FR111

Fundamentals of
Financial Accounting

Session 1
 Part-C: Accounting for Assets [WEIGHT 20%]
C1. Accounting for current assets [60%]
C2. Accounting for non-current assets [40%]

• Discussion Topics_ C1:

8.1 Introduction
8.2 Accounting for inventory
8.3 Accounting for account receivables
8.4 Accounting for notes receivables
8.5 Bank reconciliation statement
 Current Assets
• Current assets are the liquid assets and can be converted into cash
within short period of time.
• Current assets are assets that are: [IAS 1.66]
o expected to be realized in the entity's normal operating cycle
o held primarily for the purpose of trading
o expected to be realized within 12 months after the reporting period
o cash and cash equivalents (unless restricted).

Examples of current assets are:

Cash in hand, cash at bank, trade/accounts receivable, notes
receivable, short-term investment in share and bond, inventories (raw
materials, work-in-process, finished goods, supplies), prepayments.
 Accounting for Inventories [IAS-2]
• Inventories include assets held for:
I. sale in the ordinary course of business (finished goods),
II. assets in the production process for sale in the ordinary course of business
(work in process), and
III. materials and supplies that are consumed in production (raw materials).

• Details of IAS 2 can be accessed at:

https://www.iasplus.com/en/standards/ias/ias2
 Measurement of Inventories
• Inventories cost should include all:
I. costs of purchase (including taxes, transport, and handling) net of trade discounts
received
II. costs of conversion (including fixed and variable manufacturing overheads) and
III. other costs incurred in bringing the inventories to their present location and
condition

• Inventory cost should not include: [IAS 2.16 and 2.18]

o abnormal waste
o storage costs
o administrative overheads unrelated to production
o selling costs
o foreign exchange differences arising directly on the recent acquisition of inventories
invoiced in a foreign currency
o interest cost when inventories are purchased with deferred settlement terms.
 Measurement of Inventories
• IAS 2 outlines acceptable methods of determining cost:
1. specific identification (inventory items that are not interchangeable),
2. first-in first-out (FIFO) [For items that are interchangeable] or
3. weighted average cost [For items that are interchangeable]
Note that the LIFO formula, which had been allowed prior to the 2003 revision of IAS 2, is no longer
allowed.
Also note that the same cost formula should be used for all inventories with similar characteristics as to
their nature and use to the entity. For groups of inventories that have different characteristics, different
cost formulas may be justified.

• IAS 2 requires inventories to be measured/reported at the lower of cost

and (market) net realizable value (NRV).
• NRV is the estimated selling price in the ordinary course of business, less the estimated cost of
completion and the estimated costs necessary to make the sale.
 Note that IAS 2 suggests
• When inventories are sold and revenue is recognized, the carrying
amount of those inventories is recognized as an expense (often called
cost-of-goods-sold). Any write-down to NRV and any inventory losses
are also recognized as an expense when they occur.
• So, perpetual inventory system is preferable to periodic inventory
system.
 Cost Flow Methods
Specific identification method:
• This method is applicable where the size of a single unit of inventory is huge
and highly valuable/costly. They can easily be counted and costs records for
each unit is available conveniently and economically.
• For example, suppose that an automobile dealer has three trucks in stock.
Every detail about the trucks is identical with the exception on the serial
numbers which are 1001,1002 and 1003 respectively. The dealer incurred
the following cost for each truck: 1001: $30,000; 1002: $32,000; 1003:
$35,000. A customer enters the dealership and offers $34,000 for one of
the trucks. Depending on which truck the dealer sells, the dealer could
recognize net income of $4,000, $2,000 or a loss of $1,000.
• The ability to manipulate net income is a theoretical fault of the specific
identification approach.
 First in First out (FIFO) Costing Method

• To compute cost of goods sold: Multiply the quantity of goods sold by

the cost of inventory starting with the oldest cost.
• To compute ending inventory value: Multiply the quantity of ending
inventory by the cost of inventory starting with the most recent cost.

Weighted average cost method

Determine the average cost of each unit by dividing the total costs of
inventory by the total quantity of inventories hold during the period.
COGS: Unit sold multiplied by weighted average cost
Ending inventory: Units on hand multiplied by weighted average cost.
 Store Ledger [FIFO Method] Perpetual
Date Particulars Received/Purchased Issue/sale (COGS) Balance (Ending inventory)
Unit Rate Amount Unit Rate Amount Unit Rate Amount

February Beginning Balance 800 6 4800

1
4 200 7 1400 800 6 4800
200 7 1400
10 200 8 1600 800 6 4800
200 7 1400
200 8 1600
11 800 6 4800 200 7 1400
200 8 1600
12 400 8 3200 200 7 1400
200 8 1600
400 8 3200
20 200 7 1400
200 8 1600
100 8 800 300 8 2400
25 Return from factory 100 8 800 400 8 3200
28 600 9 5400 400 8 3200
600 9 5400
Total 1500 12400 1300 8600 1000 8600
 Store Ledger [LIFO Method] Perpetual
Date Particulars Received/Purchased Issue/sale (COGS) Balance (Ending inventory)
Unit Rate Amount Unit Rate Amount Unit Rate Amount
February Beginning Balance 800 6 4800
1
4 200 7 1400 800 6 4800
200 7 1400
10 200 8 1600 800 6 4800
200 7 1400
200 8 1600
11 200 8 1600 400 6 2400
200 7 1400
400 6 2400
12 400 8 3200 400 6 2400
400 8 3200
20 400 8 3200 300 6 1800
100 6 600
25 Return from factory 100 6 600 300 6 1800
100 6 600
28 600 9 5400 300 6 1800
100 6 600
600 9 5400
 Store Ledger [Weighed Average Method]
Date Particulars Received/Purchased Issue/sale (COGS) Balance (Ending inventory)
Unit Rate Amount Unit Rate Amount Unit Rate Amount
February Beginning Balance 800 6 4800
1
4 200 7 1400 1000 6.20 6200

10 200 8 1600 1200 6.5 7800

11 800 6.5 5200 400 6.5 2600

12 400 8 3200 800 7.25 5800

20 500 7.25 3625 300 7.25 2175

25 Return from factory 100 7.25 725 400 7.25 2900

28 600 9 5400 1000 8.30 8300

Total 1500 12,325 1300 8825 1000 8300

Return from store to supplier is to be recorded as issue/sale and the purchase/received rate is to be used to value them
 CMA May 2022
On 1st June 2020 a company held 400 units of finished goods valued at Tk. 22 each. During June, the following
transactions took place.
Date Units Purchased Cost per Unit
10/06/20 300 Tk. 23
20/06/20 400 Tk.24
25/06/20 500 Tk.25
Goods sold out of inventories during June were as follows:
Date Units Sold Sales Price per Unit
14/06/20 600 Tk.30
21/06/20 400 Tk.31
28/06/20 100 Tk.32
Required: Calculate value of inventories using FIFO Method

