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For the purpose of depreciation, land and Required: Briefly explain if this
buildings are treated separately even if they equipment will be recognised in the
were acquired together. The reason is, the financial statements and subsequently
value of land normally increases overtime, depreciated.
while the value of buildings diminishes Objective of charging
overtime. depreciation on property, plant
FOR ONLINE READING ONLY
Example 7.4 and equipment
Determine whether depreciation will be Businesses hold property, plant and
charged or not in the following scenarios: equipment assets to support revenue
1. The carrying value of the machine generation. For example, a manufacturing
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is TZS 40,000,000 and its residual firm may need to construct or rent a factory
value is TZS 20,0000,000. Its fair building to house manufacturing machines
value is TZS 50,000,000. for production. During production or
storage, these machines lose their production
2. The carrying value of the machine capacity due to wear and tear. Thus, if
is TZS 20,000,000 and its residual the value of these machines was based
value TZS 21,000,000.
on their production capacity, it is correct

Solution 7.4 to say their original value has decreased.
1. In this scenario, depreciation will be To maintain a true and fair view of the
charged because the carrying value financial statements, depreciation should
exceeds the residual value that is be determined and presented accordingly.
TZS 40,000,000 > TZS 20,000,000, Depreciation can be viewed as a charge
despite the fact that, the fair value of against the cost of those items that enhance
TZS 50,000,0000 exceeds the carrying the revenue-generating capacity against the
value, TZS 40,000,000. profit of the business. However, it would
be incorrect to charge the whole cost in the
2. In this case, the depreciation charge first year of purchase since the asset will
will be zero because the residual value help generate income for many years. The
of TZS 21,000,000 > the carrying value matching principle in accounting requires
TZS 20,000,000. that expenses be recognised in the year
in which the revenue is earned, thus the
Activity 7.2 cost should be allocated over the useful
Mkaka Enterprises Limited has life of the asset. Physical wear and tear
equipment which is in working condition
with valuation of TZS 120,000,000. The and obsolescence also contribute to the
equipment was classified as held for sale depreciating value of an asset.
on 2 April 2024. The financial statement Similarly to other costs such as materials
nd
of the company ends on 31 December and labour, depreciation on non-current
st
2024.

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