Accounting Building Business Skills€¦ · Factors in calculating depreciation 12 Depreciation methods • Straight line • Reducing balance • Units of production Example data:
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AccountingBuilding Business Skills
Paul D. Kimmel
Chapter Eight:Reporting and Analysing
Non-current assets
PowerPoint presentation by Christine LangridgeSwinburne University of Technology, Lilydale
Depreciation expense decreases each year asgreater benefits consumed earlier in assetslife
Calculation: depreciation rate = 1 –
ncr
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Reducing balance method
Bill’s Pizza
Calculation depreciation rate
= 1 –
=
= tely)(approxima %40
5987.01
5$13000$1000
−
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Reducing balance method
Bill’s Pizza
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Units of Production method
Useful life expressed in terms of total units ofproduction or use expected from asset
Calculation: depreciable cost of asset useful life of the asset = depreciation cost per unit
depreciation expense: depreciation cost per unit x yearly units of production
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Units of Production method
Bill’s Pizza
Calculation depreciation: depreciation per unit: $12,000/100,000 units = $0.12 per unitDepreciation expense: $0.12 x 15,000 units = $1,800
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Units of Production method
Bill’s Pizza
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Comparison of methods
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Patterns of depreciation
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Subsequent expenditure
Ordinary repairs:• expenses in maintaining operating efficiency
of the asset• expensed in Statement of Financial
PerformanceAdditions and improvements:• costs incurred to increase operating efficiency• expenditure capitalised and depreciated over
asset’s remaining useful life
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Impairments
• Non-current assets to be written down toits recoverable amount when carryingamount greater than than its recoverableamount
• Recoverable amount is net amount thatis expected to be recovered from inflowsand outflows from use of the asset andits disposal
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Revaluation
Reassessment of the value of a non-currentasset
Recording the revaluation:
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Disposal of PPE assets
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Sale of PPE assets
Example: Wright Ltd.Sale of asset on 1 JulySale price $160,000 cashCost $60,000accumulated depreciation 1 January 2004 $41,000Depreciation 1 January – 1 July $8,000
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Sale of PPE assets
Recording depreciation:
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Sale of PPE assets
Calculation of gain on disposal
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Sale of PPE assets
Recording the sale of the asset
Journal entry
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Sale of PPE assets
Recording the sale of the asset – alternative method
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Sale of PPE assets – losson sale
Example: Wright Ltd.Sale price $9,000 instead of $16,000
Calculation of gain on disposal
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Sale of PPE assets – losson sale
Recording the loss on sale of the asset
Journal entry
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Sale of PPE assets – losson sale
Recording the loss on sale of the asset – alternative method
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Property, plant & equipmentrecords
• detailed asset register maintained as aninternal control procedure to protect andefficiently manage property, plant &equipment
• Subsidiary ledger maintained to keepdetails of individual assets
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Intangible assets
• non-monetary assets that have nophysical presence
• Classified as either:– identifiable– unidentifiable
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Intangible assets – amortisation
• Identifiable assets are assumed to have alimited life and are amortised
• Patent amortised over legal or useful life,whichever is shorter
Example:National Libs purchased patent for $60,000legal life of a patent is 16 yearsUseful life estimated at 8 years
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Intangible assets – amortisation
Example:annual amortisation expense:
$60,000/8 = $7,500
Journal entry
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Types of intangible assets
• patents• research and development costs• copyright• trademarks and brand names• franchises and licences• goodwill
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Other Non-current assets
Self-generating & regenerating assets
• non-human living assets– Examples
Trees held as part of a forestryoperation, animals held as part of alivestock operation, orchards, vineyards,fishery holdings
• measured at net market value
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Natural resources
• Search & extraction from the ground ofnatural substances, e.g. minerals, oils,natural gas
• Capitalisation of pre-production costs notpermitted until a resource is extracted
• Once production has begunpre-production costs are charged toinventory by amortisation
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Natural resources –amortisation
Example:• Wallace Tin Mine• Capitalised pre production costs $150M• Residual value $10M• Mine contains 7M tonnes of ore• Current year’s production 2M tonnes• Direct production costs $10M• Depletable amount $140M ($150M - $140M)
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Natural resources –amortisation
Formula and calculation of depletion
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Natural resources –amortisation
Journal entry to record depletion:
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Analysis and interpretation
average useful life of PPE assets average cost of PPE assets depreciation expense
Example: Colorado Group Ltd. ($55,288 + $51,152)/2 $9,035 = 5.89 years
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Analysis and interpretation
Average age of PPE assets accumulated depreciation depreciation expense