Non-Current Assets: Plant Assets andIntangible Assets
Chapter 10
HORNGREN ♦ HARRISON ♦ BAMBER ♦ BEST ♦ FRASER ♦ WILLETT
10 - 2Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Objectives
1. Measure the cost of a non-current asset.2. Account for depreciation3. Select the best depreciation method for
income tax purposes4. Account for the disposal of a non-current
asset5. Account for the revaluation of a non-
current asset6. Account for intangible assets and
amortisation
10 - 3Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Asset Account Related Expense Account
Plant AssetsLand……………………………………… NoneBuildings, Machinery and Equipment,
Furniture and Fixtures,and Land Improvements……………… Depreciation
Natural Resources……………………….. DepletionIntangibles………………………………….. Amortisation
Non-current Assets
10 - 4Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Measure the costof a non-current asset.
Objective 1
10 - 5Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
An asset must be carried on the statement of financial position at the amount paid for it.An asset must be carried on the statement of financial position at the amount paid for it.
The cost of an asset equals the sum ofall of the costs incurred to bring the asset
to its intended purpose.
The cost of an asset equals the sum ofall of the costs incurred to bring the asset
to its intended purpose.
Cost Principle
10 - 6Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Land and Land Improvements
Purchase price of land $ 500,000Add related costs:Back property taxes $ 40,000Stamp duty 8,000Removal of buildings 5,000Survey fees 1,000
54,000
Total cost of land $ 554,000
Purchase price of land $ 500,000Add related costs:Back property taxes $ 40,000Stamp duty 8,000Removal of buildings 5,000Survey fees 1,000
54,000
Total cost of land $ 554,000
10 - 7Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
PavingFences
Sprinkler systemsLights in parking lot
PavingFences
Sprinkler systemsLights in parking lot
Land Improvements
All improvements located on the land but subject to decay:
10 - 8Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Buildings – Construction
Architectural feesBuilding permits
Contractor’s charges Interest during construction
Architectural feesBuilding permits
Contractor’s charges Interest during construction
MaterialsLabour
Overhead
MaterialsLabour
Overhead
10 - 9Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Buildings – Purchasing
Purchase priceAgents commissions
Stamp dutyRepairing or renovating building
for its intended purpose
Purchase priceAgents commissions
Stamp dutyRepairing or renovating building
for its intended purpose
10 - 10Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Machinery and Equipment
Purchase price (less trade discounts)Transportation charges
Insurance in transitCustoms dutiesInstallation cost
Expenditures to test assetbefore it is placed in service
Purchase price (less trade discounts)Transportation charges
Insurance in transitCustoms dutiesInstallation cost
Expenditures to test assetbefore it is placed in service
10 - 11Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Finance Leases
What are finance leases? They are lease arrangements similar to
instalment purchases. Finance leases are reported as assets,
even though the company does not own the asset.
Leasehold improvements are similar to land improvements.
10 - 12Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Capitalising the Cost of Interest
Suppose on January 2, 2004, Coats Hire borrows $1,000,000 on a two-year, 10% loan, to build a warehouse.
Total interest for the financial year ended 30/6/04 is 6/12 x $100,000 = $50,000.
10 - 13Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
June 30, 2004
Building 50,000Interest Payable (or cash)
50,000
Accrued interest of construction loan
June 30, 2004
Building 50,000Interest Payable (or cash)
50,000
Accrued interest of construction loan
Capitalising the Cost of Interest
Note Interest Expense was not debited. Note Interest Expense was not debited.
10 - 14Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Lump-Sum Purchases Example
Andrea Lim paid $110,000 for a combined purchase of land and a building.
The land is appraised at $90,000 and the building at $60,000.
How much of the purchase price is allocated to land and how much to the building?
10 - 15Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Lump-Sum Purchases Example
Building: $60,000 ÷ $150,000 = 40%$110,000 × 40% = $44,000
Land: $90,000 ÷ $150,000 = 60%$110,000 × 60% = $66,000
10 - 16Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Does the expenditure increase capacityor efficiency or extend useful life?
Does the expenditure increase capacityor efficiency or extend useful life?
YES NO
Capital ExpenditureDebit Non-current Assets accounts
Capital ExpenditureDebit Non-current Assets accounts
ExpenseDebit Repairs and
Maintenance account
ExpenseDebit Repairs and
Maintenance account
Distinction Between Capital Expenditures and Expenses
10 - 17Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Cost
Estimated useful life
Estimated residual value
Measuring the Depreciationof Property, Plant & Equipment
10 - 18Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Objective 2
Account for depreciation.
