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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, plant &equipment
Cost of property• includes: purchase price, settlement costs, stamp duty, accrued property & land taxesExample:
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Cost of property, plant &equipment
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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Straight-line depreciation
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Straight-line depreciation
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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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
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Analysis and interpretation
Asset turnover ratio: $ sales generated foreach $ invested in assets
net sales average total assets