Credit note for asset previously depreciated

Londina

Basically a client has now received a credit note for an asset which he bought last year and it has been depreciating since.What do you do in this case? The last year accounts are already filed, so this is a post adjustment balance sheet.

Which double entries do you post in the accounts? it's like a disposal of the asset right?
I'm also doing month end for this client, therefore every month I post a portion of the depreciation, do I have to credit those?

Thanks in advance for any help.

coojee

I'd just depreciate it based on the new amount and not change last years figures (unless it's material) So for example:

Original cost 10,000 depreciation rate 25% RB, last years depreciation 2,500, NBV B/F 7,500

Now receive a CN for 2,000 making original cost 8,000. Last years depreciation should have been 2,000 and NBV (last year) 6,000. Depreciation this year should be 6,000 x 25% = 1,500 and NBV 4,500

In this years accounts, depreciation needs to be the balancing figure to make the NBV correct. So NBV b/f 7,500 less CN = 5,500, correct NBV = 4,500 so depreciation needs to be 1,000 this year to make the NBV 4,500.

I wouldn't change the monthly accounts, I'd just apportion the remainder of the depreciation due over the remaining months. Say you're 6 months into the year you'll have already apportioned 937.50 (old deprecation charge for year x 6/12) but the new charge for the year is to be 1,000 so you only now need to charge the remainder of 62.50 over the remainder of the year. If you've already charged more than the amount due then you'll have to reverse some if it.

That might seem quite a simplistic way of doing it and I'm sure someone will be along sooner or later to give you a more complicated way.

Londina

Cheers Coojee for the reply, it starts to make sense to me!

However the credit note is for the full original cost (sorry I should mentioned earlier), therefore do I need to follow the same steps?

coojee

Londina wrote: »

Cheers Coojee for the reply, it starts to make sense to me!

However the credit note is for the full original cost (sorry I should mentioned earlier), therefore do I need to follow the same steps?

Oh, that's weird then. You still have the asset, it's working and yet you've got it for nothing. You'll have to write it all down to nil then

DR PLCA with credit note
CR asset cost account (should now be nil)

DR accumulated depn account (should now be nil)
CR depreciation in the P and L account (this will just reverse the DR that went through last year)

With any luck you've enough depreciation from other items that you'll still have an overall DR in the P and L but you'll probably still need to make a note in the accounts as depn will look odd for this year.

How come they credited the whole amount?

Londina

coojee wrote: »

Oh, that's weird then. You still have the asset, it's working and yet you've got it for nothing. You'll have to write it all down to nil then

DR PLCA with credit note
CR asset cost account (should now be nil)

DR accumulated depn account (should now be nil)
CR depreciation in the P and L account (this will just reverse the DR that went through last year)

With any luck you've enough depreciation from other items that you'll still have an overall DR in the P and L but you'll probably still need to make a note in the accounts as depn will look odd for this year.

How come they credited the whole amount?

I still don't understand either, apparently he bought this software last year which now he's not happy about it therefore he asked a full credit for it (not a easy request, but the supplier at the end agreed!)

So the depreciation that went last year has to stay as it is? I just need to reverse what it has been depreciated this year!

Quite difficult situation....don't think there is such example in AAT text book! The only thing I was going to do was the disposal journals, but without any profit/loss going through the bank!

Richard

Has he been using the software up until he decided he was no longer happy with it?

My guess, (and it is a guess!), would be that if he has been using the software in his business to earn revenue, then depreciation should be charged to the accounts up until he disposed of the asset. You would then dispose of the asset in the usual way. This, however, would leave a gain on disposal in the P&L.

qwerty

You think receiving a refund in the next year is weird . . . we had a client who received a full refund several years after purchasing some software.

The supplier originally agreed to support the software 'forever' (why anyone in their right mind would do this I don't know), and then around 5 or so years later decided to no longer support the product. Our client then, successfully, argued that the software was no longer fit for purpose and got themselves a full refund!

We just dealt with it like any other disposal, with the refund as the proceeds and showed a gain on disposal in the profit and loss account.

Londina

I have an update from the client, the credit note is actually for 2/3 of the price (I'm getting confused, basically he's still using part of the software, but not all the functions...), therefore I still have to apportion the depreciation as suggested by coojee and since I have already charged more than the amount due, I have to reverse most of it.

Example:

Original cost 12,000 depreciation rate 25% RB, last years depreciation 3,000, NBV B/F 9000
and now I have a CN for 8,000 making original cost 4,000.

What about the depreciation of last year, do I have to take it into account that has been charged £3,000 when I adjust the depreciation of this year? I think so, but I'm not too sure

Andy Blyth

Hi,

Yes you do need to take last year's depreciation into account. The best way to do it is to work out what the position should be now and your depreciation charge for this year is whatever it needs to be to make the closing position correct.

Using your example above, actual original cost is now £4k, so last year's depreciation should have been £1k, NBV b/f £3k.

This year's depreciation should be £750, NBV c/f £2,250.

You have alrerady depreciated by £3k last year, making your effective NBV b/f £1k.

You therefore need to reverse £1,250 of last years depreciation along with any already posted this year. That will give you the correct position at the end of this year of NBV £2,250.