Welcome to

C101 AUT19 Financial

Accounting
• Tutorial 3 – Long lived assets
• Tutor:
• Matthew Grosse
• mgrosse@london.edu
Today
• Revision from Revenue Recognition
• Questions?
• Non – Current Assets
• Questions?
• Quiz 3 –
• Q10
Revision – Week 1
 On 1st September, Matt is hired as an accountant to provide his services to a
client. He completes one day of work providing accounting advice. He provides
the client an invoice of $1,000.
 Record the transaction as at 1st September.

 On 1st September, Matt sells accounting textbooks to a shop. The accounting

textbooks cost Matt $600 to produce. He sells the textbooks for $1,000 and has
given the bookstore an invoice, payment is due in 30 days.
 Record the transaction as at 1st September.
Revision – Week 1
 On 1st September, Matt is hired as an accountant to provide his
services to a client. He completes one day of work providing
accounting advice. He provides the client an invoice of $1,000.
 Service Revenue (P&L) increases by 1,000
 Accounts Receivable (A) increases by 1,000
Revision – Week 1
 On 1st September, Matt sells accounting textbooks to a shop. The
accounting textbooks cost Matt $600 to produce. He sells the
textbooks for $1,000 and has given the bookstore an invoice,
payment is due in 30 days.
 Sales Revenue (P&L) increases by 1,000
 Accounts Receivable (A) increases by 1,000
 Inventory (A) decreases by 600
 Cost of Goods Sold (P&L) increases by 600
 (Cost of goods sold is an expense, which is now recognised so the expense increases.
This means the P&L has decreased)
Revenue
• What is Revenue?
• When is Revenue recorded?
Revision – Week 2
 Revenue is the gross inflow of economic benefits during the period arising from
the course of the ordinary activities of an entity when those inflows result in
increases in equity, other than increases relating to contributions from equity
participants.

 Revenue must be recognised when the company has earned the revenue, and the
amount is realisable.
Revision – Week 2
 On 1st September, Matt receives $1,000 from a client who is paying a deposit for
accounting services to be provided in October.
 Record the transaction as at 1st September.

 On 1st September, Matt receives $1,000 from a client who is paying a deposit for
accounting services to be provided in October. Matt completes the work on
October 15.
 Record the transaction as at October 15.
Revision – Week 2
 On 1st September, Matt receives $1,000 from a client who is paying a deposit for
accounting services to be provided in October.
 Cash (A) increases by 1,000
 Unearned Revenue (L) increases by 1,000

 On 1st September, Matt receives $1,000 from a client who is paying a deposit for
accounting services to be provided in October. Matt completes the work on
October 15.
 Service Revenue (P&L) increases by 1,000
 Unearned Revenue (L) decreases by 1,000
Revision – Week 2
 When is Percentage of Completion able to be used?
 What is the process for Revenue Recognition if we are using Percentage of
Completion
 What does it mean to recognise Gross Revenue, or Net Revenue?
 When should a business use the Gross, or Net Revenue method?
 When a business sells a product with multiple deliverables, how
should you record the revenue?
 What is Non-GAAP reporting
Long-Lived Assets
 Buying or Making the Asset - Capitalisation
 Using the asset - depreciation
 Selling the asset
Non-current Asset - Capitalisation
 Acquisition cost:
 All costs necessary to acquire the asset and make it ready for use
 For self-constructed assets: capitalise entire construction cost, including interest on debt
incurred to finance the construction (required US, permitted IFRS).

 Additional costs during company’s operation:

 If the expenditures restore or maintain an asset: expense them.
 If the expenditures (1) increase the useful life of the asset, (2) reduce operating costs, or (3)
increase the productivity/output: capitalise them and depreciate over the remaining useful
life.
Asset - Capitalisation
 Q1 – Q4
 Q10

 LBS buy a new computer for 1,500, the tax is 100, the transport cost is
100 and there is an installation fee of 50. How would LBS record this
transaction?
 PPE (A) increases by 1,750
 Cash (A) decreases by 1,750
Using the asset
 The process of expensing a proportion of the cost each period is called:
 Depreciation for tangible assets
 Amortisation for intangible assets (with finite life)
 Depletion for natural resources
 Depreciation is a process of cost allocation, not asset valuation
 Not intended to track the asset’s declining market value
 Objective: to spread the cost of an asset over the period of use

 What is the difference between Depreciation Expense and Accumulated

Depreciation?
Depreciation
 Need to know:
 Asset cost
 Estimate - useful Life
 Estimate - salvage value
 Choose - Depreciation method

 Straight Line Depreciation Expense = (Cost – salvage value) / useful

life.
• Accumulated Depreciation (XA) is the sum of all Depreciation
Expense from prior periods.
 Accumulated Depreciation
• Balance Sheet:

• Assets:
• PPE 100,000
Accumulated Depreciation is on the
• Accumulated Depreciation – PPE (10,000) Balance Sheet as a Contra Asset

• Net PPE 90,000

Practice Q
• I own a building worth 100,000 I expect it will last for 20 years with 0
residual value.
• Provide the transaction to record Depreciation for year 1:
Practice Q
• I own a building worth 100,000 I expect it will last for 20 years with 0
residual value.
• Provide the transaction to record Depreciation for year 1:

