October 2010 - Q19

[ssaini]

Hi,

Just wanted to find out why when restating the income statement depreciation charge has been calculated and used for the whole year as opposed to the interest charge which has only been calculated for the relevant months. Is this not inconsistent?

Thanks for any help,
Salil

 

[morrisja]

Just in case you missed it in the question:

"Real plc depreciates equipment using the straight line method, with a
full year’s depreciation charged in the year of acquisition."

This is why it's done that way in the answer.

Whether or not this meets the accruals concept is another question. I would say that depreciation is a judgement call more than an accurate calculation (though possibly someone with more experience would say differently). It may be that this pattern of depreciation is appropriate for the machinery in question and so should be charged in this way, or it may just be that this is not consistent.

I think the best approach is to stick with accruals concept and charge things as they are due (as with interest in this question), but if you're explicitly told otherwise, then follow the question.

 

[johnpe21]

sorry but i am also bit confused with the accrued interest figure. Doesnt the fact that the question states that the first payment was due on 30 sep 2011 mean that we should charge 4 months as accrued interest ? Or do we always calculate the interest for the whole year? ( thats what the 80 figure stands for)

Could you please also explain to me the reason why we dont add the 1 m stock in the cost of sales in the income statement?

thanks a lot in advance !

 

[morrisja]

Loan is 4m @8%. Interest for a year is 320k. Accrued interest for Q4 2010 is 1/4 of this or 80k which is the correct figure (or am I missing something?).


As far as the stock goes I believe this sentence explains it:

"There will be no production from the machine in 2010."

The project has not resulted in any new production so the materials purchased will have no effect on profit. We have Purchases+1m, Closing inventories +1m. Cost of sales does not change. Our inventories have increased as noted in current assets, which is matched by the increase in non-current liabilities.

Does this all make sense?

 

[ssaini]

Hi,

I appreciate that

"Real plc depreciates equipment using the straight line method, with a
full year’s depreciation charged in the year of acquisition."

This does not say when in the year of acquisition.

However, as depreciation is the cost associated with the wearing out of an asset over its useful life, would the depreciation charge not occur at the end of the year (like what is likely with the borrowings). In which case why have we only taken the interest for the associated months only. Or is the assumption that the interest will be paid monthly as such the interest has been charged for the relevant months but charges made at the end of the year are considered upfront.

Thanks for all your help.

Salil

 

[Colin McKee]

Depreciation

Hi
the depreciation charge would be calculated when you close the accounts for a period (eg a quarter or a year), and would apply to that periods profit. It doesnt really crystallise at a certain point in time. In this question we take a ful years depreciation in the first year, which means the first time we calculate the annual profit after the asset has been purchased. Hope this helps.