Solution to Review Problem

Value of inventories using FIFO method

= [500 units* Tk.25]
= Tk. 12500
Periodic system and no store ledger is maintained
 Solution to Problem 8.2
• Cost of goods sold under specific identification method:
• March 5: [(1100 × 0.60) + (1100× 0.65)]= $1375
• March 30: [ (450 × 0.60)+ (550 × 0.65)+ (2900 × 0.72)+ (1100 × 0.80)]=
$ 3595.50

• Cost of goods sold under FIFO method = (2000 × 0.60) + (2500 × 0.65) +
(2700 × 0.72) =
• Ending inventory = (1300 × 0.72) + (2,500 × 0.80) =
 Review Problem: Reporting Closing Inventory
Suppose a company has three items of inventories on hand at the year-end. Their costs and NRVs are as
follows:
Item Cost (Tk.) Net Realizable Value NRV (Tk.)
1 36 40
2 28 24
3 46 48
Total 110 112

Required: Calculate the closing value of inventory at the year-end?

Solution to Review Problem

Closing value of Inventories at the year-end

Item Cost(Tk.) NRV(Tk.) Lower of cost and NRV

1 36 40 36
2 28 24 24
3 46 48 46
Total Value of three items 106
 Accounts Receivable/Trade Receivables
 Receivables are claims against customers and others for goods sold on
credit, or services rendered on credit, or money lent to customers and others.
Receivables may arise either from trade or non-trade transactions.
 Trade receivables or accounts receivables arise/emerge from trade or sales
of goods on account/ on credit.
 Non-trade receivables arise/emerge from transactions other than sales of
goods or services including advances to employees, travel advances etc.
 Methods of recoding Receivable expense/ uncollectible/bad and
doubtful debt/irrecoverable debt [Expected credit loss]
Bad debts/ uncollectible/doubtful debt/ irrecoverable debts represent the portion of receivables that
cannot be collected within a stipulated long-term period usually 3 years. There are two methods of
recording uncollectible:

Methods of recording uncollectible

Direct write-off method Allowance method

Percentage on sales Percentage on Receivables

A fixed-percentage Aging schedule

 Direct write-off vs. Allowance method
• In direct write-off method, bad debts are recorded as and when the name of a receivable is written
off from the books of accounts after waiting for a certain periods usually 3 years. This method is
recommended by tax authority. The journal entry to record such transaction would be:
Receivable expense/Bad debt expense Dr.
Trade/Accounts Receivable-Mr. X/Y/Z Cr.
However, this method violates the matching or expense recognition principle in the sense that
corresponding/related expenses are recognized in a period different from the revenue recognition
period.
• In contrast, Allowance/Provision method recognizes bad debt in the period in which the sales are
made by estimating a certain percentage of credit sales or outstanding receivables. An allowance or
provision is created for the doubtful portion of receivables or credit sales [now-a-days known as
expected credit loss-ECL]. When the receivables are truly become uncollectible, the accumulated
allowance is used to write-off such receivables. This method is recommended in the IAS/IFRS in the
presentation of financial statements.
 Rules of recording uncollectible/bad debt under Allowance Method

Debit Credit
(i) To estimate doubtful debt/ to create allowance or provision for doubtful debt
(%):
Receivable expense/Bad debt expense…. Dr. 100,000
Allowance for doubtful debt……………….Cr. 100,000
(ii) To write-off uncollectible/ bad debt when management decides:
Allowance for doubtful debt………Dr. 68,000
Accounts receivable-Mr. X/Co……………………….Cr. 68,000
(iii) To record the recovery of bad debts previously written off:

a) Accounts receivable-Mr. X/Co………Dr.

Allowance for doubtful debt……………….Cr.

b) Cash………………….Dr.
Accounts receivable………………………Cr.
 Application of allowance method: % of credit sales and receivables

Illustration 1:
The accounts receivable of ST Ltd is Tk 600,000; credit sales Tk 1,000,000 and
credit balance in allowance for doubtful account is Tk 32,000 at December 31, 2020
before any year end adjustment.
Requirements:
i) Prepare journal entry to record the uncollectible if the company wants to
make a allowance/provision for doubtful debt of 2% of credit sales.
ii) Prepare journal entry to record the uncollectible if the company wants to
make a provision for doubtful debt of 8% of accounts receivable.
iii) Previously written off bad debts amounting to Tk 15,000 were collected
during the period.
 Debit Credit
(i)
Bad debt expense…. Dr. (1,000,000×2%) = 20,000
Allowance for doubtful debt……………….Cr. 20,000

(ii)
Bad debt expense…. Dr. (600,000×8%) = (48,000- 16,000
32,000)= 16,000
Allowance for doubtful debt……………….Cr.
(iii)
a) Accounts receivable………Dr. 15,000
Allowance for doubtful debt……………….Cr. 15,000

a) Cash………………….Dr. 15,000
Accounts receivable………………………Cr. 15,000
 Now try to solve the following problem
Problem 1:
The accounts receivable of ST Ltd is Tk 700,000; credit sales Tk
5,000,000 and debit balance in allowance for doubtful account is Tk
20,000 at December 31, 2019 before any year end adjustment.
Requirements:
i) Prepare journal entry to record the uncollectible if the company wants to
make a provision for doubtful debt of 1% of credit sales.
ii) Prepare journal entry to record the uncollectible if the company wants to
make a provision for doubtful debt of 5% of accounts receivable.
 Debit Credit

(i) Bad debt expense…. Dr. (5,000,000×1%) = 50,000

Allowance for doubtful debt……………….Cr. 50,000

(ii) Bad debt expense…. Dr. (700,000×5%) = (35,000+20,000)= 55,000

Allowance for doubtful debt……………….Cr. 55,000
 Allowance for Doubtful Debt

Dr. Cr.

Balance b/d 100,000

ACCOUNT RECEIVABLE – MR X 130,000

Balance c/d 200,000 Bad debt expense 230,000

330,000 330,000
Aging Schedule and allowance for doubtful debt
XZ Company operates in an industry that has a high rate of bad debts. Before any year-end
adjustments, the balance in XZ’S accounts receivable account was Tk 470,000 and the allowance
for doubtful accounts had a credit balance of Tk 40,000. The year-end balance reported in the
balance sheet for the allowance for doubtful accounts will be based on the aging schedule shown
below:

Days Account Outstanding Amount Probability of Collection

Less than 16 days Tk 100,000 0.96
Between 16 and 30 days Tk 90,000 0.91
Between 31 and 45 days Tk 110,000 0.80
Between 46 and 60 days Tk 40,000 0.75
Between 61 and 75 days Tk 100,000 0.40
Over 75 days Tk 30,000 .00

Requirements:

i. What is the appropriate balance for the allowance for doubtful accounts at year-end?
ii. Pass the necessary journal entries.
iii. Show how accounts receivable would be presented on the balance sheet.
iv. Analyze the effect of the year-end bad debt adjustment on the before-tax income.
 Sample answer
Requirement (i): Schedule showing year-end balance of Allowance for doubtful debt

Days Account Amount Estimated Estimated

Outstanding uncollectible (%) uncollectible (Tk)

Less than 16 days Tk 100,000 0.04 4,000

Between 16 and 30 days Tk 90,000 0.09 8,100

Between 31 and 45 days Tk 110,000 0.20 22,000

Between 46 and 60 days Tk 40,000 0.25 10,000

Between 61 and 75 days Tk 100,000 0.60 60,000

Year end allowance for doubtful accounts 104,100

 Allowance for Doubtful Debt
Dr. Cr.

