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

©2003 John Wiley & Sons Australia, Ltd

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Learning Objectives

• Describe how historical cost applies toproperty, plant & equipment assets.

• Explain the concept of depreciation.• Calculate depreciation using various

methods and contrast the expense patternsof the methods.

• Account for subsequent expenditures andasset impairments.

• Account for revaluation of non-currentassets.

• Account for the disposal of property, plant &equipment assets.

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Learning Objectives

• Describe the use of an asset register.• Identify basic issues related to reporting

intangible assets.• Explain the nature of, and be able to account

for, self-generating & regenerating assets.• Account for the acquisition and depletion of

natural resources.• Indicate how non-current assets are reported

in the Statement of Financial Position &explain methods of evaluating use ofnon-current assets.

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Property, plant & equipment

• Physical assets used in the business toprovide future economic benefits for anumber of years

• Economic benefit derived from the useof the asset must be recognised(depreciation)

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Cost of property, plant &equipment

• initially recorded at historical cost– all expenditure necessary to acquire the

asset and make it ready for useexample: purchase price, freight costs

paid, installation costs (capital expenses)

– excludes non-capital expenditures whichare expensed immediately

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Cost of property• includes: purchase price, settlement costs, stamp duty, accrued property & land taxesExample:

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Cost of plant & equipmentIncludes: purchase price, freight charges, insurance during transit, installation costsExcludes: annual charges e.g. vehicle registration & insuranceExample:

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To lease or buy?

Leasing: use of asset given to lessee bylessor for a given period of time at anagreed price

advantages:• reduced risk of obsolescence• little or no deposit• shared tax advantage• assets & liabilities are not reported

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Accounting for property, plant& equipment

Depreciation:• the allocation of the cost of the asset over

its useful life• Cost less accumulated depreciation

equals carrying amount

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Depreciation

Factors contributing to decline in value of anasset

• Wear and tear through physical use ofasset

• Technical obsolescence• Commercial obsolescence

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Depreciation

Factors in calculating depreciation

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Depreciation methods

• Straight line• Reducing balance• Units of production

Example data:• Cost $13,000• expected residual value $1,000• estimated useful life (in years) 5• estimated useful life (kms) 100,000

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Straight-line depreciation

Depreciation expense same each year asbenefits are consumed at same rate eachyear

Calculation: cost of asset – residual value useful life of the asset

Example:Bill’ Pizza: annual depreciation ($13,000 - $1,000) / 5 = $2,400

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Recording the transactions

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Reducing balance method

Depreciation expense decreases each year asgreater benefits consumed earlier in assetslife

Calculation: depreciation rate = 1 –

ncr

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Bill’s Pizza

Calculation depreciation rate

= 1 –

=

= tely)(approxima %40

5987.01

5$13000$1000

−

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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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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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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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Recording the loss on sale of the asset

Journal entry

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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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Formula and calculation of depletion

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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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Average age of PPE assets accumulated depreciation depreciation expense

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Asset turnover ratio: $ sales generated foreach $ invested in assets

net sales average total assets

Accounting Building Business Skills€¦ · Factors in calculating depreciation 12 Depreciation methods • Straight line • Reducing balance • Units of production Example data:

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Accounting Building Business Skills€¦ · Factors in calculating depreciation 12 Depreciation methods • Straight line • Reducing balance • Units of production Example data: