u0027s the carrying amount gave us the gain on disposal,"},{"Start":"12:16.010 ","End":"12:21.030","Text":"which is the same gain on disposal we get in this journal entry."}],"ID":28603},{"Watched":false,"Name":"Exercise 5 - Introduction","Duration":"3m 4s","ChapterTopicVideoID":26368,"CourseChapterTopicPlaylistID":254924,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:05.678","Text":"Hello and welcome to another presentation in this series on Non-Current Assets,"},{"Start":"00:05.678 ","End":"00:07.065","Text":"brought to you by Proprep."},{"Start":"00:07.065 ","End":"00:08.940","Text":"My name is Kathy Service,"},{"Start":"00:08.940 ","End":"00:11.700","Text":"and today we\u0027re going to do an exercise on the effects of"},{"Start":"00:11.700 ","End":"00:15.240","Text":"depreciation policies and disposals."},{"Start":"00:15.240 ","End":"00:19.560","Text":"BAB and CAC are 2 companies which each purchased"},{"Start":"00:19.560 ","End":"00:26.160","Text":"a new lorry at 20,000 per lorry on the 30th of September X1."},{"Start":"00:26.160 ","End":"00:29.130","Text":"The following table summarizes their accounting policies"},{"Start":"00:29.130 ","End":"00:33.190","Text":"regarding these depreciable assets. Let\u0027s look at BAB."},{"Start":"00:33.190 ","End":"00:35.985","Text":"BAB depreciates its asset,"},{"Start":"00:35.985 ","End":"00:39.120","Text":"the lorry have a useful life of 5 years."},{"Start":"00:39.120 ","End":"00:40.400","Text":"CAC, on the other hand,"},{"Start":"00:40.400 ","End":"00:44.045","Text":"uses a depreciable life of 4 years."},{"Start":"00:44.045 ","End":"00:48.300","Text":"The residual value in terms of BAB is 0."},{"Start":"00:48.300 ","End":"00:50.070","Text":"CAC sees the residual value,"},{"Start":"00:50.070 ","End":"00:53.135","Text":"on the other hand, is 1,000 currency units."},{"Start":"00:53.135 ","End":"00:56.870","Text":"The depreciation method used by both companies was,"},{"Start":"00:56.870 ","End":"00:59.410","Text":"however, the straight line."},{"Start":"00:59.410 ","End":"01:03.470","Text":"Remember when we do depreciation estimates,"},{"Start":"01:03.470 ","End":"01:06.874","Text":"so depreciation calculations, there are 3 variables."},{"Start":"01:06.874 ","End":"01:08.780","Text":"The one is your useful life,"},{"Start":"01:08.780 ","End":"01:10.970","Text":"the other one is your residual value,"},{"Start":"01:10.970 ","End":"01:14.325","Text":"and another is the depreciation method."},{"Start":"01:14.325 ","End":"01:17.285","Text":"BAB and CAC had different useful lives,"},{"Start":"01:17.285 ","End":"01:21.050","Text":"different residual values, but they use the same depreciation method."},{"Start":"01:21.050 ","End":"01:24.275","Text":"Further information regarding these assets is given below."},{"Start":"01:24.275 ","End":"01:29.705","Text":"The financial year-end of BAB is the 31st of December,"},{"Start":"01:29.705 ","End":"01:34.250","Text":"whereas the financial year-end of CAC is the 31st of March."},{"Start":"01:34.250 ","End":"01:38.870","Text":"The disposal date being the date on which the lorry was disposed of was"},{"Start":"01:38.870 ","End":"01:42.410","Text":"the 30th of June X4 in the case of BAB and"},{"Start":"01:42.410 ","End":"01:46.205","Text":"can\u0027t dispose of their lorry on the 30th of March, X4."},{"Start":"01:46.205 ","End":"01:52.745","Text":"BAB sold their lorry for 10,000 and CAC also sold their lorry for 10,000."},{"Start":"01:52.745 ","End":"02:00.375","Text":"Notice here that BAB and CAC both purchased their lorry for 20,000."},{"Start":"02:00.375 ","End":"02:03.950","Text":"The purchase price was 20,000 and"},{"Start":"02:03.950 ","End":"02:09.175","Text":"the selling price in the case of both BAB and CAC was 10,000."},{"Start":"02:09.175 ","End":"02:11.100","Text":"That\u0027s really important."},{"Start":"02:11.100 ","End":"02:18.155","Text":"They spent 20,000 in both cases and both of them recovered 10,000."},{"Start":"02:18.155 ","End":"02:20.200","Text":"Let\u0027s look now at the required."},{"Start":"02:20.200 ","End":"02:24.530","Text":"Calculate the annual depreciation expense for each company."},{"Start":"02:24.530 ","End":"02:27.650","Text":"Then find the carrying amount of the lorry"},{"Start":"02:27.650 ","End":"02:31.069","Text":"at the first financial year-end following the purchase."},{"Start":"02:31.069 ","End":"02:36.880","Text":"Then calculate the gain or loss on the eventual disposal of the lorry."},{"Start":"02:36.880 ","End":"02:39.890","Text":"Then D, compare the overall effect on"},{"Start":"02:39.890 ","End":"02:44.495","Text":"retained earnings of these policies over the life of the lorry."},{"Start":"02:44.495 ","End":"02:48.500","Text":"In other words, what we\u0027re looking for is what was the total expense from"},{"Start":"02:48.500 ","End":"02:52.990","Text":"the point of purchase to the disposal and then explain your findings."},{"Start":"02:52.990 ","End":"03:00.290","Text":"It\u0027s not just calculating the effect and the BAB and CAC\u0027s policies,"},{"Start":"03:00.290 ","End":"03:04.740","Text":"but also to explain what it is that you find."}],"ID":28590},{"Watched":false,"Name":"Exercise 5 - Part a","Duration":"2m 30s","ChapterTopicVideoID":26369,"CourseChapterTopicPlaylistID":254924,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.500 ","End":"00:04.500","Text":"Let\u0027s look at part A wherein we are in we are asked"},{"Start":"00:04.500 ","End":"00:08.100","Text":"to calculate the annual depreciation expense."},{"Start":"00:08.100 ","End":"00:10.380","Text":"We\u0027ll start by looking BAB."},{"Start":"00:10.380 ","End":"00:18.525","Text":"Now, the cost of the lorry was 20,000 and the residual value according to BAB was nil."},{"Start":"00:18.525 ","End":"00:23.835","Text":"BAB is going to depreciate the full cost of 20,000."},{"Start":"00:23.835 ","End":"00:28.220","Text":"BAB believes that its useful life is 5 years,"},{"Start":"00:28.220 ","End":"00:34.665","Text":"so the annual depreciation expense is going to be 4,000 per annum."},{"Start":"00:34.665 ","End":"00:37.395","Text":"You could write this in the following way;"},{"Start":"00:37.395 ","End":"00:41.640","Text":"cost of 20,000 less the residual value of"},{"Start":"00:41.640 ","End":"00:46.900","Text":"nil divided by the useful life gives you 4,000 per annum."},{"Start":"00:46.900 ","End":"00:48.493","Text":"Now, let\u0027s look at CAC."},{"Start":"00:48.493 ","End":"00:53.043","Text":"The cost of the lorry to CAC was also 20,000,"},{"Start":"00:53.043 ","End":"00:54.220","Text":"but according to CAC,"},{"Start":"00:54.220 ","End":"00:57.115","Text":"the residual value was 1,000."},{"Start":"00:57.115 ","End":"01:03.200","Text":"That then means that CAC is going to depreciate 19,000 of the cost."},{"Start":"01:03.200 ","End":"01:08.790","Text":"By the time CAC reaches the end of the useful life of the lorry,"},{"Start":"01:08.790 ","End":"01:10.955","Text":"the lorry will have a carrying amount of 1,000."},{"Start":"01:10.955 ","End":"01:14.035","Text":"It will not have depreciated the full 20,000."},{"Start":"01:14.035 ","End":"01:19.616","Text":"In other words, not all of the 20,000 will have been expensed,"},{"Start":"01:19.616 ","End":"01:26.600","Text":"only 19,000 will have been expensed and 1,000 will remain in the asset account."},{"Start":"01:26.600 ","End":"01:28.700","Text":"Now, according to CAC,"},{"Start":"01:28.700 ","End":"01:34.495","Text":"their estimation was that the lorry would have a useful life of 4 years."},{"Start":"01:34.495 ","End":"01:42.495","Text":"Now, if you divide 19,000 by 4 years, you get 4,750."},{"Start":"01:42.495 ","End":"01:46.385","Text":"This calculation again could be written in the following way."},{"Start":"01:46.385 ","End":"01:52.940","Text":"Cost of 20,000 less the residual value of 1,000 divided"},{"Start":"01:52.940 ","End":"02:00.505","Text":"by the useful life of 4 years gives you currency units of 4,750."},{"Start":"02:00.505 ","End":"02:02.910","Text":"You can have a look here,"},{"Start":"02:02.910 ","End":"02:05.175","Text":"BAB and CAC compared."},{"Start":"02:05.175 ","End":"02:11.830","Text":"The cost was 20,000 in both the cases, so they were equal."},{"Start":"02:11.830 ","End":"02:15.095","Text":"The residual value was not equal."},{"Start":"02:15.095 ","End":"02:20.000","Text":"The depreciable amount was therefore not equal because the residual value is not equal."},{"Start":"02:20.000 ","End":"02:22.310","Text":"The useful life was not equal and therefore"},{"Start":"02:22.310 ","End":"02:26.605","Text":"the annual depreciation expense was not equal."},{"Start":"02:26.605 ","End":"02:28.415","Text":"That\u0027s part A done."},{"Start":"02:28.415 ","End":"02:30.920","Text":"Let\u0027s move on to part B."}],"ID":28591},{"Watched":false,"Name":"Exercise 5 - Part b","Duration":"4m 4s","ChapterTopicVideoID":26370,"CourseChapterTopicPlaylistID":254924,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.790","Text":"Now let\u0027s look at part B."},{"Start":"00:02.790 ","End":"00:07.290","Text":"Part B required us to calculate the carrying amount of"},{"Start":"00:07.290 ","End":"00:12.165","Text":"the lorry at the first financial year end following the purchase."},{"Start":"00:12.165 ","End":"00:14.220","Text":"Let\u0027s look at BAB first."},{"Start":"00:14.220 ","End":"00:21.030","Text":"The purchase date for BAB was the 30th of September X1."},{"Start":"00:21.030 ","End":"00:26.505","Text":"In fact, it was the 30th of September X1 for CAC as well."},{"Start":"00:26.505 ","End":"00:28.050","Text":"However, importantly,"},{"Start":"00:28.050 ","End":"00:35.115","Text":"the first financial year end for BAB would have been the 31st of December X1."},{"Start":"00:35.115 ","End":"00:39.650","Text":"This was only 3 months after the lorry"},{"Start":"00:39.650 ","End":"00:45.035","Text":"had been purchased: October, November, and December."},{"Start":"00:45.035 ","End":"00:51.005","Text":"That means that as a fraction of the annual depreciation,"},{"Start":"00:51.005 ","End":"00:56.090","Text":"we\u0027re looking at a quarter of the annual depreciation,"},{"Start":"00:56.090 ","End":"01:00.853","Text":"which would be expensed in the very first year."},{"Start":"01:00.853 ","End":"01:07.970","Text":"The annual depreciation expense is normally 4,000 per annum,"},{"Start":"01:07.970 ","End":"01:10.685","Text":"but we don\u0027t have a full year."},{"Start":"01:10.685 ","End":"01:16.895","Text":"The depreciation expense that will be recognized up to the first financial year end."},{"Start":"01:16.895 ","End":"01:21.300","Text":"In the case of BAB, that\u0027s only 3 months or a quarter of a year."},{"Start":"01:21.300 ","End":"01:24.025","Text":"Let\u0027s put that in there for you, quarter of a year."},{"Start":"01:24.025 ","End":"01:30.400","Text":"That means that the depreciation expense in that year would have been a quarter of that,"},{"Start":"01:30.400 ","End":"01:33.760","Text":"which is 1,000 currency units."},{"Start":"01:33.760 ","End":"01:39.017","Text":"The carrying amount at the end of the first financial year, in the case of BAB,"},{"Start":"01:39.017 ","End":"01:44.935","Text":"would be cost less accumulated depreciation of 1,000."},{"Start":"01:44.935 ","End":"01:48.545","Text":"So the carrying amount would be 19,000."},{"Start":"01:48.545 ","End":"01:50.350","Text":"Now let\u0027s look at CAC."},{"Start":"01:50.350 ","End":"01:52.435","Text":"As I mentioned a moment ago,"},{"Start":"01:52.435 ","End":"01:56.965","Text":"the purchase date for CAC was also the 30th of September X1."},{"Start":"01:56.965 ","End":"02:04.640","Text":"However, the first financial year end was the 31st of March X2."},{"Start":"02:04.710 ","End":"02:13.375","Text":"The number of months in the financial year would therefore be 6 months: October,"},{"Start":"02:13.375 ","End":"02:18.610","Text":"November, December, January, February, and March."},{"Start":"02:18.610 ","End":"02:23.200","Text":"In terms of a fraction of annual depreciation in that first year,"},{"Start":"02:23.200 ","End":"02:27.730","Text":"we\u0027re looking at 6 months out of a normal 12 months in a year."},{"Start":"02:27.730 ","End":"02:32.380","Text":"So that is therefore a half of years depreciation."},{"Start":"02:32.380 ","End":"02:39.960","Text":"The annual depreciation expense in CAC\u0027s books was 4,750."},{"Start":"02:39.960 ","End":"02:45.445","Text":"Therefore, the depreciation that will be expensed in that first financial year ended"},{"Start":"02:45.445 ","End":"02:51.940","Text":"31st of March X2 would be a half of the 4,750."},{"Start":"02:51.940 ","End":"02:58.050","Text":"That gives us 2,375."},{"Start":"02:58.050 ","End":"03:01.040","Text":"The carrying amount in CAC books at"},{"Start":"03:01.040 ","End":"03:07.430","Text":"the 31st of March X2 would therefore be 20,000 being in the cost less"},{"Start":"03:07.430 ","End":"03:16.780","Text":"the accumulated depreciation of 2,375, giving us 17,625."},{"Start":"03:16.780 ","End":"03:18.710","Text":"Let\u0027s compare the two together."},{"Start":"03:18.710 ","End":"03:21.125","Text":"You can see the purchase dates were the same,"},{"Start":"03:21.125 ","End":"03:23.659","Text":"but the first financial year end was different,"},{"Start":"03:23.659 ","End":"03:28.190","Text":"which meant that the number of months net first financial year was different."},{"Start":"03:28.190 ","End":"03:30.830","Text":"That mean we took a different fraction of"},{"Start":"03:30.830 ","End":"03:33.309","Text":"the annual depreciation into account each year,"},{"Start":"03:33.309 ","End":"03:37.430","Text":"but the annual depreciation expense was also different as we know from"},{"Start":"03:37.430 ","End":"03:41.890","Text":"part A because the variables of depreciation were different."},{"Start":"03:41.890 ","End":"03:46.585","Text":"Therefore the amount that was expensed in each of those years is different."},{"Start":"03:46.585 ","End":"03:50.955","Text":"The carrying amount in BAB\u0027s books would be 19,000,"},{"Start":"03:50.955 ","End":"03:55.370","Text":"and the carrying amount in CAC\u0027s books would be a little bit less because more had been"},{"Start":"03:55.370 ","End":"04:01.655","Text":"expensed in CAC books because more had been expensed in CAC books."},{"Start":"04:01.655 ","End":"04:05.670","Text":"Part B is done. Now let\u0027s look at part C."}],"ID":28592},{"Watched":false,"Name":"Exercise 5 - Part c","Duration":"11m 1s","ChapterTopicVideoID":26371,"CourseChapterTopicPlaylistID":254924,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:03.010","Text":"Part C. Now in Part C,"},{"Start":"00:03.010 ","End":"00:07.840","Text":"we\u0027re asked to calculate the gain or loss on the disposal of the item of property,"},{"Start":"00:07.840 ","End":"00:09.340","Text":"plant, and equipment."},{"Start":"00:09.340 ","End":"00:11.950","Text":"Now when we calculate this gain or"},{"Start":"00:11.950 ","End":"00:15.250","Text":"loss on disposal of the item of property, plant, and equipment,"},{"Start":"00:15.250 ","End":"00:18.490","Text":"what we need to do is we will need to compare"},{"Start":"00:18.490 ","End":"00:20.410","Text":"the selling price with"},{"Start":"00:20.410 ","End":"00:24.430","Text":"the carrying amount of that item of property, plant, and equipment."},{"Start":"00:24.430 ","End":"00:27.145","Text":"In order to calculate the carrying amount,"},{"Start":"00:27.145 ","End":"00:30.939","Text":"we\u0027re going to need to calculate"},{"Start":"00:30.939 ","End":"00:38.080","Text":"the cost less the accumulated depreciation to the date of disposal."},{"Start":"00:38.080 ","End":"00:42.719","Text":"In order to calculate the accumulated depreciation to date of disposal,"},{"Start":"00:42.719 ","End":"00:46.640","Text":"we need to know when the asset was first"},{"Start":"00:46.640 ","End":"00:51.950","Text":"available for use because that\u0027s the date on which we begin depreciation."},{"Start":"00:51.950 ","End":"00:54.980","Text":"It\u0027s the date on which it\u0027s available for use,"},{"Start":"00:54.980 ","End":"01:02.805","Text":"and then we will depreciate it until it\u0027s disposed off in this case."},{"Start":"01:02.805 ","End":"01:05.430","Text":"In this particular example,"},{"Start":"01:05.430 ","End":"01:08.870","Text":"the asset was available for use as far as we know,"},{"Start":"01:08.870 ","End":"01:12.340","Text":"immediately on purchase date."},{"Start":"01:12.340 ","End":"01:17.690","Text":"Between the purchase date which is we assume the date it was available for use"},{"Start":"01:17.690 ","End":"01:23.585","Text":"and the disposal date being the date of course in which it was disposed off,"},{"Start":"01:23.585 ","End":"01:27.110","Text":"is a period during which it is depreciated."},{"Start":"01:27.110 ","End":"01:30.005","Text":"This is the depreciation period."},{"Start":"01:30.005 ","End":"01:34.250","Text":"It\u0027s the period of which it was depreciated if you like."},{"Start":"01:34.250 ","End":"01:39.710","Text":"That\u0027s why we\u0027re talking about here the purchase date and the disposal date."},{"Start":"01:39.710 ","End":"01:41.960","Text":"The purchase date being what we are"},{"Start":"01:41.960 ","End":"01:45.700","Text":"assuming to be the date in which it was available for use."},{"Start":"01:45.700 ","End":"01:47.690","Text":"Between those 2 dates,"},{"Start":"01:47.690 ","End":"01:50.600","Text":"we depreciate the asset."},{"Start":"01:50.600 ","End":"01:53.510","Text":"We compare the purchase date with the disposal date and"},{"Start":"01:53.510 ","End":"01:56.149","Text":"calculate the number of years in-between."},{"Start":"01:56.149 ","End":"01:59.310","Text":"There may be complete years or partial years."},{"Start":"01:59.310 ","End":"02:01.140","Text":"In this particular case,"},{"Start":"02:01.140 ","End":"02:04.960","Text":"a combination of full years and partial years."},{"Start":"02:04.960 ","End":"02:09.830","Text":"We then look at what is the depreciation expense in"},{"Start":"02:09.830 ","End":"02:15.172","Text":"a normal 12-month period to your annual depreciation expense,"},{"Start":"02:15.172 ","End":"02:19.200","Text":"and we\u0027ll then multiply these 2 together."},{"Start":"02:19.200 ","End":"02:22.249","Text":"How much do you normally depreciate per year,"},{"Start":"02:22.249 ","End":"02:25.430","Text":"and then how many years has it been depreciated by."},{"Start":"02:25.430 ","End":"02:28.400","Text":"Multiply those 2 together and that will give you"},{"Start":"02:28.400 ","End":"02:33.875","Text":"the accumulated depreciation on the date on which the asset is disposed off."},{"Start":"02:33.875 ","End":"02:35.225","Text":"Once you have that figure,"},{"Start":"02:35.225 ","End":"02:37.580","Text":"you can then work out what the carrying amount is."},{"Start":"02:37.580 ","End":"02:41.930","Text":"The carrying amount on disposal date is the cost which in this case is"},{"Start":"02:41.930 ","End":"02:48.210","Text":"20,000 less as I say the accumulated depreciation to that disposal date."},{"Start":"02:48.210 ","End":"02:52.145","Text":"That\u0027s a bit of the theory, let\u0027s have a look at it in terms of BAB."},{"Start":"02:52.145 ","End":"02:54.020","Text":"Then looking at it in terms of BAB,"},{"Start":"02:54.020 ","End":"02:58.580","Text":"the purchase date was the 30th of September x1,"},{"Start":"02:58.580 ","End":"03:05.975","Text":"the date in which BAB got rid of its asset was the 30th of June x4."},{"Start":"03:05.975 ","End":"03:08.899","Text":"Now if you look at it on a timeline,"},{"Start":"03:08.899 ","End":"03:12.485","Text":"you buy it on the 30th of September x1,"},{"Start":"03:12.485 ","End":"03:15.395","Text":"we still got it on the 30th of September x2."},{"Start":"03:15.395 ","End":"03:20.265","Text":"You still got it on the 30th of September x3."},{"Start":"03:20.265 ","End":"03:25.070","Text":"This is definitely not to scale."},{"Start":"03:25.070 ","End":"03:28.310","Text":"We don\u0027t quite make it to the 30th of September x4."},{"Start":"03:28.310 ","End":"03:32.280","Text":"Instead, we\u0027ve got it for the first year and the second year,"},{"Start":"03:32.280 ","End":"03:38.975","Text":"and then we go through to the 30th of June x4 somewhere here."},{"Start":"03:38.975 ","End":"03:41.770","Text":"That\u0027s 1 year. That\u0027s another year."},{"Start":"03:41.770 ","End":"03:43.730","Text":"Then the period from here to here,"},{"Start":"03:43.730 ","End":"03:47.820","Text":"it\u0027s not a complete year, it is 9 months."},{"Start":"03:47.820 ","End":"03:53.115","Text":"That\u0027s from the 30th of September x3 to the 31st of December x3,"},{"Start":"03:53.115 ","End":"03:56.220","Text":"October, November, December, is 3 months."},{"Start":"03:56.220 ","End":"04:01.485","Text":"Then you\u0027ve got from beginning of x4 to the 30th of June x4."},{"Start":"04:01.485 ","End":"04:03.630","Text":"January to June is another 6 months."},{"Start":"04:03.630 ","End":"04:06.090","Text":"That\u0027s where I get the 9 months from."},{"Start":"04:06.090 ","End":"04:08.210","Text":"We\u0027ve got 1 full year,"},{"Start":"04:08.210 ","End":"04:12.260","Text":"another full year, and then we\u0027ve got 3/4 of a year."},{"Start":"04:12.260 ","End":"04:15.575","Text":"We\u0027ve actually got 2.75 years here."},{"Start":"04:15.575 ","End":"04:23.045","Text":"In other words, BAB had the asset for 2.75 years before it disposed off the asset."},{"Start":"04:23.045 ","End":"04:29.539","Text":"The number of years from purchase date to disposal date is 2.75 years."},{"Start":"04:29.539 ","End":"04:33.740","Text":"Now, the annual depreciation expense that we calculated back in I think"},{"Start":"04:33.740 ","End":"04:37.785","Text":"it was Part A is 4,000 currency units a year."},{"Start":"04:37.785 ","End":"04:39.825","Text":"That\u0027s for 12 months period."},{"Start":"04:39.825 ","End":"04:41.565","Text":"On disposal date,"},{"Start":"04:41.565 ","End":"04:45.480","Text":"how much would BAB have depreciated this asset by when it\u0027s"},{"Start":"04:45.480 ","End":"04:50.670","Text":"4,000 and if it had been 2 years where we would have depreciated by 8,000 so far,"},{"Start":"04:50.670 ","End":"04:54.860","Text":"but it\u0027s not for 2 years, it\u0027s 2.75 years."},{"Start":"04:54.860 ","End":"04:58.470","Text":"That gives you an amount of 11,000."},{"Start":"04:58.470 ","End":"05:02.750","Text":"That is the accumulated depreciation that had been expensed."},{"Start":"05:02.750 ","End":"05:06.980","Text":"The carrying amount on disposal date will be the cost of 20,000"},{"Start":"05:06.980 ","End":"05:12.050","Text":"minus the accumulated depreciation of 11,000."},{"Start":"05:12.050 ","End":"05:15.920","Text":"That gives us carrying amount of 9,000."},{"Start":"05:15.920 ","End":"05:20.605","Text":"Now we know that BAB sold the asset for 10,000."},{"Start":"05:20.605 ","End":"05:22.575","Text":"Selling price is 10,000."},{"Start":"05:22.575 ","End":"05:26.365","Text":"We know we have expensed 9,000."},{"Start":"05:26.365 ","End":"05:30.400","Text":"We know that our carrying amount is 9,000,"},{"Start":"05:30.400 ","End":"05:37.290","Text":"and therefore the gain on the disposal is going to be 1,000."},{"Start":"05:37.290 ","End":"05:39.555","Text":"Now let\u0027s look at CAC."},{"Start":"05:39.555 ","End":"05:45.380","Text":"CAC also bought their assets on the 30th of September x1."},{"Start":"05:45.380 ","End":"05:50.325","Text":"However, CAC didn\u0027t sell it on the 30th of June x4,"},{"Start":"05:50.325 ","End":"05:55.595","Text":"but rather on the 30th of March x4. It\u0027s a little bit earlier."},{"Start":"05:55.595 ","End":"06:00.935","Text":"The number of years between the purchase date and the disposal date is a bit shorter."},{"Start":"06:00.935 ","End":"06:04.955","Text":"They both are on the 30th of September x1."},{"Start":"06:04.955 ","End":"06:10.350","Text":"They had it at least to the 30th of September x2."},{"Start":"06:10.350 ","End":"06:14.205","Text":"They still had it on the 30th of September x3."},{"Start":"06:14.205 ","End":"06:17.300","Text":"The next full year it would\u0027ve been 30th of September x4,"},{"Start":"06:17.300 ","End":"06:25.480","Text":"but they don\u0027t make it that far because they sell it on the 30th of March x4."},{"Start":"06:25.480 ","End":"06:31.740","Text":"They had it for 1 year and then another year and then not a complete year."},{"Start":"06:32.050 ","End":"06:34.475","Text":"They had it for 1 complete year,"},{"Start":"06:34.475 ","End":"06:37.250","Text":"another complete year and then there\u0027s incomplete year."},{"Start":"06:37.250 ","End":"06:42.140","Text":"30th of September x3 to the 31st of December x3 is 3 months,"},{"Start":"06:42.140 ","End":"06:47.445","Text":"and then from the beginning of x4 to the 30th of March x4 is another 3 months."},{"Start":"06:47.445 ","End":"06:49.785","Text":"Here we have 6 months."},{"Start":"06:49.785 ","End":"06:53.805","Text":"This is a half of a year, 6/12."},{"Start":"06:53.805 ","End":"06:58.355","Text":"We\u0027ve had this asset for 2.5 years."},{"Start":"06:58.355 ","End":"07:05.029","Text":"Number of years from purchase to disposal is 2.5 years."},{"Start":"07:05.029 ","End":"07:09.530","Text":"Now the annual depreciation expense for"},{"Start":"07:09.530 ","End":"07:15.080","Text":"12-month period in other words was 4,750 per annum currency units."},{"Start":"07:15.080 ","End":"07:21.650","Text":"How much would CAC have depreciated to the date on which the asset was disposed off."},{"Start":"07:21.650 ","End":"07:27.905","Text":"It would have been 4,750 per year for 2.5 years."},{"Start":"07:27.905 ","End":"07:34.750","Text":"That gives one an accumulated depreciation of 11,875."},{"Start":"07:34.750 ","End":"07:40.240","Text":"That then means that the carrying amount on disposal date would be the cost of"},{"Start":"07:40.240 ","End":"07:47.590","Text":"20,000 minus the accumulated depreciation of 11,875."},{"Start":"07:47.590 ","End":"07:53.145","Text":"That gives one a carrying amount of 8,125."},{"Start":"07:53.145 ","End":"07:58.120","Text":"Now CAC sold their assets for the same amount that BAB sold the asset for,"},{"Start":"07:58.120 ","End":"08:00.290","Text":"so they sold it for 10,000."},{"Start":"08:00.290 ","End":"08:02.730","Text":"If one subtracts the carrying amount."},{"Start":"08:02.730 ","End":"08:08.835","Text":"So subtract the carrying amount of 8,125,"},{"Start":"08:08.835 ","End":"08:18.235","Text":"it means that CAC would have recorded a gain on disposal of 1,875."},{"Start":"08:18.235 ","End":"08:20.805","Text":"Now let\u0027s compare the two."},{"Start":"08:20.805 ","End":"08:23.345","Text":"In terms of BAB and CAC,"},{"Start":"08:23.345 ","End":"08:27.125","Text":"they both purchased it on the 30th of September x1."},{"Start":"08:27.125 ","End":"08:31.585","Text":"BAB held onto their asset a little bit longer than CAC did."},{"Start":"08:31.585 ","End":"08:39.110","Text":"The number of years that they depreciated was 2.75 versus CAC only depreciated for 2.5."},{"Start":"08:39.110 ","End":"08:43.730","Text":"However, that said, the depreciation expense for BAB is"},{"Start":"08:43.730 ","End":"08:49.571","Text":"actually 4,000 a year which is lower than the annual depreciation for CAC,"},{"Start":"08:49.571 ","End":"08:54.430","Text":"but if you compare or multiply should I say the 2.75 by 4,"},{"Start":"08:54.430 ","End":"09:02.090","Text":"you get to total depreciation expense so far of 11,000 in the case of BAB,"},{"Start":"09:02.090 ","End":"09:12.125","Text":"and 2.5 years times 4,750 giving you total depreciation expense of 11,875."},{"Start":"09:12.125 ","End":"09:19.220","Text":"That 11,000 has been expensed so far leaving 9,000 in the asset account,"},{"Start":"09:19.220 ","End":"09:22.585","Text":"so that you can see adds up to 20,000."},{"Start":"09:22.585 ","End":"09:31.395","Text":"11,000 has been expensed by BAB and 9,000 remains in the asset account."},{"Start":"09:31.395 ","End":"09:36.670","Text":"9,000 has still not been expensed yet in the case of CAC."},{"Start":"09:36.670 ","End":"09:39.049","Text":"If you have a look at these 2 here,"},{"Start":"09:39.049 ","End":"09:47.710","Text":"11,875 of the asset is being expensed leaving 8,125 in the asset account."},{"Start":"09:47.710 ","End":"09:52.425","Text":"8,125 has not yet been expensed."},{"Start":"09:52.425 ","End":"09:57.665","Text":"When one records the income from the sale of the asset in our books,"},{"Start":"09:57.665 ","End":"10:01.640","Text":"we must remember that there is still part of the cost of"},{"Start":"10:01.640 ","End":"10:05.555","Text":"the asset sitting in the asset account and we still need to"},{"Start":"10:05.555 ","End":"10:14.240","Text":"expense that carrying amount of the 9,000 in terms of BAB and 8,125 in terms of CAC."},{"Start":"10:14.240 ","End":"10:19.825","Text":"That must still be expensed and that is why we subtract the carrying amount."},{"Start":"10:19.825 ","End":"10:23.170","Text":"It\u0027s the portion of the asset that had not yet been expensed"},{"Start":"10:23.170 ","End":"10:27.130","Text":"that must be expensed on the date the asset is sold."},{"Start":"10:27.130 ","End":"10:30.580","Text":"We take our sales price which is income,"},{"Start":"10:30.580 ","End":"10:36.820","Text":"and we subtract the portion of the cost of the asset that had not yet been expensed,"},{"Start":"10:36.820 ","End":"10:39.045","Text":"and we expense that now."},{"Start":"10:39.045 ","End":"10:42.205","Text":"That then gives us the net income in this case,"},{"Start":"10:42.205 ","End":"10:45.900","Text":"the net income which is a gain that we recognize in our books."},{"Start":"10:45.900 ","End":"10:48.185","Text":"We don\u0027t recognize 10,000 income,"},{"Start":"10:48.185 ","End":"10:53.530","Text":"we recognize the gain being the income less the portion"},{"Start":"10:53.530 ","End":"10:55.690","Text":"of the carrying amount that had not yet been"},{"Start":"10:55.690 ","End":"10:59.360","Text":"expensed that we expensed on the date of disposal."},{"Start":"10:59.360 ","End":"11:02.220","Text":"That is Part C done."}],"ID":28593},{"Watched":false,"Name":"Exercise 5 - Part d","Duration":"5m 53s","ChapterTopicVideoID":26372,"CourseChapterTopicPlaylistID":254924,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:04.650","Text":"Now in part d, we\u0027re asked to calculate the overall effect on"},{"Start":"00:04.650 ","End":"00:09.480","Text":"retained earnings of these policies over the life of the item,"},{"Start":"00:09.480 ","End":"00:12.045","Text":"property, plant, and equipment, which was a lorry."},{"Start":"00:12.045 ","End":"00:14.040","Text":"Let\u0027s look at BAB first."},{"Start":"00:14.040 ","End":"00:19.290","Text":"BAB we had the asset for 2.75 years."},{"Start":"00:19.290 ","End":"00:25.920","Text":"We look at how much had been charged to income as the depreciation expense."},{"Start":"00:25.920 ","End":"00:32.550","Text":"In other words, how much went through to the income statement as a depreciation expense?"},{"Start":"00:32.550 ","End":"00:39.225","Text":"That was the 2.75 years of 4,000 per year,"},{"Start":"00:39.225 ","End":"00:42.435","Text":"that came to 11,000."},{"Start":"00:42.435 ","End":"00:47.510","Text":"Then we look in BAB at the gain recorded on disposal."},{"Start":"00:47.510 ","End":"00:49.520","Text":"Now, gain is income."},{"Start":"00:49.520 ","End":"00:53.075","Text":"The gain recorded on the disposal being income,"},{"Start":"00:53.075 ","End":"00:54.940","Text":"it goes in the opposite direction,"},{"Start":"00:54.940 ","End":"00:57.335","Text":"so that is why we\u0027re subtracting it."},{"Start":"00:57.335 ","End":"01:03.585","Text":"Now, the gain we recognize to calculate it in the Part C was 1,000."},{"Start":"01:03.585 ","End":"01:06.360","Text":"The net expense is 10,000."},{"Start":"01:06.360 ","End":"01:08.535","Text":"That\u0027s in BAB\u0027s books."},{"Start":"01:08.535 ","End":"01:12.850","Text":"Now, let\u0027s look at it from the perspective of CAC."},{"Start":"01:12.850 ","End":"01:17.430","Text":"Now, CAC had the asset for 2.5 years."},{"Start":"01:17.430 ","End":"01:21.965","Text":"That was, the depreciation expense would have been 2.5"},{"Start":"01:21.965 ","End":"01:27.500","Text":"years multiplied by the annual depreciation was 2,750,"},{"Start":"01:27.500 ","End":"01:30.455","Text":"a little bit more than BAB\u0027s annual depreciation."},{"Start":"01:30.455 ","End":"01:38.300","Text":"That gives total depreciation that had been expensed over the 2.5 years of 11,875."},{"Start":"01:38.300 ","End":"01:40.220","Text":"Now, just to remind you, of course,"},{"Start":"01:40.220 ","End":"01:44.040","Text":"that you can pick these figures up instead of calculating it again,"},{"Start":"01:44.040 ","End":"01:48.325","Text":"you could pick it up from the accumulated depreciation ledger account."},{"Start":"01:48.325 ","End":"01:51.165","Text":"Remember this is an expense,"},{"Start":"01:51.165 ","End":"01:54.620","Text":"and what I\u0027m about to subtract is the income."},{"Start":"01:54.620 ","End":"01:59.980","Text":"We in this particular case recognized a gain on disposal."},{"Start":"01:59.980 ","End":"02:06.110","Text":"As I say, that\u0027s an income and that\u0027s why we subtract them because the expenses going in"},{"Start":"02:06.110 ","End":"02:09.170","Text":"the opposite direction to income and we\u0027re trying to figure out"},{"Start":"02:09.170 ","End":"02:13.305","Text":"the net expense or the net income over the years."},{"Start":"02:13.305 ","End":"02:20.765","Text":"In Part C, we calculated that gain on disposal to be 1,875."},{"Start":"02:20.765 ","End":"02:24.500","Text":"That then means that the net expense over the life of"},{"Start":"02:24.500 ","End":"02:29.730","Text":"this particular asset being 2.5 years was 10,000."},{"Start":"02:30.070 ","End":"02:37.415","Text":"10,000 was the net expense that went through our books in relation to the lorry,"},{"Start":"02:37.415 ","End":"02:39.395","Text":"and that was in the case of CAC."},{"Start":"02:39.395 ","End":"02:41.975","Text":"Now let\u0027s compare it with BAB."},{"Start":"02:41.975 ","End":"02:45.260","Text":"If you have a look at BAB and you have a look at CAC,"},{"Start":"02:45.260 ","End":"02:48.980","Text":"BAB expensed 11,000 but"},{"Start":"02:48.980 ","End":"02:53.600","Text":"recognized income of 1000 and therefore the net expense is 10,000."},{"Start":"02:53.600 ","End":"02:57.565","Text":"CAC expensed more 11,875,"},{"Start":"02:57.565 ","End":"02:59.985","Text":"but also recognize a high income,"},{"Start":"02:59.985 ","End":"03:04.365","Text":"but the net effect was 10,000 expense as well."},{"Start":"03:04.365 ","End":"03:06.720","Text":"Now, why is that?"},{"Start":"03:06.720 ","End":"03:13.280","Text":"Well, the reasoning is simply that what we put through our profit or loss,"},{"Start":"03:13.280 ","End":"03:15.730","Text":"in other words, our income statement,"},{"Start":"03:15.730 ","End":"03:20.955","Text":"has to ultimately reflect the cashflows."},{"Start":"03:20.955 ","End":"03:23.795","Text":"In the case of BAB and the case of CAC,"},{"Start":"03:23.795 ","End":"03:25.970","Text":"our net expense was 10,000,"},{"Start":"03:25.970 ","End":"03:29.885","Text":"and that suggests that our net cash flow"},{"Start":"03:29.885 ","End":"03:34.385","Text":"was a cash outflow of 10,000 over the life of that lorry."},{"Start":"03:34.385 ","End":"03:39.575","Text":"Let\u0027s consider this. Continue. The accounting system of accruals, in other words,"},{"Start":"03:39.575 ","End":"03:46.310","Text":"income and expenses works to allocate cash flows to the various accounting periods."},{"Start":"03:46.310 ","End":"03:48.395","Text":"As I was saying a moment ago,"},{"Start":"03:48.395 ","End":"03:51.920","Text":"the profit or loss numbers, must converge,"},{"Start":"03:51.920 ","End":"03:58.175","Text":"in other words, must be equal to the net cash flows over the life of the asset of course."},{"Start":"03:58.175 ","End":"04:00.320","Text":"In this particular case,"},{"Start":"04:00.320 ","End":"04:02.660","Text":"the net cash outflow is 10,000,"},{"Start":"04:02.660 ","End":"04:09.005","Text":"and you can see the net expense was 10,000 in BAB and the net expense in CAC was 10,000."},{"Start":"04:09.005 ","End":"04:13.970","Text":"That suggests that the net cash outflow should indeed be 10,000."},{"Start":"04:13.970 ","End":"04:17.720","Text":"But let us consider how do I get that net cash outflow of 10,000?"},{"Start":"04:17.720 ","End":"04:19.070","Text":"Where do I get that from?"},{"Start":"04:19.070 ","End":"04:22.165","Text":"Well, it\u0027s because,"},{"Start":"04:22.165 ","End":"04:23.960","Text":"in the case of BAB and CAC,"},{"Start":"04:23.960 ","End":"04:26.885","Text":"we purchased the lorry for 20,000,"},{"Start":"04:26.885 ","End":"04:29.700","Text":"so a purchases is an outflow."},{"Start":"04:30.070 ","End":"04:34.280","Text":"We then have to subtract any influence."},{"Start":"04:34.280 ","End":"04:37.750","Text":"If we sell the asset, in which case,"},{"Start":"04:37.750 ","End":"04:39.330","Text":"and in this case we did,"},{"Start":"04:39.330 ","End":"04:43.145","Text":"we sold the lorry for 10,000, that\u0027s an inflow."},{"Start":"04:43.145 ","End":"04:47.780","Text":"We\u0027ve got the purchase which is an outflow less the sale of that asset,"},{"Start":"04:47.780 ","End":"04:49.865","Text":"which is an inflow,"},{"Start":"04:49.865 ","End":"04:54.905","Text":"and that gives us a net cash outflow of 10,000."},{"Start":"04:54.905 ","End":"04:58.700","Text":"Therefore, the retained earnings over the life of"},{"Start":"04:58.700 ","End":"05:02.810","Text":"the asset is the same as the net cash outflow."},{"Start":"05:02.810 ","End":"05:08.285","Text":"In other words, what goes through our retained earnings is in fact our cash reality."},{"Start":"05:08.285 ","End":"05:10.640","Text":"We may not recognize income and"},{"Start":"05:10.640 ","End":"05:14.765","Text":"expenses in the year in which there is an inflow or an outflow."},{"Start":"05:14.765 ","End":"05:17.015","Text":"But that\u0027s the nature of the accrual system."},{"Start":"05:17.015 ","End":"05:22.520","Text":"But over the life of that transaction or the life of this particular asset,"},{"Start":"05:22.520 ","End":"05:29.910","Text":"the net effect on our profit must reflect the actual reality in terms of cashflows."},{"Start":"05:29.910 ","End":"05:31.920","Text":"Our cash-flows was indeed,"},{"Start":"05:31.920 ","End":"05:34.140","Text":"there was an outflow of 20,000,"},{"Start":"05:34.140 ","End":"05:36.450","Text":"there was an inflow of 10,000."},{"Start":"05:36.450 ","End":"05:38.600","Text":"Over the life of the asset,"},{"Start":"05:38.600 ","End":"05:42.250","Text":"we have a net outflow of 10,000,"},{"Start":"05:42.250 ","End":"05:46.670","Text":"and therefore we have to show a net expense of 10,000,"},{"Start":"05:46.670 ","End":"05:50.375","Text":"which is indeed what we did in both case of BAB and CAC."},{"Start":"05:50.375 ","End":"05:54.090","Text":"All right, I hope that helped you. Until next time."}],"ID":28594},{"Watched":false,"Name":"Interest capitalisation video","Duration":"6m 32s","ChapterTopicVideoID":26632,"CourseChapterTopicPlaylistID":254924,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:05.100","Text":"In this video we\u0027ll focus on interest capitalization."},{"Start":"00:05.100 ","End":"00:10.095","Text":"What then do we mean by interest capitalization?"},{"Start":"00:10.095 ","End":"00:15.840","Text":"As you know normally any interest that a company incurs on"},{"Start":"00:15.840 ","End":"00:21.746","Text":"loans or borrowings is recognized as an expense in the income statement,"},{"Start":"00:21.746 ","End":"00:25.290","Text":"however there are certain circumstances where"},{"Start":"00:25.290 ","End":"00:30.965","Text":"that interest could be added to the cost of property, plant, and equipment."},{"Start":"00:30.965 ","End":"00:34.170","Text":"In the first scenario the interest is recorded"},{"Start":"00:34.170 ","End":"00:37.469","Text":"as an expense as you\u0027re more familiar with,"},{"Start":"00:37.469 ","End":"00:41.130","Text":"but in this scenario the interest you\u0027ll see could be"},{"Start":"00:41.130 ","End":"00:45.980","Text":"regarded as an asset on the statement of financial position."},{"Start":"00:45.980 ","End":"00:47.705","Text":"Where does it come about?"},{"Start":"00:47.705 ","End":"00:52.565","Text":"It comes about in particular with self-constructed assets"},{"Start":"00:52.565 ","End":"00:58.429","Text":"such as for example when an entity construct new plant and machinery,"},{"Start":"00:58.429 ","End":"01:01.025","Text":"or in fact maybe an office building."},{"Start":"01:01.025 ","End":"01:05.060","Text":"Now, accounting rules and principles specify that"},{"Start":"01:05.060 ","End":"01:10.520","Text":"these borrowing costs which is the interest can be added to the cost of what is"},{"Start":"01:10.520 ","End":"01:15.880","Text":"called a qualifying asset and a qualifying asset"},{"Start":"01:15.880 ","End":"01:22.355","Text":"are assets that require a substantial time to prepare for the intended use."},{"Start":"01:22.355 ","End":"01:25.460","Text":"Other words, a substantial time to construct"},{"Start":"01:25.460 ","End":"01:30.140","Text":"the building or to build the new item of plant."},{"Start":"01:30.140 ","End":"01:34.700","Text":"The accounting process of adding the borrowing cost or"},{"Start":"01:34.700 ","End":"01:40.715","Text":"the interest to cost of the asset is known as interest capitalization."},{"Start":"01:40.715 ","End":"01:44.450","Text":"Now accounting principles also tell us that,"},{"Start":"01:44.450 ","End":"01:50.103","Text":"that interest capitalization needs to stop when the asset is in fact ready for use"},{"Start":"01:50.103 ","End":"01:56.029","Text":"even if the loan itself still remains outstanding and unpaid,"},{"Start":"01:56.029 ","End":"02:01.070","Text":"and therefore any interest incurred on that loan after the asset is"},{"Start":"02:01.070 ","End":"02:07.245","Text":"ready for use will be expensed in the normal way on the income statement."},{"Start":"02:07.245 ","End":"02:09.895","Text":"Turning to an example,"},{"Start":"02:09.895 ","End":"02:14.130","Text":"the company decided to self-instruct a new plant facility."},{"Start":"02:14.130 ","End":"02:18.290","Text":"The construction took 3 years to complete,"},{"Start":"02:18.290 ","End":"02:21.770","Text":"and the cost of the new plant facility is"},{"Start":"02:21.770 ","End":"02:26.410","Text":"a 1 million currents units excluding the borrowing costs."},{"Start":"02:26.410 ","End":"02:28.585","Text":"How is it funded?"},{"Start":"02:28.585 ","End":"02:32.125","Text":"It is funded partly from cash reserves,"},{"Start":"02:32.125 ","End":"02:36.220","Text":"but also the company borrowed 750,000 currency"},{"Start":"02:36.220 ","End":"02:42.580","Text":"units on a 5-year interest-only loan at the beginning of the project."},{"Start":"02:42.580 ","End":"02:46.870","Text":"The loan was repaid in full 2 years after"},{"Start":"02:46.870 ","End":"02:52.845","Text":"completion of the plant and the interest rate is 2 percent per annum."},{"Start":"02:52.845 ","End":"02:57.839","Text":"What then is the amount of the interest that will be capitalized,"},{"Start":"02:57.839 ","End":"03:01.415","Text":"in other words, added to the cost of the plant?"},{"Start":"03:01.415 ","End":"03:04.199","Text":"Looking at the complete picture,"},{"Start":"03:04.199 ","End":"03:09.995","Text":"if the cost of the plant itself we\u0027re told is 1 million currency units;"},{"Start":"03:09.995 ","End":"03:12.543","Text":"the amount of interest are capitalized,"},{"Start":"03:12.543 ","End":"03:20.510","Text":"we can compute as the amount of the borrowings the loan was for an amount of 750,000."},{"Start":"03:20.510 ","End":"03:25.460","Text":"The interest rate is 2 percent per annum,"},{"Start":"03:25.460 ","End":"03:30.425","Text":"and the amount was borrowed for a 3-year period."},{"Start":"03:30.425 ","End":"03:36.605","Text":"That gives a total interest to capitalize of 45,000,"},{"Start":"03:36.605 ","End":"03:45.780","Text":"and therefore the total cost of a new plant is 1 million and 45,000."},{"Start":"03:45.780 ","End":"03:47.910","Text":"To look at the counting entries for"},{"Start":"03:47.910 ","End":"03:51.720","Text":"this interest capitalization in each of the the years;"},{"Start":"03:51.720 ","End":"03:54.605","Text":"so for years 1-3,"},{"Start":"03:54.605 ","End":"03:57.535","Text":"the company would pay the interest."},{"Start":"03:57.535 ","End":"03:59.260","Text":"Let\u0027s assume it\u0027s paid in cash,"},{"Start":"03:59.260 ","End":"04:05.810","Text":"so therefore the credit would go to bank for an amount of 15,000."},{"Start":"04:05.810 ","End":"04:09.120","Text":"Remember that 15,000 is the annual interest cost of"},{"Start":"04:09.120 ","End":"04:14.490","Text":"750,000 multiplied by 2 percent for the 1 year,"},{"Start":"04:14.490 ","End":"04:17.035","Text":"and the debit would not go to"},{"Start":"04:17.035 ","End":"04:21.879","Text":"interest expense but the debit would go to the plant itself."},{"Start":"04:21.879 ","End":"04:26.845","Text":"Plant is the asset for 15,000."},{"Start":"04:26.845 ","End":"04:31.790","Text":"That would be repeated each year for 3 years to give a total of"},{"Start":"04:31.790 ","End":"04:38.680","Text":"45,000 interest capitalized over the 3-year construction period."},{"Start":"04:38.680 ","End":"04:41.285","Text":"Now from a practical perspective,"},{"Start":"04:41.285 ","End":"04:46.930","Text":"it\u0027s quite common for companies to have more than one interest-bearing loan,"},{"Start":"04:46.930 ","End":"04:53.405","Text":"and therefore the interest expense may initially be recorded on an aggregate basis"},{"Start":"04:53.405 ","End":"04:56.600","Text":"just for practical reasons and then reduced"},{"Start":"04:56.600 ","End":"05:00.229","Text":"by the amount capitalized to the particular project."},{"Start":"05:00.229 ","End":"05:02.480","Text":"To look at an example of that,"},{"Start":"05:02.480 ","End":"05:05.090","Text":"let\u0027s assume in the first year of"},{"Start":"05:05.090 ","End":"05:12.560","Text":"the plant construction the company incurred a total interest expense of 17,000."},{"Start":"05:12.560 ","End":"05:21.800","Text":"In other words that 17,000 comprises the interest of 15,000 which was paid on"},{"Start":"05:21.800 ","End":"05:26.808","Text":"the borrowings for the particular plant that is being constructed"},{"Start":"05:26.808 ","End":"05:32.395","Text":"and 2,000 for other borrowings in relation to the business."},{"Start":"05:32.395 ","End":"05:41.750","Text":"The general entries passed therefore will be a debit to the interest expense of"},{"Start":"05:41.750 ","End":"05:45.530","Text":"17,000 in total and a credit to"},{"Start":"05:45.530 ","End":"05:51.245","Text":"bank recording the interest on all the companies loans for the period."},{"Start":"05:51.245 ","End":"05:54.630","Text":"Because we know that 15,000 of that"},{"Start":"05:54.630 ","End":"06:01.072","Text":"17,000 can be capitalized to the asset under construction,"},{"Start":"06:01.072 ","End":"06:07.945","Text":"we can then debit this plant account with 15,000 and"},{"Start":"06:07.945 ","End":"06:16.370","Text":"credit to reverse the amount out of the interest expense of 15,000 as well."},{"Start":"06:16.370 ","End":"06:19.745","Text":"This plant\u0027s account you could also call it plant account"},{"Start":"06:19.745 ","End":"06:23.235","Text":"under construction if you want to;"},{"Start":"06:23.235 ","End":"06:27.515","Text":"not necessary, just to distinguish it from"},{"Start":"06:27.515 ","End":"06:32.910","Text":"other items or plant that the business may have."}],"ID":28606},{"Watched":false,"Name":"Exercise 6 - Introduction","Duration":"3m 7s","ChapterTopicVideoID":26373,"CourseChapterTopicPlaylistID":254924,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:03.780","Text":"Hello, and welcome to another presentation in this series on"},{"Start":"00:03.780 ","End":"00:07.695","Text":"non-current assets brought to you by Proprep."},{"Start":"00:07.695 ","End":"00:13.290","Text":"Today, we\u0027re going to do another exercise this time involving interest capitalization."},{"Start":"00:13.290 ","End":"00:18.225","Text":"Imperial ship builders built a new hangar for its facility in Plymouth shipyard,"},{"Start":"00:18.225 ","End":"00:21.015","Text":"where it builds luxury yachts."},{"Start":"00:21.015 ","End":"00:24.990","Text":"Construction took 2 years to complete at"},{"Start":"00:24.990 ","End":"00:31.015","Text":"a total cost of 12 million currency units, excluding finance costs."},{"Start":"00:31.015 ","End":"00:33.110","Text":"To fund the new hangar,"},{"Start":"00:33.110 ","End":"00:36.335","Text":"as well as some other ongoing activities,"},{"Start":"00:36.335 ","End":"00:39.909","Text":"Imperial entered into 2 loans."},{"Start":"00:39.909 ","End":"00:44.450","Text":"The first loan was for 7 million currency units,"},{"Start":"00:44.450 ","End":"00:50.165","Text":"and that was taken for a 7-year period with interest charged at 2 percent."},{"Start":"00:50.165 ","End":"00:54.890","Text":"The principle was to be paid back in 7 equal installments,"},{"Start":"00:54.890 ","End":"00:59.770","Text":"paid at the end of each year together with the interest."},{"Start":"00:59.770 ","End":"01:05.210","Text":"The second loan for 8 million currency units was taken for 3 years,"},{"Start":"01:05.210 ","End":"01:09.545","Text":"and this 1 was on an interest-only basis."},{"Start":"01:09.545 ","End":"01:11.735","Text":"In other words, the principal,"},{"Start":"01:11.735 ","End":"01:17.405","Text":"8 million currency units was to be paid back at the end of the third year."},{"Start":"01:17.405 ","End":"01:23.030","Text":"The interest on this loan is 3 percent and is paid at the end of each year."},{"Start":"01:23.030 ","End":"01:26.215","Text":"Construction began on the first of January,"},{"Start":"01:26.215 ","End":"01:29.930","Text":"20X4, at which time both loans were taken."},{"Start":"01:29.930 ","End":"01:31.940","Text":"This makes it a little easier for us,"},{"Start":"01:31.940 ","End":"01:36.845","Text":"so construction began and the loans are taken out on the very same day."},{"Start":"01:36.845 ","End":"01:42.690","Text":"Now, the cost of the construction was paid evenly over time at 500,000 a month."},{"Start":"01:42.690 ","End":"01:47.690","Text":"So these are construction costs which are different to borrowing costs."},{"Start":"01:47.690 ","End":"01:51.065","Text":"So the construction costs was 500,000 a month."},{"Start":"01:51.065 ","End":"01:55.709","Text":"Remember construction took 2 years to complete."},{"Start":"01:56.520 ","End":"02:00.070","Text":"You can work out the construction costs that way."},{"Start":"02:00.070 ","End":"02:03.700","Text":"The policy of Imperial is to report the cost of assets under"},{"Start":"02:03.700 ","End":"02:08.725","Text":"construction as a separate item in its note on property, plant, and equipment."},{"Start":"02:08.725 ","End":"02:12.520","Text":"This is cost of assets under construction."},{"Start":"02:12.520 ","End":"02:16.050","Text":"This case we have a hangar under construction."},{"Start":"02:16.050 ","End":"02:19.210","Text":"We\u0027re going to show the hangar under construction as"},{"Start":"02:19.210 ","End":"02:23.590","Text":"a separate item to a completed hangar, for example."},{"Start":"02:23.590 ","End":"02:28.120","Text":"The company also estimates that the useful life of the new hangar"},{"Start":"02:28.120 ","End":"02:32.380","Text":"is 25 years and the residual value is 0."},{"Start":"02:32.380 ","End":"02:35.290","Text":"They don\u0027t tell us what method of depreciation to use,"},{"Start":"02:35.290 ","End":"02:38.205","Text":"so we shall assume straight line."},{"Start":"02:38.205 ","End":"02:40.550","Text":"Now let\u0027s look at the required."},{"Start":"02:40.550 ","End":"02:44.795","Text":"Part a, prepare the note on finance costs,"},{"Start":"02:44.795 ","End":"02:48.980","Text":"showing the interest expense before and after"},{"Start":"02:48.980 ","End":"02:53.540","Text":"capitalization for the years 20X4 through to 20X7,"},{"Start":"02:53.540 ","End":"02:55.625","Text":"so for a 4-year period."},{"Start":"02:55.625 ","End":"02:59.855","Text":"Then b, calculate the year-end carrying amount."},{"Start":"02:59.855 ","End":"03:04.970","Text":"Another name for carrying amount is net book value of the hangar for the same period,"},{"Start":"03:04.970 ","End":"03:08.700","Text":"20X4 through to 20X7."}],"ID":28596},{"Watched":false,"Name":"Exercise 6 - Calculating the capitalisation rate","Duration":"2m 9s","ChapterTopicVideoID":26374,"CourseChapterTopicPlaylistID":254924,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:03.480","Text":"Now, in terms of the solution,"},{"Start":"00:03.480 ","End":"00:05.580","Text":"you may have noticed that"},{"Start":"00:05.580 ","End":"00:11.715","Text":"our construction costs are less than the amount that we borrowed."},{"Start":"00:11.715 ","End":"00:15.390","Text":"This means that a portion of our borrowings was"},{"Start":"00:15.390 ","End":"00:18.870","Text":"not actually used on this particular project,"},{"Start":"00:18.870 ","End":"00:20.935","Text":"the construction of the hangar."},{"Start":"00:20.935 ","End":"00:25.170","Text":"This, in turn, will mean that we will not be"},{"Start":"00:25.170 ","End":"00:30.450","Text":"capitalizing 100 percent of the borrowing costs to the hangar."},{"Start":"00:30.450 ","End":"00:32.520","Text":"If we\u0027re not recognizing or"},{"Start":"00:32.520 ","End":"00:37.120","Text":"capitalizing 100 percent of the borrowing costs to the hangar,"},{"Start":"00:37.120 ","End":"00:41.990","Text":"then what portion will we capitalize to the hangar?"