Non-Current Assets

Property, Plant and Equipment Property, plant and equipment (PPE) are

physical assets used in the business to provide future economic benefits for a number of years.

FRS - economic benefits derived from the use of an asset must be recognised on a systematic basis over the asset’s useful life.

This decline is recognised as depreciation expense in the income statement.

Property, Plant and Equipment (cont’d)

Two classes of PPE assets: Property

Includes land and buildings Plant and equipment

Includes cash registers, computers, office furniture, factory machinery, motor vehicles

Determining the Cost of PPE PPE assets are initially recorded at

historical cost. The cost of an asset

Includes all expenditure necessary to acquire the asset and make it ready for use. e.g. purchase price, freight costs paid,

installation costs (capital expenses) Excludes non-capital expenditures which

are expensed immediately.

Determining the Cost of PPE (cont’d)

Cost of Property Includes:

purchase price settlement costs stamp duty accrued property taxes assumed by

purchaser Example

LandCash price of property $100

000Net removal cost of warehouse 6

000Solicitor’s fee 1 000Stamp duty 2

000Cost of land $109

000

Determining the Cost of PPE (cont’d)

Cost of Plant and Equipment Includes:

purchase price freight charges insurance during transit installation costs

ExampleDelivery Truck

Cash price $22 000

Airconditioning 1 320

Painting and lettering 500

Cost of delivery truck $23 820

1. Depreciation Depreciation is the process of

allocating to expense the cost of a PPE asset over its useful (service) life in a rational and systematic manner.

Carrying amount equals cost less accumulated depreciation.

Depreciation (cont’d)

• 4 factors that contribute to the decline in value of a depreciable asset:

1. Usage of the asset.2. Wear and tear through physical use

of the asset.3. Technical and commercial

obsolescence.4. Legal life.

Depreciation (cont’d)

Factors in calculating depreciation:1. Cost

• All expenditures necessary to acquire the asset and make it ready for intended use.

2. Useful life• Estimate of the expected life based on

intended use, need for repair, vulnerability to obsolescence and legal life.

3. Residual value• Estimate of the asset’s value at the end of

its useful life.

Depreciation (cont’d)

Depreciation methods1. Straight line2. Reducing balance3. Units of productionExample

Delivery truck purchased by Bill’s Pizzas.

Cost $13 000Expected residual value

$1 000Estimated useful life (in years)

5Estimated useful life (in kms) 100

000

Depreciation (cont’d)

1. Straight-Line Method Depreciation expense same each year as

benefits are consumed at same rate each year.

Calculation for annual charge: cost of asset – residual value

useful life of the asset

Bill’s Pizzas Example: Annual depreciation ($13,000 - $1,000) / 5 = $2,400

Depreciation (cont’d)

Straight-line depreciation schedule

Calculation End of year Depreciable Depreciation Depreciation Accumulated CarryingYear amount x rate = expense p.a. depreciation amount2007 $12 000 20% $ 2 400 $ 2 400 $10

600 *2008 12 000 20 2 400 4 800

8 2002009 12 000 20 2 400 7 200

5 8002010 12 000 20 2 400 9 600

3 4002011 12 000 20 2 400 12 000

1 000Total $12 000

* Cost $13 000 – Year 1 depreciation $2400 = Carrying amount $10 600

BILL’S PIZZAS

Depreciation (cont’d) Journal entry to record depreciation

expense

Dec 30 Depreciation Expense – Delivery Truck 2 400 Accumulated Depreciation – Delivery Truck 2 400

(To record depreciation expense for the year)

Depreciation (cont’d)

Units-of-Production Method Useful life is expressed in terms of total

units of production or use expected from the asset.

Calculation of depreciation cost per unit: depreciable cost of asset

useful life of the asset Depreciation expense:

depreciation cost x yearly units of per unit production

Depreciation (cont’d)

Bill’s Pizzas Example: Depreciation per unit

= $12 000/100 000 units= $0.12 per unit

Depreciation expense= $0.12 x 15 000 units= $1 800

Depreciation (cont’d)Units-of-production depreciation

schedule

Calculation End of year Units of Depreciation Depreciation Accumulated CarryingYear production (km) x cost unit = expense p.a. depreciation amount2007 15 000 $0.12 $ 1 800 $ 1 800 $11

200 *2008 30 000 0.12 3 600 5 400 7

6002009 20 000 0.12 2 400 7 800 5

2002010 25 000 0.12 3 000 10 800 2

2002011 10 000 0.12 1 200 12 000 1

000 Total 100 000 $12 000* $13 000 - $1800

BILL’S PIZZAS

5. Disposals of PPE Assets

PPE assets may be disposed of by:a. Sale

Equipment is sold to another party.

b. Scrapping Equipment is scrapped or discarded.

c. Exchange Existing equipment is traded for new

equipment.

Sale of PPE Assets

Example (Gain on sale) Wright Ltd sells office furniture on

1 July 2007 for $160 000 cash. Original cost was $60 000. Accumulated depreciation to

1 January 2007 is $41 000. Depreciation expense for first 6

months of 2007 is $8000.

Sale of PPE Assets (cont’d) Recording depreciation Calculation of gain on disposalJul 1 Depreciation Expense – Office Furniture 8 000

Accumulated Depreciation – Office Furniture 8 000 (To record depreciation expense for first 6 mths of 2007)

Cost of office furniture $60 000

Less: Accumulated depreciation ($41 000+ $8000) 49 000

Carrying amount at date of disposal 11 000Proceeds from sale 16 000Gain on disposal of asset $ 5

000

Sale of PPE Assets (cont’d)

Recording the sale of the asset

Jul 1 Cash 16 000 Accumulated Depreciation – Office Furniture 49 000

Office Furniture 60 000 Gain on Disposal 5 000 (To record sale of office furniture at a gain)

Sale of PPE Assets (cont’d) Example (Loss on sale) Assume that office furniture was sold for

$9000 rather than $16 000. Calculation of loss on disposal

Cost of office furniture $60 000

Less: Accumulated depreciation ($41 000+ $8000) 49 000

Carrying amount at date of disposal 11 000Proceeds from sale 9 000Loss on disposal of asset $ 2

000

Sale of PPE Assets (cont’d)

Recording the loss on sale of the asset

Jul 1 Cash 9 000 Accumulated Depreciation – Office Furniture 49 000 Loss on Disposal 2 000

Office Furniture 60 000 (To record sale of office furniture at a loss)