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Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia

PowerPoint to accompany

Chapter 11

Non-Current Assets:

Property, Plant and Equipment, and Intangibles

Learning Objectives

1. Measure the cost of a non-current asset

2. Account for depreciation3. Select the best depreciation method


pfor income tax purposes

4. Account for the disposal of a non-current asset

5. Account for the revaluation of a non-current asset

6. Account for intangible assets

Non-current Assets



Measure the costof a non current asset

Objective 1


of a non-current asset.

An asset must be carried on the balance sheet at the

amount paid for it.

Cost Principle


The cost of an asset equals the sum of all of the costs incurred to bring the asset to its intended purpose.

Land and Land Improvements



Land Improvements

All improvements located on the land but subject to depreciation:

Fencing

Paving


Paving

Sprinkler systems

Lighting

etc.

Buildings – Construction

Architectural fees

Building permits

Contractor charges

P t f t i l l b


Interest during construction?(AASB 123 prefers expensing)

Payments for materials, labour

Buildings – Purchasing

Purchase price

Agents’ commissions

Stamp duty


Repairing or renovating building for its intended purpose


Machinery and Equipment

Purchase price (less any discounts)

Transportation charges

I i t it


Insurance in transit

Customs duties

Installation costs

Expenditures to test asset before it is placed in service

Capitalising The Cost of Interest

Suppose on January 1, 20X1, In Motion T-Shirts borrows $50,000 on a two-year, 10% loan, to build a warehouse.

Total interest for the financial year


Total interest for the financial year ended 30/6/X1 is 6/12 x $10,000 = $2,500.

AASB 123 (Borrowing Costs) allows capitalisation (record as asset) but prefers expensing (more conservative).

Jan-June 20X1

Building 50,000Cash at Bank 50,000

Building the warehouse

Capitalising The Cost of Interest


Building the warehouse

June 30 20X1

Building 2,500Cash at Bank 2,500

Capitalising the interest


Lump-sum Purchases

Business may purchase a group of assets (e.g. land and buildings)

For accounting purposes we need to indentify each separately


indentify each separately

Using the relative-fair-value method (AASB3) we divide the cost according to their fair (market) values.

Lump-sum Purchases Example

In Motion T-shirts paid $100,000 for a combined purchase of land and a building.

The land is appraised at $30,000 and


the building at $60,000. How much of the purchase price is

allocated to land and how much to the building?

Lump-sum Purchases Example

Land: $30,000 ÷ $120,000 = 25%$100,000 × 25% = $25,000


Building: $90,000 ÷ $120,000 = 75%$100,000 × 75% = $75,000


Does the expenditure increase capacityor efficiency or extend useful life?

YES NO

Distinction Between Capital Expenditures and Expenses


Capital ExpenditureDebit

Non-currentAssets accounts

ExpenseDebit Repairs

and Maintenanceaccount

Distinction Between Capital Expenditures and expenses

This is easy in theory but allows choice in

Does the expenditure increase capacity or efficiency or extend

useful life?


This is easy in theory but allows choice in practice.

There are cases where it is clearly an expense or clearly an asset.

But in cases where doubt exists this allows ‘earnings management’ – (legally produce higher or lower profit figures).

Depreciation is NOT a process of valuation

Measuring The Depreciationof Property, Plant and Equipment


Depreciation does NOTprovide cash for the

replacement of the asset


Cost

Measuring The Depreciationof Property, Plant and Equipment


Estimated useful life

Estimated residual value

Objective 2

Account for d i ti


depreciation.

Straight-Line (SL)

Depreciation Methods


Units-of-Production (UOP)

Reducing-Balance (RB)


Depreciation Methods Example

Qantas purchased a baggage-handling truck for $41,000.

It is expected to have a trade-in value of


$1,000 at the end of its useful life.

The van has an estimated service life of 100,000 km or 5 years.

(Cost – Residual value) ÷ years of useful life

($41,000 – 1,000) = $40,000 ÷ 5 = $8,000

Straight-line Method example


( , , ) , ,

Year 1 Depreciation: $ 8,000Year 2 Depreciation: 8,000Year 3 Depreciation: 8,000Year 4 Depreciation: 8,000Year 5 Depreciation: 8,000Total Depreciation: $40,000

($41,000 – 1,000) ÷ 100,000km = $.40/km

Year 1: 20 000 km =$ 8 000

Units-of-Production Method Example


Year 1: 20,000 km =$ 8,000Year 2: 30,000 km = 12,000Year 3: 25,000 km = 10,000Year 4: 15,000 km = 6,000 Year 5: 10,000 km = 4,000

Total: 100,000 km =$40,000


Reducing-Balance Method Example (approx)

Straight-line rate is 100% ÷ 5 = 20%

Reducing-balance is approximately 1.5 times the straight-line rate = 30%


g

What is the book value of the van at the end of the first year?