},{"Start":"00:41.990 ","End":"00:43.310","Text":"To answer this question,"},{"Start":"00:43.310 ","End":"00:46.820","Text":"we need to calculate the capitalization rate."},{"Start":"00:46.820 ","End":"00:51.065","Text":"Now the capitalization rate is really comparing 2 items,"},{"Start":"00:51.065 ","End":"00:53.090","Text":"the construction cost,"},{"Start":"00:53.090 ","End":"00:55.295","Text":"and the total borrowings."},{"Start":"00:55.295 ","End":"00:59.465","Text":"We were actually given the construction costs of 12 million."},{"Start":"00:59.465 ","End":"01:02.990","Text":"However, had you not been given the 12 million in total,"},{"Start":"01:02.990 ","End":"01:07.940","Text":"they had also given you 500,000 currency units as being"},{"Start":"01:07.940 ","End":"01:11.300","Text":"the construction costs per month and we had also"},{"Start":"01:11.300 ","End":"01:15.185","Text":"been told that the construction took 2 years."},{"Start":"01:15.185 ","End":"01:17.420","Text":"If you multiply that by 24 months,"},{"Start":"01:17.420 ","End":"01:20.065","Text":"you get 12 million."},{"Start":"01:20.065 ","End":"01:22.465","Text":"You could\u0027ve worked it out as well."},{"Start":"01:22.465 ","End":"01:25.150","Text":"Now we look to the total borrowings."},{"Start":"01:25.150 ","End":"01:27.115","Text":"We took out 2 loans."},{"Start":"01:27.115 ","End":"01:29.725","Text":"The first loan was for 7 million,"},{"Start":"01:29.725 ","End":"01:32.473","Text":"the second loan was for 8 million,"},{"Start":"01:32.473 ","End":"01:36.565","Text":"so we\u0027re looking at a total of 15 million."},{"Start":"01:36.565 ","End":"01:42.684","Text":"You can see here, we borrowed 3 million more than we needed for this particular project."},{"Start":"01:42.684 ","End":"01:46.540","Text":"To work on our capitalization rate in X4 and X5,"},{"Start":"01:46.540 ","End":"01:48.370","Text":"we take our construction costs,"},{"Start":"01:48.370 ","End":"01:49.720","Text":"which were 12 million,"},{"Start":"01:49.720 ","End":"01:52.825","Text":"and we divide that by the total borrowings,"},{"Start":"01:52.825 ","End":"01:54.865","Text":"which we worked out as 15 million."},{"Start":"01:54.865 ","End":"01:59.665","Text":"So 12 million divided by 15 million gives you 0.8,"},{"Start":"01:59.665 ","End":"02:02.505","Text":"or in other words, 80 percent."},{"Start":"02:02.505 ","End":"02:05.060","Text":"This means we\u0027re going to take 80 percent of"},{"Start":"02:05.060 ","End":"02:10.470","Text":"our borrowing costs and we\u0027ll capitalize those to the cost of the hangar"}],"ID":28597},{"Watched":false,"Name":"Exercise 6 - Part a","Duration":"12m 59s","ChapterTopicVideoID":26375,"CourseChapterTopicPlaylistID":254924,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.110 ","End":"00:04.350","Text":"Let\u0027s remember that this question is all about interest,"},{"Start":"00:04.350 ","End":"00:10.960","Text":"how much interest is incurred and how much of that could get capitalized to the hanger."},{"Start":"00:10.970 ","End":"00:13.680","Text":"To be able to answer those questions,"},{"Start":"00:13.680 ","End":"00:17.415","Text":"we need to calculate how much interest is incurred on each of our loans."},{"Start":"00:17.415 ","End":"00:18.885","Text":"We\u0027ve got 2 loans."},{"Start":"00:18.885 ","End":"00:21.015","Text":"The 1st one is a 7 million loan,"},{"Start":"00:21.015 ","End":"00:23.565","Text":"the 2nd loan is an 8 million loan."},{"Start":"00:23.565 ","End":"00:26.460","Text":"Let\u0027s look at the 7 million loan 1st."},{"Start":"00:26.460 ","End":"00:28.320","Text":"We start with an opening balance,"},{"Start":"00:28.320 ","End":"00:29.670","Text":"we show it here as 7 million,"},{"Start":"00:29.670 ","End":"00:30.920","Text":"but to be honest,"},{"Start":"00:30.920 ","End":"00:34.340","Text":"it was actually 0 on the very 1st day."},{"Start":"00:34.340 ","End":"00:36.380","Text":"But on that very 1st day,"},{"Start":"00:36.380 ","End":"00:39.100","Text":"we then took out a loan of 7 million,"},{"Start":"00:39.100 ","End":"00:43.660","Text":"but it is effectively 7 million opening balance."},{"Start":"00:43.660 ","End":"00:49.310","Text":"Now, we have to calculate the interest on that 7 million at the end of the year."},{"Start":"00:49.310 ","End":"00:52.055","Text":"Now, the interest has been calculated here."},{"Start":"00:52.055 ","End":"00:54.500","Text":"It\u0027s 140,000, how did we get that?"},{"Start":"00:54.500 ","End":"00:59.720","Text":"Well, it\u0027s the opening balance of 7 million multiplied by the interest rate of"},{"Start":"00:59.720 ","End":"01:05.580","Text":"2 percent for an entire 1 year or 12 over 12 months."},{"Start":"01:05.580 ","End":"01:07.965","Text":"On the last day of the year,"},{"Start":"01:07.965 ","End":"01:09.965","Text":"we also made a payment."},{"Start":"01:09.965 ","End":"01:14.465","Text":"Now, the payment that we make is a combination always of"},{"Start":"01:14.465 ","End":"01:19.880","Text":"whatever principle is being repaid and how much interest is being repaid."},{"Start":"01:19.880 ","End":"01:21.785","Text":"Now, in this particular case,"},{"Start":"01:21.785 ","End":"01:26.855","Text":"we were told that the loan principal is the 7 million,"},{"Start":"01:26.855 ","End":"01:29.450","Text":"in other words, principal is the amount you borrow."},{"Start":"01:29.450 ","End":"01:32.270","Text":"Now, we\u0027re told that that 7 million is going to be"},{"Start":"01:32.270 ","End":"01:36.450","Text":"repaid in 7 annual equal installments."},{"Start":"01:36.450 ","End":"01:39.180","Text":"We simply divide the 7 million over"},{"Start":"01:39.180 ","End":"01:45.600","Text":"the 7 years and we see that we are going to repay a million per year."},{"Start":"01:46.040 ","End":"01:54.270","Text":"In 20X4, the principal that is repaid is 1 million plus the interest,"},{"Start":"01:54.270 ","End":"01:56.445","Text":"so it\u0027s principal plus the interest."},{"Start":"01:56.445 ","End":"02:01.410","Text":"Principal is 1 million, the interest that was incurred during the year is 140,000,"},{"Start":"02:01.410 ","End":"02:03.750","Text":"and both of those amounts have been paid."},{"Start":"02:03.750 ","End":"02:08.610","Text":"That is 1,140,000 being paid."},{"Start":"02:08.610 ","End":"02:11.210","Text":"If we take our opening balance, the interest,"},{"Start":"02:11.210 ","End":"02:14.210","Text":"and the payment, we get our closing balance."},{"Start":"02:14.210 ","End":"02:18.110","Text":"Now that closing balance at the end of 20X4 is going to be our opening balance in"},{"Start":"02:18.110 ","End":"02:22.800","Text":"20X5 and we will continue the process."},{"Start":"02:22.820 ","End":"02:28.350","Text":"The closing balance in 20X4 becomes opening balance in 20X5."},{"Start":"02:28.350 ","End":"02:31.580","Text":"The interest in 20X5 is slightly lower because"},{"Start":"02:31.580 ","End":"02:35.920","Text":"our opening balance has dropped because we\u0027ve repaid a million of the principal."},{"Start":"02:35.920 ","End":"02:41.775","Text":"That 120,000 is 2 percent multiplied by the 6 million."},{"Start":"02:41.775 ","End":"02:45.820","Text":"The payment in 20X5 is the 1 million plus"},{"Start":"02:45.820 ","End":"02:50.170","Text":"whatever the interest was for 20X5, being 120,000."},{"Start":"02:50.170 ","End":"02:53.610","Text":"Our payment is 1,120,000,"},{"Start":"02:53.610 ","End":"03:00.800","Text":"giving us a closing balance now of 6 million plus 120,000,000 less 1,120,000,"},{"Start":"03:00.800 ","End":"03:02.305","Text":"giving us 5 million."},{"Start":"03:02.305 ","End":"03:05.970","Text":"That 5 million becomes our opening balance in 20X6."},{"Start":"03:05.970 ","End":"03:09.210","Text":"You\u0027ll see our interest in 20X6 is 100,000,"},{"Start":"03:09.210 ","End":"03:12.360","Text":"which is slightly lower than 20X5 interest."},{"Start":"03:12.360 ","End":"03:17.095","Text":"That is because it\u0027s 2 percent of a slightly lower opening balance."},{"Start":"03:17.095 ","End":"03:20.860","Text":"The payment is a combination of the principal of"},{"Start":"03:20.860 ","End":"03:24.970","Text":"a million plus the interest that was incurred during that year."},{"Start":"03:24.970 ","End":"03:28.910","Text":"The payment in 20X6 is 1.1 million."},{"Start":"03:29.090 ","End":"03:31.420","Text":"Those 1st 3 items,"},{"Start":"03:31.420 ","End":"03:34.945","Text":"the opening balance plus the interest less the payment gives us a closing balance of"},{"Start":"03:34.945 ","End":"03:39.670","Text":"4 million and that then gives us our opening balance in 20X7 of 4 million,"},{"Start":"03:39.670 ","End":"03:45.645","Text":"2 percent multiplied by our opening balance of 4 million gives us interest of 80,000."},{"Start":"03:45.645 ","End":"03:50.380","Text":"The payment we make on that last day of the year is the principal of 1 million plus"},{"Start":"03:50.380 ","End":"03:55.795","Text":"the interest of 80,000 for that year giving us 1,080,000 payment."},{"Start":"03:55.795 ","End":"03:58.665","Text":"If you combine those 3 items,"},{"Start":"03:58.665 ","End":"04:01.625","Text":"you calculate the closing balance."},{"Start":"04:01.625 ","End":"04:04.985","Text":"That is the 1st loan analyzed."},{"Start":"04:04.985 ","End":"04:07.354","Text":"Now let\u0027s analyze the 2nd loan."},{"Start":"04:07.354 ","End":"04:11.030","Text":"The 2nd loan is an amount of 8 million and"},{"Start":"04:11.030 ","End":"04:14.725","Text":"the opening balance for our purposes is 8 million."},{"Start":"04:14.725 ","End":"04:19.790","Text":"Once again, technically, we had no balance at the beginning of 20X4,"},{"Start":"04:19.790 ","End":"04:20.890","Text":"but on the 1st day,"},{"Start":"04:20.890 ","End":"04:24.495","Text":"we took out a loan of 8 million."},{"Start":"04:24.495 ","End":"04:28.775","Text":"For our purposes, the opening balance is 8 million."},{"Start":"04:28.775 ","End":"04:33.320","Text":"Now, we calculate the interest for 20X4,"},{"Start":"04:33.320 ","End":"04:37.460","Text":"the interest is 3 percent of the 8 million,"},{"Start":"04:37.460 ","End":"04:41.645","Text":"3 percent multiplied by our opening balance of 8 million."},{"Start":"04:41.645 ","End":"04:43.865","Text":"Then we make a payment at the end of the year."},{"Start":"04:43.865 ","End":"04:45.425","Text":"Now, the payment once again,"},{"Start":"04:45.425 ","End":"04:48.695","Text":"is made up of principal plus interest."},{"Start":"04:48.695 ","End":"04:50.825","Text":"But in the case of the 2nd loan,"},{"Start":"04:50.825 ","End":"04:56.600","Text":"we were told that it was an interest only loan,"},{"Start":"04:56.600 ","End":"05:02.005","Text":"which means that the principal is paid at the end of the term of the loan."},{"Start":"05:02.005 ","End":"05:07.910","Text":"In 20X4, the portion of the principal that we repaid is nil and therefore,"},{"Start":"05:07.910 ","End":"05:12.120","Text":"the payment is made purely of interest."},{"Start":"05:12.120 ","End":"05:17.765","Text":"Our interest that was incurred in 20X4 was 240,000 and therefore,"},{"Start":"05:17.765 ","End":"05:20.705","Text":"that is the amount that we pay at the end of the year."},{"Start":"05:20.705 ","End":"05:27.410","Text":"Given that our payment of 240,000 equals the interest that we incurred during the year,"},{"Start":"05:27.410 ","End":"05:33.350","Text":"it means that our opening balance of 8 million = our closing balance of 8 million."},{"Start":"05:33.350 ","End":"05:39.140","Text":"Now our closing balance of 8 million is going to be the opening balance in 20X5."},{"Start":"05:39.140 ","End":"05:43.415","Text":"Closing balance at the end of 20X4 becomes our opening balance in 20X5."},{"Start":"05:43.415 ","End":"05:48.950","Text":"You\u0027ll notice that because we don\u0027t repay any of the principal,"},{"Start":"05:48.950 ","End":"05:53.855","Text":"that the opening balance remains 8 million in each of those 3 years."},{"Start":"05:53.855 ","End":"05:57.470","Text":"Remember, the 2nd loan has a 3-year term."},{"Start":"05:57.470 ","End":"06:03.260","Text":"Because the opening balance means 8 million in each of those 3 years,"},{"Start":"06:03.260 ","End":"06:06.400","Text":"the interest is the same in each year,"},{"Start":"06:06.400 ","End":"06:08.535","Text":"240,000 in 20X4,"},{"Start":"06:08.535 ","End":"06:10.320","Text":"240,000 in 20X5,"},{"Start":"06:10.320 ","End":"06:11.890","Text":"and again in 20X6."},{"Start":"06:11.890 ","End":"06:14.930","Text":"That\u0027s because it\u0027s 3 percent multiplied by"},{"Start":"06:14.930 ","End":"06:19.450","Text":"the opening balance and that opening balance hasn\u0027t changed."},{"Start":"06:19.450 ","End":"06:27.650","Text":"Notice that the payment"},{"Start":"06:27.650 ","End":"06:32.480","Text":"in 20X4 was 240,000 and was 240,000 in 20X5."},{"Start":"06:32.480 ","End":"06:34.435","Text":"But notice that in 20X6,"},{"Start":"06:34.435 ","End":"06:40.385","Text":"the payment has increased to 8.24 million and that\u0027s because in terms of the 2nd loan,"},{"Start":"06:40.385 ","End":"06:43.130","Text":"the principal was going to be repaid at the end"},{"Start":"06:43.130 ","End":"06:46.840","Text":"of the third year and the principal was 8 million."},{"Start":"06:46.840 ","End":"06:50.125","Text":"At the end of the third year, 20X6,"},{"Start":"06:50.125 ","End":"06:52.320","Text":"we\u0027re going to be paying the 8 million plus the"},{"Start":"06:52.320 ","End":"06:55.295","Text":"240,000 interest for that particular year."},{"Start":"06:55.295 ","End":"06:59.585","Text":"That closing balance at the end of 20X6 is nil."},{"Start":"06:59.585 ","End":"07:02.195","Text":"Notice then in 20X7,"},{"Start":"07:02.195 ","End":"07:05.405","Text":"our opening balance and movement is nil."},{"Start":"07:05.405 ","End":"07:08.150","Text":"That then brings us to what we\u0027re trying to achieve,"},{"Start":"07:08.150 ","End":"07:11.120","Text":"which is what is our total interest expense?"},{"Start":"07:11.120 ","End":"07:16.265","Text":"Our interest expense is effectively the interest on the 1st loan,"},{"Start":"07:16.265 ","End":"07:18.380","Text":"which we\u0027ve called A, and the 2nd learn,"},{"Start":"07:18.380 ","End":"07:19.835","Text":"which we\u0027ve called B."},{"Start":"07:19.835 ","End":"07:27.245","Text":"In 20X4, our total interest expense is 380,000 made up"},{"Start":"07:27.245 ","End":"07:31.290","Text":"of the 140,000 interest on"},{"Start":"07:31.290 ","End":"07:37.185","Text":"the 1st loan and the 240,000 interest on the 2nd loan, giving us 380,000."},{"Start":"07:37.185 ","End":"07:40.695","Text":"In 20X5, the interest on the 1st one was 120,"},{"Start":"07:40.695 ","End":"07:45.253","Text":"20X5 interest on the 2nd loan was 240,"},{"Start":"07:45.253 ","End":"07:51.580","Text":"and therefore, our total interest incurred was 360,000 in 20X6."},{"Start":"07:51.580 ","End":"07:53.955","Text":"Interest on the 1st loan\u0027s 100,000,"},{"Start":"07:53.955 ","End":"07:56.640","Text":"interest on the 2nd loan is 240,000."},{"Start":"07:56.640 ","End":"07:59.820","Text":"In total, we\u0027ve incurred 340,000 interest."},{"Start":"07:59.820 ","End":"08:01.220","Text":"Then in 20X7,"},{"Start":"08:01.220 ","End":"08:03.325","Text":"we\u0027ve only got interest on the 1st loan,"},{"Start":"08:03.325 ","End":"08:05.590","Text":"we don\u0027t have any interest on the 2nd loan."},{"Start":"08:05.590 ","End":"08:09.110","Text":"That therefore, gives us total interest incurred of 80,000."},{"Start":"08:09.110 ","End":"08:13.090","Text":"We\u0027re not going to capitalize all of this interest because"},{"Start":"08:13.090 ","End":"08:17.475","Text":"we had borrowed more than we needed for this particular project."},{"Start":"08:17.475 ","End":"08:25.090","Text":"Therefore, part of the interest relates to the financing of other things."},{"Start":"08:25.090 ","End":"08:28.720","Text":"This brings us to the capitalization rate."},{"Start":"08:28.720 ","End":"08:31.120","Text":"Remember, the capitalization rate is"},{"Start":"08:31.120 ","End":"08:35.510","Text":"the construction cost as a percentage of your total borrowings."},{"Start":"08:35.510 ","End":"08:38.980","Text":"We worked that out in a previous slide and found it to"},{"Start":"08:38.980 ","End":"08:42.685","Text":"be 0.8 or in other words 80 percent."},{"Start":"08:42.685 ","End":"08:46.240","Text":"This was an amount of 12 million construction cost,"},{"Start":"08:46.240 ","End":"08:48.865","Text":"total borrowing costs of 15."},{"Start":"08:48.865 ","End":"08:52.800","Text":"Notice that I\u0027ve got 0 under 20X6 and 20X7,"},{"Start":"08:52.800 ","End":"08:54.195","Text":"there\u0027s a reason for that."},{"Start":"08:54.195 ","End":"08:57.460","Text":"The reason is that borrowing costs may only be"},{"Start":"08:57.460 ","End":"09:01.315","Text":"capitalized while the construction is underway."},{"Start":"09:01.315 ","End":"09:03.775","Text":"As soon as construction ceases,"},{"Start":"09:03.775 ","End":"09:09.760","Text":"capitalization of the borrowing costs or the interest expense must cease."},{"Start":"09:09.760 ","End":"09:14.170","Text":"In this question, capitalization only occurs in 20X4 and"},{"Start":"09:14.170 ","End":"09:18.430","Text":"20X5 because construction only occurred during those 2 years,"},{"Start":"09:18.430 ","End":"09:20.885","Text":"construction took 2 years to complete."},{"Start":"09:20.885 ","End":"09:23.005","Text":"In 20X6 and 20X7,"},{"Start":"09:23.005 ","End":"09:25.205","Text":"there was no construction taking place,"},{"Start":"09:25.205 ","End":"09:29.945","Text":"so therefore, I\u0027ve applied a capitalization rate of 0."},{"Start":"09:29.945 ","End":"09:34.220","Text":"You could equally have simply said not applicable."},{"Start":"09:34.220 ","End":"09:36.455","Text":"How much was capitalized?"},{"Start":"09:36.455 ","End":"09:39.770","Text":"The portion that is capitalized, which we\u0027ve called D,"},{"Start":"09:39.770 ","End":"09:44.450","Text":"is calculated as the total interest incurred or"},{"Start":"09:44.450 ","End":"09:47.240","Text":"the total interest that would otherwise be expensed"},{"Start":"09:47.240 ","End":"09:51.110","Text":"of 380,000 multiplied by the capitalization rate."},{"Start":"09:51.110 ","End":"09:58.155","Text":"This,8 multiplied by the 380,000 gives us the 304,000."},{"Start":"09:58.155 ","End":"10:05.745","Text":"In 20X5, it\u0027s the 0.8 multiplied by 360,000 that gives us the 288,000."},{"Start":"10:05.745 ","End":"10:12.020","Text":"In 20X6 and in 20X7 because no construction took place, nothing gets capitalized."},{"Start":"10:12.020 ","End":"10:16.030","Text":"If our total interest expense or total interest incurred was"},{"Start":"10:16.030 ","End":"10:21.500","Text":"this item C and the interest that is going to be capitalized is D,"},{"Start":"10:21.500 ","End":"10:25.520","Text":"that then leaves us with the interest that will remain in"},{"Start":"10:25.520 ","End":"10:30.560","Text":"the expense account being C minus D. In 20X4,"},{"Start":"10:30.560 ","End":"10:35.210","Text":"if we take C being the total interest incurred of 380,000 and we"},{"Start":"10:35.210 ","End":"10:41.005","Text":"subtract 304,000, we get 76,000."},{"Start":"10:41.005 ","End":"10:45.440","Text":"In 20X5, the total interest expense is 360,000"},{"Start":"10:45.440 ","End":"10:49.880","Text":"less the portion that\u0027s going to be capitalized gives us 72,000."},{"Start":"10:49.880 ","End":"10:53.920","Text":"In 20X6, 340,000 was the total incurred,"},{"Start":"10:53.920 ","End":"10:56.310","Text":"nothing is capitalized so therefore,"},{"Start":"10:56.310 ","End":"10:59.115","Text":"340,000 is expensed in total,"},{"Start":"10:59.115 ","End":"11:01.724","Text":"80,0000 was the total expense."},{"Start":"11:01.724 ","End":"11:05.650","Text":"In 20X7, 80,000 was the total interesting incurred,"},{"Start":"11:05.650 ","End":"11:07.820","Text":"nothing gets capitalized, so therefore,"},{"Start":"11:07.820 ","End":"11:10.075","Text":"the full amount gets expensed."},{"Start":"11:10.075 ","End":"11:15.335","Text":"Now we have everything we need in order to prepare our interest expense note."},{"Start":"11:15.335 ","End":"11:22.015","Text":"In 20X4, we\u0027re going to show that we have total interest expense is 380,000."},{"Start":"11:22.015 ","End":"11:27.050","Text":"We\u0027re then going to show that 304,000 gets capitalized and that therefore,"},{"Start":"11:27.050 ","End":"11:31.080","Text":"only 76,000 remains in our expense account."},{"Start":"11:31.270 ","End":"11:34.115","Text":"Let\u0027s see how this appears."},{"Start":"11:34.115 ","End":"11:37.220","Text":"In 20X4, you see the total interest expense of"},{"Start":"11:37.220 ","End":"11:41.600","Text":"380,000 less the portion that\u0027s being capitalized,"},{"Start":"11:41.600 ","End":"11:45.400","Text":"leaving us with the portion that is going to be expensed."},{"Start":"11:45.400 ","End":"11:50.155","Text":"Let\u0027s go back to the previous slide and see the figures for 20X5."},{"Start":"11:50.155 ","End":"11:54.930","Text":"In 20X5, we have 360,000 interest incurred,"},{"Start":"11:54.930 ","End":"11:58.730","Text":"less the portion that\u0027s being capitalized of 288,000,"},{"Start":"11:58.730 ","End":"12:03.100","Text":"leaving us with a portion that will remain in the expense account."},{"Start":"12:03.100 ","End":"12:05.690","Text":"20X5, you see these figures coming through."},{"Start":"12:05.690 ","End":"12:09.455","Text":"Total interest expense was 360,000,"},{"Start":"12:09.455 ","End":"12:13.595","Text":"but 288,000 has been capitalized so therefore,"},{"Start":"12:13.595 ","End":"12:16.715","Text":"72,000 will be expensed."},{"Start":"12:16.715 ","End":"12:23.045","Text":"Let\u0027s go back and have a look at the previous slide for the 20X6 and the 20X7 figures."},{"Start":"12:23.045 ","End":"12:25.100","Text":"In 20X6 and 20X7,"},{"Start":"12:25.100 ","End":"12:26.465","Text":"let\u0027s do those together."},{"Start":"12:26.465 ","End":"12:34.375","Text":"The total interest expense in 20X6 was 340,000 and the total expense in 20X7 was 80,000."},{"Start":"12:34.375 ","End":"12:35.870","Text":"In both of those years,"},{"Start":"12:35.870 ","End":"12:37.340","Text":"nothing gets capitalized,"},{"Start":"12:37.340 ","End":"12:41.350","Text":"so the entire interest incurred gets expensed."},{"Start":"12:41.350 ","End":"12:43.095","Text":"Let\u0027s see that in the note."},{"Start":"12:43.095 ","End":"12:45.070","Text":"20X6 and 20X7,"},{"Start":"12:45.070 ","End":"12:49.970","Text":"we\u0027ve got the total interest expense of 340,000 and 80,000."},{"Start":"12:49.970 ","End":"12:52.175","Text":"We show that nothing gets capitalized,"},{"Start":"12:52.175 ","End":"12:55.780","Text":"so therefore, all of it remains in the expense account."},{"Start":"12:55.780 ","End":"12:57.765","Text":"That is the end of part a."},{"Start":"12:57.765 ","End":"13:00.400","Text":"We now move on to part b."}],"ID":28598},{"Watched":false,"Name":"Exercise 6 - Part b","Duration":"6m 52s","ChapterTopicVideoID":26376,"CourseChapterTopicPlaylistID":254924,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:03.405","Text":"A solution to part b."},{"Start":"00:03.405 ","End":"00:05.310","Text":"Now in solution to part b,"},{"Start":"00:05.310 ","End":"00:11.730","Text":"we\u0027re asked to calculate the carrying amount of the item of property,"},{"Start":"00:11.730 ","End":"00:14.700","Text":"plant, and equipment being the hangar."},{"Start":"00:14.700 ","End":"00:19.470","Text":"In this question, we were told that the company liked to keep the hangar under"},{"Start":"00:19.470 ","End":"00:23.895","Text":"construction separate to the hangar that was completed."},{"Start":"00:23.895 ","End":"00:26.175","Text":"We have got 2 columns here,"},{"Start":"00:26.175 ","End":"00:30.150","Text":"one for the hangar under construction and then for the completed hangar."},{"Start":"00:30.150 ","End":"00:32.935","Text":"Let\u0027s look at the 1st year, 20X4."},{"Start":"00:32.935 ","End":"00:36.620","Text":"In 20X4, we have nothing to begin with,"},{"Start":"00:36.620 ","End":"00:38.605","Text":"an opening balance of nil."},{"Start":"00:38.605 ","End":"00:41.510","Text":"Then during that year construction begins."},{"Start":"00:41.510 ","End":"00:46.490","Text":"We\u0027re told that construction costs of 500,000 per month,"},{"Start":"00:46.490 ","End":"00:48.289","Text":"and we know there are 12 months in a year,"},{"Start":"00:48.289 ","End":"00:53.000","Text":"so 500,000 by 12 gives us 6 million construction costs,"},{"Start":"00:53.000 ","End":"00:58.330","Text":"to which we must remember to add the interest costs that were going to be capitalized."},{"Start":"00:58.330 ","End":"01:00.405","Text":"If you go back to part A,"},{"Start":"01:00.405 ","End":"01:04.870","Text":"you\u0027ll see we\u0027re capitalizing 304,000."},{"Start":"01:04.870 ","End":"01:14.000","Text":"This gives us total additions to our hangar under construction of 6.304 million."},{"Start":"01:14.000 ","End":"01:20.010","Text":"At the end of the year that therefore gives us 6.304 million."},{"Start":"01:20.010 ","End":"01:28.935","Text":"This is then our opening balance on the 1st 20X5, 6.304 million."},{"Start":"01:28.935 ","End":"01:32.280","Text":"Construction continued in 20X5,"},{"Start":"01:32.280 ","End":"01:35.420","Text":"therefore, we\u0027re going to have further additions during the year."},{"Start":"01:35.420 ","End":"01:40.925","Text":"Once again, the construction costs are still 500,000 per month for 12 months."},{"Start":"01:40.925 ","End":"01:43.690","Text":"That\u0027s another 6 million on construction costs,"},{"Start":"01:43.690 ","End":"01:45.650","Text":"plus if you go back to part A,"},{"Start":"01:45.650 ","End":"01:51.950","Text":"you see we have 288,000 in interest expenses that are going to be capitalized."},{"Start":"01:51.950 ","End":"01:59.180","Text":"Our additions in 20X5 come to 6.288 million."},{"Start":"01:59.180 ","End":"02:03.210","Text":"Closing balance at the end of the year 31st,"},{"Start":"02:03.210 ","End":"02:09.310","Text":"December 20X5 is therefore 12,592,000."},{"Start":"02:09.310 ","End":"02:12.965","Text":"That\u0027s in our opening balance of the 1st 20X6."},{"Start":"02:12.965 ","End":"02:17.240","Text":"Now, remember that our construction ended at the end of the 2nd year."},{"Start":"02:17.240 ","End":"02:20.360","Text":"Now we\u0027re looking at a completed hangar."},{"Start":"02:20.360 ","End":"02:23.840","Text":"This means that we transfer the total cost from"},{"Start":"02:23.840 ","End":"02:28.055","Text":"the one column into the other column like so,"},{"Start":"02:28.055 ","End":"02:29.690","Text":"subtract the 12,"},{"Start":"02:29.690 ","End":"02:31.925","Text":"and then add the 12."},{"Start":"02:31.925 ","End":"02:35.540","Text":"This is simply a transfer between the accounts."},{"Start":"02:35.540 ","End":"02:38.525","Text":"But it\u0027s interesting to note that so far,"},{"Start":"02:38.525 ","End":"02:43.985","Text":"everything that we have been putting into these accounts has been costs."