Balance b/d 40,000

ACCOUNT RECEIVABLE – MR X 30,000

Balance c/d 104,100 Bad debt expense 94,100

134,100 134,100
Requirement (ii):

Debit Credit

(i) Allowance for doubtful debt………Dr. 30,000

Accounts receivable……………………….Cr. 30,000

(ii) Bad debt expense…. Dr. (40,000-30,000-104100)= 94,100

Allowance for doubtful debt……………….Cr. 94,100

Requirement (iii):

Tk Tk

Accounts receivable 470,000

Less: Bad debts written off (30,000)

Less: Allowance for doubtful debts (104,100)

NRV (net realizable value) 335,900

Requirement (iv):

Before-tax income will decrease by (40,000-30,000-104100) = Tk 94,100 as a result of year-end

bad debt adjustment.
 Notes receivables
• A promissory note which is usually accepted by the seller from the buyer in the
event of failure to make payment of dues within the stipulated time. It usually
bears interest on balance due for the period for which the note is issued.
• Example: On July 17, 2021, received a Tk 12,000, 90-day, 10% note on account
from Adams Co. Here, due date for the note should be October 15 (July 14 days
+ August 31 days + September 30 days + October 15 days). Interest earned
during the term of the note should be Tk300 (Tk 12,000 x .10 x 90 days/360
days). Maturity value of the note should be Tk 12,300 (principal + interest).
• Journal entries if the note is honored on the maturity date:
Debit Cash 12,300
Credit Notes receivable 12,000
Credit Interest receivable 300
• Journal entries if the note is dishonored on the maturity date:
Debit Account receivable 12,300
Credit Notes receivable 12,000
Credit Interest receivable 300
 Bank Reconciliation Statement
• At the end of each month, the bank with which a company/business
maintains account usually sends a bank statement that shows the
beginning balance, transactions during the month, and month-end
balance. If the accountants of the business finds disagreement between
the month-end balance displayed in its cash book/account’s balance and
bank statement's balance, a bank reconciliation statement is prepared by
the business to find the reasons for such disagreement.
• Purposes of Bank Reconciliation Statement:
1. To judge the accuracy of the cash book/accounts balances
2. To judge the accuracy of bank statement
3. To find out transactions recorded by bank but not recorded by the business and
vice versa
Reasons for disagreement between cash book balance and bank statement balance

1. Errors made by either party

2. Time lag: Transactions recorded by any of the party until the end of the month while
the opposite did not updated the balance until the end of the end of the period
due to ignorance.

Examples of time lag includes:

Outstanding check: Check written by the company (and therefore recorded in the
company’s book) but not presented to the bank for clearance until the end of the month.
Deposit-in-transit: Deposit recorded by the company but not presented to the bank until
the end of the month.
Bank charge: Various fees and charges deducted by the bank from the depositor’s
accounts without their knowledge.
Bank interest: Interest given by the bank on the balances of accounts
Payments collected by the banks without the knowledge of the business
NSF Check: Non-sufficient funds check received from customers/ A/R
 How to reconcile the balances
Rule 1: The party that did not record the transaction will record/update the balances by
adding or subtracting from the existing balances. The party that has already updated the
balances or recorded the transaction will do nothing.

Rule 2: The party that did the mistakes or commit the errors has to rectify now. The
opposite party will do nothing.

Specimen of Bank Reconciliation Statement

Particulars TK Particulars TK
Balance as per cash/bank/company account Balance as per bank statement

Add/less: Errors made by the company Less: Outstanding check

Less: Subscription paid by the bank but not Add: Check-in-transit/ Deposit-in-
recorded by the company transit
Add or less: Errors made by the bank
Adjusted balance Adjusted balance
 Review Problem 1: Bank Reconciliation Statement
The following information are available for MAXIS CO. Ltd. as of December 31, 2019.
• Cash on the books as of December 31, amounted to Tk. 113,675. Cash on Bank Statement on the same
date was Tk. 141,717.
• A deposit of Tk. 14,250 representing cash receipts of December 31, did not appear on the Bank Statement.
• Outstanding cheque totaled Tk. 7,294.
• A cheque for Tk. 2,420 returned with the statement was recorded incorrectly in the cash payments journal
as Tk. 2,024. The cheque was for advertisement.
• The Bank service charges for December amounted to Tk. 26.
• The bank collected Tk. 36,400 for MAXIS CO. Ltd. On a note. The face value of the note was Tk. 36,000.
• A NSF cheque for Tk. 1,140 from a customer returned with the statement.
• The bank mistakenly deducted a cheque for tk. 800 drawn by MAXCON CO. Ltd.
• The bank reported that it had credited the amount for Tk. 960 for interest on the average balance.

Required:
1. Prepare Bank Reconciliation Statement as of December 31, 2019.
2. Pass the necessary journal entries to adjust the cash account.
 Solution to Review Problem 1
MAXIS CO. Ltd.
Req 1. Bank Reconciliation Statement December 31, 2019
Particulars TK Particulars TK
Balance as per cash/bank/company account 113,675 Balance as per bank statement 141,717
Add: Less: Outstanding check (7,294)
Note receivable collected by the bank:
Principal 36,000
Interest earned on NR 400 36,400
Interest credited by the bank on balance 960

Less: Add:
Errors of understatement (2,420-,2024) 396 Deposit-in-transit 14,250
NSF Check 1,140 Errors made by the bank 800
Bank service charge 26
Adjusted balance 149,473 Adjusted balance 149,473
Req 2. Cash Tk. 36,400
To N/R Tk. 36,000
To Interest Income Tk. 400