10 - 19Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Straight-Line (SL)
Units-of-Production (UOP)
Reducing-Balance (RB)
Depreciation Methods
10 - 20Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Depreciation Methods Example
Donishia and Richard Catering, purchased a delivery van on July 1, 2004, for $22,000.
They expect the van to have a trade-in value of $2,000 at the end of its useful life.
The van has an estimated service life of 100,000 km or 4 years.
10 - 21Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
(Cost – Residual value) ÷ years of useful life(Cost – Residual value) ÷ years of useful life
($22,000 – 2,000) ÷ 4 = $20,000 ÷ 4 = $5,000($22,000 – 2,000) ÷ 4 = $20,000 ÷ 4 = $5,000
Year 1 Depreciation: $ 5,000Year 2 Depreciation: 5,000Year 3 Depreciation: 5,000Year 4 Depreciation: 5,000Total Depreciation: $20,000
Year 1 Depreciation: $ 5,000Year 2 Depreciation: 5,000Year 3 Depreciation: 5,000Year 4 Depreciation: 5,000Total Depreciation: $20,000
Straight-Line Method Example
10 - 22Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
($22,000 – 2,000) ÷ 100,000km = $.20/km($22,000 – 2,000) ÷ 100,000km = $.20/km
Year 1: 30,000 miles = $ 6,000 Year 2: 27,000 miles = 5,400 Year 3: 23,000 miles = 4,600 Year 4: 20,000 miles = 4,000 Total: 100,000 miles = $20,000 (Actual mileage in year 4 was 22,000)
Year 1: 30,000 miles = $ 6,000 Year 2: 27,000 miles = 5,400 Year 3: 23,000 miles = 4,600 Year 4: 20,000 miles = 4,000 Total: 100,000 miles = $20,000 (Actual mileage in year 4 was 22,000)
Units-of-ProductionMethod Example
10 - 23Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Reducing-Balance Method Example
Straight-line rate is 100% ÷ 4 = 25% Reducing-balance is approximately 1.5
times the straight-line rate = 37.5% What is the book value of the van at the
end of the first year? $ 22,000 × 37.5% = $ 8,250 $ 22,000 – $ 8,250 = $ 13,750
10 - 24Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Reducing-Balance Method Example
June 30, 2005
Depreciation Expense $ 8,250Accumulated Depreciation $ 8,250
To record depreciation expense for a one-year period
June 30, 2005
Depreciation Expense $ 8,250Accumulated Depreciation $ 8,250
To record depreciation expense for a one-year period
10 - 25Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Reducing-Balance Method Example
Remember the book value of the van at the end of the first year?
$ 22,000 – $ 8,250 = $ 13,750 Depreciation for the second year is $ 13,750 × 37.5% = $ 5,156 Giving a book value of $ 13,750 - $ 5,156 = $ 8,594
10 - 26Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Comparing Depreciation Methods
Year SL UOP RB 1 $ 5,000 $ 6,000 $ 8,250 2 $ 5,000 $ 5,400 $ 5,156 3 $ 5,000 $ 4,600 $ 3,223 4 $ 5,000 $ 4,000 $ 2,014
Totals $20,000 $20,000 $18,643
10 - 27Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Comparing Depreciation Methods
The $ 1,357 difference in reducing balance is due to the inaccuracy of using 1.5 times the straight line method.
Using the formula on page 416 of the textbook the rate is .451%
This gives depreciations of $9,922 + $5,447 + $2,990 + $1,641 = $20,000
10 - 28Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Objective 3
Select the best depreciationmethod for income
tax purposes.
10 - 29Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
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.‘Diminishing Value’ which is reducing
balance at 1.5 times the straight line rate.
10 - 30Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Prime cost method:$5,000 × 3/12 = $1,250
Prime cost method:$5,000 × 3/12 = $1,250
Reducing-balance method:$8,250 × 3/12 = $2,062
Reducing-balance method:$8,250 × 3/12 = $2,062
Depreciation for Partial Years
Assume that Donishia and Richard Catering, owned the van for 3 months.
How much is the van’s depreciation?
10 - 31Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Remaining useful life
Revised SL depreciation
=
Cost – Accumulated depreciation
–
New residual value
÷
Revising Depreciation Rates
10 - 32Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Objective 4
Account for the disposalof a non-current asset.