},{"Start":"02:43.985 ","End":"02:47.600","Text":"There has been no depreciation yet because"},{"Start":"02:47.600 ","End":"02:52.055","Text":"depreciation only begins once an asset is available for use."},{"Start":"02:52.055 ","End":"02:54.390","Text":"Since it was under construction,"},{"Start":"02:54.390 ","End":"02:59.885","Text":"it was not yet available for use and depreciation was not provided for."},{"Start":"02:59.885 ","End":"03:04.840","Text":"However, from the 1st of January 20X6,"},{"Start":"03:04.840 ","End":"03:09.875","Text":"the hangar is now available for use and therefore must be depreciated."},{"Start":"03:09.875 ","End":"03:12.140","Text":"The next line item you see here in"},{"Start":"03:12.140 ","End":"03:16.120","Text":"our calculation is the accumulated depreciation figure."},{"Start":"03:16.120 ","End":"03:22.235","Text":"Depreciation for 20X6 would be calculated as the cost,"},{"Start":"03:22.235 ","End":"03:27.470","Text":"which is 12,592,000 less the residual value,"},{"Start":"03:27.470 ","End":"03:29.810","Text":"which we were told is 0,"},{"Start":"03:29.810 ","End":"03:38.000","Text":"and we are now multiplying that by 1/25 with 25 is the useful life."},{"Start":"03:38.000 ","End":"03:41.420","Text":"Notice that because the question did not give us"},{"Start":"03:41.420 ","End":"03:43.820","Text":"the depreciation method that we are"},{"Start":"03:43.820 ","End":"03:47.510","Text":"assuming that the method to use is the straight-line method."},{"Start":"03:47.510 ","End":"03:53.045","Text":"Given that the accumulated depreciation is then 503,680,"},{"Start":"03:53.045 ","End":"04:00.260","Text":"it means our closing balance at the end of the year is 12,088,320."},{"Start":"04:00.260 ","End":"04:03.830","Text":"Now notice that because we\u0027re subtracting depreciation,"},{"Start":"04:03.830 ","End":"04:09.214","Text":"that our carrying amount which until now has been represented by cost,"},{"Start":"04:09.214 ","End":"04:13.220","Text":"is now cost less accumulated depreciation."},{"Start":"04:13.220 ","End":"04:16.050","Text":"Now let\u0027s move on to 20X7."},{"Start":"04:16.050 ","End":"04:21.440","Text":"In 20X7 our cost is still 12,592,000 because remember,"},{"Start":"04:21.440 ","End":"04:24.440","Text":"construction was complete in 20X5,"},{"Start":"04:24.440 ","End":"04:27.440","Text":"so there were no further construction costs added."},{"Start":"04:27.440 ","End":"04:31.220","Text":"Furthermore, there is no interest to add because interest may"},{"Start":"04:31.220 ","End":"04:35.405","Text":"not be capitalized once construction is complete."},{"Start":"04:35.405 ","End":"04:38.945","Text":"Our cost is still 12,592,000."},{"Start":"04:38.945 ","End":"04:41.150","Text":"However, we\u0027re now going to subtract"},{"Start":"04:41.150 ","End":"04:48.965","Text":"a higher accumulated depreciation because in 20X7 need to depreciate by yet another year."},{"Start":"04:48.965 ","End":"04:51.200","Text":"At the end of 20X7,"},{"Start":"04:51.200 ","End":"04:57.335","Text":"our accumulated depreciation is going to be calculated as follows."},{"Start":"04:57.335 ","End":"05:03.980","Text":"The cost is still 12,592,000 the residual value remains unchanged at nil."},{"Start":"05:03.980 ","End":"05:07.830","Text":"But now we have depreciated by a 2nd year."},{"Start":"05:07.830 ","End":"05:13.250","Text":"So far, we\u0027ve depreciated 2 years out of the 25-year useful life,"},{"Start":"05:13.250 ","End":"05:17.540","Text":"2 divided by the total useful life of 25 years."},{"Start":"05:17.540 ","End":"05:27.560","Text":"Our closing balance at the end of 20X7 is therefore a carrying amount of 11,584,614,"},{"Start":"05:27.560 ","End":"05:32.060","Text":"and that is the cost less accumulated depreciation."},{"Start":"05:32.060 ","End":"05:35.690","Text":"Notice that the depreciation increased, in fact,"},{"Start":"05:35.690 ","End":"05:41.480","Text":"it doubled because in 20X6 we would have depreciated by"},{"Start":"05:41.480 ","End":"05:50.260","Text":"503,680 and we would have depreciated further 503,680 in 20X7."},{"Start":"05:50.260 ","End":"05:53.300","Text":"That accumulated depreciation if you like,"},{"Start":"05:53.300 ","End":"06:03.430","Text":"is the 503,680 for X4 plus the 503,680 in X5."},{"Start":"06:03.430 ","End":"06:08.285","Text":"The answer to be is highlighted here in green."},{"Start":"06:08.285 ","End":"06:11.360","Text":"At the end of X4, those are our costs."},{"Start":"06:11.360 ","End":"06:16.000","Text":"It\u0027s is a combination of construction costs of 6 million plus the capitalized interest."},{"Start":"06:16.000 ","End":"06:18.165","Text":"The end of X5,"},{"Start":"06:18.165 ","End":"06:24.465","Text":"the total cost of increase to 12.5 million and that\u0027s the construction costs,"},{"Start":"06:24.465 ","End":"06:28.130","Text":"500,000 by 12 plus the interest that was capitalized."},{"Start":"06:28.130 ","End":"06:30.840","Text":"Then at the end of 20X6,"},{"Start":"06:30.840 ","End":"06:34.190","Text":"our carrying amount is now not just cost but cost"},{"Start":"06:34.190 ","End":"06:38.920","Text":"less accumulated depreciation of 12.088320."},{"Start":"06:39.170 ","End":"06:41.715","Text":"Then at the end of X7,"},{"Start":"06:41.715 ","End":"06:43.620","Text":"our carrying amount has dropped to"},{"Start":"06:43.620 ","End":"06:50.545","Text":"11,584,640 due to further depreciation having been provided in 20X7."},{"Start":"06:50.545 ","End":"06:53.230","Text":"I hope that\u0027s helped you."}],"ID":28599},{"Watched":false,"Name":"Change in estimates video","Duration":"9m 48s","ChapterTopicVideoID":26640,"CourseChapterTopicPlaylistID":254924,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:04.810","Text":"Hello and welcome to another video presentation in the series on property,"},{"Start":"00:04.810 ","End":"00:08.260","Text":"plant and equipment brought to you by Proprep."},{"Start":"00:08.260 ","End":"00:13.765","Text":"In this video, we will focus on changes in estimates."},{"Start":"00:13.765 ","End":"00:20.410","Text":"As you have seen, depreciation policy involves the estimates of 2 factors."},{"Start":"00:20.410 ","End":"00:27.415","Text":"These are the useful life of the asset and also the asset\u0027s residual value."},{"Start":"00:27.415 ","End":"00:31.150","Text":"Recall the useful life is the amount of years or"},{"Start":"00:31.150 ","End":"00:35.650","Text":"maybe production units that is expected from the asset."},{"Start":"00:35.650 ","End":"00:40.315","Text":"The residual value is an estimate of the amount the entity"},{"Start":"00:40.315 ","End":"00:45.005","Text":"expects to realize for that asset at the end of its useful life."},{"Start":"00:45.005 ","End":"00:50.315","Text":"Now these anters may change and therefore require to be reviewed each year."},{"Start":"00:50.315 ","End":"00:52.775","Text":"Any change in the estimate of"},{"Start":"00:52.775 ","End":"00:58.745","Text":"either the useful life or residual value is applied prospectively."},{"Start":"00:58.745 ","End":"01:02.840","Text":"What prospectively means is that the effect of the change"},{"Start":"01:02.840 ","End":"01:07.415","Text":"is applied in the current year and in future years."},{"Start":"01:07.415 ","End":"01:12.890","Text":"In other words, there\u0027s no need to go back and restate any prior period numbers."},{"Start":"01:12.890 ","End":"01:16.850","Text":"It is probably as well to think about why that is the case."},{"Start":"01:16.850 ","End":"01:22.430","Text":"Well, it\u0027s because the estimates of either the useful life or"},{"Start":"01:22.430 ","End":"01:25.135","Text":"residual value are in fact estimates"},{"Start":"01:25.135 ","End":"01:29.135","Text":"and we\u0027re presumably the best estimates at the time there were made."},{"Start":"01:29.135 ","End":"01:32.890","Text":"When the estimate changes in the future year,"},{"Start":"01:32.890 ","End":"01:35.330","Text":"that is not an error of any sorts."},{"Start":"01:35.330 ","End":"01:37.730","Text":"It is simply a change in accounting estimate."},{"Start":"01:37.730 ","End":"01:43.475","Text":"Therefore, the prior period figures are correct based on the previous estimate."},{"Start":"01:43.475 ","End":"01:47.704","Text":"Now, all the entity has to do is to compute"},{"Start":"01:47.704 ","End":"01:51.140","Text":"the new depreciation amounts for"},{"Start":"01:51.140 ","End":"01:56.139","Text":"the current year and future years based on the updated estimate."},{"Start":"01:56.139 ","End":"01:58.800","Text":"Looking at example 1,"},{"Start":"01:58.800 ","End":"02:00.645","Text":"at the beginning of the year,"},{"Start":"02:00.645 ","End":"02:02.290","Text":"and is year 1,"},{"Start":"02:02.290 ","End":"02:08.210","Text":"the company purchases a machine for 30,000 currency units and estimates"},{"Start":"02:08.210 ","End":"02:15.365","Text":"a useful life of 5 years and a residual value of 5,000 currency units."},{"Start":"02:15.365 ","End":"02:20.990","Text":"The company you see uses the straight line depreciation method."},{"Start":"02:20.990 ","End":"02:24.484","Text":"Now recall from previous examples,"},{"Start":"02:24.484 ","End":"02:27.425","Text":"when using the straight-line depreciation method,"},{"Start":"02:27.425 ","End":"02:32.810","Text":"we can compute the depreciation expense for a period by"},{"Start":"02:32.810 ","End":"02:38.855","Text":"looking at the cost of the asset less its residual value,"},{"Start":"02:38.855 ","End":"02:43.615","Text":"and divide that by the estimated useful life."},{"Start":"02:43.615 ","End":"02:51.875","Text":"In this case, the cost is 30,000 currency units."},{"Start":"02:51.875 ","End":"02:57.190","Text":"List the residual value of 5,000 currency units,"},{"Start":"02:57.190 ","End":"03:00.615","Text":"which is 25,000 depreciable amount,"},{"Start":"03:00.615 ","End":"03:06.220","Text":"you will recall, and the useful life is a useful life of 5 years."},{"Start":"03:06.220 ","End":"03:10.745","Text":"Therefore, you\u0027ll clearly see depreciation expense"},{"Start":"03:10.745 ","End":"03:15.665","Text":"is equal to 5,000 currency units per year."},{"Start":"03:15.665 ","End":"03:18.110","Text":"Now at the end of the third year,"},{"Start":"03:18.110 ","End":"03:21.770","Text":"the company estimates that the useful life will in fact be"},{"Start":"03:21.770 ","End":"03:25.400","Text":"6 years in total rather than the 5."},{"Start":"03:25.400 ","End":"03:28.010","Text":"Now note importantly, although the change in"},{"Start":"03:28.010 ","End":"03:30.740","Text":"estimate took place at the end of the third year,"},{"Start":"03:30.740 ","End":"03:36.380","Text":"the reporting of the depreciation expense for that third year is"},{"Start":"03:36.380 ","End":"03:41.870","Text":"computed as if the change took place at the beginning of the year."},{"Start":"03:41.870 ","End":"03:43.925","Text":"In other words, we will compute"},{"Start":"03:43.925 ","End":"03:49.759","Text":"the depreciation expense for that year based on the updated estimate."},{"Start":"03:49.759 ","End":"03:52.362","Text":"Looking at the solution,"},{"Start":"03:52.362 ","End":"03:56.240","Text":"it is useful when you are computing a change in estimate to have"},{"Start":"03:56.240 ","End":"04:00.905","Text":"a column for the old estimate and the calculation related to that."},{"Start":"04:00.905 ","End":"04:05.360","Text":"The old estimate you remember was a 5-year useful life and a column"},{"Start":"04:05.360 ","End":"04:10.460","Text":"for the new estimate with its 6-year total useful life."},{"Start":"04:10.460 ","End":"04:12.395","Text":"Looking at the numbers,"},{"Start":"04:12.395 ","End":"04:18.710","Text":"we know this asset cost the entity 30,000 currency units."},{"Start":"04:18.710 ","End":"04:24.230","Text":"We now need to compute the accumulated depreciation for both year 1 and year 2"},{"Start":"04:24.230 ","End":"04:31.000","Text":"combined because I need to find out the carrying amount at the end of year 2."},{"Start":"04:31.000 ","End":"04:38.980","Text":"I take the cost of 30,000 less the residual value of 5,000,"},{"Start":"04:38.980 ","End":"04:43.130","Text":"which gives the depreciable amount of 25,000."},{"Start":"04:43.130 ","End":"04:47.990","Text":"We divide that by the estimated useful life of 5 years,"},{"Start":"04:47.990 ","End":"04:54.170","Text":"which gives us a depreciation per year and remember now we\u0027ve had the asset for 2 years,"},{"Start":"04:54.170 ","End":"04:56.615","Text":"for both year 1 and year 2."},{"Start":"04:56.615 ","End":"05:02.300","Text":"That gives us an accumulated depreciation at the end of year 2 of"},{"Start":"05:02.300 ","End":"05:09.990","Text":"10,000 and therefore carrying amount at the end of year 2 of 20,000."},{"Start":"05:09.990 ","End":"05:17.005","Text":"Note now, when we compute the depreciation expense for year 3,"},{"Start":"05:17.005 ","End":"05:19.270","Text":"we need to base it on firstly,"},{"Start":"05:19.270 ","End":"05:26.050","Text":"the 20,000 carrying amount at the end of year 2, not the 30,000."},{"Start":"05:26.050 ","End":"05:28.025","Text":"I\u0027ll come back in 1 minute."},{"Start":"05:28.025 ","End":"05:29.720","Text":"From the 20,000,"},{"Start":"05:29.720 ","End":"05:31.780","Text":"we subtract the residual value,"},{"Start":"05:31.780 ","End":"05:33.429","Text":"which has not changed,"},{"Start":"05:33.429 ","End":"05:35.220","Text":"which is 5,000,"},{"Start":"05:35.220 ","End":"05:39.940","Text":"and now we divided by the remaining useful life."},{"Start":"05:39.940 ","End":"05:42.205","Text":"Look at the total years yet."},{"Start":"05:42.205 ","End":"05:45.460","Text":"The original estimate was 5 years."},{"Start":"05:45.460 ","End":"05:47.705","Text":"2 years had been used up,"},{"Start":"05:47.705 ","End":"05:49.545","Text":"up to the end of year 2,"},{"Start":"05:49.545 ","End":"05:54.555","Text":"which implied 3 remaining years from the end of year 2,"},{"Start":"05:54.555 ","End":"05:56.260","Text":"beginning of year 3."},{"Start":"05:56.260 ","End":"06:01.685","Text":"But the estimate has changed from a total of 5 years to a total of 6 years."},{"Start":"06:01.685 ","End":"06:06.560","Text":"Therefore, the remaining useful life from the beginning"},{"Start":"06:06.560 ","End":"06:11.825","Text":"of year 3 is in fact now 4 years, not 3 years."},{"Start":"06:11.825 ","End":"06:16.745","Text":"Note we use the remaining useful life of 4 years"},{"Start":"06:16.745 ","End":"06:22.205","Text":"and the carrying amount at the end of year 2 of 20,000."},{"Start":"06:22.205 ","End":"06:28.100","Text":"If I tried to use the 30,000 original cost in this calculation,"},{"Start":"06:28.100 ","End":"06:33.050","Text":"we would end up double counting some of the previous depreciation expense."},{"Start":"06:33.050 ","End":"06:35.600","Text":"I\u0027m going to put the 20,000 carrying amount"},{"Start":"06:35.600 ","End":"06:38.225","Text":"into new estimate columns so I can work from that."},{"Start":"06:38.225 ","End":"06:41.030","Text":"The computation of the depreciation expense for"},{"Start":"06:41.030 ","End":"06:46.110","Text":"the third year comes to an amount of 3,750."},{"Start":"06:46.600 ","End":"06:55.935","Text":"Therefore the carrying amount at the end of year 3 is an amount of 16,250."},{"Start":"06:55.935 ","End":"06:58.135","Text":"In example 2,"},{"Start":"06:58.135 ","End":"07:00.980","Text":"we will look at a similar scenario,"},{"Start":"07:00.980 ","End":"07:07.460","Text":"but now the residual value will be changing rather than the useful life."},{"Start":"07:07.460 ","End":"07:11.940","Text":"The company again, buys a machine for 30,000 currency units,"},{"Start":"07:11.940 ","End":"07:15.425","Text":"an estimated useful life of 5 years,"},{"Start":"07:15.425 ","End":"07:19.850","Text":"and a residual value of 5,000 and again,"},{"Start":"07:19.850 ","End":"07:23.525","Text":"using the straight line depreciation method."},{"Start":"07:23.525 ","End":"07:26.135","Text":"The end of the third year,"},{"Start":"07:26.135 ","End":"07:29.630","Text":"the company estimates that the residual value will in fact be"},{"Start":"07:29.630 ","End":"07:35.195","Text":"0 rather than the 5,000 originally estimated."},{"Start":"07:35.195 ","End":"07:39.755","Text":"The starting point is the same as the previous example,"},{"Start":"07:39.755 ","End":"07:42.470","Text":"where we take the 30,000,"},{"Start":"07:42.470 ","End":"07:44.330","Text":"which is the original cost,"},{"Start":"07:44.330 ","End":"07:47.465","Text":"less the 5,000 residual value,"},{"Start":"07:47.465 ","End":"07:52.260","Text":"and we divide it by the estimated useful life of 5 years,"},{"Start":"07:52.260 ","End":"07:58.010","Text":"which gives us the 5,000 depreciation expense per year."},{"Start":"07:58.010 ","End":"08:01.910","Text":"Looking at the solution, again, 2 columns."},{"Start":"08:01.910 ","End":"08:04.940","Text":"The old estimate with a residual value of"},{"Start":"08:04.940 ","End":"08:10.610","Text":"5,000 and the new estimates with the residual value at 0."},{"Start":"08:10.610 ","End":"08:14.660","Text":"Let\u0027s now complete the table as before."},{"Start":"08:14.660 ","End":"08:18.710","Text":"The cost of the asset is 30,000 and"},{"Start":"08:18.710 ","End":"08:23.720","Text":"the accumulated depreciation is the same calculation as the previous examples."},{"Start":"08:23.720 ","End":"08:29.840","Text":"The cost of 30,000 less the residual value of 5,000 divided by"},{"Start":"08:29.840 ","End":"08:34.875","Text":"the 5 years estimated useful life and"},{"Start":"08:34.875 ","End":"08:41.210","Text":"multiply by 2 years to go from the beginning of year 1 to the end of year 2,"},{"Start":"08:41.210 ","End":"08:44.270","Text":"which gives an accumulated depreciation amount of"},{"Start":"08:44.270 ","End":"08:49.820","Text":"10,000 and the same carrying amount you saw in the previous example of 20,000,"},{"Start":"08:49.820 ","End":"08:54.155","Text":"which I\u0027ll also put into this new estimate column."},{"Start":"08:54.155 ","End":"08:59.215","Text":"Now, to compute the depreciation expense for the third year,"},{"Start":"08:59.215 ","End":"09:05.865","Text":"again, we start with a 20,000 carrying amount at the end of year 2."},{"Start":"09:05.865 ","End":"09:09.125","Text":"Note the residual value is now 0."},{"Start":"09:09.125 ","End":"09:13.390","Text":"But the remaining useful life is now 3 years"},{"Start":"09:13.390 ","End":"09:18.665","Text":"and not 4 years because useful life hasn\u0027t changed."},{"Start":"09:18.665 ","End":"09:23.180","Text":"The useful life was estimated at 5 years"},{"Start":"09:23.180 ","End":"09:29.595","Text":"and 2 years have gone past and therefore 3 years are remaining."},{"Start":"09:29.595 ","End":"09:38.690","Text":"This computation gives us a depreciation expense of 6,667 for"},{"Start":"09:38.690 ","End":"09:48.510","Text":"the third year and therefore a carrying amount of 13,333 at the end of year 3."}],"ID":28595},{"Watched":false,"Name":"Exercise 7 - Introduction","Duration":"6m 27s","ChapterTopicVideoID":26377,"CourseChapterTopicPlaylistID":254924,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:04.200","Text":"Hello and welcome to another presentation in"},{"Start":"00:04.200 ","End":"00:08.575","Text":"the series on non-current assets brought to you by Proprep."},{"Start":"00:08.575 ","End":"00:13.695","Text":"Today we\u0027re going to do an exercise involving changes in estimates."},{"Start":"00:13.695 ","End":"00:15.510","Text":"On the 1st of January,"},{"Start":"00:15.510 ","End":"00:20.760","Text":"2021 ABB purchased an industrial electricity generator"},{"Start":"00:20.760 ","End":"00:23.085","Text":"to backup the power supply in its plant,"},{"Start":"00:23.085 ","End":"00:28.120","Text":"which is located in a region prone to frequent power outages."},{"Start":"00:28.280 ","End":"00:31.035","Text":"Here we have our purchase date."},{"Start":"00:31.035 ","End":"00:34.740","Text":"The cost of the generator was 500,000 currency"},{"Start":"00:34.740 ","End":"00:40.080","Text":"units and ABB uses the straight-line depreciation method."},{"Start":"00:40.080 ","End":"00:44.780","Text":"The cost of the assets and the method of depreciation."},{"Start":"00:44.780 ","End":"00:48.440","Text":"Now, on the 1st of the 1st 2021, in other words,"},{"Start":"00:48.440 ","End":"00:51.005","Text":"on the day we purchased the asset,"},{"Start":"00:51.005 ","End":"00:55.280","Text":"ABB estimated the useful life to be 10 years."},{"Start":"00:55.280 ","End":"00:57.110","Text":"We have the useful life now,"},{"Start":"00:57.110 ","End":"01:00.985","Text":"and the residual value is estimated to be 0."},{"Start":"01:00.985 ","End":"01:04.860","Text":"On the 31st of July, 2023,"},{"Start":"01:04.860 ","End":"01:11.140","Text":"ABB reassessed the estimate of the useful life to be 12 years."},{"Start":"01:11.140 ","End":"01:14.270","Text":"Here we have a reassessment of an estimate."},{"Start":"01:14.270 ","End":"01:19.630","Text":"In other words a change in estimate and it\u0027s change to 12 years."},{"Start":"01:19.630 ","End":"01:23.075","Text":"We were working with the useful life of 10 years."},{"Start":"01:23.075 ","End":"01:25.970","Text":"Sorry, I don\u0027t know if you heard that. We were working"},{"Start":"01:25.970 ","End":"01:29.315","Text":"with useful life of 10 years. Now it\u0027s 12."},{"Start":"01:29.315 ","End":"01:32.840","Text":"Then on the 1st of October 2029,"},{"Start":"01:32.840 ","End":"01:38.300","Text":"ABB re-estimated the residual value to be 50,000,"},{"Start":"01:38.300 ","End":"01:44.970","Text":"so we have here another change in estimate because previously the residual value was 0."},{"Start":"01:44.970 ","End":"01:48.500","Text":"When it re-estimated the residual value to be 50,000 it"},{"Start":"01:48.500 ","End":"01:52.130","Text":"kept the revised estimated useful life unchanged."},{"Start":"01:52.130 ","End":"01:58.280","Text":"In other words, in 2023 we reassessed the estimate of useful life to be 12 years,"},{"Start":"01:58.280 ","End":"02:02.015","Text":"whereas previously it had been 10 years."},{"Start":"02:02.015 ","End":"02:06.630","Text":"This re-estimate of 12 years has remained unchanged."},{"Start":"02:06.910 ","End":"02:10.280","Text":"Let\u0027s quickly plot what has happened."},{"Start":"02:10.280 ","End":"02:12.320","Text":"On the 1st of January,"},{"Start":"02:12.320 ","End":"02:15.900","Text":"21 the asset is purchased."},{"Start":"02:15.900 ","End":"02:19.895","Text":"On this date we estimated that the useful life was 10 years."},{"Start":"02:19.895 ","End":"02:23.990","Text":"That is our original estimate on that purchase date."},{"Start":"02:23.990 ","End":"02:26.465","Text":"Let\u0027s count out 10 years,"},{"Start":"02:26.465 ","End":"02:33.240","Text":"this is the 31st of December, 21."},{"Start":"02:33.240 ","End":"02:36.075","Text":"Here we have our 10 years."},{"Start":"02:36.075 ","End":"02:39.290","Text":"Now on the 31st of July, 2023,"},{"Start":"02:39.290 ","End":"02:44.080","Text":"ABB reassessed the estimate of the useful life to be 12 years."},{"Start":"02:44.080 ","End":"02:46.310","Text":"This moment where we changed our minds,"},{"Start":"02:46.310 ","End":"02:49.040","Text":"so let\u0027s put a little question mark here just to indicate that"},{"Start":"02:49.040 ","End":"02:52.100","Text":"we weren\u0027t sure of ourselves,"},{"Start":"02:52.100 ","End":"02:54.545","Text":"so we\u0027re changing our minds."},{"Start":"02:54.545 ","End":"02:59.345","Text":"This occurred on the 31st of July, 23."},{"Start":"02:59.345 ","End":"03:05.030","Text":"However, we\u0027re going to account for this change in our minds"},{"Start":"03:05.030 ","End":"03:11.125","Text":"as if we had changed our mind even though this occurred on the 31st of July, 2023."},{"Start":"03:11.125 ","End":"03:14.390","Text":"Although we change our minds on the 31st of July,"},{"Start":"03:14.390 ","End":"03:19.100","Text":"2023 when we calculate our depreciation for 2023,"},{"Start":"03:19.100 ","End":"03:26.275","Text":"we\u0027re going to account for it as if we had changed our minds on the 1st of January, 23."},{"Start":"03:26.275 ","End":"03:28.455","Text":"Now in the 1st of October,"},{"Start":"03:28.455 ","End":"03:32.533","Text":"2029 that\u0027s somewhere here,"},{"Start":"03:32.533 ","End":"03:35.420","Text":"this is another occasion where we changed our minds."},{"Start":"03:35.420 ","End":"03:38.570","Text":"I\u0027m just going to put a little question mark here to indicate that we felt"},{"Start":"03:38.570 ","End":"03:42.500","Text":"we had been unsure previously and now we\u0027ve changed our minds."},{"Start":"03:42.500 ","End":"03:46.460","Text":"Here on the 1st of October 29,"},{"Start":"03:46.460 ","End":"03:48.170","Text":"we change our mind again."},{"Start":"03:48.170 ","End":"03:51.575","Text":"When we change our mind and 31st of July, 2023,"},{"Start":"03:51.575 ","End":"03:55.375","Text":"we changed our useful life to now be 12 years,"},{"Start":"03:55.375 ","End":"03:58.295","Text":"previously we were working with a 10 year useful life."},{"Start":"03:58.295 ","End":"04:01.010","Text":"Here on the 1st of October 2029,"},{"Start":"04:01.010 ","End":"04:07.205","Text":"we changed our residual value to 50,000 currency units."},{"Start":"04:07.205 ","End":"04:11.405","Text":"Remember previously our residual value had been 0."},{"Start":"04:11.405 ","End":"04:15.785","Text":"Now when we calculate the depreciation for the year 2029,"},{"Start":"04:15.785 ","End":"04:19.400","Text":"we\u0027re going to assume that this change in our minds,"},{"Start":"04:19.400 ","End":"04:21.575","Text":"although took place in the 1st of October,"},{"Start":"04:21.575 ","End":"04:27.245","Text":"we will assume it took place on the 1st of January, 29."},{"Start":"04:27.245 ","End":"04:29.135","Text":"Going back right to the beginning,"},{"Start":"04:29.135 ","End":"04:32.660","Text":"on the 1st of January 2021,"},{"Start":"04:32.660 ","End":"04:35.930","Text":"we had certain variables relating to"},{"Start":"04:35.930 ","End":"04:39.650","Text":"depreciation that we were using until the 1st of January,"},{"Start":"04:39.650 ","End":"04:44.510","Text":"23 we were calculating our depreciation using a useful life of"},{"Start":"04:44.510 ","End":"04:50.010","Text":"10 years and we were working with a residual value of nil."},{"Start":"04:50.010 ","End":"04:53.545","Text":"We calculate our depreciation for both those 2 years"},{"Start":"04:53.545 ","End":"04:58.380","Text":"using this as the basis of our calculation."},{"Start":"04:58.380 ","End":"05:00.560","Text":"Then from the 1st of January,"},{"Start":"05:00.560 ","End":"05:04.615","Text":"23 we changed the useful life to 12 years."},{"Start":"05:04.615 ","End":"05:08.200","Text":"But we leave the residual value as nil."