$ 41,000 × 30% = $ 12,300 depreciation

$ 41,000 – $12,300 = $ 28,700

Reducing-Balance Method Example

End of year 1

D i ti E $ 12 300


Depreciation Expense $ 12,300Accumulated Depreciation $12,300

To record depreciation expense for a one-year period

Reducing-Balance Method Example

Remember the book value of the truck at the end of the first year?

$ 41,000 – $12,300 = $ 28,700

Depreciation for the second year is


Depreciation for the second year is

$ 28,700 × 30% = $ 8,610

Giving a book value of

$ 28.700 - $ 8,610 = $ 20,090


Reducing-balance method example (precise method)

The method used in the last few slides is a approximate method commonly used for its simplicity

Your textbook (pages 441-442) shows


Your textbook (pages 441 442) shows the more precise method.

Comparing depreciation methods


See Exhibit 11-10 on page 444 of your textbook

Comparing depreciation methods

The large amount in year 5 using the reducing balance is due to the inaccuracy of using 1.5 times the


straight line method.

This is amount is used to totally depreciate the asset

Using the formula on page 442 of your textbook the rate is .524%


Objective 3

Select the best d i ti


depreciationmethod for income

tax purposes.

Relationship between depreciation and taxes

Most businesses use straight-line depreciation for financial reporting.

For tax purposes businesses can use;

‘Prime Cost’ which is straight line


‘Prime Cost’ which is straight-line.

‘Diminishing Value’ which is reducing-balance at 1.5 times the straight-line rate.

Depreciation for partial years

Assume In Motion T-Shirts buys a building on 1 July for $100,000 with a RV of $40,000 and a useful life of 20 years.

How much is the building's depreciation on 31st of December?


Prime cost method:3,000 × 6/12 = $1,500

Reducing-balance method:$2,250 × 1.5 = $2,250

on 31 of December?


Revised SL depreciation

=Cost – Accumulated depreciation

Changing the useful life


Estimated remaining useful life

–New residual value

÷

Objective 4

Account for the disposalof a non-current asset


of a non-current asset.

Disposing of non-current assets

Sell, exchange, scrap.

First bring depreciation up to date, then:

Dr Accumulated Depreciation Cr Asset


Dr Accumulated Depreciation, Cr Asset.

Gain/loss is reported on the Income Statement...

– and closed to Profit and Loss Summary.


Disposing by scrapping an asset

Suppose you disposed of a piece of equipment that cost $6,000 and has no residual value. Accumulated depreciation is $6,000


p $ ,

The entry to record the disposal is

Acc Dep’n Equipment 6,000

Equipment 6,000

Disposing by scrapping an asset

Assume we scrap the same piece of equipment a year earlier when accumulated depreciation was $5,000




Acc Dep’n Equipment 5,000

Loss on disposal of equip 1,000

Equipment 6,000

Preferred disclosure instead of gains and losses show disposal proceeds as revenue and carrying amount as an expense

Dr Acc. Depn 5,000Cr Equipment 6 000


Cr Equipment 6,000Dr Carrying Amount of Asset 1,000


Disposing by selling example

You sell on old piece of furniture

Cost: $ 10,000

Residual value: $ 0

Purchased 1 January 20X6


Purchased 1 January 20X6

Estimated useful life at acquisition: 10 yrs


Assume the equipment is sold on 30/6/X9.

What is the accumulated depreciation J 30?


$10,000 ÷ 10 = $1,000$1,000 * 6/12 = $500

$1000*3 + $500 = $3,500

on June 30?


Assume the furniture is sold for $5,000.

June 30, 20X9


Cash 5,000Accumulated Depreciation 3 500Loss on Sale of Furniture 1,500

Furniture 10,000


Dr Accumulated Depreciation 3,500Cr Furniture 10,000Dr Cash 5,000Cr Disposal proceeds - revenue 5,000Dr Carrying amount – expense 6,500


Exchanging non-current assets (e.g. trade-in) Domino’s Pizza trade in a delivery van

Old van cost $10,000 and accumulated depreciation of $8,000

A trade in of $2 500 is allowed


A trade-in of $2,500 is allowed.

The new van costs $13,000

Thus the cash payment is $10,500.

