ACCY901

Accounting Foundations for Professionals

Topic 7 Non-Current Assets

Dr Andy Wang
BCom(Hons), MAccg, PhD, CPA
Topic 7 Chapter 8
Accounting for non-current assets (property, plant and equipment,
PPE)

Learning Objectives:
1. Describe how historical cost applies to property,
plant and equipment assets
2. Explain the concept of depreciation
3. Calculate depreciation using various methods
and contrast the expense patterns of the
methods
4. Account for the revaluation of property, plant
and equipment assets
5. Account for the disposal of property, plant and
equipment assets

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1. What is 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
– According to AASB 116, 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
– Examples?
– Accounting issues:
• Initial recognition: Cost Model
• Depreciation
• Subsequent recognition: Revaluation Model
• Derecognition: sale or scrap

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2. Initial recognition: Determining the cost of PPE
• PPE assets are initially recorded at cost in accordance with AASB
116, para 6 (Cost Model)
– How to determine cost?
• Fair value of consideration: cash or cash equivalents paid or the fair
value of the other consideration given to acquire the asset
– Fair value is the amount for which an asset could be exchanged between
knowledgeable willing partners in an arm’s-length transaction.
– The cost of an asset:
• Consists of the fair value of all expenditure necessary to acquire the
asset and make it ready for use
– purchase price, freight costs paid, installation costs (capital expenses)
• Excludes non-capital expenditures which are expensed immediately
– Interest paid to finance the purchase of PPE or employee training costs
are expensed in P & L.

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2. Initial recognition: Determining the cost of PPE

• Property
– Cost of property includes
• purchase price
• settlement costs (e.g. solicitor’s fees)
• stamp duty
• accrued property taxes assumed by purchaser

• Example LAND
Cash price of property $100,000
Net removal cost of warehouse 6,000
Solicitor’s fee 1,000
Stamp duty 2,000
Cost of land $109,000

Initial recognition:
Dr. Land 109,000
Cr. Cash 109,000

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2. Initial recognition: Determining the cost of PPE
• Plant and equipment
– Cost includes
• purchase price
• freight charges
• insurance during transit
• installation costs

• Example DELIVERY TRUCK

Cash price $22,000
Air-conditioning 1,320
Painting and lettering 500
Cost of delivery truck $23,820

Initial recognition:
Dr. Delivery Truck 23,820
Cr. Cash 23,820

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 3. PPE: Depreciation
• Depreciation is the process of allocating the cost of a PPE asset to
expense over its useful (service) life in a rational and systematic manner.
– For accounting purposes, depreciation is a process of allocating an asset's
cost, not a method of determining an asset's net realisable (NRV) or market
value.
– Key terms:

– Journal entry for depreciation:

Dr. Depreciation Expense
Cr. Accumulated Depreciation
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3. PPE: Depreciation

• AASB 116 outlines 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

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 3. PPE: Depreciation methods
Depreciation methods
1) Straight-line Method
2) Diminishing-balance Method
3) Units-of-production Method

Example
Delivery truck purchased by Bill’s Pizzas

Cost $13,000
Expected residual value $1,000
Estimated useful life (in years) 5
Estimated useful life (in kms) 100,000

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 3. PPE: Depreciation methods

1) Straight-line method:
– Depreciation expense same each year as benefits are consumed at
same rate each year (evenly)
– 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

• Journal entry to record depreciation expense:

2018 Depreciation Expense – Delivery Truck 2 400

Accumulated Depreciation – Delivery Truck 2 400
(To record depreciation expense for the year)

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 3. PPE: Depreciation methods
1) Straight-line method:
Straight-line depreciation schedule

BILL’S PIZZAS

Calculation End of year

Depreciable Depreciation Depreciation Accumulated Carrying
Year amount x rate = expense p.a. depreciation amount
2018 $12 000 20% $ 2 400 $ 2 400 $10 600 *
2019 12 000 20 2 400 4 800 8 200
2020 12 000 20 2 400 7 200 5 800
2021 12 000 20 2 400 9 600 3 400
2022 12 000 20 2 400 12 000 1 000
Total $12 000
* Cost $13 000 – Year 1 depreciation $2400 = Carrying amount $10 600

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 3. PPE: Depreciation methods
2) Diminishing-balance method
– Depreciation expense decreases each year as greater benefits
are consumed earlier in assets life
– Calculation
n
Depreciation rate = 1 – r
c

or 1 – (r / c)1/n

– A note on the reducing-balance method:

• For tax purposes in Australia, the reducing-balance method uses a rate
twice the straight-line rate (more on this in the example).
• This is referred to as the ‘double declining balance’ method.
• But just because a business uses one method for taxation it does not
have to use that method in its financial statements.
• Key difference: use carrying amount multiplying depreciation rate.