},{"Start":"05:08.200 ","End":"05:16.540","Text":"When we work out the depreciation in the years 23 all the way through to the year 28,"},{"Start":"05:16.540 ","End":"05:21.370","Text":"we\u0027re using these factors to calculate our depreciation."},{"Start":"05:21.370 ","End":"05:23.380","Text":"This is slightly different to the ones before,"},{"Start":"05:23.380 ","End":"05:26.530","Text":"the residual value is the same but the useful life has changed."},{"Start":"05:26.530 ","End":"05:29.510","Text":"What I haven\u0027t indicated on the timeline yet was"},{"Start":"05:29.510 ","End":"05:33.955","Text":"the extra 2 years that we extended the useful life by."},{"Start":"05:33.955 ","End":"05:38.120","Text":"Then we\u0027re going to calculate our depreciation from the 1st of January,"},{"Start":"05:38.120 ","End":"05:40.625","Text":"29 all the way to the end of its useful life."},{"Start":"05:40.625 ","End":"05:42.830","Text":"Then remember, on the 1st of October,"},{"Start":"05:42.830 ","End":"05:52.280","Text":"29 the residual value was 50,000 and the useful life remained at 12 years."},{"Start":"05:52.280 ","End":"05:54.930","Text":"From the 1st of January,"},{"Start":"05:54.930 ","End":"05:58.100","Text":"29 all the way through to the end of its useful life,"},{"Start":"05:58.100 ","End":"06:00.350","Text":"which is now the 31st of December,"},{"Start":"06:00.350 ","End":"06:02.075","Text":"2032 we\u0027re going to be using these variables."},{"Start":"06:02.075 ","End":"06:08.980","Text":"We calculating our depreciation using these variables."},{"Start":"06:08.980 ","End":"06:11.800","Text":"Now let\u0027s look at the required."},{"Start":"06:13.210 ","End":"06:22.930","Text":"We have to calculate the depreciation expense that ABB will recognize from 2021-2032."},{"Start":"06:22.930 ","End":"06:27.630","Text":"In other words, throughout the useful life of the asset."}],"ID":28601},{"Watched":false,"Name":"Exercise 7 - Solution","Duration":"18m 17s","ChapterTopicVideoID":27434,"CourseChapterTopicPlaylistID":254924,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.490","Text":"Let\u0027s look at the solution now."},{"Start":"00:02.490 ","End":"00:06.885","Text":"We\u0027ve been asked to calculate the depreciation for the year is 2021,"},{"Start":"00:06.885 ","End":"00:09.990","Text":"right the way through to 2032, inclusive."},{"Start":"00:09.990 ","End":"00:11.505","Text":"Now we have here a table,"},{"Start":"00:11.505 ","End":"00:13.635","Text":"and I\u0027m going to walk you through it."},{"Start":"00:13.635 ","End":"00:16.980","Text":"We have a column for the opening carrying amount."},{"Start":"00:16.980 ","End":"00:18.450","Text":"In the very first year,"},{"Start":"00:18.450 ","End":"00:22.095","Text":"the opening carrying amount equals the cost."},{"Start":"00:22.095 ","End":"00:24.375","Text":"Just bear that in mind for a moment."},{"Start":"00:24.375 ","End":"00:27.015","Text":"Then we have a column for our residual value."},{"Start":"00:27.015 ","End":"00:32.220","Text":"We then have a column and I\u0027ll come back to why this is in a moment."},{"Start":"00:32.220 ","End":"00:35.205","Text":"We have a column for our depreciable amount,"},{"Start":"00:35.205 ","End":"00:40.390","Text":"but we\u0027re dealing with a remaining opening depreciable amount,"},{"Start":"00:40.390 ","End":"00:43.010","Text":"not the total depreciable amount."},{"Start":"00:43.010 ","End":"00:45.185","Text":"I\u0027ll explain that in a moment."},{"Start":"00:45.185 ","End":"00:47.825","Text":"Then we have a column once again,"},{"Start":"00:47.825 ","End":"00:50.570","Text":"instead of just having a column for useful life,"},{"Start":"00:50.570 ","End":"00:56.330","Text":"we have a column indicating the remaining useful life at the start of the year."},{"Start":"00:56.330 ","End":"01:00.050","Text":"I\u0027ll explain that it\u0027s linked to the fact that we are working with"},{"Start":"01:00.050 ","End":"01:05.885","Text":"a remaining opening depreciable amount instead of the depreciable amount."},{"Start":"01:05.885 ","End":"01:09.440","Text":"Then we have the depreciation expense column,"},{"Start":"01:09.440 ","End":"01:13.175","Text":"which is actually the answer to this question,"},{"Start":"01:13.175 ","End":"01:17.660","Text":"and then we have our closing carrying amount at the end of the year."},{"Start":"01:17.660 ","End":"01:21.965","Text":"Why are we using remaining opening useful life?"},{"Start":"01:21.965 ","End":"01:23.600","Text":"Now let\u0027s consider this."},{"Start":"01:23.600 ","End":"01:25.370","Text":"We\u0027re using, as I said a moment ago,"},{"Start":"01:25.370 ","End":"01:29.510","Text":"we\u0027re using the remaining opening depreciable amount"},{"Start":"01:29.510 ","End":"01:33.500","Text":"and the remaining useful life that started the year in other words,"},{"Start":"01:33.500 ","End":"01:36.905","Text":"the remaining opening useful life, if you like."},{"Start":"01:36.905 ","End":"01:39.960","Text":"Why are we doing this?"},{"Start":"01:40.390 ","End":"01:44.510","Text":"Normally when we calculate our depreciation,"},{"Start":"01:44.510 ","End":"01:50.175","Text":"we calculated at cost less the residual value,"},{"Start":"01:50.175 ","End":"01:53.030","Text":"and we divide that by our useful life."},{"Start":"01:53.030 ","End":"01:55.625","Text":"That\u0027s assuming we\u0027re using straight-line method."},{"Start":"01:55.625 ","End":"01:58.820","Text":"When however, we have a change in estimate,"},{"Start":"01:58.820 ","End":"02:01.895","Text":"what we need to do is instead of using cost,"},{"Start":"02:01.895 ","End":"02:04.385","Text":"we use the carrying amount, in other words,"},{"Start":"02:04.385 ","End":"02:07.145","Text":"opening carrying amount in that particular year,"},{"Start":"02:07.145 ","End":"02:09.590","Text":"the year in which there is a change in estimate."},{"Start":"02:09.590 ","End":"02:14.210","Text":"We subtract the latest estimate of the residual value,"},{"Start":"02:14.210 ","End":"02:22.190","Text":"and then we divide the remaining useful life because the carrying amount less"},{"Start":"02:22.190 ","End":"02:24.245","Text":"the residual value gives us"},{"Start":"02:24.245 ","End":"02:30.530","Text":"the remaining depreciable amount because the carrying amount is residual value,"},{"Start":"02:30.530 ","End":"02:37.475","Text":"gives us the remaining depreciable amount."},{"Start":"02:37.475 ","End":"02:41.104","Text":"Whenever we have a change in estimate,"},{"Start":"02:41.104 ","End":"02:44.895","Text":"we\u0027re going to stop calculating our depreciation"},{"Start":"02:44.895 ","End":"02:49.600","Text":"as cost less residual value divided by useful life."},{"Start":"02:49.600 ","End":"02:54.160","Text":"In other words, our total useful life where cost less residual value gives"},{"Start":"02:54.160 ","End":"03:00.785","Text":"us total depreciable amount divided by total useful life."},{"Start":"03:00.785 ","End":"03:02.845","Text":"We\u0027re now going to work with"},{"Start":"03:02.845 ","End":"03:08.050","Text":"the remaining depreciable amount divided by the remaining useful life."},{"Start":"03:08.050 ","End":"03:10.145","Text":"Let\u0027s get started."},{"Start":"03:10.145 ","End":"03:17.250","Text":"In 2021 our opening carrying amount is 500,000 which happens to equal our cost."},{"Start":"03:17.250 ","End":"03:23.265","Text":"Within pop in the residual value, that is 0."},{"Start":"03:23.265 ","End":"03:27.565","Text":"The depreciable amount at that moment is 500,000."},{"Start":"03:27.565 ","End":"03:31.460","Text":"There\u0027s 500,000 minus the residual value,"},{"Start":"03:31.460 ","End":"03:35.330","Text":"giving us 500,000 depreciable amount."},{"Start":"03:35.330 ","End":"03:41.195","Text":"We then divide that 500,000 by the remaining useful life of 10 years."},{"Start":"03:41.195 ","End":"03:45.500","Text":"That gives us our depreciation expense of 50,000."},{"Start":"03:45.500 ","End":"03:48.155","Text":"Now we calculate our closing carrying amount,"},{"Start":"03:48.155 ","End":"03:56.125","Text":"which is 500,000 less the depreciation expense giving us the 450,000."},{"Start":"03:56.125 ","End":"04:00.920","Text":"Just take note that to calculate this depreciation at this point,"},{"Start":"04:00.920 ","End":"04:04.565","Text":"we could still have calculated it using our usual formula,"},{"Start":"04:04.565 ","End":"04:07.770","Text":"which is 500,000 less"},{"Start":"04:07.770 ","End":"04:15.950","Text":"the residual value divided by our total useful life of 10 years,"},{"Start":"04:16.260 ","End":"04:21.010","Text":"50,000 so the formula here that we were"},{"Start":"04:21.010 ","End":"04:25.825","Text":"given is that we were working with the remaining opening depreciable amount,"},{"Start":"04:25.825 ","End":"04:29.110","Text":"and we were dividing by the remaining useful life but"},{"Start":"04:29.110 ","End":"04:33.519","Text":"the remaining useful life in 2021 equals"},{"Start":"04:33.519 ","End":"04:37.900","Text":"our total useful life and our remaining depreciable amount at the beginning"},{"Start":"04:37.900 ","End":"04:42.655","Text":"of 2021 happens to also equal our total depreciable amount."},{"Start":"04:42.655 ","End":"04:46.570","Text":"The total depreciable amount at beginning of 2021"},{"Start":"04:46.570 ","End":"04:51.450","Text":"equals the remaining depreciable amount in 2021."},{"Start":"04:51.450 ","End":"04:56.960","Text":"You would still have got the right answer in 2021 had you used"},{"Start":"04:56.960 ","End":"05:03.350","Text":"cost less residual value divided by the total useful life."},{"Start":"05:03.350 ","End":"05:05.300","Text":"Let\u0027s continue with 2022."},{"Start":"05:05.300 ","End":"05:06.800","Text":"2022."},{"Start":"05:06.800 ","End":"05:11.585","Text":"Are opening carrying amount is the same as last year\u0027s closing carrying amount."},{"Start":"05:11.585 ","End":"05:14.580","Text":"Our residual value remains unchanged,"},{"Start":"05:14.580 ","End":"05:18.485","Text":"so our depreciable amount is now 450,000."},{"Start":"05:18.485 ","End":"05:21.945","Text":"That\u0027s the 450,000 opening carrying amount,"},{"Start":"05:21.945 ","End":"05:24.185","Text":"minus the residual value of nil,"},{"Start":"05:24.185 ","End":"05:28.835","Text":"giving us that depreciable amount of 450,000."},{"Start":"05:28.835 ","End":"05:30.635","Text":"Now we\u0027re talking about"},{"Start":"05:30.635 ","End":"05:40.640","Text":"a remaining opening depreciable amount so of the original depreciable amount of 500,000,"},{"Start":"05:40.640 ","End":"05:44.870","Text":"50,000 has been depreciated so therefore,"},{"Start":"05:44.870 ","End":"05:48.845","Text":"there\u0027s 450,000 still to be depreciated."},{"Start":"05:48.845 ","End":"05:50.810","Text":"Because we\u0027re now dealing with"},{"Start":"05:50.810 ","End":"05:55.100","Text":"the remaining opening depreciable amount we must then divide"},{"Start":"05:55.100 ","End":"06:00.890","Text":"by the remaining useful life as at the start of the year."},{"Start":"06:00.890 ","End":"06:04.055","Text":"The remaining useful life at the beginning of \u002722,"},{"Start":"06:04.055 ","End":"06:08.510","Text":"given that \u002721 has already been depreciated is 9."},{"Start":"06:08.510 ","End":"06:13.700","Text":"That\u0027s because we started with a 10-year useful life and we depreciate it by"},{"Start":"06:13.700 ","End":"06:19.140","Text":"1 year in 2021 so that\u0027s why we have 9 years left,"},{"Start":"06:19.140 ","End":"06:24.800","Text":"so 450,000 divided by 9 remaining years gives us"},{"Start":"06:24.800 ","End":"06:31.527","Text":"depreciation of 50,000 because there has not yet been a change in estimate,"},{"Start":"06:31.527 ","End":"06:35.750","Text":"you could have calculated that 50,000 using our old approach,"},{"Start":"06:35.750 ","End":"06:42.905","Text":"which was cost less residual value divided by the total useful life."},{"Start":"06:42.905 ","End":"06:48.955","Text":"Our cost was 500,000 our residual value is nil and our totally useful life"},{"Start":"06:48.955 ","End":"06:55.575","Text":"was 10 years that we would still have calculated a depreciation of 50,000."},{"Start":"06:55.575 ","End":"07:00.510","Text":"Things will change in 2023 so let\u0027s move on to 2023."},{"Start":"07:00.510 ","End":"07:03.630","Text":"In 2023, our opening carrying amount is"},{"Start":"07:03.630 ","End":"07:08.945","Text":"400,000 which is what our closing carrying amount was at the end of 2022."},{"Start":"07:08.945 ","End":"07:14.665","Text":"That closing carrying amount at the end of 2022 was the opening carrying amount"},{"Start":"07:14.665 ","End":"07:21.460","Text":"450,000 less the depreciation of 50,000 giving us that 400,000."},{"Start":"07:21.460 ","End":"07:25.120","Text":"Now in 2023, during the year,"},{"Start":"07:25.120 ","End":"07:26.575","Text":"we changed our mind."},{"Start":"07:26.575 ","End":"07:31.355","Text":"We changed our mind with regard to the total useful life,"},{"Start":"07:31.355 ","End":"07:35.405","Text":"so our original useful life was 10 years."},{"Start":"07:35.405 ","End":"07:39.230","Text":"We then changed it to be 12 years."},{"Start":"07:39.230 ","End":"07:45.605","Text":"Now, we made that change in July of \u002723, but that\u0027s irrelevant."},{"Start":"07:45.605 ","End":"07:48.650","Text":"We take it as if we changed our minds on the 1st of"},{"Start":"07:48.650 ","End":"07:53.300","Text":"January of \u002723 so our depreciation for"},{"Start":"07:53.300 ","End":"07:56.165","Text":"2023 is going to be based on"},{"Start":"07:56.165 ","End":"08:03.015","Text":"a 12-year total useful life rather than a 10-year useful life."},{"Start":"08:03.015 ","End":"08:07.790","Text":"The change that occurred related to the useful life,"},{"Start":"08:07.790 ","End":"08:11.890","Text":"nothing change with regard to the residual value."},{"Start":"08:11.890 ","End":"08:14.705","Text":"We still deduct a residual value of nil,"},{"Start":"08:14.705 ","End":"08:19.085","Text":"and we now have a remaining opening depreciable amount."},{"Start":"08:19.085 ","End":"08:23.975","Text":"At the beginning of 2023 there\u0027s 400,000 still to depreciate."},{"Start":"08:23.975 ","End":"08:30.700","Text":"In other words we started off with cost of 500,000 and we have depreciated"},{"Start":"08:30.700 ","End":"08:34.455","Text":"50,000 in year 1 and 50,000 in year 2"},{"Start":"08:34.455 ","End":"08:39.260","Text":"so we still have to depreciate an amount of 400,000."},{"Start":"08:39.260 ","End":"08:43.340","Text":"Now what we\u0027re doing here in the next column is we\u0027re dividing it"},{"Start":"08:43.340 ","End":"08:47.845","Text":"by the remaining useful life at the start of the year,"},{"Start":"08:47.845 ","End":"08:49.879","Text":"so don\u0027t get confused."},{"Start":"08:49.879 ","End":"08:52.955","Text":"That is a revised useful life of 10 years."},{"Start":"08:52.955 ","End":"08:54.560","Text":"It\u0027s not the total useful life,"},{"Start":"08:54.560 ","End":"08:56.225","Text":"the original total useful life."},{"Start":"08:56.225 ","End":"09:01.970","Text":"This 10 here is the revised total useful life of 12 years"},{"Start":"09:01.970 ","End":"09:08.250","Text":"minus the 2 years that have already been depreciated 2021 and 2022."},{"Start":"09:08.250 ","End":"09:10.825","Text":"We now believe they are 10 years left."},{"Start":"09:10.825 ","End":"09:14.695","Text":"We would have if we had not changed our estimate of the useful life,"},{"Start":"09:14.695 ","End":"09:19.570","Text":"we would otherwise have depreciated by 8 years, 8 remaining years."},{"Start":"09:19.570 ","End":"09:21.160","Text":"But we changed our minds,"},{"Start":"09:21.160 ","End":"09:22.795","Text":"so instead of dividing by 8,"},{"Start":"09:22.795 ","End":"09:24.505","Text":"we\u0027re dividing by 10."},{"Start":"09:24.505 ","End":"09:27.736","Text":"Because we\u0027re dividing by 10 and not 8,"},{"Start":"09:27.736 ","End":"09:32.200","Text":"our depreciation expense is now 40,000."},{"Start":"09:32.200 ","End":"09:37.525","Text":"Our closing carrying amount is now the opening carrying amount of 400,000"},{"Start":"09:37.525 ","End":"09:45.020","Text":"minus the depreciation in 2023 of 40,000, giving us 360."},{"Start":"09:45.020 ","End":"09:47.050","Text":"Let\u0027s move on to 2024."},{"Start":"09:47.050 ","End":"09:50.410","Text":"In 2024, our opening carrying amount is 360"},{"Start":"09:50.410 ","End":"09:54.250","Text":"because that is what the closing carrying amount was at the end of \u002723."},{"Start":"09:54.250 ","End":"09:57.595","Text":"We then subtract our unchanged residual value of 0,"},{"Start":"09:57.595 ","End":"10:03.350","Text":"giving us the opening depreciable amount of 360,000."},{"Start":"10:03.570 ","End":"10:06.800","Text":"We now have 9 years left,"},{"Start":"10:06.800 ","End":"10:11.230","Text":"so 360,000 divided by 9 gives us 40,000"},{"Start":"10:11.230 ","End":"10:17.620","Text":"and our closing carrying amount is therefore 360,000 being the opening carrying amount,"},{"Start":"10:17.620 ","End":"10:20.005","Text":"less the depreciation for the year,"},{"Start":"10:20.005 ","End":"10:22.795","Text":"giving us a carrying amount of 320,000."},{"Start":"10:22.795 ","End":"10:25.960","Text":"Our opening carrying amount in 2025 is"},{"Start":"10:25.960 ","End":"10:30.265","Text":"320,000 because that was the closing carrying amount in 2024."},{"Start":"10:30.265 ","End":"10:32.905","Text":"Once again, the residual value is nil."},{"Start":"10:32.905 ","End":"10:37.495","Text":"Therefore the remaining opening depreciable amount is 320,000."},{"Start":"10:37.495 ","End":"10:40.180","Text":"Just keep reminding you that\u0027s the opening carrying amount of"},{"Start":"10:40.180 ","End":"10:43.255","Text":"320 less the residual value,"},{"Start":"10:43.255 ","End":"10:46.330","Text":"giving us that 320,000."},{"Start":"10:46.330 ","End":"10:49.345","Text":"At the beginning of 2025,"},{"Start":"10:49.345 ","End":"10:52.495","Text":"we have 8 years left."},{"Start":"10:52.495 ","End":"10:58.645","Text":"Just remember that in 2023 we changed our minds regarding the total useful life."},{"Start":"10:58.645 ","End":"11:02.470","Text":"We now believed in 2023 that the total useful life was 12 years."},{"Start":"11:02.470 ","End":"11:05.365","Text":"In other words, the beginning of 2021,"},{"Start":"11:05.365 ","End":"11:07.990","Text":"we believed there would\u0027ve been 12 years left."},{"Start":"11:07.990 ","End":"11:09.640","Text":"At the beginning of 2022,"},{"Start":"11:09.640 ","End":"11:12.310","Text":"we would have believed that we have 11 years left,"},{"Start":"11:12.310 ","End":"11:14.710","Text":"\u002723 10 years left,"},{"Start":"11:14.710 ","End":"11:16.825","Text":"then \u002724 9 years left,"},{"Start":"11:16.825 ","End":"11:20.150","Text":"and now in \u002725, 8 years left."},{"Start":"11:20.150 ","End":"11:25.095","Text":"We take the 320,000 and we divide it by the 8."},{"Start":"11:25.095 ","End":"11:28.645","Text":"That then gives us our 40,000."},{"Start":"11:28.645 ","End":"11:30.625","Text":"To calculate our closing carrying amount,"},{"Start":"11:30.625 ","End":"11:34.825","Text":"we take our opening carrying amount and subtract the depreciation expense."},{"Start":"11:34.825 ","End":"11:39.645","Text":"That gives us our closing carrying amount of 280,000."},{"Start":"11:39.645 ","End":"11:45.925","Text":"In 2026 our opening carrying amount equals last year\u0027s closing carrying amount."},{"Start":"11:45.925 ","End":"11:49.570","Text":"We subtract the residual value of nil to give us"},{"Start":"11:49.570 ","End":"11:54.640","Text":"the opening depreciable amount in 2026 of 280,000."},{"Start":"11:54.640 ","End":"11:57.307","Text":"The remaining useful life is now 7,"},{"Start":"11:57.307 ","End":"12:05.695","Text":"so 280,000 divided by 7 gives us 40,000 as our depreciation expense."},{"Start":"12:05.695 ","End":"12:09.430","Text":"Our opening carrying amount of 280,000 less"},{"Start":"12:09.430 ","End":"12:13.840","Text":"the depreciation we process for this particular year 2026,"},{"Start":"12:13.840 ","End":"12:19.570","Text":"gives us our closing carrying amount of 240,000 and so on."},{"Start":"12:19.570 ","End":"12:24.655","Text":"Opening carrying amount of 240,000 is from our closing carrying amount to the prior year."},{"Start":"12:24.655 ","End":"12:29.080","Text":"We subtract the residual value to give us our depreciable amount."},{"Start":"12:29.080 ","End":"12:31.660","Text":"We then take the depreciable amount and divide it"},{"Start":"12:31.660 ","End":"12:34.885","Text":"by the remaining useful life of 6 years,"},{"Start":"12:34.885 ","End":"12:37.270","Text":"and that gives us 40,000."},{"Start":"12:37.270 ","End":"12:42.010","Text":"We take the opening carrying amount of 240,000 and subtract the"},{"Start":"12:42.010 ","End":"12:47.920","Text":"40,000 we get to our closing carrying amount of 200,000."},{"Start":"12:47.920 ","End":"12:50.380","Text":"In 2028 our opening carrying amount of"},{"Start":"12:50.380 ","End":"12:54.190","Text":"200,000 comes from last year\u0027s closing carrying around."},{"Start":"12:54.190 ","End":"12:55.825","Text":"Still no change in estimate."},{"Start":"12:55.825 ","End":"12:57.970","Text":"It\u0027s simply 200,000 less"},{"Start":"12:57.970 ","End":"13:02.350","Text":"the residual value equals the opening depreciable amount of 200,000."},{"Start":"13:02.350 ","End":"13:04.390","Text":"We take the 200,000,"},{"Start":"13:04.390 ","End":"13:10.645","Text":"we divide it by 5 to give us depreciation of 40,000."},{"Start":"13:10.645 ","End":"13:16.270","Text":"If we take our opening carrying amount and subtract our depreciation for the year,"},{"Start":"13:16.270 ","End":"13:21.280","Text":"we get to closing carrying amount of 160,000."},{"Start":"13:21.280 ","End":"13:23.770","Text":"Now let\u0027s look at 2029."},{"Start":"13:23.770 ","End":"13:28.075","Text":"In 2029, we had the second change in estimate."},{"Start":"13:28.075 ","End":"13:30.655","Text":"Our opening balance, however, was straightforward."},{"Start":"13:30.655 ","End":"13:36.490","Text":"It was the closing carrying amount at the end of the prior year of 160,000."},{"Start":"13:36.490 ","End":"13:39.460","Text":"Now instead of subtracting residual value of 0,"},{"Start":"13:39.460 ","End":"13:42.100","Text":"we\u0027ve not changed our minds regarding the residual value,"},{"Start":"13:42.100 ","End":"13:44.860","Text":"and so we now subtract 50,000."},{"Start":"13:44.860 ","End":"13:50.140","Text":"In other words, previously we were depreciating the entire carrying amount."},{"Start":"13:50.140 ","End":"13:53.350","Text":"The idea was that at the end of the useful life,"},{"Start":"13:53.350 ","End":"13:57.505","Text":"the residual value would be nil and therefore the carrying amount should reflect nil."},{"Start":"13:57.505 ","End":"14:01.435","Text":"But now we believe that at the end of the useful life,"},{"Start":"14:01.435 ","End":"14:04.765","Text":"the asset will still have a value of 50,000."},{"Start":"14:04.765 ","End":"14:09.325","Text":"Therefore, we should not depreciate the full carrying amount,"},{"Start":"14:09.325 ","End":"14:12.760","Text":"but we need to depreciate the carrying amount less the"},{"Start":"14:12.760 ","End":"14:16.465","Text":"50,000 so that by the time we reach the end of the useful life,"},{"Start":"14:16.465 ","End":"14:19.765","Text":"our carrying amount should still reflect 50,000."},{"Start":"14:19.765 ","End":"14:25.840","Text":"This means that we\u0027re going to subtract from the 160,000 an amount of 50,000."},{"Start":"14:25.840 ","End":"14:29.420","Text":"The revised remaining depreciable amount,"},{"Start":"14:29.420 ","End":"14:31.890","Text":"is now only a 110,000."},{"Start":"14:31.890 ","End":"14:38.125","Text":"We then take that 110,000 and we divide it by the remaining useful life of 4."},{"Start":"14:38.125 ","End":"14:40.795","Text":"Now remember the 4 hasn\u0027t changed."},{"Start":"14:40.795 ","End":"14:45.235","Text":"It\u0027s still based on the total useful life of 12 years,"},{"Start":"14:45.235 ","End":"14:50.200","Text":"which we\u0027ve been counting down ever since we changed our minds,"},{"Start":"14:50.200 ","End":"14:52.465","Text":"which was in 2023."},{"Start":"14:52.465 ","End":"14:55.315","Text":"In 2023 just to recap,"},{"Start":"14:55.315 ","End":"14:58.240","Text":"we said the total useful life was"},{"Start":"14:58.240 ","End":"15:03.400","Text":"12 years and we\u0027d obviously depreciated the prior 2 years."},{"Start":"15:03.400 ","End":"15:06.565","Text":"Therefore, there were 10 years remaining."},{"Start":"15:06.565 ","End":"15:09.745","Text":"All right, and that\u0027s just been diminishing each year-by-year."},{"Start":"15:09.745 ","End":"15:11.275","Text":"There\u0027s no change there."},{"Start":"15:11.275 ","End":"15:18.940","Text":"Now, a 110,000 divide by the remaining useful life of 4 years gives us 27,500."},{"Start":"15:18.940 ","End":"15:23.890","Text":"If we then take our opening carrying amount and subtract the 27,500,"},{"Start":"15:23.890 ","End":"15:28.630","Text":"we get 132,500 as our closing carrying amount."},{"Start":"15:28.630 ","End":"15:33.040","Text":"In 2030 we then start with a 132,500,"},{"Start":"15:33.040 ","End":"15:35.185","Text":"which was last year\u0027s closing carrying amount."},{"Start":"15:35.185 ","End":"15:40.110","Text":"We then subtract the"},{"Start":"15:40.110 ","End":"15:47.530","Text":"50,000 residual value to give us the opening depreciable amount of 82,500."},{"Start":"15:47.530 ","End":"15:53.230","Text":"We then take 82,500 and we divide it by the remaining useful life of"},{"Start":"15:53.230 ","End":"15:59.530","Text":"3 years to give us depreciation for the year of 27,500."},{"Start":"15:59.530 ","End":"16:02.320","Text":"If we then take our opening carrying amount of"},{"Start":"16:02.320 ","End":"16:08.275","Text":"132,500 and subtract the depreciation expense of 275000,"},{"Start":"16:08.275 ","End":"16:12.070","Text":"we get to our closing carrying amount of 105,000."},{"Start":"16:12.070 ","End":"16:15.625","Text":"In 2031, that 105,000"},{"Start":"16:15.625 ","End":"16:19.780","Text":"carrying amount at the end of 2030 becomes our opening carrying amount."},{"Start":"16:19.780 ","End":"16:24.235","Text":"We subtract the residual value of 50,000 to give us"},{"Start":"16:24.235 ","End":"16:30.415","Text":"the opening depreciable amount in 2031 of 55,000."},{"Start":"16:30.415 ","End":"16:35.800","Text":"We then divide 55,000 by 2 being the remaining useful life at the start of"},{"Start":"16:35.800 ","End":"16:41.965","Text":"2031 to give us 27,500 depreciation for the year."},{"Start":"16:41.965 ","End":"16:48.250","Text":"If we take the opening carrying amount of 105,000 and subtract the 27,500,"},{"Start":"16:48.250 ","End":"16:53.875","Text":"we get to 77,500 as our closing carrying amount."},{"Start":"16:53.875 ","End":"17:00.595","Text":"That closing carrying amount of 77,500 becomes our opening carrying amount in 2032."