10 - 33Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Disposing of Non-current Assets
– selling– exchanging– discarding (scrapping it) Gain/loss is reported on the Statement
of Financial Performance...– and closed to Profit and Loss Summary.
10 - 34Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Disposing by Discarding Example
Ly the manager of Ly’s Landscaping, is contemplating the disposal of an old piece of equipment:
Equipment cost: $ 36,000 Residual value: $
6,000 Accumulated depreciation 30/6/05: $ 20,000 Estimated useful life at acquisition: 10 years
10 - 35Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
($36,000 – $6,000) ÷ 10 = $3,000$3,000 ÷ 12 = $250$250 × 3 = $750$20,000 + $750 = $20,750
($36,000 – $6,000) ÷ 10 = $3,000$3,000 ÷ 12 = $250$250 × 3 = $750$20,000 + $750 = $20,750
Disposing by Discarding Example
Assume the equipment is discarded on 30/9/05.
What is the accumulated depreciation on September 30?
10 - 36Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Disposing by Discarding Example
September 30, 2005
Accumulated Depreciation 20,750Carrying amount of asset 15,250
Equipment 36,000
To record discarding of equipment
September 30, 2005
Accumulated Depreciation 20,750Carrying amount of asset 15,250
Equipment 36,000
To record discarding of equipment
10 - 37Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Selling a Non-current Asset Example
Assume the equipment is sold for $10,000. September 30, 2005
Cash 10,000
Proceeds of Sale N-C Asset 10,000
Accumulated Depreciation 20,750 Carrying amount of N-C Asset 15,250 Equipment 36,000
To record sale of equipment for $10,000
10 - 38Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Selling a Non-current Asset Example
AASB 1018 Statement of Financial Performance requires;The removal in the asset account and the
related accumulated depreciationProceeds from the sale be included in total
revenueAnd the carrying amount of the assets sold
be included in total revenue.
10 - 39Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Exchanging Non-current Assets
Assume the same equipment (with a cost of $36,000 and a book value of $15,250) is exchanged for new, similar equipment having a cost of $42,000 a trade-in of $18,000 is allowed.
Cash payment is $24,000. The trade in value is the proceeds from sale The carrying value the expense The cost of the new equipment $42,000
10 - 40Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
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, maintain physical condition.
10 - 41Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Objective 5
Account for the revaluation
of a non-current asset
10 - 42Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Revaluation
AASB 1041 Revaluation of Non-current Assets allows assets to be recorded at cost or ‘fair value’
Upward revaluations are credited to owners equity (Asset Revaluation Reserve account)
Downward revaluations are debited to an expense.
For depreciable assets the accumulated depreciation is credited against the asset.
10 - 43Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Objective 6
Account for intangibleassets and amortisation.
10 - 44Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
PatentsCopyrightsTrademarksFranchisesGoodwill
Not physical in natureNot physical in nature
Intangible Assets
10 - 45Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Intangible Assets: Patents
Patents are government grants. They give the holder the right to produce
and sell an invention for 20 years. Suppose a company pays $170,000 to
acquire a patent on July 1. The company believes that its expected
useful life is 5 years. What are the entries?
10 - 46Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
July 1 (this year)Patents 170,000
Cash 170,000To acquire a patent
June 30 (next year)Amortisation Expense 34,000
Patents 34,000To amortise the cost of a patent
Intangible Assets: Patents
10 - 47Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Literary compositions (novels)Musical compositionsFilms (movies)SoftwareOther works of art
Intangible Assets: Copyrights
10 - 48Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Trademarks, Trade Names,or Brand Names are assets that represent
distinctive identifications of a product or service.
Trademarks, Trade Names,or Brand Names are assets that represent
distinctive identifications of a product or service.
Intangible Assets: Trademarks
10 - 49Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Intangible Assets: Franchises
Franchises are privileges granted by private business or government to sell a product or service.
10 - 50Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Purchase price paid forMexana Company $10 millionAssets at market value 9 millionLess Mexana’s liabilities 1 millionMarket value ofMexana’s net assets 8 millionGoodwill $ 2 million
Purchase price paid forMexana Company $10 millionAssets at market value 9 millionLess Mexana’s liabilities 1 millionMarket value ofMexana’s net assets 8 millionGoodwill $ 2 million
Goodwill Example
Intangible Assets: Goodwill
10 - 51Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
International accounting for goodwillInternational accounting for goodwill
Research and developmentResearch and development
Ethical Issue:
Capitalise or expense expenditure
Ethical Issue:
Capitalise or expense expenditure
Special Issues
10 - 52Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
End of Chapter 10