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 3. PPE: Depreciation methods

2). Diminishing-balance method

• Bill’s Pizzas example

Annual depreciation rate

= 1 – ($1000/$13 000)1/5
= 1 – 0.5987
= 40% (approximately)
(Note double straight line rate – 5 years – 20%)

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 3. PPE: Depreciation methods
2). Diminishing-balance method
Diminishing-balance depreciation schedule

BILL’S PIZZAS
Calculation End of year
Carrying amount Depreciation Depreciation Accumulated Carrying
Year beginning of yr x rate = expense p.a. depreciation amount
2018 $13 000 40% $ 5 200 $ 5 200 $7 800 *
2019 7 800 40 3 120 8 320 4 680
2020 4 680 40 1 872 10 192 2 808
2021 2 808 40 1 123 11 315 1 685
2022 1 685 40 685 ** 12 000 1 000
Total $12 000
* $13 000 - $5200
** Calculation of $674 ($1685 x 40%) is adjusted to $685 in order for carrying amount to equal residual value.
This is because the rate was rounded to 40%, rather than 40.13% using the formula.

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 3. PPE: Depreciation methods

3) Units-of-production method
– Useful life is expressed in terms of total units of production or use
expected from the asset
!"#$"%&'()" '*+,-.
– Calculation of depreciation cost per unit =
.+.') -,*("$ +/ ,-&.0

– Then, calculate depreciation expense based on actual units produced

each year:

depreciation cost x yearly units of

per unit production

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 3. PPE: Depreciation methods

3) Units-of-production method

• Bill’s Pizzas example

– Depreciation per unit
= ($13,000 - $1,000) /100,000 kms
= $0.12 per unit

– Depreciation expense 2018:

= $0.12 x 15,000 kms
= $1,800

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 3. PPE: Depreciation methods
3) Units-of-production method

Units-of-production depreciation schedule

BILL’S PIZZAS
Calculation End of year
Units of Depreciation Depreciation Accumulated Carrying
Year production (km) x cost unit = expense p.a. depreciation amount
2018 15 000 $0.12 $ 1 800 $ 1 800 $11 200 *
2019 30 000 0.12 3 600 5 400 7 600
2020 20 000 0.12 2 400 7 800 5 200
2021 25 000 0.12 3 000 10 800 2 200
2022 10 000 0.12 1 200 12 000 1 000
Total 100 000 $12 000
* $13 000 - $1800
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3. PPE: Depreciation methods

Year Straight-line Diminishing-balance Units-of-production

2018 $ 2 400 $ 5 200 $ 1 800
2019 2 400 3 120 3 600
2020
Comparison of2depreciation
400 methods1 872 2 400
2021 2 400 1 123 3 000
2022 2 400 685 1 200
$12 000 $12 000 $12 000

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Lecture Activity 1:
ABC Ltd purchased a delivery van costing $52,000. It is expected to have a
residual value of $12,000 at the end of its useful life of 4 years or 200,000
kilometers.

Required
Assume the van was purchased on 1 July 2017 and that the accounting period
ends on 30 June. Calculate the depreciation expense for the year 2017–18 using
each of the following depreciation methods:
1. straight-line method
2. units of production method (assume the van was driven 78,000 kilometres
during the financial year).
3. diminishing-balance method

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Lecture Activity 1:

1. Straight-line Method:

2. Units-of-production Method:
• depreciation rate
=
=
• 2017-2018 depreciation
=
=

3. Diminishing-balance Method:
• depreciation rate =
• 2017-2018 depreciation
=
=

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Lecture Activity 1: Solution

1. Straight-line Method: ($52,000 - $12,000)/4 = $10,000

2. Units-of-production Method:
• depreciation rate
= (52,000 - $12,000)/200,000 kms
= $0.20 per km
• 2017-2018 depreciation
= 0.20 x 78,000 kms
= $15,600

3. Diminishing-balance Method:
1
• depreciation rate = 1 - $12,000 ÷ $52,000 = 31%
• 2017-2018 depreciation
= $52,000 x 31%
= $16,120

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4. PPE: Revaluation
Revaluation
• a reassessment of the fair value of a non-current asset at a
particular date
– AASB 116 requires each class of PPE to be measured either on cost
basis or revalued basis
– How to revalue?
• Compare two values: Carrying amount vs Fair Value
– Carrying amount equals cost less accumulated depreciation
– Fair value: the amount for which an asset could be exchanged between
knowledgeable willing partners in an arm’s-length transaction.