Cash Tk. 960

To Interest Income Tk. 960

Advertisement expense Tk. 396

To Cash Tk. 396

A/R Tk. 1,140

To Cash Tk. 1,140

Bank Service Charge Tk. 26

To Cash Tk. 26
 Review Problem 2 : Bank Reconciliation
The bank statement of Universal Company having account with AB Bank shows
Tk. Tk.
Balance on June 30, 2019 1,40,000
Deposit during July, 2019 50,000
1,90,000
Less: Cheque cleared 60,000
Service charge for July, 2019 100
1,29,900
a) Balance per ledger account as of July 31, Tk. 1,24,084.
b) A Credit memorandum included with the Cancelled cheques returned indicates the collection of a note by the
bank for the Universal Company Tk. 2,000.
c) An NSF cheque for the amount of Tk. 920 is returned by the bank and included in the total of cheques deducted
/ cleared on the bank statement.
d) Deposit in transit as of July 31, Tk. 5,000 and as of June 30, Tk. 2,400.
e) Cheques outstanding as of June 30, all of which cleared by the bank in July Tk. 3,400. Cheques outstanding as of
July 31, Tk. 8,200.
f) Deposit of Universe Company credited to Universal Company account by the bank Tk. 2,000.
g) Cheque of Universe Company charged against Universal Company account by the bank Tk. 400.
h) Deposit of July 21, recorded by the company as Tk. 1,637 but actual amount was Tk. 1,673. The receipts for the
day were from collection on account.
Required:
1. Prepared a Bank Reconciliation Statement as of July 31, 2019 for the Universal Company.
2. Prepare adjusting Journals needed in July 31, 2019.

Solution to Review Problem 2

Universal Company
Bank Reconciliation Statement
As on July 31, 2019
Tk Tk
Balance as per bank statement 129,900 Balance as per cash book 124,084
Add: Deposit in transit (d) 5,000 Add: Wrong Deposit (h 36
Wrongly Charged (g) 400 Notes Collected (b) 2,000
Less: Outstanding cheque (e) 8,200 Less: NFS cheque (c) 920
Wrongly Credited (f) 2,000 Service Charge 100
Adjusted balance 125,100 Adjusted balance 125,100
1. Cash 2,036
Account Receivable 2,000
Account Payable 36

2. Accounts Receivable 920

Service Charge 100
Cash 1,020
 Review Problem 3: Bank Reconciliation Statement
• The cash account of United Motors Ltd. disclosed a balance of Tk. 170,560 on June 30, 2020. The bank statement as
of June 30, showed a balance of Tk. 212,090. Upon comparing the bank statement with the cash records the
following facts were developed:
• United Motors account has been charged for a customer’s uncollectible cheque amounting to Tk. 11,430 on June 30.
A customer’s cheque for Tk. 7,250 had been entered as Tk. 6,250 both by the depositor and the bank but was later
corrected by the bank.
• A two-month 9% Tk. 30,000 customer’s note dated April 28 discounted on June 5 had been protested on June 29
and the bank had charged United Motors for tk. 30,500 which included a protest fee of Tk. 50.
• Cheque No. 0151 for Tk. 12,420 had been entered in the cash book as Tk. 12,240 and cheque No. 0159 for Tk. 6,290
had been entered as Tk. 9,260. The company uses the voucher system.
• There were bank service charges for June Tk. 410 not yet recorded on the books.
• A bank memo statement stated that notes receivable for Tk. 25,000 and interest of Tk. 750 had been collected on
June 28 and the bank had made a charge of Tk. 250. ( No entry had been made on the books when sent to the bank
for collection)
• Cheques outstanding on June 30 were Tk. 123,080.
• Receipts of June 30 for Tk. 68,500 were deposited July 02.

Required:
1. Prepare a bank reconciliation statement using the form where both bank and book balance is brought to corrected
cash balance.
2. Give necessary journal entries in United Motor’s book.
 Solution to Review Problem 3
Req 1. Bank Reconciliation Statement As of 30th June 2020
Tk Tk
Balance as per bank statement 212,090 Balance as per cash book 170,560
Add: Add:
Deposit in transit 68,500 Errors in recording deposit (7,250 -6,250) 1,000
Errors in recording checks (6,290-9,260) 2,970
Notes Collected:
Principal 25,000
Interest 750
Charge (250) 25,500
Less: Less:
Outstanding cheque 123,080 NFS cheque (c) 11,430
Dishonored Note Receivable 30,500
Errors in recording checks (12,420-12,240) 180
Service Charge 410
Adjusted balance 157,510 Adjusted balance 157,510
Req 2. General Journal

Taka Taka
Cash/Bank 25,500
Bank charges 250
Notes Receivable 25,000
Interest income 750
Cash/Bank 1,000
Accounts Receivable 1,000
Cash/Bank 2,970
Accounts Payable 2,970
Accounts Receivable 11,430
Cash/Bank 11,430
Accounts Receivable 30,500
Cash/Bank 30,500
Accounts Payable 180
Cash/Bank 180
Bank charges 410
Cash/Bank 410
 Review Problem 4: Bank Reconciliation Statement
On 30 November 2021, the cash account balance in the general ledger of ABC Ltd showed a debit balance of BDT
193,287 while the bank statement showed a credit balance of BDT 183,332. A comparison of the bank statement and cash
account revealed the following facts:
 The statement included a debit memo of BDT 535 for the printing of additional company checks.
 Cash sales of BDT 68,720 deposited in the bank were incorrectly recorded by the company for BDT 68,270. The bank
credited ABC Ltd for the correct amount.
 Outstanding checks at November 30 were BDT 120,350 and deposits in transit were BDT 82,100.
 On November 18, AB Ltd issued a check for BDT 78,000 to KK Company, on account. ABC Ltd was incorrectly
debited by the bank for the check.
 On November 28, the bank collected a note on behalf of the ABC Ltd from its customer for BDT 90,000 plus interest
BDT 4,500. The bank charged a collection fee of BDT 250 for the transaction. This transaction has not yet been
recorded by ABC Ltd.
 The bank statement showed an NSF check received by ABC Ltd from one of its customer Mr. Zaman for BDT
109,370. The check was received by ABC on November 28 and duly recorded in the cash account.
 ABC Ltd issued a check for BDT 38,000 to a supplier and duly cleared by the bank. However, the check was
incorrectly recorded by the ABC as BDT 83,000.
Required:
1. Prepare a bank reconciliation statement at 30 November 2021.
2. Also pass necessary journal entries that ABC Ltd should record in their books of account.
 Solution to Review Problem 4
ABC Ltd
Bank reconciliation statement as at 30 November, 2021
BDT BDT
Balance as per cash/bank account 193,287 Balance as per bank statement 183,332
Bank charge for printing company checks Deposit-in-transit 82,100
Errors of understatement (68,720-68,270) (535) Outstanding checks (120,350)
Collection of notes by the bank: 450 Errors of recording 78,000
Principal 90,000
Interest earned 4,500
Bank charge (250) 94,250
NSF Check recorded erroneously (109,370)
Errors of overstatement (83,000-38,000) 45,000