},{"Start":"17:00.595 ","End":"17:04.570","Text":"We then subtract the residual value of 50,000"},{"Start":"17:04.570 ","End":"17:09.055","Text":"to give us the opening depreciable amount of 27,500."},{"Start":"17:09.055 ","End":"17:18.805","Text":"We then divide the 27,500 by 1 remaining year to give us depreciation expense of 27,500."},{"Start":"17:18.805 ","End":"17:22.240","Text":"Now notice that if we take our opening carrying amount of"},{"Start":"17:22.240 ","End":"17:27.820","Text":"77,500 and subtract the depreciation expense of 27,500,"},{"Start":"17:27.820 ","End":"17:30.910","Text":"we get to 50,000."},{"Start":"17:30.910 ","End":"17:36.535","Text":"That 50,000 is the closing carrying amount for the year equals 50,000,"},{"Start":"17:36.535 ","End":"17:38.860","Text":"which is our closing carrying amount,"},{"Start":"17:38.860 ","End":"17:45.570","Text":"which you will see reflects the revised residual value."},{"Start":"17:45.570 ","End":"17:49.830","Text":"Also notice that the opening carrying amount of 500,000,"},{"Start":"17:49.830 ","End":"17:54.965","Text":"which was the cost less the residual value,"},{"Start":"17:54.965 ","End":"17:58.735","Text":"the revised residual value of 50,000,"},{"Start":"17:58.735 ","End":"18:04.150","Text":"means that our total depreciation is 450,000."},{"Start":"18:04.150 ","End":"18:06.280","Text":"Of the cost of 500,000,"},{"Start":"18:06.280 ","End":"18:11.110","Text":"450,000 has been expensed as depreciation."},{"Start":"18:11.110 ","End":"18:15.310","Text":"The 50,000 remains in the asset account."},{"Start":"18:15.310 ","End":"18:18.380","Text":"I hope that has helped."}],"ID":28602}],"Thumbnail":null,"ID":254924},{"Name":"Short Exercises","TopicPlaylistFirstVideoID":0,"Duration":null,"Videos":[{"Watched":false,"Name":"Exercise 1","Duration":"10m 18s","ChapterTopicVideoID":27461,"CourseChapterTopicPlaylistID":274161,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:04.860","Text":"This is a selection of short exercises on the topic of property, plant,"},{"Start":"00:04.860 ","End":"00:07.815","Text":"and equipment brought to you by Proprep."},{"Start":"00:07.815 ","End":"00:10.065","Text":"Exercise 1."},{"Start":"00:10.065 ","End":"00:14.985","Text":"Exercise 1 deals with the initial measurement of cost."},{"Start":"00:14.985 ","End":"00:17.100","Text":"Here we have a company which,"},{"Start":"00:17.100 ","End":"00:18.945","Text":"purchased a factory plant,"},{"Start":"00:18.945 ","End":"00:22.289","Text":"and this company uses dollars as its currency."},{"Start":"00:22.289 ","End":"00:25.275","Text":"You\u0027ll see we have 6 points,"},{"Start":"00:25.275 ","End":"00:28.050","Text":"which are 6 transactions which we need to deal with."},{"Start":"00:28.050 ","End":"00:29.595","Text":"The required says,"},{"Start":"00:29.595 ","End":"00:33.890","Text":"show all transactions in an equation worksheet,"},{"Start":"00:33.890 ","End":"00:37.580","Text":"and calculate the initial cost of the plant."},{"Start":"00:37.580 ","End":"00:40.160","Text":"Here we have our equation worksheet."},{"Start":"00:40.160 ","End":"00:45.695","Text":"You see we have columns for assets, liabilities, and equity."},{"Start":"00:45.695 ","End":"00:47.270","Text":"As you might recall,"},{"Start":"00:47.270 ","End":"00:52.430","Text":"our accounting equation is assets equals liabilities plus"},{"Start":"00:52.430 ","End":"01:00.005","Text":"equity or assets minus liabilities equals our equity."},{"Start":"01:00.005 ","End":"01:03.390","Text":"Under assets, you see we have columns for cash,"},{"Start":"01:03.390 ","End":"01:05.235","Text":"plant, and prepayments,"},{"Start":"01:05.235 ","End":"01:08.680","Text":"and under the liabilities we have the accounts payable,"},{"Start":"01:08.680 ","End":"01:10.990","Text":"and under equity, we have income statement,"},{"Start":"01:10.990 ","End":"01:13.690","Text":"so income, and expense items."},{"Start":"01:13.690 ","End":"01:18.130","Text":"Now, you won\u0027t know what these columns ought to be hitted up as."},{"Start":"01:18.130 ","End":"01:21.635","Text":"I know this because I\u0027ve already done the exercise."},{"Start":"01:21.635 ","End":"01:26.530","Text":"You would create these column headings as you worked through the exercise."},{"Start":"01:26.530 ","End":"01:31.610","Text":"You would not know those column headings upfront."},{"Start":"01:31.720 ","End":"01:34.625","Text":"Let\u0027s look at the first transaction."},{"Start":"01:34.625 ","End":"01:38.045","Text":"The plant was invoiced at a cost of 110,000,"},{"Start":"01:38.045 ","End":"01:41.795","Text":"including non-refundable taxes of 10,000 dollars,"},{"Start":"01:41.795 ","End":"01:43.520","Text":"and this was paid in cash."},{"Start":"01:43.520 ","End":"01:46.700","Text":"Now, what costs get capitalized to the property,"},{"Start":"01:46.700 ","End":"01:48.290","Text":"plant, and equipment items?"},{"Start":"01:48.290 ","End":"01:51.230","Text":"The costs that get capitalized are all those costs that are"},{"Start":"01:51.230 ","End":"01:55.115","Text":"incurred in order to get the asset to a location,"},{"Start":"01:55.115 ","End":"01:59.830","Text":"and put into a condition that enables it to be used as intended by management."},{"Start":"01:59.830 ","End":"02:02.465","Text":"That would include the invoice price,"},{"Start":"02:02.465 ","End":"02:06.860","Text":"and it would include these taxes so the invoice price was obviously 100,000"},{"Start":"02:06.860 ","End":"02:12.574","Text":"plus these non-refundable taxes of 10,000 coming to 110,000."},{"Start":"02:12.574 ","End":"02:16.265","Text":"But, we are going to capitalize the entire 110,000,"},{"Start":"02:16.265 ","End":"02:18.785","Text":"including the tax of 10,000,"},{"Start":"02:18.785 ","End":"02:22.310","Text":"because the tax of 10,000 was not refundable,"},{"Start":"02:22.310 ","End":"02:24.110","Text":"we could not get it back."},{"Start":"02:24.110 ","End":"02:30.335","Text":"The 110,000 is a cost of getting the asset to the location and condition,"},{"Start":"02:30.335 ","End":"02:32.290","Text":"enabling it to be used."},{"Start":"02:32.290 ","End":"02:33.840","Text":"It was paid in cash,"},{"Start":"02:33.840 ","End":"02:38.690","Text":"so let\u0027s look and see how this works out in our accounting worksheet."},{"Start":"02:38.690 ","End":"02:43.630","Text":"Here we have our cash being reduced by the 110,000."},{"Start":"02:43.630 ","End":"02:47.330","Text":"We\u0027ve got the 110,000 in the plant column."},{"Start":"02:47.330 ","End":"02:49.295","Text":"As you can see under the plant column,"},{"Start":"02:49.295 ","End":"02:53.420","Text":"we\u0027ve included the 10,000 texts because we couldn\u0027t get it back."},{"Start":"02:53.420 ","End":"02:56.860","Text":"Our assets have gone down and up."},{"Start":"02:56.860 ","End":"03:01.325","Text":"Our accounting equation remains at 0 if you like,"},{"Start":"03:01.325 ","End":"03:03.035","Text":"it still remains in balance."},{"Start":"03:03.035 ","End":"03:04.910","Text":"Now let\u0027s look at the next transaction."},{"Start":"03:04.910 ","End":"03:08.510","Text":"The cost of transporting the plant to the factory where it was to be"},{"Start":"03:08.510 ","End":"03:12.365","Text":"used was 5,000 dollars paid in cash."},{"Start":"03:12.365 ","End":"03:16.888","Text":"Now, remember, we include all costs of getting the asset to the location,"},{"Start":"03:16.888 ","End":"03:19.810","Text":"and condition necessary for it to be used."},{"Start":"03:19.810 ","End":"03:23.420","Text":"Naturally, we would have had to transport the plant to the factory."},{"Start":"03:23.420 ","End":"03:28.180","Text":"This cost of 5,000 is part of the cost of acquiring the plant."},{"Start":"03:28.180 ","End":"03:30.015","Text":"We paid it in cash,"},{"Start":"03:30.015 ","End":"03:33.060","Text":"so our cash goes down by 5,000,"},{"Start":"03:33.060 ","End":"03:39.140","Text":"and the 5,000 cost being a transport cost to get it to a location necessary,"},{"Start":"03:39.140 ","End":"03:42.390","Text":"get capitalized to plant."},{"Start":"03:42.620 ","End":"03:46.330","Text":"Let\u0027s look at the third transaction."},{"Start":"03:48.980 ","End":"03:54.370","Text":"An invoice of 14,000 dollars was received for the insurance of the plant."},{"Start":"03:54.370 ","End":"03:56.435","Text":"This was paid in cash."},{"Start":"03:56.435 ","End":"04:02.580","Text":"This invoice includes 2,000 dollars for insurance during the transportation,"},{"Start":"04:02.580 ","End":"04:07.360","Text":"so that\u0027s getting it to the premises where it will be used,"},{"Start":"04:07.360 ","End":"04:10.510","Text":"and 12,000 for insurance covering the plant"},{"Start":"04:10.510 ","End":"04:14.605","Text":"against damage during usage over the next year."},{"Start":"04:14.605 ","End":"04:17.740","Text":"What is important here is 2,000 was"},{"Start":"04:17.740 ","End":"04:21.120","Text":"getting it to the property where we\u0027re going to use it,"},{"Start":"04:21.120 ","End":"04:24.084","Text":"and 12,000 is for insurance"},{"Start":"04:24.084 ","End":"04:27.520","Text":"covering the plant against damage during usage over the next year."},{"Start":"04:27.520 ","End":"04:30.460","Text":"This is after getting it to our premises."},{"Start":"04:30.460 ","End":"04:38.390","Text":"So 2,000 is getting it to the location where we are going to be able to use the plant,"},{"Start":"04:38.390 ","End":"04:42.530","Text":"and the 12,000 is after it\u0027s already at the location."},{"Start":"04:42.530 ","End":"04:45.380","Text":"The 2,000 gets capitalized,"},{"Start":"04:45.380 ","End":"04:49.895","Text":"but the 12,000 is insurance during the usage of the plant."},{"Start":"04:49.895 ","End":"04:52.535","Text":"That\u0027s not part of the cost of acquiring the plant,"},{"Start":"04:52.535 ","End":"04:55.910","Text":"that\u0027s part of the cost of using the plant."},{"Start":"04:55.910 ","End":"05:03.830","Text":"Only 2,000 will be capitalized and 12,000 will ultimately need to be expensed."},{"Start":"05:03.830 ","End":"05:05.720","Text":"However, at the moment,"},{"Start":"05:05.720 ","End":"05:07.580","Text":"we haven\u0027t started using it yet,"},{"Start":"05:07.580 ","End":"05:11.315","Text":"so that 12,000 would be a prepaid expense,"},{"Start":"05:11.315 ","End":"05:14.630","Text":"and that then would be expensed over the period."},{"Start":"05:14.630 ","End":"05:17.200","Text":"You can see here, we\u0027ve got insurance,"},{"Start":"05:17.200 ","End":"05:21.350","Text":"the full amount obviously reduces our cash because we paid for it,"},{"Start":"05:21.350 ","End":"05:25.910","Text":"2,000 insurance incurred on the transportation of"},{"Start":"05:25.910 ","End":"05:28.265","Text":"the plant to the company premises"},{"Start":"05:28.265 ","End":"05:31.265","Text":"is part of the cost of getting the asset to the location,"},{"Start":"05:31.265 ","End":"05:35.090","Text":"and putting it in a condition necessary enabling it to be used."},{"Start":"05:35.090 ","End":"05:40.820","Text":"The 12,000 is insurance over the usage of the plant,"},{"Start":"05:40.820 ","End":"05:44.165","Text":"and thus it\u0027s not going to be capitalized to the plant."},{"Start":"05:44.165 ","End":"05:47.000","Text":"It is, however, still treated as an asset at"},{"Start":"05:47.000 ","End":"05:49.970","Text":"the stage and that\u0027s simply because it\u0027s a prepayment."},{"Start":"05:49.970 ","End":"05:52.760","Text":"We haven\u0027t yet started to use this plant."},{"Start":"05:52.760 ","End":"05:54.965","Text":"As the plant is being used,"},{"Start":"05:54.965 ","End":"05:57.500","Text":"we\u0027ll be getting the benefit of that insurance,"},{"Start":"05:57.500 ","End":"06:00.815","Text":"and that 12,000 will gradually be expensed,"},{"Start":"06:00.815 ","End":"06:04.790","Text":"so taken out of the asset and put into the expense column,"},{"Start":"06:04.790 ","End":"06:06.725","Text":"and the equity income statement."},{"Start":"06:06.725 ","End":"06:08.280","Text":"The next transaction."},{"Start":"06:08.280 ","End":"06:13.385","Text":"Engineering fees of 6,000 dollars were incurred on installation."},{"Start":"06:13.385 ","End":"06:15.365","Text":"These were not yet paid."},{"Start":"06:15.365 ","End":"06:19.400","Text":"Once again, this is an installation cost,"},{"Start":"06:19.400 ","End":"06:24.380","Text":"and all costs incurred in getting the asset to a location and putting it"},{"Start":"06:24.380 ","End":"06:29.725","Text":"into a condition that enables it to be used will be capitalized to the plant."},{"Start":"06:29.725 ","End":"06:35.315","Text":"An installation cost is obviously necessary before we can start to use the asset."},{"Start":"06:35.315 ","End":"06:39.205","Text":"This 6,000 must get capitalized to the plant."},{"Start":"06:39.205 ","End":"06:41.235","Text":"Note it is not yet paid,"},{"Start":"06:41.235 ","End":"06:44.960","Text":"so if we look at our accounting equation worksheet,"},{"Start":"06:44.960 ","End":"06:49.445","Text":"you see the installation cost is being capitalized to the plant."},{"Start":"06:49.445 ","End":"06:54.550","Text":"The fact that it is not yet paid means that we do not adjust our cash,"},{"Start":"06:54.550 ","End":"06:57.140","Text":"but we adjust accounts payable instead."},{"Start":"06:57.140 ","End":"07:02.495","Text":"Our assets have gone up and our liabilities have gone up."},{"Start":"07:02.495 ","End":"07:07.295","Text":"Assets minus liabilities equals equity,"},{"Start":"07:07.295 ","End":"07:14.555","Text":"so our assets went up by 6,000 and our liabilities went up by 6,000."},{"Start":"07:14.555 ","End":"07:20.900","Text":"Our equation remains in balance with our equity coming to 0."},{"Start":"07:20.900 ","End":"07:24.140","Text":"In other words, there was no change in equity."},{"Start":"07:24.140 ","End":"07:26.315","Text":"Let\u0027s look at the next transaction."},{"Start":"07:26.315 ","End":"07:28.910","Text":"Training costs of 15,000 dollars were"},{"Start":"07:28.910 ","End":"07:32.240","Text":"incurred to educate staff on how to operate the plant."},{"Start":"07:32.240 ","End":"07:33.845","Text":"This was paid in cash."},{"Start":"07:33.845 ","End":"07:35.375","Text":"Now, this is an interesting one."},{"Start":"07:35.375 ","End":"07:39.820","Text":"Training costs, they occur in order to use the plants,"},{"Start":"07:39.820 ","End":"07:43.310","Text":"so these are not costs incurred in order to get the plant to"},{"Start":"07:43.310 ","End":"07:47.000","Text":"the location and condition enabling it to be used,"},{"Start":"07:47.000 ","End":"07:52.025","Text":"this is now a cost of actually being able to use the plant."},{"Start":"07:52.025 ","End":"07:56.480","Text":"These training costs are incurred after getting the plant into a location,"},{"Start":"07:56.480 ","End":"08:01.090","Text":"and condition necessary for it to be able to be used."},{"Start":"08:01.090 ","End":"08:03.460","Text":"That 15,000, the training costs,"},{"Start":"08:03.460 ","End":"08:06.245","Text":"are never capitalized to the asset."},{"Start":"08:06.245 ","End":"08:08.435","Text":"You see here we\u0027ve got training costs,"},{"Start":"08:08.435 ","End":"08:09.860","Text":"it was paid in cash,"},{"Start":"08:09.860 ","End":"08:12.830","Text":"so we have it under the cash column reducing our cash,"},{"Start":"08:12.830 ","End":"08:16.790","Text":"and because it\u0027s not going to plant, there\u0027s nothing under,"},{"Start":"08:16.790 ","End":"08:21.740","Text":"plant we\u0027re going to put it under the income statement as an expense instead."},{"Start":"08:21.740 ","End":"08:27.320","Text":"We\u0027ll call this one training expenses or something to that effect."},{"Start":"08:27.320 ","End":"08:29.855","Text":"But the point is it is an expense."},{"Start":"08:29.855 ","End":"08:31.895","Text":"Let\u0027s look at the next transaction."},{"Start":"08:31.895 ","End":"08:37.009","Text":"The cost of hosting a launch party to celebrate the new plant acquisition,"},{"Start":"08:37.009 ","End":"08:41.015","Text":"costing 3,000 dollars, not yet paid."},{"Start":"08:41.015 ","End":"08:46.490","Text":"Once again, this is definitely not a cost that was necessary in order"},{"Start":"08:46.490 ","End":"08:51.925","Text":"to get the plant to a location and condition that enables it to be used."},{"Start":"08:51.925 ","End":"08:55.595","Text":"The cost of 3,000 must be expensed."},{"Start":"08:55.595 ","End":"08:57.140","Text":"We have a launch party,"},{"Start":"08:57.140 ","End":"08:59.285","Text":"you\u0027ll see because we haven\u0027t paid for it,"},{"Start":"08:59.285 ","End":"09:01.055","Text":"it doesn\u0027t affect our cash,"},{"Start":"09:01.055 ","End":"09:03.605","Text":"we put it under accounts payable instead,"},{"Start":"09:03.605 ","End":"09:08.510","Text":"and under equity, we see we have the expense."},{"Start":"09:08.510 ","End":"09:11.570","Text":"This would be an entertainment expense."},{"Start":"09:11.570 ","End":"09:15.200","Text":"But, the most important issue over and above what we call"},{"Start":"09:15.200 ","End":"09:19.165","Text":"the expense is that it is not under the plant column."},{"Start":"09:19.165 ","End":"09:24.385","Text":"We have recorded all the transactions in the accounting equation worksheet,"},{"Start":"09:24.385 ","End":"09:28.205","Text":"and the next part of the required was to calculate the initial cost."},{"Start":"09:28.205 ","End":"09:30.760","Text":"What we do is we add up these columns."},{"Start":"09:30.760 ","End":"09:35.290","Text":"The most important column that we were asked to calculate was the plant column,"},{"Start":"09:35.290 ","End":"09:40.670","Text":"but if you wanted to double-check that you haven\u0027t made a mistake along the way,"},{"Start":"09:40.670 ","End":"09:45.515","Text":"all you do is you add up basically all your columns,"},{"Start":"09:45.515 ","End":"09:49.115","Text":"and then make sure your accounting equation still works."},{"Start":"09:49.115 ","End":"09:53.940","Text":"In other words, does assets of 144,000 decrease,"},{"Start":"09:53.940 ","End":"09:57.195","Text":"plus the 123,000 asset,"},{"Start":"09:57.195 ","End":"09:59.830","Text":"plus the 12,000 asset."},{"Start":"09:59.830 ","End":"10:06.035","Text":"Does that equal because its assets equals liabilities plus equity?"},{"Start":"10:06.035 ","End":"10:11.560","Text":"Does it equal 9,000 minus the 18,000?"},{"Start":"10:11.560 ","End":"10:15.525","Text":"Yes, it does. We haven\u0027t made a mistake."},{"Start":"10:15.525 ","End":"10:19.330","Text":"Let\u0027s move on to exercise 2."}],"ID":28638},{"Watched":false,"Name":"Exercise 2","Duration":"4m 9s","ChapterTopicVideoID":27462,"CourseChapterTopicPlaylistID":274161,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.170 ","End":"00:02.640","Text":"Exercise 2."},{"Start":"00:02.640 ","End":"00:05.910","Text":"Exercise 2 involves depreciation."},{"Start":"00:05.910 ","End":"00:08.220","Text":"Let\u0027s read through it step-by-step."},{"Start":"00:08.220 ","End":"00:10.560","Text":"A plant is purchased on the 1st of July,"},{"Start":"00:10.560 ","End":"00:14.520","Text":"20X0, at a cost of 90,000 currency units."},{"Start":"00:14.520 ","End":"00:18.705","Text":"The plant is available for use from the 1st of January 20X1,"},{"Start":"00:18.705 ","End":"00:20.430","Text":"which is 6 months later,"},{"Start":"00:20.430 ","End":"00:23.715","Text":"and brought into use from 1st of April 20X1."},{"Start":"00:23.715 ","End":"00:25.980","Text":"Yet, a further few months later,"},{"Start":"00:25.980 ","End":"00:30.060","Text":"it\u0027s taken out of use between the 1st of June 20X1 and"},{"Start":"00:30.060 ","End":"00:34.695","Text":"the 30th of June 20X1 due to plant maintenance."},{"Start":"00:34.695 ","End":"00:36.945","Text":"The useful life is 3 years,"},{"Start":"00:36.945 ","End":"00:39.990","Text":"the residual value, also known as salvage value,"},{"Start":"00:39.990 ","End":"00:45.935","Text":"is 30,000, the maintenance cost in 20X1 were 20,000 paid in cash."},{"Start":"00:45.935 ","End":"00:51.280","Text":"We are required to choose the most correct option and to explain our answer."},{"Start":"00:51.280 ","End":"00:54.860","Text":"The depreciation using the straight line method for"},{"Start":"00:54.860 ","End":"00:59.195","Text":"the financial year ended 30th of June 20X1 is,"},{"Start":"00:59.195 ","End":"01:03.820","Text":"and we are to select the correct option or the most correct option."},{"Start":"01:03.820 ","End":"01:05.445","Text":"Looking at the solution,"},{"Start":"01:05.445 ","End":"01:07.995","Text":"now this is straight-line depreciation,"},{"Start":"01:07.995 ","End":"01:10.280","Text":"when we do straight-line depreciation,"},{"Start":"01:10.280 ","End":"01:15.790","Text":"we take the depreciable amount and write it off over the useful life."},{"Start":"01:15.790 ","End":"01:20.360","Text":"The depreciation expense per year, calendar year,"},{"Start":"01:20.360 ","End":"01:22.770","Text":"would be the depreciable amount,"},{"Start":"01:22.770 ","End":"01:25.340","Text":"divided by that useful life."},{"Start":"01:25.340 ","End":"01:30.730","Text":"The depreciable amount in turn is the cost less the residual value,"},{"Start":"01:30.730 ","End":"01:35.105","Text":"and in this case, our useful life is determined in terms of years,"},{"Start":"01:35.105 ","End":"01:37.790","Text":"so we\u0027re going to divide it by the number of years."},{"Start":"01:37.790 ","End":"01:41.780","Text":"The depreciation expense per year is therefore the cost which"},{"Start":"01:41.780 ","End":"01:45.890","Text":"was 90,000 less the residual value which was 30,000,"},{"Start":"01:45.890 ","End":"01:48.970","Text":"so our depreciable amount is 60,000."},{"Start":"01:48.970 ","End":"01:52.920","Text":"The useful life in years was 3 years."},{"Start":"01:52.920 ","End":"01:57.135","Text":"60,000 divide by 3 years is 20,000."},{"Start":"01:57.135 ","End":"02:01.820","Text":"Please note that that is the depreciation expense per year."},{"Start":"02:01.820 ","End":"02:08.135","Text":"We\u0027ve been asked to calculate the depreciation for the year ended 30th of June 20X1."},{"Start":"02:08.135 ","End":"02:10.800","Text":"Useful timeline is,"},{"Start":"02:10.800 ","End":"02:13.935","Text":"we purchased it on the 1st of July 20X0,"},{"Start":"02:13.935 ","End":"02:18.995","Text":"it was first available for use from the 1st of January 20X1,"},{"Start":"02:18.995 ","End":"02:24.260","Text":"and it was actually brought in to use on the 1st of April 20X1,"},{"Start":"02:24.260 ","End":"02:31.315","Text":"and it was taken out of use on the 1st of June through to the 30th of June."},{"Start":"02:31.315 ","End":"02:34.935","Text":"In this period, it wasn\u0027t used,"},{"Start":"02:34.935 ","End":"02:38.130","Text":"this is our financial year-end."},{"Start":"02:38.130 ","End":"02:39.660","Text":"To start with this was,"},{"Start":"02:39.660 ","End":"02:41.480","Text":"the purchase date just to reiterate,"},{"Start":"02:41.480 ","End":"02:43.490","Text":"this was the purchase date,"},{"Start":"02:43.490 ","End":"02:48.295","Text":"it was available for use for the first time on the 1st of January,"},{"Start":"02:48.295 ","End":"02:53.635","Text":"it was brought in to use on the 1st of April,"},{"Start":"02:53.635 ","End":"02:58.105","Text":"and it was taken out of use on the 1st of June to the 30th of June,"},{"Start":"02:58.105 ","End":"03:00.095","Text":"and that was a financial year-end."},{"Start":"03:00.095 ","End":"03:03.850","Text":"What we need to remember when we do our depreciation is that,"},{"Start":"03:03.850 ","End":"03:07.480","Text":"we depreciate from the date that is available for use,"},{"Start":"03:07.480 ","End":"03:12.575","Text":"we don\u0027t stop depreciation during periods of idleness."},{"Start":"03:12.575 ","End":"03:16.885","Text":"We start here and we\u0027re going to end on the 30th of June,"},{"Start":"03:16.885 ","End":"03:19.390","Text":"that is a period of 6 months."},{"Start":"03:19.390 ","End":"03:23.950","Text":"The depreciation for the 30th of June will be the depreciation for a full year,"},{"Start":"03:23.950 ","End":"03:25.910","Text":"which is 20,000,"},{"Start":"03:25.910 ","End":"03:31.080","Text":"multiply it by the 6 over 12 months,"},{"Start":"03:31.080 ","End":"03:33.210","Text":"a period of years,"},{"Start":"03:33.210 ","End":"03:35.085","Text":"a portion of a year."},{"Start":"03:35.085 ","End":"03:41.065","Text":"It will be 10,000 for the year ended the 30th of June,"},{"Start":"03:41.065 ","End":"03:43.640","Text":"which is a 6 month period."},{"Start":"03:43.640 ","End":"03:47.710","Text":"Our answer to solution 2 is a depreciation using"},{"Start":"03:47.710 ","End":"03:53.535","Text":"the straight line method for the financial year ended 30th of June, 20X1 is 10,000."},{"Start":"03:53.535 ","End":"03:57.475","Text":"It\u0027s not the 20,000 which would\u0027ve been the depreciation for a full calendar year,"},{"Start":"03:57.475 ","End":"04:03.660","Text":"it\u0027s 10,000, because it is only 6 months from the date it was first available for use."},{"Start":"04:03.660 ","End":"04:09.350","Text":"Remember, we don\u0027t stop depreciating during periods of idleness."}],"ID":28639},{"Watched":false,"Name":"Exercise 3","Duration":"5m 5s","ChapterTopicVideoID":27463,"CourseChapterTopicPlaylistID":274161,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:03.345","Text":"Exercise 3, consider the following."},{"Start":"00:03.345 ","End":"00:07.560","Text":"When calculating the depreciation rate under the reducing balance method,"},{"Start":"00:07.560 ","End":"00:10.485","Text":"the formula is, and we\u0027re given 5 options."},{"Start":"00:10.485 ","End":"00:12.685","Text":"Choose the correct option."},{"Start":"00:12.685 ","End":"00:19.775","Text":"One, could the depreciation rate be the Nth root of cost or 2,"},{"Start":"00:19.775 ","End":"00:24.585","Text":"the Nth root of cost divided by residual value, or 3,"},{"Start":"00:24.585 ","End":"00:29.435","Text":"1 minus the Nth root of cost divided by residual value,"},{"Start":"00:29.435 ","End":"00:34.085","Text":"or 4, 1 minus the Nth root of residual value divide by cost,"},{"Start":"00:34.085 ","End":"00:35.945","Text":"or none of the above."},{"Start":"00:35.945 ","End":"00:39.350","Text":"The answer is depreciation rate will be"},{"Start":"00:39.350 ","End":"00:43.940","Text":"1 minus the Nth root of residual value divide by cost."},{"Start":"00:43.940 ","End":"00:46.420","Text":"For those of you who are interested,"},{"Start":"00:46.420 ","End":"00:48.900","Text":"we could have worked out 1,"},{"Start":"00:48.900 ","End":"00:51.485","Text":"2, or 3 as having been illogical."},{"Start":"00:51.485 ","End":"00:53.120","Text":"How do we know that 1, 2,"},{"Start":"00:53.120 ","End":"00:54.755","Text":"and 3 are illogical?"},{"Start":"00:54.755 ","End":"00:58.925","Text":"Well, it starts with understanding what a depreciation rate does."