Gain on sale is $500 (2,500 – 2,000).

Exchanging non-current assets (e.g. trade-in)

The journal entry is

Delivery van (new) 13 000

A D ’ ( ld) 8 000


Acc Dep’n (old) 8 000

Delivery van (old) 10 000

Cash at Bank 10 500

Gain on Sale of Vehicle 500


Dr Delivery van (new) 13,000Dr Accumulated depreciation (old) 8,000Cr Delivery van (old) 10,000Cr Cash at bank 10,500Cr Trade-in allowance – revenue 2,500Dr Carrying amount (old)- expense 2,000


Dr Carrying amount (old) expense 2,000

Internal control ofnon-current assets

Cornerstone of internal control is separating custody of assets from


accounting for the asset.

Also need physical controls – to prevent theft and maintain physical condition of the asset.

Impairment of non-current assets

AASB 136 Impairment of Assets requires, if ‘carrying amount’ is greater than its ‘recoverable amount’ then the carrying amount must be


then the carrying amount must be reduced (‘written down’).

Recoverable amount = greater of selling price or ‘value in use’ (present value of future cash flows).


Example

You own a block of land that cost you $100,000 and is recorded at cost

You have it valued and find its worth $80 000


$80,000

The journal entry would be

Impairment loss – Land 20 000

Land 20 000

Example cont.

If the land had a building with carrying amount of $150,000 (cost $200,000) with a recoverable amount of $120,000

The journal entries would be



Accumulated Dep’n 50 000

Building 50 000

Impairment Loss on Building 30 000

Building 30 000

Accumulated Dep’n 50 000Building 80 000

Impairment Loss on Building 30 000



Objective 5

Account for the revaluation


revaluationof a non-current asset.

Revaluation

AASB 116 Property, Plant and Equipment allows assets to be recorded at cost or ‘fair value’ (arm’s length sale).


Upward revaluations are credited to owners equity (Revaluation Reserve account).

Downward revaluations are expenses.

This is ‘conservatism’.

Example

Land which cost $100,00 is revalued to $200,000

The entry would be:

Land 100 000


Revaluation Reserve 100 000


Examples

Building with carrying amount of $150,000 (cost $200,000) is revalued to $120,000





Building 50 000

Revaluation loss on Building 30 000

Building 30 000

Revaluation

For depreciable assets the accumulated depreciation is first credited against the asset.

No “offsetting” decreases against


No offsetting decreases against increases is allowed.

Only when an asset was previously revalued upwards can a downwards revaluation be debited to ‘Revaluation Reserve’.

Examples

Assume the building before actually originally cost $130,000 and had been revalued to $200,000

Thus the entry would be


Thus the entry would be


Building 50 000

Revaluation Reserve 30 000

Building 30 000


Objective 6

Account for intangible assets


intangible assets.

Not physical in nature

Intangible assets


PatentsCopyrightsTrademarksFranchises

Goodwill

Specific Intangibles

Intangible assets: Patents

Patents are government grants.

They give the holder the right to produce and sell an invention for 20 years


years.

Suppose a company pays $200,000 to acquire a patent on 1 January.

The company believes that its expected useful life is 5 years.

What are the entries?


Jan 1 (this year)Patents 200,000

Cash 200,000To acquire a patent

Intangible assets: Patents


q p

Dec 31 (next year)Amortisation Expense–Patents 40,000

Accumulated Amort.–Patents 40,000To amortise the cost of a patent

Intangible assets: Copyrights

Literary compositions (novels) Musical compositions Films (movies)

S ft


Software Other works of art

Intangible Assets: Trademarks

Trademarks, Trade Names,or Brand Names are assets that

represent distinctive identifications


of a product or service


Intangible assets: Franchises

Franchises and licences are privileges granted by private business or

government to sell a product or service.


p

Purchase price paid for

Goodwill Example

Intangible assets: Goodwill


p pTasman Stores $10 millionAssets at market value 9 millionLess liabilities 1 millionMarket value of Tasman net assets: 8 millionGoodwill $ 2 million

Accounting for goodwill

AASB 138 Intangible Assets does not allow the recognition of ‘internally generated goodwill’.AASB 3 B i C bi ti t t


AASB 3 Business Combinations states that goodwill is not amortised.

AASB 136 Impairment of Assetsrequires the regular measurement of the current value of purchased goodwill – if it has decreased – then a loss is recorded.


Research and development

Special issues


Capitalise or expense expenditure

Ethical Issue:

Capitalise or expense expenditure

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