Adjusted Balance 223,082 Adjusted Balance 223,082

 Journal entry

Bank charge Dr. 535

Cash/bank A/C Cr. 535
Cash/bank Dr. 450
Sales revenue Cr. 450
Cash/bank Dr. 94,250
Bank charge Dr. 250
Note receivable Cr. 90,000
Interest revenue Cr. 4,500
Accounts receivable Dr. 109,370
Cash/bank Cr. 109,370
Cash/bank Dr. 45,000
Accounts payable Cr. 45,000
 C2. Accounting for non-current assets [40%]
[Assets acquired and held for use in operation]

Non-current
assets

Intangible
Tangible Assets
Assets

Property, plant Identifiable

and equipment

Natural
Unidentifiable
resources
 Property, plant and equipment [IAS-16]
• Property, plant and equipment (also known as plant assets, fixed assets,
and tangible non-current assets) have the following three characteristics:
i) They have physical substance which implies that they have a definite
shape, size and can be seen (visible) and touched (tangible);
ii) They are long-term in nature and usually subject to depreciation
(except land whose value is expected to increase i.e., appreciation);
and
iii) They are held for use in operation, and not for sale.
 Acquisition can take any of the following forms:

i) Purchase (cash or installment)

ii) Lease
iii) Self-construction (Capitalization)
iv) Exchange
v) Donation
 Purchase of PPE
• Property (Land and building):
• Land: Costs of land include the following:
i) Purchase price or costs of acquisition or cash paid
ii) Registration and recording costs/ attorney fees
iii) Costs of draining, filling, grading
iv) Net removal costs
v) Assumptions of any lien or mortgage
vi) Tree plantation permanent in nature
• Land improvement (with limited or definite life and subject to depreciation):
i) Parking lots
ii) Fences around the property
iii) Private driveways
 Purchase/self-construction
• Building:
i) Costs of work permit such as RAJUK permission
ii) Costs of design/ architects fees
iii) Costs of material (bricks, cements, sands), labor and overhead
iv) Interest costs incurred during the construction specifically for the building

• Plant and Equipment:

i) Purchase price
ii) Freight
iii) Sales tax or VAT
iv) Installation
v) Painting and lettering
vi) Insurance during transit
vii) Interest cost on funds exclusively used for the construction of a plant assets
 Review Problem 1: Identification of Assets
Q. Classify with reasons the following items as non-current assets, current assets or liabilities;
(i) A personal computer used in the accounts department of a retail store.
(ii) A furniture on sale in an office equipment shop.
(iii) Wages due to be paid to staff at the end of the week.
(iv) Raw materials stored to be used to produce apparels by Textile Company.
(v) An amount owing to a leasing company for the acquisition of a van.

Solution to Review Problem 1

(i) Non-current Assets: The useful life of the personal computer is expected to be more than one year by
nature (Property, plant and equipment).
(ii) Current Assets: The product of the office equipment shop is furniture and as it keeps the furniture to be
sold, it is considered a current asset (Inventories).
(iii) Liabilities: The wages are to be paid within a week, so this is a current liability.
(iv) Currents Assets: Raw material is the inventory of the company. It is to be used to produce products and sell
in near future, so raw materials are current assets.
(v) Liabilities: The amount is due to be paid to the leasing company in the future which will cause an outflow of
economic benefits from the company, so it’s the liability.
 Review Problem 2: Acquisition of PPE

• XYZ Ltd. is the supplier of furniture. To improve the services to customers, the company purchases four equipments
on March 1, 2020. The terms of acquisition of the equipment are described below.
i) Equipment-1 has a list price of Tk 2,000,000 and is acquired for cash Tk 1,850,000.
ii) Equipment-2 has a list price of Tk 1,000,000 and is acquired in exchange for 8,000 shares of XYZ Ltd. The face
value of each share is Tk 10 and market value at the date of acquisition is Tk 120.
iii) Equipment-3 has a list price of Tk 1,000,000. It is acquired in exchange for 2,000 units of furniture (carried as
inventories by XYZ Ltd) whose cost to XYZ Ltd was Tk 700,000 and market value was Tk 890,000.
iv) Equipment-4 has a list price of Tk 3,005,000 and is acquired for a down payment of Tk 1,005,000 cash and a
non-interest bearing note with a face amount of Tk 2,000,000. The note is due March 1, 2021. The company
normally has to pay interest at a rate of 13% for such a borrowing, and the dealership has an incremental
borrowing rate of 14%.
v) Equipment-5 has a list price of Tk 200,000. It is acquired in exchange for 2,000 shares of ABC Ltd. These shares
are held by XYZ as investment. The face value of each share was Tk10 and market value at the date of
acquisition was Tk 90. The shares were originally purchased by XYZ Ltd 3 months ago @ Tk 80.

Requirement: Prepare the appropriate journal entries for the above transactions for XYZ Ltd.
 Debit Credit
(i) Equipment 1 Dr. 1,850,000
Cash……………….Cr. 1,850,000
(ii) Equipment 2 Dr. (8,000×120) 960,000
Share capital/Common stock…………………….Cr. (8,000×10) 80,000
Share premium/Additional paid in capital.. Cr. (8,000×110) 880,000
(iii) a) Equipment 3 Dr. 890,000
Sales Revenue…….Cr. 890,000

a) Cost of goods sold Dr. 700,000

Inventories ………………Cr. 700,000
(iv) Equipment 4 Dr. [1,005,000+(2,000,000/1.13)] 2,774,912
Interest expense Dr. 230,088
Notes payable………………………Cr. 2,000,000
Cash…………………………………….Cr. 1,005,000
(v) a) Investment in shares of ABC Ltd Dr. [2000×(90-80)] 20,000
Gain on exchange ………………………..Cr. 20,000

b)Equipment 5 Dr. (2,000×90) 180,000

Investment in shares of ABC Ltd……………….Cr 180,000
 Allocation/Depreciation (use) of PPE
• Depreciation (for tangible assets, depletion for mine, amortization for
intangible assets) is the allocation of depreciable costs of a non-current
tangible assets over the effective or useful or working life of the asset.
• Factors in charging depreciation:
1. Acquisition costs
2. Useful/effective life
3. Salvage/scrape/residual value
4. Depreciable costs
 Methods of charging depreciation
1. Straight-line method: This method produces the similar amount of annual
depreciation charge throughout the effective/useful life of the asset. % of
annual depreciation = 100 ÷ useful life….apply the rate on depreciable
cost…depreciable cost= acquisition cost – salvage value….Alternatively,
annual depreciation charge can be computed as: [Cost – Salvage value] ÷
estimated useful life
2. Units of activity/production method: This method produces depreciation
charges based on the actual activity level during the period……Depreciation
rate per unit of output or activity= depreciable costs ÷ total activity units or
hours or mile………….then multiply the actual activity unit by the depreciation
rate per unit of activity
3. Declining balance method: It is a form of accelerated depreciation method
which usually double the straight line rate to impose higher depreciation
charges during the earlier years of the asset’s life than the later years on the
ground that with the passage of time an asset’s productive capacity declines…
4. Sum-of-the-year digit Method: It is also one kind accelerated depreciation
method that charges depreciation at a higher rate at the earlier years of the
effective life of an asset.
 Illustration: Cost = Tk 20,000 ; useful life =5 years, salvage value = Tk 2,000.
Depreciable cost= 20,000- 2,000= 18,000, % of depreciation =100 ÷ 5= 20%.