},{"Start":"00:58.925 ","End":"01:02.900","Text":"A depreciation rate is applied to the value of your asset to"},{"Start":"01:02.900 ","End":"01:07.174","Text":"determine the portion of your asset that has to be expensed."},{"Start":"01:07.174 ","End":"01:12.175","Text":"The depreciation rate needs to be a fraction that is less than 1."},{"Start":"01:12.175 ","End":"01:14.040","Text":"We\u0027re taking a proportion,"},{"Start":"01:14.040 ","End":"01:17.550","Text":"so 52 percent or 0.5 or 30 percent or 0.3,"},{"Start":"01:17.550 ","End":"01:19.940","Text":"or 25 percent being 0.25,"},{"Start":"01:19.940 ","End":"01:22.115","Text":"all of these are less than 1."},{"Start":"01:22.115 ","End":"01:24.860","Text":"We apply that rate to the value of the asset,"},{"Start":"01:24.860 ","End":"01:27.440","Text":"and we take that portion of the asset 30 percent,"},{"Start":"01:27.440 ","End":"01:29.045","Text":"25 percent, or 50 percent,"},{"Start":"01:29.045 ","End":"01:33.010","Text":"whatever it may be, and we expense that portion of the asset,"},{"Start":"01:33.010 ","End":"01:36.765","Text":"so the rate has to be less than 1."},{"Start":"01:36.765 ","End":"01:38.890","Text":"Now if we look at number 1,"},{"Start":"01:38.890 ","End":"01:43.400","Text":"the depreciation rate here is going to be greater than 1 or equal to 1."},{"Start":"01:43.400 ","End":"01:48.645","Text":"The reason is cost is a number that will be greater than or equal to 1."},{"Start":"01:48.645 ","End":"01:49.935","Text":"Let\u0027s say, for example,"},{"Start":"01:49.935 ","End":"01:51.535","Text":"the cost is 9,"},{"Start":"01:51.535 ","End":"01:55.600","Text":"and let\u0027s say the useful life being N is 3."},{"Start":"01:55.600 ","End":"01:58.050","Text":"You would get a rate of 3,"},{"Start":"01:58.050 ","End":"02:02.090","Text":"and that wouldn\u0027t make any sense because that is not less than 1."},{"Start":"02:02.090 ","End":"02:04.310","Text":"A rate of 3,"},{"Start":"02:04.310 ","End":"02:06.950","Text":"you\u0027d be multiplying that by the value of your asset,"},{"Start":"02:06.950 ","End":"02:08.960","Text":"and you wouldn\u0027t get a proportion of the asset,"},{"Start":"02:08.960 ","End":"02:12.690","Text":"you would get a multiplied version of your asset."},{"Start":"02:12.690 ","End":"02:14.415","Text":"If you asset\u0027s value was 100,"},{"Start":"02:14.415 ","End":"02:16.800","Text":"you would get a figure of 300,"},{"Start":"02:16.800 ","End":"02:19.820","Text":"and that obviously doesn\u0027t make any logical sense."},{"Start":"02:19.820 ","End":"02:21.710","Text":"Now let\u0027s look at 2."},{"Start":"02:21.710 ","End":"02:23.615","Text":"The same logic is going to apply here,"},{"Start":"02:23.615 ","End":"02:26.165","Text":"because in almost all cases,"},{"Start":"02:26.165 ","End":"02:28.730","Text":"the residual value is less than cost."},{"Start":"02:28.730 ","End":"02:31.670","Text":"Now you need to understand what residual value is."},{"Start":"02:31.670 ","End":"02:36.020","Text":"Well, the residual value represents the value that"},{"Start":"02:36.020 ","End":"02:38.840","Text":"the asset will probably have at the end of"},{"Start":"02:38.840 ","End":"02:41.750","Text":"its useful life if it was in its condition as it currently is."},{"Start":"02:41.750 ","End":"02:43.130","Text":"But the point being,"},{"Start":"02:43.130 ","End":"02:47.720","Text":"the residual value is a portion generally of the cost."},{"Start":"02:47.720 ","End":"02:51.650","Text":"There are occasions when the residual value might be greater than cost,"},{"Start":"02:51.650 ","End":"02:53.345","Text":"but in those instances,"},{"Start":"02:53.345 ","End":"02:56.195","Text":"depreciation ceases to be processed"},{"Start":"02:56.195 ","End":"03:00.370","Text":"until such time as the residual value drops below cost again."},{"Start":"03:00.370 ","End":"03:03.290","Text":"When we\u0027re applying the depreciation rate,"},{"Start":"03:03.290 ","End":"03:06.515","Text":"it will be when the residual value is less than cost."},{"Start":"03:06.515 ","End":"03:13.220","Text":"The argument that I applied to 1 about why 1 is illogical holds for 2 as well,"},{"Start":"03:13.220 ","End":"03:17.210","Text":"because cost divided by a figure that is less than cost is"},{"Start":"03:17.210 ","End":"03:21.380","Text":"going to give us a figure that is greater than or equal to 1."},{"Start":"03:21.380 ","End":"03:23.315","Text":"To the same logic applies."},{"Start":"03:23.315 ","End":"03:26.360","Text":"If you took a figure, even if it was 1,"},{"Start":"03:26.360 ","End":"03:29.060","Text":"and you found the cubed root of 1,"},{"Start":"03:29.060 ","End":"03:31.715","Text":"you\u0027re going to get a rate of 1."},{"Start":"03:31.715 ","End":"03:35.980","Text":"We need a depreciation rate that is less than 1."},{"Start":"03:35.980 ","End":"03:39.320","Text":"Cost divided by a smaller figure is going to give you"},{"Start":"03:39.320 ","End":"03:42.670","Text":"a figure that is greater than or equal to 1."},{"Start":"03:42.670 ","End":"03:44.410","Text":"If you find the Nth root of that,"},{"Start":"03:44.410 ","End":"03:48.695","Text":"it\u0027s always going to give you a number that is greater than or equal to 1."},{"Start":"03:48.695 ","End":"03:50.335","Text":"Now let\u0027s look at number 3."},{"Start":"03:50.335 ","End":"03:51.845","Text":"The depreciation rate,"},{"Start":"03:51.845 ","End":"03:56.600","Text":"could it be 1 minus the Nth root of cost divided by residual value."},{"Start":"03:56.600 ","End":"04:02.160","Text":"Well, here again, it couldn\u0027t be because this portion here,"},{"Start":"04:03.250 ","End":"04:06.260","Text":"the Nth root of cost divided by"},{"Start":"04:06.260 ","End":"04:10.550","Text":"residual value is what I\u0027ve just described in the part 2,"},{"Start":"04:10.550 ","End":"04:15.695","Text":"as always giving you a figure of 1 or greater than 1."},{"Start":"04:15.695 ","End":"04:18.698","Text":"If you came to a figure of, let\u0027s say, 1,"},{"Start":"04:18.698 ","End":"04:23.420","Text":"1 minus 1 would give you 0."},{"Start":"04:23.420 ","End":"04:26.345","Text":"A depreciation rate of 0 doesn\u0027t make sense."},{"Start":"04:26.345 ","End":"04:28.760","Text":"If it gave you a figure greater than 1,"},{"Start":"04:28.760 ","End":"04:30.770","Text":"let\u0027s say it gave you 2,"},{"Start":"04:30.770 ","End":"04:34.170","Text":"then 1 minus 2 would give us negative 1,"},{"Start":"04:34.170 ","End":"04:36.065","Text":"and getting a depreciation rate that is"},{"Start":"04:36.065 ","End":"04:39.545","Text":"a negative figure would also not make any logical sense."},{"Start":"04:39.545 ","End":"04:40.940","Text":"We can see that 1, 2,"},{"Start":"04:40.940 ","End":"04:44.060","Text":"and 3 logically from a mathematical perspective are"},{"Start":"04:44.060 ","End":"04:47.300","Text":"going to give us figures that are not representative of"},{"Start":"04:47.300 ","End":"04:50.210","Text":"a rate that we could apply in order to write off"},{"Start":"04:50.210 ","End":"04:54.500","Text":"portions of the value of our asset in order to expense them."},{"Start":"04:54.500 ","End":"05:00.455","Text":"Then you would only have 4 or 5 as being possible answers,"},{"Start":"05:00.455 ","End":"05:02.548","Text":"and obviously we know 4 is correct,"},{"Start":"05:02.548 ","End":"05:05.460","Text":"and therefore 5 is incorrect."}],"ID":28640},{"Watched":false,"Name":"Exercise 4","Duration":"1m 56s","ChapterTopicVideoID":27464,"CourseChapterTopicPlaylistID":274161,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:03.120","Text":"Exercise 4. Consider the following."},{"Start":"00:03.120 ","End":"00:06.525","Text":"When using the reducing balance depreciation method,"},{"Start":"00:06.525 ","End":"00:09.420","Text":"we apply the depreciation rate to the cost,"},{"Start":"00:09.420 ","End":"00:13.155","Text":"or we apply the depreciation rate to the carrying amount,"},{"Start":"00:13.155 ","End":"00:16.260","Text":"or we ignore the asset\u0027s residual value,"},{"Start":"00:16.260 ","End":"00:21.375","Text":"or we apply the depreciation rate to the depreciable amount,"},{"Start":"00:21.375 ","End":"00:24.435","Text":"or none of the above are correct."},{"Start":"00:24.435 ","End":"00:27.705","Text":"We are required to choose the most correct option."},{"Start":"00:27.705 ","End":"00:31.965","Text":"Solution 4, when using the reducing balance depreciation method,"},{"Start":"00:31.965 ","End":"00:33.285","Text":"the correct answer is,"},{"Start":"00:33.285 ","End":"00:36.675","Text":"we apply the depreciation rate to the carrying amount."},{"Start":"00:36.675 ","End":"00:40.400","Text":"Now how do we know that the other 4 options were not correct?"},{"Start":"00:40.400 ","End":"00:42.125","Text":"Well, let\u0027s look at number 1."},{"Start":"00:42.125 ","End":"00:45.020","Text":"We apply the depreciation rate to the cost."},{"Start":"00:45.020 ","End":"00:46.580","Text":"Let\u0027s look at number 1."},{"Start":"00:46.580 ","End":"00:49.220","Text":"We apply the depreciation rate to the cost."},{"Start":"00:49.220 ","End":"00:52.415","Text":"That can\u0027t be correct because cost is a static amount"},{"Start":"00:52.415 ","End":"00:55.895","Text":"and we are applying the reducing balance method,"},{"Start":"00:55.895 ","End":"00:58.310","Text":"so the cost doesn\u0027t reduce."},{"Start":"00:58.310 ","End":"01:00.140","Text":"Let\u0027s look at Option 3."},{"Start":"01:00.140 ","End":"01:02.315","Text":"We ignore the asset\u0027s residual value."},{"Start":"01:02.315 ","End":"01:05.270","Text":"That can\u0027t be correct because the residual value is taken into"},{"Start":"01:05.270 ","End":"01:08.240","Text":"account when calculating the rate of depreciation."},{"Start":"01:08.240 ","End":"01:12.545","Text":"The rate of depreciation is calculated as 1 minus"},{"Start":"01:12.545 ","End":"01:17.585","Text":"the nth root of the residual value divided by cost."},{"Start":"01:17.585 ","End":"01:22.735","Text":"4, we apply the depreciation rate to the depreciable amount."},{"Start":"01:22.735 ","End":"01:27.050","Text":"That can\u0027t be correct because the depreciation rate takes into account"},{"Start":"01:27.050 ","End":"01:31.880","Text":"the residual value and the depreciable amount also takes into account the residual value,"},{"Start":"01:31.880 ","End":"01:37.860","Text":"the depreciable amount being cost less residual value."},{"Start":"01:37.860 ","End":"01:40.520","Text":"So if the depreciation rate and"},{"Start":"01:40.520 ","End":"01:43.865","Text":"the depreciable amount both take into account the residual value,"},{"Start":"01:43.865 ","End":"01:47.680","Text":"we would be double-counting the effects of the residual value."},{"Start":"01:47.680 ","End":"01:50.670","Text":"5, none of the above are correct."},{"Start":"01:50.670 ","End":"01:55.650","Text":"That can\u0027t be correct because number 2 is indeed correct."}],"ID":28641},{"Watched":false,"Name":"Exercise 5","Duration":"1m 29s","ChapterTopicVideoID":27465,"CourseChapterTopicPlaylistID":274161,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:06.690","Text":"Exercise 5. A plant is purchased on the 1st of the 1st X1 at a cost of 90,000."},{"Start":"00:06.690 ","End":"00:09.990","Text":"The plant is to be depreciated on the reducing balance method,"},{"Start":"00:09.990 ","End":"00:12.435","Text":"useful life of 3 years."},{"Start":"00:12.435 ","End":"00:17.460","Text":"The residual, otherwise known as salvage value is 30,870."},{"Start":"00:17.460 ","End":"00:20.430","Text":"The plant is available for use from 1st of"},{"Start":"00:20.430 ","End":"00:25.200","Text":"the 1st X1 and brought into use from 1st of July, X1."},{"Start":"00:25.200 ","End":"00:29.070","Text":"Required, calculate the depreciation rate."},{"Start":"00:29.070 ","End":"00:33.015","Text":"Calculating the depreciation rate using the reducing balance."},{"Start":"00:33.015 ","End":"00:41.040","Text":"We take 1 and we subtract the Nth root of the residual value divided by the cost,"},{"Start":"00:41.040 ","End":"00:44.225","Text":"where N is the useful life."},{"Start":"00:44.225 ","End":"00:47.780","Text":"In this example, we are told that the useful life is 3 years,"},{"Start":"00:47.780 ","End":"00:52.205","Text":"so therefore it\u0027s the 3rd root or the cubed root."},{"Start":"00:52.205 ","End":"00:56.360","Text":"The residual value we\u0027re told is 30,870,"},{"Start":"00:56.360 ","End":"00:58.490","Text":"and the cost was 90,000."},{"Start":"00:58.490 ","End":"01:03.560","Text":"So we take 30,870 and divide by 90,000,"},{"Start":"01:03.560 ","End":"01:05.630","Text":"and we find the cubed root thereof."},{"Start":"01:05.630 ","End":"01:07.640","Text":"That is 0.7."},{"Start":"01:07.640 ","End":"01:12.635","Text":"So 1 minus 0.7 is 0.3,"},{"Start":"01:12.635 ","End":"01:15.429","Text":"which is the same thing as saying 30 percent."},{"Start":"01:15.429 ","End":"01:19.977","Text":"So the depreciation rate using the reducing balance method is 30 percent."},{"Start":"01:19.977 ","End":"01:21.890","Text":"Please note that we would apply"},{"Start":"01:21.890 ","End":"01:25.494","Text":"this rate to the opening carrying amount in each of the years,"},{"Start":"01:25.494 ","End":"01:29.670","Text":"so cost less accumulated depreciation."}],"ID":28642},{"Watched":false,"Name":"Exercise 6","Duration":"3m 34s","ChapterTopicVideoID":27466,"CourseChapterTopicPlaylistID":274161,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:07.875","Text":"Exercise 6. A plant is purchased on the 1/1/ X1 at a cost of 90,000."},{"Start":"00:07.875 ","End":"00:13.860","Text":"The plant is to be depreciated at 30 percent per annum on the reducing balance method."},{"Start":"00:13.860 ","End":"00:16.170","Text":"Useful life is 3 years."},{"Start":"00:16.170 ","End":"00:21.945","Text":"The residual, otherwise known as salvage value, is 30,870."},{"Start":"00:21.945 ","End":"00:29.685","Text":"The plant is available for use from the 1/1/X1 and brought into use from 1st of July, X1."},{"Start":"00:29.685 ","End":"00:35.250","Text":"Required, calculate the depreciation for the years ended 31st December,"},{"Start":"00:35.250 ","End":"00:39.580","Text":"20X1 and 31st December, 20X2."},{"Start":"00:39.580 ","End":"00:46.640","Text":"Solution 6. First we\u0027re going to calculate the depreciation per year of usage."},{"Start":"00:46.640 ","End":"00:51.185","Text":"Then we\u0027re going to calculate the depreciation per financial year."},{"Start":"00:51.185 ","End":"00:54.920","Text":"When calculating the depreciation per year of usage,"},{"Start":"00:54.920 ","End":"00:57.975","Text":"we\u0027re going to need to know the opening carrying amount,"},{"Start":"00:57.975 ","End":"01:01.340","Text":"we then calculate the depreciation for that year as"},{"Start":"01:01.340 ","End":"01:04.760","Text":"a percentage of that opening carrying amount because remember,"},{"Start":"01:04.760 ","End":"01:08.720","Text":"we\u0027re using the reducing balance method and the closing carrying amount will"},{"Start":"01:08.720 ","End":"01:13.610","Text":"be equal to the opening carrying amount less the depreciation for that year."},{"Start":"01:13.610 ","End":"01:19.525","Text":"In year 1, our opening carrying amount was the cost of 90,000,"},{"Start":"01:19.525 ","End":"01:23.685","Text":"the depreciation for that year is 27,000,"},{"Start":"01:23.685 ","End":"01:29.015","Text":"which is equal to 30 percent of the opening carrying amount."},{"Start":"01:29.015 ","End":"01:32.165","Text":"The opening carrying amount is 63,000,"},{"Start":"01:32.165 ","End":"01:36.875","Text":"which was the previous year\u0027s closing carrying amount."},{"Start":"01:36.875 ","End":"01:44.580","Text":"The depreciation in that second year of usage will therefore be 63,000 times 30 percent,"},{"Start":"01:50.300 ","End":"01:53.765","Text":"that gives us 18,900."},{"Start":"01:53.765 ","End":"01:56.840","Text":"The closing carrying amount for the second year of usage will be the"},{"Start":"01:56.840 ","End":"02:01.500","Text":"63,000 less the 18,900."},{"Start":"02:01.500 ","End":"02:04.290","Text":"Our closing carrying amount is 44,100,"},{"Start":"02:04.290 ","End":"02:08.405","Text":"that\u0027s going to give us the opening carrying amount in the third year of usage."},{"Start":"02:08.405 ","End":"02:13.920","Text":"The depreciation in the third year of usage will be 30 percent times"},{"Start":"02:13.920 ","End":"02:20.645","Text":"44,100 and that\u0027s going to give us a closing carrying amount of 30,870."},{"Start":"02:20.645 ","End":"02:23.060","Text":"Notice that the closing carrying amount at the end of"},{"Start":"02:23.060 ","End":"02:26.720","Text":"the useful life equals the residual value that we were given."},{"Start":"02:26.720 ","End":"02:31.220","Text":"The next stage is to calculate the depreciation per financial year."},{"Start":"02:31.220 ","End":"02:35.900","Text":"Now the financial year coincides with the date on which the asset was available for use,"},{"Start":"02:35.900 ","End":"02:38.225","Text":"which is where we start to depreciate."},{"Start":"02:38.225 ","End":"02:43.460","Text":"The asset was available for use from the 1st of January X1,"},{"Start":"02:43.460 ","End":"02:49.820","Text":"which was exactly 12 months before the first financial year ended."},{"Start":"02:49.820 ","End":"02:55.850","Text":"The first financial year ended on the 31st of December X1."},{"Start":"02:55.850 ","End":"02:59.060","Text":"This makes it a lot easier because it means that"},{"Start":"02:59.060 ","End":"03:04.145","Text":"the depreciation per financial year ended 31st December X1,"},{"Start":"03:04.145 ","End":"03:09.215","Text":"X2, and X3 will be the same as the depreciation per year of usage,"},{"Start":"03:09.215 ","End":"03:10.745","Text":"1, 2, and 3."},{"Start":"03:10.745 ","End":"03:13.160","Text":"In other words, the 31st December,"},{"Start":"03:13.160 ","End":"03:21.795","Text":"20X1 depreciation will be 27,000 being the first year of usage, 27,000 depreciation."},{"Start":"03:21.795 ","End":"03:27.710","Text":"Similarly, the 31st of December 20X2 depreciation will simply be 18,900,"},{"Start":"03:27.710 ","End":"03:34.390","Text":"which was the second year of usages, depreciation of 18,900."}],"ID":28643},{"Watched":false,"Name":"Exercise 7","Duration":"6m 15s","ChapterTopicVideoID":27467,"CourseChapterTopicPlaylistID":274161,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:08.025","Text":"Exercise 7, a plant is purchased on the 1st of January 20X4 at a cost of 180,000."},{"Start":"00:08.025 ","End":"00:13.680","Text":"The plant is to be depreciated at 30 percent per annum on the reducing balance method."},{"Start":"00:13.680 ","End":"00:17.400","Text":"The useful life is 3 years and the residual value,"},{"Start":"00:17.400 ","End":"00:22.060","Text":"also known as salvage value, is 61,740."},{"Start":"00:22.060 ","End":"00:24.320","Text":"The plant is available for use from"},{"Start":"00:24.320 ","End":"00:29.900","Text":"the 1st of January 20X4 and brought into use from the 1st of May 20X4."},{"Start":"00:29.900 ","End":"00:33.710","Text":"Required, show the depreciation journal for"},{"Start":"00:33.710 ","End":"00:40.960","Text":"the year ended 30th of June 20X4 and also for the year ended 30th of June 20X5."},{"Start":"00:40.960 ","End":"00:44.570","Text":"Solution 7, first we do the calculations to"},{"Start":"00:44.570 ","End":"00:49.520","Text":"calculate the depreciation in each of the years of usage."},{"Start":"00:49.520 ","End":"00:56.240","Text":"We have a useful life of 3 years and therefore we have 3 columns: 1, 2, and 3."},{"Start":"00:56.240 ","End":"00:59.150","Text":"We start with the opening carrying amount."},{"Start":"00:59.150 ","End":"01:05.015","Text":"To begin with, the opening carrying amount is the cost, which was 180,000."},{"Start":"01:05.015 ","End":"01:10.705","Text":"Then the depreciation for the first year is 54,000."},{"Start":"01:10.705 ","End":"01:13.990","Text":"The 54,000 is the depreciation rate of"},{"Start":"01:13.990 ","End":"01:18.265","Text":"30 percent multiplied by the opening carrying amount."},{"Start":"01:18.265 ","End":"01:20.680","Text":"We\u0027re multiplying it by the opening carrying amount"},{"Start":"01:20.680 ","End":"01:22.810","Text":"because we\u0027re using the reducing balance method."},{"Start":"01:22.810 ","End":"01:25.840","Text":"The closing carrying amount is 126,000."},{"Start":"01:25.840 ","End":"01:32.760","Text":"That is the opening carrying amount less the depreciation of 54,000 giving us 126,000."},{"Start":"01:32.760 ","End":"01:37.435","Text":"That then becomes our opening carrying amount in the second year of usage."},{"Start":"01:37.435 ","End":"01:40.030","Text":"The depreciation in the second year of usage would be"},{"Start":"01:40.030 ","End":"01:45.655","Text":"30 percent times the new opening carrying amount of 126,000."},{"Start":"01:45.655 ","End":"01:47.475","Text":"Notice that in the prior year,"},{"Start":"01:47.475 ","End":"01:50.480","Text":"the depreciation was 30 percent multiplied by"},{"Start":"01:50.480 ","End":"01:53.975","Text":"the previous year\u0027s opening carrying amount, which was 180,000."},{"Start":"01:53.975 ","End":"01:56.300","Text":"Notice that in each of these 2 years,"},{"Start":"01:56.300 ","End":"01:59.180","Text":"the opening carrying amount is diminishing and that we\u0027re"},{"Start":"01:59.180 ","End":"02:02.420","Text":"applying the rate to the opening carrying amount,"},{"Start":"02:02.420 ","End":"02:05.300","Text":"which is diminishing, which is why we\u0027re calling this the"},{"Start":"02:05.300 ","End":"02:08.720","Text":"diminishing balance method or the reducing balance method."},{"Start":"02:08.720 ","End":"02:10.550","Text":"The closing carrying amount is then"},{"Start":"02:10.550 ","End":"02:14.795","Text":"the opening carrying amount less the depreciation of 37,800,"},{"Start":"02:14.795 ","End":"02:17.990","Text":"giving us 88,200, which then becomes"},{"Start":"02:17.990 ","End":"02:21.835","Text":"the opening carrying amount in the third and final year of usage."},{"Start":"02:21.835 ","End":"02:24.795","Text":"The depreciation for the year, in the third year,"},{"Start":"02:24.795 ","End":"02:29.180","Text":"is 30 percent of the opening carrying amount of 88,200,"},{"Start":"02:29.180 ","End":"02:30.650","Text":"giving us depreciation of"},{"Start":"02:30.650 ","End":"02:37.475","Text":"26,460 and that then gives us the closing carrying amount of 61,740."},{"Start":"02:37.475 ","End":"02:40.460","Text":"Notice that the closing carrying amount in the final year of"},{"Start":"02:40.460 ","End":"02:43.850","Text":"usage will reflect the residual value that we were given."},{"Start":"02:43.850 ","End":"02:47.720","Text":"Now, we were asked to do the journal entries for 2 of the years."},{"Start":"02:47.720 ","End":"02:50.930","Text":"Let\u0027s do the journal for the 30th of June 20X4."},{"Start":"02:50.930 ","End":"02:54.215","Text":"The depreciation will be debited with 27,000"},{"Start":"02:54.215 ","End":"02:59.315","Text":"and the accumulated depreciation will be credited with 27,000."},{"Start":"02:59.315 ","End":"03:02.035","Text":"Journal for the 30th of June 20X5,"},{"Start":"03:02.035 ","End":"03:09.440","Text":"the depreciation will be 45,900 and the accumulated depreciation will be 45,900."},{"Start":"03:09.440 ","End":"03:12.020","Text":"Now, where do we get these figures from?"},{"Start":"03:12.020 ","End":"03:14.595","Text":"For that, we need a timeline."},{"Start":"03:14.595 ","End":"03:21.395","Text":"We purchased the asset on the 1st of the 1st X4."},{"Start":"03:21.395 ","End":"03:23.870","Text":"That was the date it was purchased and that was"},{"Start":"03:23.870 ","End":"03:26.645","Text":"also the date it became available for use."},{"Start":"03:26.645 ","End":"03:32.120","Text":"The asset was then brought into use on the 1st of May X4,"},{"Start":"03:32.120 ","End":"03:35.505","Text":"this was brought into use."},{"Start":"03:35.505 ","End":"03:40.580","Text":"Then finally, we have a date of the 30th of June X4,"},{"Start":"03:40.580 ","End":"03:44.730","Text":"which is our financial year end."},{"Start":"03:44.730 ","End":"03:50.120","Text":"Now, the only important dates here are the date it became available for use."},{"Start":"03:50.120 ","End":"03:53.120","Text":"It happens to also be the date we purchased it,"},{"Start":"03:53.120 ","End":"03:55.610","Text":"but were these 2 dates different?"},{"Start":"03:55.610 ","End":"03:58.040","Text":"Remember, the purchase date is irrelevant."},{"Start":"03:58.040 ","End":"04:01.730","Text":"We\u0027re looking for the date it first became available for use."},{"Start":"04:01.730 ","End":"04:06.110","Text":"Similarly, the brought into use date is also irrelevant."},{"Start":"04:06.110 ","End":"04:09.680","Text":"The second date we\u0027re looking for is our financial year end."},{"Start":"04:09.680 ","End":"04:13.160","Text":"The asset was available for use for a period of 6 months"},{"Start":"04:13.160 ","End":"04:17.110","Text":"in that first financial year ended 30th of June X4."},{"Start":"04:17.110 ","End":"04:21.125","Text":"In the year ended 30th of June X4,"},{"Start":"04:21.125 ","End":"04:24.485","Text":"being the first financial year that it had been used,"},{"Start":"04:24.485 ","End":"04:28.195","Text":"the depreciation will be 54,000,"},{"Start":"04:28.195 ","End":"04:29.955","Text":"which is for a full year,"},{"Start":"04:29.955 ","End":"04:33.840","Text":"times 6 over 12, that\u0027s 27,000."},{"Start":"04:33.840 ","End":"04:36.050","Text":"Then in the second year of usage,"},{"Start":"04:36.050 ","End":"04:39.090","Text":"30th of June X5,"},{"Start":"04:39.090 ","End":"04:42.360","Text":"remember, we\u0027ve got a full year of usage,"},{"Start":"04:42.360 ","End":"04:45.380","Text":"so we\u0027re looking at a timeline for the second financial year, it."},{"Start":"04:45.380 ","End":"04:53.010","Text":"Starts on the 1st of July X4 and it ends on the 30th of June X5."},{"Start":"04:53.010 ","End":"04:56.415","Text":"The asset was used for a full 12 months."},{"Start":"04:56.415 ","End":"05:00.665","Text":"The depreciation here would be the remaining 1/2 of the"},{"Start":"05:00.665 ","End":"05:06.335","Text":"54,000 that was not recognized in the year 30th of June X4,"},{"Start":"05:06.335 ","End":"05:08.240","Text":"because we only recognized 1/2 of it."},{"Start":"05:08.240 ","End":"05:13.560","Text":"We take another 54,000 multiply it by 6 over 12,"},{"Start":"05:13.560 ","End":"05:17.610","Text":"plus we\u0027re going to take the second year\u0027s usage of"},{"Start":"05:17.610 ","End":"05:23.375","Text":"37,800 and that is going to be multiplied by 6 over 12."},{"Start":"05:23.375 ","End":"05:29.300","Text":"If you add those 2 together, you get 45,900."},{"Start":"05:29.300 ","End":"05:33.650","Text":"Just to recap, in the year ended 30th of June X4,"},{"Start":"05:33.650 ","End":"05:35.225","Text":"that first 6 months,"},{"Start":"05:35.225 ","End":"05:38.680","Text":"that is being depreciated by 27,000,"},{"Start":"05:38.680 ","End":"05:42.060","Text":"being 1/2 of this 54."