Page 213 - Accountancy_F5

Exercise 7.1
1. Discuss whether physical existence is essential in defining non-current assets,
referring to specific examples from the financial statements of the companies listed
in Dar es Salaam Stock Exchange (DSE).

2. Classify the assets of Sunflag Limited provided below into three categories: Natural
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resources, tangible non-current assets, and intangible non-current assets.
These assets are: patents, machinery, copyrights, buildings held for sale, computers
used at the office, the Vote-book financial management information system, land
and buildings, trucks, accounting package software, cultivated forests (that is
plantations).
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3. Papa incurs various costs related to the construction of a new factory. These include
preparation expenses for the site, totalling TZS 2,400,000, and a significant cost
for materials utilised, amounting to TZS 1,500,000,000. Labor expenses totalling
TZS 31,900,000, inclusive of TZS 90,000,000 incurred during a labour dispute,
during which no construction activity took place. Additionally, there are costs
associated with testing different factory processes, totalling TZS 1,500,000, and
consultancy fees for equipment installation amounting to TZS 22,000,000. Staff
relocation to the new factory costs of TZS 11,000,000, while general overheads
amount to TZS 500,000,000. Lastly, there are costs projected for dismantling the
factory at the end of its 10-year useful life, valued at TZS 100,000,000.

Required: Determine the amount of costs to be classified as capital?

Nature and objectives of depreciation
When one takes into account deterioration, obsolescence, as well as wear and tear over
the duration of a tangible asset’s useful life, that is known as depreciation. It is shown as
a non-cash expense in the financial accounts. Depreciation is used to accurately depict
an asset’s slow value drop, align an asset’s cost of usage with its income, and comply
with accounting and tax regulations. It also helps to create a more realistic picture of a
company’s financial standing.

Nature of depreciation
Generally, depreciation refers to the actual decrease of the fair value of an asset. For
example, a value of a machine may decrease each year as it is used in generating income
or due to different reasons such as wear and tear. The concept extends to include the
process of allocating a share of the costs of asset in each accounting period to reflect the
use of an asset in generating revenue in line with the matching concept. Allocation of
an asset’s depreciable is usually done systematically over its useful life. Therefore, the

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