Depreciation schedule using Straight-line depreciation method

Year Depreciable Straight-line Annual Accumulated Year end net book value/carrying
cost method depreciation Depreciation value
expense [Cost - Accumulated depreciation]
2021 18,000 20% 3,600 3,600 16,400

2022 18,000 20% 3,600 7,200 12,800

2023 18,000 20% 3,600 10,800 9,200

2024 18,000 20% 3,600 14,400 5,600

2025 18,000 20% 3,600 18,000 2,000

Total 100% 18,000

Illustration: Cost = Tk 20,000 ; useful life =5 years, salvage value = Tk 2,000.
Depreciable cost= 20,000- 2,000= 18,000, % of depreciation =100 ÷ 5= 20%
Depreciation schedule using Double-declining depreciation method
Year Beginning Depreciation Annual depreciation Accumulated Year end net book
book value rate expense Depreciation value/carrying value [Cost-
Accumulated depreciation]
2021 20,000 40% 8,000 8,000 12,000

2022 12,000 40% 4,800 12,800 7,200

2023 7,200 40% 2,880 15,680 4,320

2024 4,320 40% 1,728 17,408 2,592

2025 2,592 40% 592* 18,000 2,000

Total 18,000
* Depreciation expense in 2025 = Beginning book value – salvage value = 2,592 - 2,000 = 592 as the salvage value can not
be lower than that stated in the question.
Illustration: Cost = Tk 20,000 ; useful life =5 years, salvage value = Tk 2,000. total units estimated to
be produced by the machine= 10,000; in 2021: 1,500, in 2022: 2,000, in 2023: 3,000, in 2024 =
2,400, in 2025: 1,100. Depreciation rate per unit = [20,000 – 2,000] ÷ 10,000 units = Tk 1.80 per unit
Depreciation schedule using units of activity depreciation method

Year Activity unit Depreciation Annual depreciation Accumulated Year end net book
rate expense Depreciation value/carrying value [Cost-
Accumulated depreciation]
2021 1,500 1.80 2700 2700 17,300

2022 2,000 1.80 3600 6,300 13,700

2023 3,000 1.80 5400 11700 8,300

2024 2,400 1.80 4320 16020 3980

2025 1,100 1.80 1980 18,000 2,000

Total 18,000
* Depreciation expense in 2025 = Beginning book value – salvage value = 2,592 - 2,000 = 592 as the salvage value can not
be lower than that stated in the question.
Illustration: Cost = Tk 20,000 ; useful life =5 years, salvage value = Tk 2,000. Sum of the year
𝑛2 +𝑛 52 +5
digits= 1+2+3+4+5 = 15; or = = 15
2 2

Depreciation schedule using Sum-of-the-year digit method

Year Depreciable SYD Annual depreciation Accumulated Year end net book
cost expense Depreciation value/carrying value [Cost-
Accumulated depreciation]
2021 18,000 5/15 6,000 6,000 14,000

2022 18,000 4/15 4,800 10,800 9,200

2023 18,000 3/15 3,600 14,400 5,600

2024 18,000 2/15 2,400 16,800 3,200

2025 18,000 1/15 1,200 18,000 2,000

Total 18,000
 Recording of depreciation expense and Disposal of PPE
• At the end of reporting period: [adjusting entry]
Depreciation expense Dr.
Accumulated depreciation Cr
Situation 1: 31.12.2025: At the end of useful life, the equipment was sold for BDT 3,000.
At the time of (sales) disposal/retirement of assets: [Gain situation]
Cash/receivables on PPE Dr. 3,000
Accumulated depreciation Dr. 18,000
PPE-Asset Cr. 20,000
Gain on disposal Cr. 1,000
[when selling price is greater than the carrying value or book value]
Situation 2: 31.12.2025: At the end of useful life, the equipment was sold for BDT 1,200.
Cash/receivables on PPE Dr. 1,200
Accumulated depreciation Dr. 18,000
Loss on disposal Dr. 800
PPE-Asset Cr. 20,000
[when selling price is lower than the carrying value or book value]
Retirement situation: While retired, the same journal is passed except for cash/receivables…..
Accumulated depreciation Dr. 18,000
Loss on retirement Dr. 2,000
PPE-Asset Cr. 20,000
 Review Problem 3. Acquisition, Depreciation and Disposal

TR Travels purchased a machinery for cash BDT 2,080,000. Related expenditures included: sales tax BDT
61,400, shipping costs BDT 48,000, insurance during shipping BDT 25,600, installation and testing costs
BDT 35,000, and BDT 40,000 of oil and lubricants to be used with the machinery during its first year of
operation. The salvage value of the machinery is assumed to be BD 240,000 at the end of its 4 years useful
life. The machine is expected to produce 100,000 units during its useful life distributed as: 20,000 units in
year 1, 30,000 units in year 2, 35,000 units in year 3 and the rest of the units in year 4.

You are required to –

i. Compute the acquisition cost of the machinery to be recorded as asset and pass the necessary journal
entry at the date of acquisition.
ii. What will be the year-ending carrying/book value of the asset at the end of 3rd year if the company
follows double-declining depreciation method?
iii. Compute the gain or loss on disposal if the company could sell the machinery for BDT 300,000 at
the end of year 3. Also pass the journal entry to record the disposal of machinery.
iv. What will be the accumulated depreciation balance at the end of year 4 if the company uses units-of-
activity method?
 (i) Acquisition cost of the Machinery:
Cash purchase price BDT 2,080,000
Sales tax 61,400
Shipping costs 48,000
Insurance during shipping 25,600
Installation and testing 35,000
Total acquisition cost 2,250,000

(ii) Annual depreciation rate=100/4=25%; under double-declining method the rate will be 50%
Year Beginning of the Depreciation Annual Accumulated Year-ending
year book value rate Depreciation depreciation book value
expense
1 2,250,000 50% 1,125,000 1,125,000 1,125,000
2 1,125,000 50% 562,500 1687,500 562,500
3 562,500 50% 281,250 1,968,750 281,250
4 281,250 50%* 41,250* 2,010,000 240,000

*Depreciation in the 4th year= Beginning book value – Salvage value.