},{"Start":"05:42.060 ","End":"05:46.880","Text":"The remaining 1/2 of that 54 is being recognized as"},{"Start":"05:46.880 ","End":"05:55.040","Text":"depreciation in the first 1/2 of that second financial year ending 30th of June X5."},{"Start":"05:55.040 ","End":"05:59.105","Text":"Then the remaining 1/2 of the year ended 30th of June X5,"},{"Start":"05:59.105 ","End":"06:06.575","Text":"the depreciation is 1/2 of the second year\u0027s usage, which is 18,900."},{"Start":"06:06.575 ","End":"06:15.720","Text":"The 2 together give us depreciation of 45,900."}],"ID":28644},{"Watched":false,"Name":"Exercise 8","Duration":"3m 49s","ChapterTopicVideoID":27468,"CourseChapterTopicPlaylistID":274161,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:05.730","Text":"A plant is purchased on the 1st of January 20X4 at a cost of 180,000."},{"Start":"00:05.730 ","End":"00:09.045","Text":"The plant is depreciated at 20,000 per annum,"},{"Start":"00:09.045 ","End":"00:14.655","Text":"and the plant is sold for a 160,000 on the 30th of June 20X5."},{"Start":"00:14.655 ","End":"00:19.110","Text":"The impact of the above information on the profit or loss for the year ended 31st,"},{"Start":"00:19.110 ","End":"00:23.985","Text":"December 20X5 will be a net expense of 10,000,"},{"Start":"00:23.985 ","End":"00:26.640","Text":"a net income of 140,000,"},{"Start":"00:26.640 ","End":"00:29.070","Text":"a net income of 10,000,"},{"Start":"00:29.070 ","End":"00:31.730","Text":"a net income of 150,000,"},{"Start":"00:31.730 ","End":"00:33.545","Text":"or none of the above."},{"Start":"00:33.545 ","End":"00:36.140","Text":"Now you will notice in this question that no"},{"Start":"00:36.140 ","End":"00:39.665","Text":"references made to the method of depreciation."},{"Start":"00:39.665 ","End":"00:44.060","Text":"Whenever this occurs, we assume the straight-line method has been used."},{"Start":"00:44.060 ","End":"00:48.650","Text":"Solution 8, the solution is none of the above."},{"Start":"00:48.650 ","End":"00:51.035","Text":"Let\u0027s look at how we calculated this."},{"Start":"00:51.035 ","End":"00:54.590","Text":"The asset was purchased for a cost of 180,000."},{"Start":"00:54.590 ","End":"01:01.085","Text":"The depreciation to the 31st of December X4 was 20,000 that was given to us."},{"Start":"01:01.085 ","End":"01:04.695","Text":"The closing carrying amount to the 31st December X4 would have been a"},{"Start":"01:04.695 ","End":"01:09.530","Text":"160,000 being the net of the cost least depreciation."},{"Start":"01:09.530 ","End":"01:12.740","Text":"Then the depreciation to the date it was sold,"},{"Start":"01:12.740 ","End":"01:15.267","Text":"which occurred halfway through the next financial year,"},{"Start":"01:15.267 ","End":"01:19.385","Text":"30th of June X5 was 10,000."},{"Start":"01:19.385 ","End":"01:21.455","Text":"How do we calculate that 10,000?"},{"Start":"01:21.455 ","End":"01:24.710","Text":"It is the depreciation of 20,000 that we were given and that\u0027s for"},{"Start":"01:24.710 ","End":"01:28.520","Text":"a full year because we were told it was 20,000 per annum."},{"Start":"01:28.520 ","End":"01:32.720","Text":"Here we know that the acid was sold exactly halfway through the year,"},{"Start":"01:32.720 ","End":"01:38.465","Text":"so we take 6/12 of that annual depreciation and expense that."},{"Start":"01:38.465 ","End":"01:44.170","Text":"The closing carrying amount at the 30th of June X5 is the 450,000."},{"Start":"01:44.170 ","End":"01:46.595","Text":"That is immediately before it is sold."},{"Start":"01:46.595 ","End":"01:51.190","Text":"When it is sold, that closing carrying amount will get derecognized."},{"Start":"01:51.190 ","End":"01:54.575","Text":"When we derecognize 150,000,"},{"Start":"01:54.575 ","End":"01:58.355","Text":"we\u0027re taking it out of the asset account and we\u0027re expensing it."},{"Start":"01:58.355 ","End":"02:04.699","Text":"What we will do when we expense it is we will expense at 150,000 against the proceeds."},{"Start":"02:04.699 ","End":"02:11.345","Text":"If the proceeds exceed the carrying amount of 150,000 we will recognize an income."},{"Start":"02:11.345 ","End":"02:14.450","Text":"Or if the proceeds are less than the carrying amount,"},{"Start":"02:14.450 ","End":"02:17.075","Text":"we will recognize a further expense."},{"Start":"02:17.075 ","End":"02:20.005","Text":"In our profit or loss on disposal account,"},{"Start":"02:20.005 ","End":"02:24.365","Text":"we recognize the proceeds of 160,000 that were received."},{"Start":"02:24.365 ","End":"02:30.350","Text":"That would be debit bank and credit this profit or loss on disposal account."},{"Start":"02:30.350 ","End":"02:35.165","Text":"Then we subtract the carrying amount as at the 30th of June X5 being the data sale."},{"Start":"02:35.165 ","End":"02:39.800","Text":"That the 150,000 that we calculated in the table above."},{"Start":"02:39.800 ","End":"02:42.995","Text":"160,000 is what we received,"},{"Start":"02:42.995 ","End":"02:47.930","Text":"and we write off the carrying amount of the asset of 150,000."},{"Start":"02:47.930 ","End":"02:49.955","Text":"This is debit,"},{"Start":"02:49.955 ","End":"02:52.963","Text":"the profit or loss on disposal account,"},{"Start":"02:52.963 ","End":"02:55.670","Text":"and credit the plants carrying amount."},{"Start":"02:55.670 ","End":"03:00.875","Text":"The difference between those 2 is an amount of 10,000 and that is income."},{"Start":"03:00.875 ","End":"03:04.775","Text":"In other words, the proceeds in the credit in this account,"},{"Start":"03:04.775 ","End":"03:06.815","Text":"profit or loss on disposal account,"},{"Start":"03:06.815 ","End":"03:09.560","Text":"exceeds the debit that is now on this account,"},{"Start":"03:09.560 ","End":"03:11.702","Text":"the profit loss on disposal account."},{"Start":"03:11.702 ","End":"03:17.810","Text":"We have 10,000 sitting on the credit side and that is income called again on disposal."},{"Start":"03:17.810 ","End":"03:21.800","Text":"What does this mean in terms of the impact"},{"Start":"03:21.800 ","End":"03:25.850","Text":"on the profit or loss for the year end the 31st of December, 20X5?"},{"Start":"03:25.850 ","End":"03:28.835","Text":"The effect on profit loss 20X5."},{"Start":"03:28.835 ","End":"03:33.550","Text":"Well, we have a gain on disposal of 10,000 which we\u0027ve calculated in the table below."},{"Start":"03:33.550 ","End":"03:36.830","Text":"We mustn\u0027t forget, there was a depreciation expense for"},{"Start":"03:36.830 ","End":"03:41.045","Text":"the first half of this year ended 31st December X5,"},{"Start":"03:41.045 ","End":"03:45.575","Text":"and that was 10,000 calculated in the table above on the left."},{"Start":"03:45.575 ","End":"03:49.350","Text":"The impact on profit and loss is 0."}],"ID":28645},{"Watched":false,"Name":"Exercise 9","Duration":"9m 7s","ChapterTopicVideoID":27459,"CourseChapterTopicPlaylistID":274161,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:04.350","Text":"We buy a vehicle for 200,000 on 1st of January, 20X1."},{"Start":"00:04.350 ","End":"00:06.870","Text":"On this date, we estimate the following;"},{"Start":"00:06.870 ","End":"00:08.595","Text":"useful life is 3 years,"},{"Start":"00:08.595 ","End":"00:10.665","Text":"residual value is 20,000,"},{"Start":"00:10.665 ","End":"00:13.545","Text":"the depreciation method is straight line."},{"Start":"00:13.545 ","End":"00:18.090","Text":"During the financial year ended 31st December, 20X3,"},{"Start":"00:18.090 ","End":"00:22.935","Text":"we realize a better estimate of the total useful life was 5 years."},{"Start":"00:22.935 ","End":"00:26.130","Text":"The accountant had already processed the depreciation for"},{"Start":"00:26.130 ","End":"00:29.955","Text":"the 20X3 year using the old estimate."},{"Start":"00:29.955 ","End":"00:33.495","Text":"Required; choose the most correct option."},{"Start":"00:33.495 ","End":"00:38.450","Text":"1, the journal that must still be processed in 20X3 is"},{"Start":"00:38.450 ","End":"00:46.090","Text":"debit depreciation and credit accumulated depreciation with 26,667,"},{"Start":"00:46.090 ","End":"00:50.055","Text":"or 2, the journal that must still be processed in 20X3 is"},{"Start":"00:50.055 ","End":"00:56.335","Text":"debit accumulated depreciation and credit depreciation with 20,000,"},{"Start":"00:56.335 ","End":"01:00.915","Text":"or 3, the journal that must still be processed in 20X3 is"},{"Start":"01:00.915 ","End":"01:06.720","Text":"debit depreciation and credit accumulated depreciation with 20,000."},{"Start":"01:06.720 ","End":"01:10.455","Text":"4, the journal that must still be processed in 20X3 is"},{"Start":"01:10.455 ","End":"01:16.200","Text":"debit depreciation and credit accumulated depreciation with 40,000,"},{"Start":"01:16.200 ","End":"01:18.500","Text":"or 5, none of the above."},{"Start":"01:18.500 ","End":"01:21.295","Text":"The answer is none of the above."},{"Start":"01:21.295 ","End":"01:22.885","Text":"How do we work that out?"},{"Start":"01:22.885 ","End":"01:24.535","Text":"Let\u0027s look at this calculation."},{"Start":"01:24.535 ","End":"01:25.795","Text":"We have 2 columns,"},{"Start":"01:25.795 ","End":"01:29.845","Text":"1 showing the old estimate and another column showing the new estimate."},{"Start":"01:29.845 ","End":"01:31.870","Text":"In the 1st of January, 20X1,"},{"Start":"01:31.870 ","End":"01:35.470","Text":"we had a cost that was given to us of 200,000."},{"Start":"01:35.470 ","End":"01:39.160","Text":"Now, we\u0027ll put that under the old estimate column because we\u0027re first going to"},{"Start":"01:39.160 ","End":"01:43.565","Text":"work out the depreciation that we have processed."},{"Start":"01:43.565 ","End":"01:46.480","Text":"In 20X1 and in 20X2,"},{"Start":"01:46.480 ","End":"01:49.645","Text":"we process depreciation using the old estimate,"},{"Start":"01:49.645 ","End":"01:55.200","Text":"200,000 being the cost less the residual value of 20,000 divided by"},{"Start":"01:55.200 ","End":"01:58.980","Text":"the 3-year total useful life and multiply"},{"Start":"01:58.980 ","End":"02:02.900","Text":"that by 2 years because we\u0027ve processed that depreciation,"},{"Start":"02:02.900 ","End":"02:05.305","Text":"which came to 60,000 per year,"},{"Start":"02:05.305 ","End":"02:07.890","Text":"200,000 minus 20 divided by 3."},{"Start":"02:07.890 ","End":"02:13.000","Text":"We\u0027ve done that for 2 years now; 20X1 and 20X2."},{"Start":"02:13.000 ","End":"02:17.615","Text":"Accumulated depreciation is now 120,000."},{"Start":"02:17.615 ","End":"02:22.055","Text":"This means at the end of 31st December, 20X2,"},{"Start":"02:22.055 ","End":"02:27.565","Text":"the carrying amount is now sitting at 80,000, 200,000 less 120,000."},{"Start":"02:27.565 ","End":"02:29.120","Text":"Then in 20X3,"},{"Start":"02:29.120 ","End":"02:32.930","Text":"the depreciation expense has already been processed."},{"Start":"02:32.930 ","End":"02:39.505","Text":"The way it was calculated is 200,000 less 20,000 divided by 3 multiplied by 1 year,"},{"Start":"02:39.505 ","End":"02:42.230","Text":"giving us the 60,000 per year."},{"Start":"02:42.230 ","End":"02:47.615","Text":"Now, that was based on using cost in the calculation."},{"Start":"02:47.615 ","End":"02:50.975","Text":"It\u0027s cost of 200,000 less residual value."},{"Start":"02:50.975 ","End":"02:53.270","Text":"When we use cost in the calculation,"},{"Start":"02:53.270 ","End":"02:58.025","Text":"we always divide by the total useful life being the 3 years."},{"Start":"02:58.025 ","End":"03:01.640","Text":"Now, there is another way to calculate the depreciation."},{"Start":"03:01.640 ","End":"03:05.000","Text":"We could use the opening carrying amount."},{"Start":"03:05.000 ","End":"03:08.435","Text":"If we use the opening carrying amount of 80,000,"},{"Start":"03:08.435 ","End":"03:10.670","Text":"our calculation will look as follows."},{"Start":"03:10.670 ","End":"03:13.625","Text":"It\u0027s the 80,000 opening carrying amount,"},{"Start":"03:13.625 ","End":"03:16.550","Text":"instead of cost, less 20,000."},{"Start":"03:16.550 ","End":"03:17.795","Text":"But in this case,"},{"Start":"03:17.795 ","End":"03:19.430","Text":"if we\u0027re using the opening carrying amount,"},{"Start":"03:19.430 ","End":"03:22.619","Text":"we don\u0027t divide by the total useful life of 3 years,"},{"Start":"03:22.619 ","End":"03:26.840","Text":"instead, we divide by the remaining useful life,"},{"Start":"03:26.840 ","End":"03:30.875","Text":"which is 3 years less the 2 years that has already gone by."},{"Start":"03:30.875 ","End":"03:34.250","Text":"We\u0027re taking the opening carrying amount of 80,000,"},{"Start":"03:34.250 ","End":"03:35.885","Text":"less the residual value."},{"Start":"03:35.885 ","End":"03:39.860","Text":"We\u0027re dividing it by the remaining useful life of 1 year."},{"Start":"03:39.860 ","End":"03:42.990","Text":"Remember, total useful life was 3 years,"},{"Start":"03:42.990 ","End":"03:47.145","Text":"but 2 years, 20X1 and 20X2 has already combined."},{"Start":"03:47.145 ","End":"03:50.130","Text":"Thus, we only have 1 year remaining."},{"Start":"03:50.130 ","End":"03:54.505","Text":"You divide the 60,000 by 1 and you multiply by 1."},{"Start":"03:54.505 ","End":"03:58.955","Text":"That then gives us a carrying amount at the end of the year of 20,000."},{"Start":"03:58.955 ","End":"04:00.815","Text":"Now, we have a change in estimate."},{"Start":"04:00.815 ","End":"04:05.660","Text":"We are told that the total useful life is no longer 3 years but 5 years."},{"Start":"04:05.660 ","End":"04:09.545","Text":"To work out the calculations for the new estimate,"},{"Start":"04:09.545 ","End":"04:14.570","Text":"let us use the second calculation that we see here,"},{"Start":"04:14.570 ","End":"04:19.575","Text":"the 80,000 less 20,000 divided by the 3 minus 2,"},{"Start":"04:19.575 ","End":"04:22.460","Text":"being the remaining useful life, by 1."},{"Start":"04:22.460 ","End":"04:24.560","Text":"We\u0027re going to ignore the calculation above."},{"Start":"04:24.560 ","End":"04:26.240","Text":"Let\u0027s just get rid of that."},{"Start":"04:26.240 ","End":"04:29.730","Text":"Let\u0027s move this calculation up."},{"Start":"04:29.730 ","End":"04:36.070","Text":"We\u0027re using the opening carrying amount to calculate our depreciation."},{"Start":"04:36.070 ","End":"04:37.657","Text":"Using the old estimate,"},{"Start":"04:37.657 ","End":"04:40.190","Text":"remember we\u0027ve taken the opening carrying amount of 80 less the"},{"Start":"04:40.190 ","End":"04:44.085","Text":"20,000 and we\u0027re dividing it by 3 minus 2."},{"Start":"04:44.085 ","End":"04:46.010","Text":"Now that we have a new estimate,"},{"Start":"04:46.010 ","End":"04:49.900","Text":"we\u0027re going to take that same opening carrying amount of 80,000."},{"Start":"04:49.900 ","End":"04:53.420","Text":"This time, we\u0027re taking the opening carrying amount of 80 less 20,"},{"Start":"04:53.420 ","End":"04:57.035","Text":"but instead of dividing by 3 minus 2 years that have gone by,"},{"Start":"04:57.035 ","End":"05:01.145","Text":"we\u0027re dividing now by 5 years minus 2 years that have gone by,"},{"Start":"05:01.145 ","End":"05:03.065","Text":"so we\u0027re dividing by 3."},{"Start":"05:03.065 ","End":"05:10.855","Text":"That gives us depreciation using the new estimate of 20,000 in the year 20X3."},{"Start":"05:10.855 ","End":"05:13.879","Text":"We don\u0027t need to continue with this calculation,"},{"Start":"05:13.879 ","End":"05:18.170","Text":"but I\u0027m going to carry on just for the purpose of you having a complete picture of how"},{"Start":"05:18.170 ","End":"05:22.760","Text":"this asset will be depreciated to the end of its useful life of 5 years."},{"Start":"05:22.760 ","End":"05:27.845","Text":"In 20X4, the depreciation expense will be 60,000,"},{"Start":"05:27.845 ","End":"05:30.890","Text":"bearing in mind, we\u0027re taking the opening carrying amount,"},{"Start":"05:30.890 ","End":"05:33.605","Text":"so 60,000 less 20,000."},{"Start":"05:33.605 ","End":"05:35.855","Text":"Because you\u0027re using the opening carrying amount,"},{"Start":"05:35.855 ","End":"05:37.610","Text":"we\u0027re going to be dividing it by"},{"Start":"05:37.610 ","End":"05:41.750","Text":"the remaining useful life as opposed to the total useful life."},{"Start":"05:41.750 ","End":"05:44.840","Text":"The remaining useful life is the new estimate of"},{"Start":"05:44.840 ","End":"05:48.020","Text":"5 years with a total life less of 3 years that have gone by now;"},{"Start":"05:48.020 ","End":"05:50.420","Text":"20X1, 20X2, and 20X3."},{"Start":"05:50.420 ","End":"05:56.640","Text":"That gives us depreciation of 20,000 and a carrying amount of 40,000."},{"Start":"05:56.640 ","End":"05:58.750","Text":"In the next year, 20X5,"},{"Start":"05:58.750 ","End":"06:02.225","Text":"the depreciation expense will be 40,000,"},{"Start":"06:02.225 ","End":"06:04.790","Text":"which is the opening carrying amount in 20X5,"},{"Start":"06:04.790 ","End":"06:10.670","Text":"so 40,000 less the residual value of 20 divided by the remaining useful life,"},{"Start":"06:10.670 ","End":"06:13.005","Text":"which is now 1 year."},{"Start":"06:13.005 ","End":"06:17.310","Text":"It\u0027s a total life of 5 years less the 4 years that have gone by,"},{"Start":"06:17.310 ","End":"06:20.805","Text":"the 20X1, 2, 3, and 4, so 4 years have gone by."},{"Start":"06:20.805 ","End":"06:25.350","Text":"We\u0027re dividing the depreciable amount of 20,000 by 1."},{"Start":"06:25.350 ","End":"06:29.855","Text":"We\u0027re multiplying it by 1 because it is a complete financial year."},{"Start":"06:29.855 ","End":"06:31.400","Text":"The depreciation, again,"},{"Start":"06:31.400 ","End":"06:34.310","Text":"would be 20,000 and at the end, therefore,"},{"Start":"06:34.310 ","End":"06:37.406","Text":"of 20X5, the carrying amount would be 20,000,"},{"Start":"06:37.406 ","End":"06:40.790","Text":"which is the residual value that we were working towards."},{"Start":"06:40.790 ","End":"06:45.995","Text":"Now we need to know what depreciation journals would be processed in 20X3,"},{"Start":"06:45.995 ","End":"06:47.750","Text":"the year of the change in estimate."},{"Start":"06:47.750 ","End":"06:51.139","Text":"Just for interest, in the 31st December, X1,"},{"Start":"06:51.139 ","End":"06:54.590","Text":"we would\u0027ve processed depreciation of 60,000 being debit to"},{"Start":"06:54.590 ","End":"06:58.430","Text":"the depreciation expense credit accumulated depreciation."},{"Start":"06:58.430 ","End":"07:01.310","Text":"The same would\u0027ve gone through in the 31st, December,"},{"Start":"07:01.310 ","End":"07:05.780","Text":"20X2 and because the accountant had already"},{"Start":"07:05.780 ","End":"07:11.357","Text":"processed the depreciation on the old estimate in the year of the change in estimate,"},{"Start":"07:11.357 ","End":"07:15.815","Text":"we would also have processed the depreciation of 60,000 in the 20X3."},{"Start":"07:15.815 ","End":"07:18.110","Text":"This then means that we need to adjust this"},{"Start":"07:18.110 ","End":"07:22.265","Text":"depreciation downwards because as you can see from the previous table,"},{"Start":"07:22.265 ","End":"07:25.730","Text":"the depreciation in 20X3 must now be 20,000."},{"Start":"07:25.730 ","End":"07:29.840","Text":"The change in estimated depreciation needs to be processed."},{"Start":"07:29.840 ","End":"07:32.705","Text":"Here, what we\u0027re doing is we are reducing"},{"Start":"07:32.705 ","End":"07:38.780","Text":"both the depreciation and the accumulated depreciation that we had processed in 20X3."},{"Start":"07:38.780 ","End":"07:41.645","Text":"Those figures need to be reduced to 20,000."},{"Start":"07:41.645 ","End":"07:44.030","Text":"Instead of debiting the depreciation,"},{"Start":"07:44.030 ","End":"07:47.560","Text":"we now credit the depreciation with 40."},{"Start":"07:47.560 ","End":"07:50.914","Text":"This 60,000 was a debit."},{"Start":"07:50.914 ","End":"07:54.710","Text":"Now we\u0027re going to credit that depreciation."},{"Start":"07:54.710 ","End":"08:00.035","Text":"Then the accumulated depreciation which had been credited,"},{"Start":"08:00.035 ","End":"08:03.800","Text":"we\u0027re now going to debit it to"},{"Start":"08:03.800 ","End":"08:08.060","Text":"reduce what we had done in the first journal entry in 20X3."},{"Start":"08:08.060 ","End":"08:10.610","Text":"The net effect of those 2 journals would be that we are"},{"Start":"08:10.610 ","End":"08:14.905","Text":"processing depreciation expense of 20,000."},{"Start":"08:14.905 ","End":"08:20.465","Text":"The question revolved around what journal entry do we still need to process"},{"Start":"08:20.465 ","End":"08:25.526","Text":"in 20X3 given that the accountant had already processed that entry?"},{"Start":"08:25.526 ","End":"08:28.055","Text":"This is the entry we\u0027re looking for."},{"Start":"08:28.055 ","End":"08:31.550","Text":"We needed to find an option that showed a debit to"},{"Start":"08:31.550 ","End":"08:37.865","Text":"accumulated depreciation and a credit to depreciation of 40,000."},{"Start":"08:37.865 ","End":"08:41.090","Text":"If we have a look at the options that were provided to us,"},{"Start":"08:41.090 ","End":"08:44.210","Text":"there was only 1 option dealing with 40,000,"},{"Start":"08:44.210 ","End":"08:48.524","Text":"but it wasn\u0027t a debit to accumulated depreciation,"},{"Start":"08:48.524 ","End":"08:50.990","Text":"it was shown as debit to depreciation."},{"Start":"08:50.990 ","End":"08:54.680","Text":"Instead of it being a debit to accumulated depreciation,"},{"Start":"08:54.680 ","End":"08:57.380","Text":"it was a credit to accumulated depreciation."},{"Start":"08:57.380 ","End":"09:00.185","Text":"So Option 4 was wrong."},{"Start":"09:00.185 ","End":"09:04.940","Text":"Obviously 1, 2, and 3 are wrong because the amounts are also wrong."},{"Start":"09:04.940 ","End":"09:07.830","Text":"The answer was none of the above."}],"ID":28646},{"Watched":false,"Name":"Exercise 10","Duration":"3m 4s","ChapterTopicVideoID":27460,"CourseChapterTopicPlaylistID":274161,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:04.545","Text":"We buy a vehicle for 200,000 on the 1st of January, 20X1."},{"Start":"00:04.545 ","End":"00:08.430","Text":"This vehicle is depreciated at 40,000 per annum."},{"Start":"00:08.430 ","End":"00:10.710","Text":"At the financial year in the 31st,"},{"Start":"00:10.710 ","End":"00:12.375","Text":"December, 20X2,"},{"Start":"00:12.375 ","End":"00:19.335","Text":"its fair value less cost to sell is 130,000 and its value in use is 80,000."},{"Start":"00:19.335 ","End":"00:22.859","Text":"We are required to choose the most correct option."},{"Start":"00:22.859 ","End":"00:28.290","Text":"The carrying amount is 160,000 and the recoverable amount is 130,000,"},{"Start":"00:28.290 ","End":"00:32.070","Text":"thus the asset is impaired by 30,000."},{"Start":"00:32.070 ","End":"00:38.055","Text":"The carrying amount is 160,000 and the recoverable amount is 80,000,"},{"Start":"00:38.055 ","End":"00:41.925","Text":"thus the asset is impaired by 80,000."},{"Start":"00:41.925 ","End":"00:48.570","Text":"3, the carrying amount is 120,000 and the recoverable amount is 130,000,"},{"Start":"00:48.570 ","End":"00:51.495","Text":"thus the asset is impaired by 10,000."},{"Start":"00:51.495 ","End":"00:57.330","Text":"4, the carrying amount is 120,000 and the recoverable amount is 80,000,"},{"Start":"00:57.330 ","End":"01:00.465","Text":"thus the asset is impaired by 40,000."},{"Start":"01:00.465 ","End":"01:06.735","Text":"5, the carrying amount is 120,000 and the recoverable amount is 130,000,"},{"Start":"01:06.735 ","End":"01:09.375","Text":"thus the asset is not impaired."},{"Start":"01:09.375 ","End":"01:11.745","Text":"The answer is 5."},{"Start":"01:11.745 ","End":"01:17.545","Text":"The carrying amount is 120,000 and the recoverable amount is 130,000,"},{"Start":"01:17.545 ","End":"01:19.880","Text":"thus the asset is not impaired."},{"Start":"01:19.880 ","End":"01:21.990","Text":"Looking at the calculations."},{"Start":"01:21.990 ","End":"01:24.980","Text":"When trying to decide whether an asset is impaired or not,"},{"Start":"01:24.980 ","End":"01:29.135","Text":"we compare its carrying amount with its recoverable amount."},{"Start":"01:29.135 ","End":"01:31.970","Text":"Let\u0027s look at the carrying amount first."},{"Start":"01:31.970 ","End":"01:40.305","Text":"The carrying amount is the cost of 20,000 less the accumulated depreciation of 40,000,"},{"Start":"01:40.305 ","End":"01:43.435","Text":"which was given to us, times the 2 years that have come by."},{"Start":"01:43.435 ","End":"01:48.575","Text":"The asset, if you recall having purchased on the 1st of January 20X1,"},{"Start":"01:48.575 ","End":"01:50.410","Text":"thus the 2 years."},{"Start":"01:50.410 ","End":"01:55.005","Text":"So 200,000 less 80,000 is 120,000."},{"Start":"01:55.005 ","End":"01:57.260","Text":"Then let\u0027s look at the recoverable amount."},{"Start":"01:57.260 ","End":"02:04.190","Text":"Recoverable amount is the higher of the fair value less cost to sell and value in use."},{"Start":"02:04.190 ","End":"02:06.545","Text":"The fair value less cost to sell was given to us as"},{"Start":"02:06.545 ","End":"02:10.985","Text":"130,000 and the value in use was given to us as 80,000."},{"Start":"02:10.985 ","End":"02:17.455","Text":"The higher of those 2 amounts is obviously the fair value less cost to sell of 130,000."},{"Start":"02:17.455 ","End":"02:19.440","Text":"If you compare these 2 amounts,"},{"Start":"02:19.440 ","End":"02:22.800","Text":"the carrying amount of 120,000 and the recoverable amount,"},{"Start":"02:22.800 ","End":"02:26.540","Text":"it means that what we\u0027re showing our users as the value of the asset is"},{"Start":"02:26.540 ","End":"02:31.265","Text":"less than what we might actually recover from that asset."},{"Start":"02:31.265 ","End":"02:34.160","Text":"Therefore, the asset is not impaired."},{"Start":"02:34.160 ","End":"02:38.210","Text":"The only time we need to impair the asset is if our carrying amount"},{"Start":"02:38.210 ","End":"02:43.635","Text":"currently exceeds what we have now calculated as being what is truly recoverable."},{"Start":"02:43.635 ","End":"02:47.330","Text":"In this case, the carrying amount is less than the recoverable amount,"},{"Start":"02:47.330 ","End":"02:50.110","Text":"which means the asset is not impaired."},{"Start":"02:50.110 ","End":"02:53.480","Text":"The vehicle is not impaired and this is because its carrying amount is"},{"Start":"02:53.480 ","End":"02:56.450","Text":"reflected at 120,000 which does not exceed what"},{"Start":"02:56.450 ","End":"03:00.050","Text":"the company believes to be a true reflection of what it"},{"Start":"03:00.050 ","End":"03:05.040","Text":"can recover from the asset being 130,000."}],"ID":28647}],"Thumbnail":null,"ID":274161}]

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