• Depreciation Expense increase by 5,000 (P&L decrease by 5,000)

• Accumulated Depreciation - Building increase by 5,000 (contra-asset)
Accumulated Depreciation
• Balance Sheet Year 1

• Assets
• PPE 100,000
• Accumulated Depreciation – PPE (5,000)
• Net PPE 95,000
Inventory capitalisation (Q10)
• I make tables for a furniture store. I purchase materials for 100, I pay a
carpenter 100 in wages, and have an electricity expense of 50 that is
required to power the tools. I also hire a cleaner to clean the warehouse
and pay them 50
• Record the transaction

• Cash goes down 250

• Inventory (A) goes up 250

• Cash goes down 50

• Cleaning Expense is 50 (P&L goes down 50)
Depreciation - adjustments
• Buy a car for 100,000 that will last 10 years with residual value of 20,000
• Depreciation expense = 8,000 per year.

• After 3 years we realise the car will only last 8 years in total (5 more years
from today). We don’t change the first 3 years, we just make the change
moving forward.

• Step 1: Calculate the remaining depreciable amount = Cost 100,000 –

24,000 accumulated Depreciation = 76,000 net value.
• Step 2: Recalculate future depreciation expense: (76,000 – 20,000) / 5
years remaining = 11,200 depreciation expense per year for the next 5
years.
Selling Assets
 1. Update accumulated depreciation to year/month of sale
 2. Calculate new net asset value (carrying amount)
 3. Calculate gain/loss on disposal/sale
 Sales Price – Carrying Amount = Gain/loss on sale
 4. Journalise
 Cash (received from sale) – Increasing asset
 Accumulated Depreciation – Decreasing contra-asset
 Loss on Sale or Gain on Sale – Increase or decrease in P&L
 Non-Current asset – Decreasing asset

 Q9
Selling Assets
• Q9
 Cash (received from sale) – Increasing asset
 Accumulated Depreciation – Decreasing contra-asset
 Loss on Sale or Gain on Sale – Increase or decrease in P&L
 Non-Current asset – Decreasing asset
Non-current assets - revision
• On 1st January 2015 you purchase a car for £100,000. You expect to
own the car for 10 years and it has £20,000 residual value.
• On 31st December 2019 you decide to sell the car. You receive
£50,000 cash. Record the transaction for the sale of the car.
Non-current assets - revision
• On 1st January 2015 you purchase a car for £100,000. You expect to
own the car for 10 years and it has £20,000 residual value.
• On 31st December 2019 you decide to sell the car. You receive
£50,000 cash. Record the transaction for the sale of the car.

• Depreciation Expense = (100,000 – 20,000) / 10 = 8,000 per year

• Accumulated Depreciation for 5 years = 5yrs * 8,000 = 40,000
• Net Value of Car = 100,000 – 40,000 = 60,000
Non-current assets - revision
• On 1st January 2015 you purchase a car for £100,000. You expect to own the car
for 10 years and it has £20,000 residual value.
• On 31st December 2019 you decide to sell the car. You receive £50,000 cash.
Record the transaction for the sale of the car.

1. Update Accumulated Depreciation Balance: 5 years * 8,000 per year = 40,000.

2. Carrying Amount = 100,000 – 40,000 = 60,000
3. Loss on sale = 50,000 selling price – 60,000 Carrying = -10,000
4. Journal Entries
• Cash (A) increases 50,000
• Car (A) decrease 100,000
• Acc Dep – Car (XA) decreases by 40,000
• Loss (Exp) increases 10,000 (P&L is lowered by 10,000)
• Balance Sheet Year 1

• Assets
• PPE 100,000 0
• Accumulated Depreciation – PPE (40,000) 0
• Net PPE 60,000 0
Intangible Assets
• IAS 38 Intangible Assets are non-monetary assets which are without physical substance
and identifiable. Intangible assets meeting the relevant recognition criteria are initially
measured at cost, subsequently measured at cost or using the revaluation model, and
amortised on a systematic basis over their useful lives (unless the asset has an
indefinite useful life, in which case it is not amortised).
• Examples include
• Patents
• Goodwill
• Copyright
• Trademarks
Goodwill
• Goodwill arises when another business is purchased. Goodwill is the excess payment
above the identifiable assets purchased.
• 1. Identify and measure the fair value of the identifiable assets acquired and
liabilities assumed
• 2. Goodwill = Purchase price – Fair value of net assets acquired
• Goodwill has an indefinite life so it is not amortized
• Goodwill is tested for impairment every year
• Goodwill can not be revalued upwards. It is only recognized upon purchase.
Conclusion
 When to capitalise or expense
 Which financial statement things show up on is important
 How to record the use or storage of the asset
 Calculate and adjust Depreciation Expense
 How to record the value of the sale of the asset
 Sales Price – Net Value (after updating accumulated depreciation)
 Intangible Assets – very similar
 Capitalise or Expense
 Record the use – Amortization (same as depreciation – different word)
 Impairment of Intangibles