Hence, the book value at the end of 3rd year will be BDT 281,250.
(iii) Gain on disposal of machinery = 300,000-281,250 = BDT 18,750

Cash Dr. 300,000

Accumulated depreciation Dr. 1,968,750
Machinery Cr. 2,250,000
Gain on disposal Cr. 18,750

(iv) Whatever method of charging depreciation is followed by the company,

the balance in the accumulated depreciation account at the end of its
effective life will be equal to the depreciable cost of the asset, i.e.,
2,250,000-240,000 = BDT 2,010,000.
 Review Problem 4. Depreciation and Retirement
At December 31, 2019 Universal Company reported the following as Plant assets:
Taka Taka
Land 30,000,000
Building 26,500,000
Less: Accumulated Depreciation 12,100,000 14,400,000
Equipment 20,000,000
Less: Accumulated Depreciation 5,000,000 15,000,000
Total Assets 59,400,000

During 2019 the following selected cash transactions occurred.

• April 01, Purchased Land for Tk. 2,200,000
• May 01, Sold equipment that cost Tk. 6,00,000 when purchased on January 01,
2015. The equipment was sold for Tk. 3,50,000.
• June 01, Sold land purchased on June 01, 2011 for Tk. 1,800,000. The land cost
was Tk. 500,000.
• July 01, Purchased equipment for Tk. 1,200,000.
• December 31, Retired equipment that cost Tk. 500,000 when purchased
December 31,2009. No salvage value received.
 Required:
(i) Journalize the above transactions. Universal Company uses straight line depreciation for building and
equipment. The building is estimated to have a 40 years life and no salvage value, the equipment to have a 10
years useful life and no salvage value. Update depreciation on assets disposed of at the time of sale or
retirement.
(ii) Record the adjustment entries for depreciation for 2019.

Solution to Review Problem 1

Req i. Date Accounts Title Ref Debit Credit
April 01 Land 2,200,000
Cash 2,200,000
May 01 Cash 350,000
Accumulated Depreciation 260,000
Equipment account 6,00,000
Gain on sales of Equipment 10,000
June 01 Cash 18,00,000
Land 5,00,000
Gain on sales of Equipment 13,00,000
July 01 Equipment account 12,00,000
Cash 12,00,000
December Accumulated Depreciation 500,000
31 Equipment account 500,000
Req ii.
Date Accounts Title Ref Debit Credit

December 31 Depreciation expenses (Building) 6,62,500

Accumulated Depreciation on Building 6,62,500

December 31 Depreciation on Equipment 2,000,000

Accumulated Depreciation on Equipment 2,000,000*
*=[{(20,000,000+600,000-1,200,000+500,000)/10} *4/12]
+ [{(19,900,000-600,000)/10} *2/12] + [{19,300,000
+1,200,000)/10} *6/12]; or 2,0100,000 if considered
fraction of time]
 Review Problem 5. Depreciation

ABC Company Ltd. acquired and put into use a machine on January 1, 2017, at a total cost of Tk.
45,000.00. The machine was estimated to have a useful life of 10 years and a salvage value of Tk. 5,000.00.
It was also estimated that the machine would produce one million units of product during its life. The machine
produced 90,000 units in 2017 and 125,000 units in 2018.

Required:
Compute the amounts of Depreciation to be recorded in 2017 and 2018 under each of the following
method:
i. Straight -line method.
ii. Units-of-production method.
iii. Sum-of-the-years-digits method.
iv. Double-declining balance method.
 Solution to Review Problem 5
(i) Straight Line method: Taka
2017: (Tk. 45,000-5,000)/10 years = 4,000
2018: (Tk. 45,000-5,000)/10 years = 4,000

(ii) Units of production method:

2017: (Tk. 45,000-5,000)/10,00,000 units
= 0.04 x 90,000 units
= 3,600
2018: (Tk. 45,000-5,000)/10,00,000 units
= 0.04 x 125,000 units = 5,000

(iii) Sum of the years digit method:

2017: (Tk. 45,000-5,000)x10/55 = 7,272.33
2018: (Tk. 45,000-5,000)x9/55 = 6,545.45

Double declining balance method:

2017: (Tk. 45,000x20%) = 9,000
2018: (Tk. 45,000-9000)x20% = 7,200
 Review Problem 6: Profit on Disposal
ABC Company Ltd., acquire an office equipment on 1st January, 2014 at a cost of Tk. 11,000 with an
estimated life of 10 years and a scrap value of Tk. 1,000 at the end of life. The equipment was sold out on 1st
July, 2018 at a price of Tk. 5,000 received in cash.
Required: Pass journal entry to record the sale and profit /loss on the sale. Show all computations.

Solution to Review Problem 1

JOURNAL ENTRIES

Dr. Cr.
Cash 5,000
Accumulated depreciation 4,500
Loss on sale of Office Equipment 1,500
Office Equipment 11,000

Computations:
Depreciation per year ( 11000 - 1000)/10 years = Tk. 1,000

Depreciation up to 1.7.2014 ( 1000x4.5years) = Tk. 4,500

 Loss on sale of Equipment:

Cost 11,000
Less: Depreciation Charged 4,500
Book value 6,500
Less: Cash received from sale 5,000
Loss on sale of Office Equip. 1,500

Review Problem 7: Journal Entries for Disposal of PPE

ABC Company Ltd., purchase a machine at a price of Tk. 36,000 on 1st January, 2001. Themachine was
depreciated straight line on the basis of a life of 12 years having no salvage value. On 1st January, 2010 the
machine was exchanged for a new one with a list price of Tk.40,000. The trade -in value agreed for the old
machine was Tk.10,000 and the balance waspaid in cash.
Required:
Pass journal entry to record the receipt of cash and the profit/loss on the exchange. Shownecessary
computations.
 Solution to Review Problem 7
Dr. Cr.

New Machine 40,000

Accumulated depreciation 27,000
Old Machine 36,000
Cash 30,000
Gain on exchange of machine 1,000

Computations:
Old Machine used ( 01.01.2001 to 01.01.2010) = 9 years
Depreciation for 9 year ( 36000/12x9) = Tk. 27,000

Gain on Exchange of Machine:

Old Machine cost 36000
Less Dep. Charged 27000
Book value 9000
Sale price of old machine 10000
Gain on exchange of machine 1000
 Review Problem 8: Depreciation Methods
Pacific Inc. purchased equipment on January 1, 2016 for Tk. 1,30,000. It is estimated that the equipment will
have a Tk. 4,000 salvage value at the end of its service life. Its service life is estimated at 7 years. Total
working hours are estimated at 42,000 and its total production is estimated at 5,25,000 units. During 2016 the
machine was operated 6,000 hours and produced 55,000 units. During 2017, the machine was operated 5,500
hours and produced 48,000 units.

Required:
Compute depreciation expense for year ending on December 31, 2016 and the year ending on December 31, 2017
using the following methods:
(i) Straight line; (ii) Units of output; (iii) Working hour; (iv) Sum of the years digits;
(v) Declining balance (twice the straight line rate)

Solution to the Review Problem 8: Depreciation Methods

(i) Straight line Method:
Depreciation per year = (130,000-4,000)/7 = Tk. 18,000
Depreciation for 2016 and 2017: Tk.18,000
(ii) Units of output method
Depreciation per unit = (130,000-4,000)/525,000 = Tk. 0.24 per unit
Depreciation for 2016 = 55,000 *0.24= Tk 13,200
Depreciation for 2017 = 48,000 * 0.24= 11,520

(iii) Working hour method

Depreciation per hour = (130,000-4,000)/42,000 = Tk. 3 per hour

Depreciation for 2016 = 6,000 *3= Tk 18,000
Depreciation for 2017 = 5,500 * 3= 16,500

(iv) Sum of the years digits method

𝑛2 +𝑛
Sum of total number of year 1+2+3+4+5+6+7 = 28 or = (49+7)/2=28
2
Depreciation for 2016 = (130,000-4,000)/28 *7= Tk 31,500
Depreciation for 2017 = (130,000-4,000)/28 *6= Tk 27,000

v) Double declining balance method

Depreciation rate = 100/7*2= 28.57%
Depreciation for 2016 = (130,000*28.57%) = 37,141
Depreciation for 2017 = (130,000-37,141)*28.57%= Tk 26,530
 Exchange of PPE
• Exchange of plant assets with commercial substance [dissimilar asset]: Both gain
and loss can be recognized immediately
• Exchange of plant assets without commercial substance [similar asset]: Do not
recognize a gain but recognize loss…….gain can be recognized only when
substantial portion is received as cash.
• However, the cost of the asset acquired should not be greater/higher than its fair
value at the date of acquisition under any circumstances .
• Entry required to pass to record the exchange:
Cash Dr.
Assets received Dr.
Accumulated depreciation Dr.
Loss on exchange Dr.
Assets surrendered or transferred Cr.
Cash Cr.
Gain on disposal Cr.
 Review Problem 1: Exchange of PPE
Max Limited exchanged used equipment (cost Tk 230,000, accumulated depreciation Tk 50,000 and fair market value at
the date of exchange Tk 185,000) for new equipment with TRX Limited and paid cash Tk 68,000.
Requirements:
i) Record the exchange in the books of Max Limited assuming that the exchange has commercial substance.
ii) Record the exchange in the books of Max Limited assuming that the exchange lacks commercial substance.

Solution to the Review Problem 8: Depreciation Methods

Requirement (i): The exchange has commercial substance (dissimilar assets)

Debit Credit
PPE-New equipment Dr. (185,000+68,000)= 253,000
Accumulated depreciation Dr. 50,000
PPE-Old equipment Cr. 230,000
Cash Cr. 68,000
Gain on exchange Cr. [185,000 – (230,000-50,000)] 5,000
 Solution to Review Problem 1: Exchange of PPE
Requirement (ii): The exchange lacks commercial substance (similar assets)

Debit Credit
PPE-New equipment Dr. (185,000+68,000-5,000)= 248,000
Accumulated depreciation Dr. 50,000
PPE-Old equipment Cr. 230,000
Cash Cr. 68,000
 Impairment
• IAS 36 Impairment of Assets seeks to ensure that an entity's assets are not carried at more than
their recoverable amount (i.e. the higher of fair value less costs of disposal and value in use).
With the exception of goodwill and certain intangible assets for which an annual impairment test
is required, entities are required to conduct impairment tests where there is an indication of
impairment of an asset, and the test may be conducted for a 'cash-generating unit' where an
asset does not generate cash inflows that are largely independent of those from other assets.
• Impairment test is required for land, buildings, machinery and equipment, investment property
carried at cost, intangible assets, goodwill, investments in subsidiaries, associates, and joint
ventures carried at cost, assets carried at revalued amounts under IAS 16 and IAS 38.
• It does not apply to inventories, deferred tax assets, financial assets, investment property carried
at fair value, non-current assets held for sale.
• Fair value: the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date (see IFRS 13 Fair
Value Measurement)
• Value in use: the present value of the future cash flows expected to be derived from an asset or
cash-generating unit
Impairment loss Dr. 8,300 -8,000= 300
Assets Cr. 300
 Accounting for Intangibles
1. Unidentifiable: internally generated or purchased but are not
identifiable separately and often provides benefits for indefinite periods
2. Identifiable: Can be traced separately and having benefits for the specific
period.
3. For example, patents are exclusive rights conveyed by governments to
inventors for a specific period.
4. Amortization be recorded as:
Debit Amortization expense XXX
Credit Accumulated amortization – Patent XXX
Similarly, copyrights and trademarks convey exclusive rights for specific
periods. Leaseholds and leasehold improvements are benefits of occupancy
that are contractually set by the lease. Also, if an intangible materially
declines in value (applying the recoverability test), it is written down.
 Review Problem 9: Intangible Assets and Amortization
Opera Co. organized in 2015, has set up a single account for all intangible assets. The following summary
discloses the debit entries that have been recorded during 2015 and 2016.
Tk.
01/07/2015 8 year franchise 84,000
01/10/2015 Advance payment on laboratory space for 2 year lease 56,000
31/12/2015 Net loss for 2015 including state incorporation fees Tk. 1,000, and related legal fees of 16,000
organizing, Tk. 5,000 (all fees incurred in 2015)
02/01/2016 Purchase of patent (10 years life) 74,000
01/03/2016 Cost of developing a secret formula (indefinite life) 25,000
01/04/2016 Goodwill purchased (indefinite life) 2,78,400
01/06/2016 Legal fee for successful defense of patent purchase above 12,650
01/09/2016 Research and development costs 80,000

Required:
1. Prepare the necessary entries to clear the intangible assets account and to set up separate accounts for
distinct types of intangibles.
2. Make adjusting entries on December 31, 2016.
 Solution to Review Problem 9: Intangible Assets and Amortization
Date Accounts title Reference Debit Credit
December Franchise……….Dr. 84,000
31, 2016 Prepaid rent 56,000
Organization expense 6,000
Retained earnings 10,000
Patents (74,000+12,650) 86,650
Research and development expense
(25,000+80,000) 1,05,000
Goodwill…………..Dr 2,78,400
Intangible Assets ……………Cr. 626,050
Franchise amortization expenses (84,000÷8) Dr. 10,500
Retained earnings (84,000÷8)/12*6 Dr. 5250
Franchise Cr. 15,750

Rent expense (56,000÷2) 28,000

Retained earnings (28,000/12*3 ) 7,000
Prepaid rent 35,000
Patent amortization expense Dr. 8,170
Patent Cr. 8,170
(74,000÷10)+ [(12,650/115)*7] =
ALL THE BEST!