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4. PPE: Revaluation
Revaluation
• Two possibilities:
– Possibility 1: Carrying amount > Fair value, revalue decrement!
– Possibility 1: Carrying amount < Fair value, revalue increment!

• Key points:
– Make sure depreciation to date of revaluation;
– Close Accumulated Depreciation to asset account;
– Revalue PPE to its fair value.
– Revalue increment recognise as Equity (Revaluation Reserve/Surplus)
– Revalue decrement recognise as Expense

• Note:
– If initial revaluations reverse in a subsequent period, revaluation increment (decrement)
should be offset against previous revaluation decrement (increment) to the extent of the
amount of the previous revaluation.

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 4. PPE: Revaluation
• Example
– A firm decides to record equipment at its fair value of $45,000. The
equipment was originally purchased for $75,000 and now has a
book value of $50,000.
• Carrying amount: 50,000.
• Fair value: 45,000.

Carrying amount > Fair value, revalue decrement!

Jan 1 Accumulated Depreciation - Equipment 25 000

Equipment 25 000
(To close off accumulated depreciation against
the asset)
Jan 1 Revaluation Expense 5 000
Equipment 5 000
(To record revaluation decrement on equipment)

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4. PPE: Revaluation
Example Revalue increment!
2015: Land in Perth has a cost of $400,000, but fair value of $450,000.

2015 Land 50,000

Revaluation Reserve 50 000

(To record revaluation increment of Land by $50 000)

2018: The fair value for the same land is estimated at $370,000.
2018 Revaluation Reserve 50 000
Revaluation Expense 30 000
Land 80 000

(To record reversal of revaluation increment of Land by writing down the Revaluation Reserve
by $50 000 and recognising an expense of $30 000)

Note: Reversal of previously recognised revaluation reserve before expense

for the same asset!
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Lecture Activity 2:
Toy Ltd has the following land and buildings in its accounts as at 30 June 2015:

At 30 June 2015, the balance of the Revaluation Reserve is $800,000, of which

$700,000 relates to the land in Auckland and $50,000 relates to the buildings (the
balance relates to other PPE assets). An independent valuation carried out on this
day determined the following fair values: land in Wellington $1,500,000, land in
Auckland $2,400,000, buildings $750,000. The estimated remaining useful life
of the buildings is 15 years with nil residual.

Required
Record all entries relating to the revaluation of the assets on 30 June 2015.

Land in Wellington, at cost 100,000

Land in Auckland, at valuation 2012 2,000,000
Buildings on land in Auckland, at valuation 2012 1,000,000
Accumulated depreciation (150,000)
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Lecture Activity 2:
1. Revaluation of land Wellington.

2. Revaluation of land Auckland.

3. Revaluation of building Auckland.

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Lecture Activity 2: Solutions
1. Revaluation of land Wellington.
30/6/15 Land – Wellington 1,400,000
Revaluation Reserve 1,400,000

2. Revaluation of land Auckland.

30/6/15 Land – Auckland 400,000
Revaluation Reserve 400,000

3. Revaluation of building Auckland.

30/6/15 Accumulated Dep’n – Buildings 150,000
Building– Auckland 150,000
(To close off the accumulated dep’n to asset A/c)
Revaluation Reserve 50,000
Loss on revaluation of building 50,000
Building– Auckland 100,000
(Revalue building from $850,000 to $750,000)

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6. Disposals of PPE assets
• PPE assets may be disposed of by

• Key points:
– Make sure depreciation up-to-date (before disposal);
– Derecognise PPE (cost) from Balance Sheet;
– Reverse accumulated depreciation;
– Recognise gain or loss from disposal.

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6. Disposals of PPE assets
Example (Gain on sale)
– Wright Ltd sells office furniture on 1 July 2012 for $16,000 cash
– Original cost was $60,000
– Accumulated depreciation to 1 January 2012 is $41,000
– Depreciation expense for first 6 months of 2012 is $8,000

Step 1: Recording depreciation (up to the date of disposal!)

Jul 1 Depreciation Expense – Office Furniture 8 000

Accumulated Depreciation – Office Furniture 8 000
(To record depreciation expense for first 6 mths of 2012)

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6. Disposals of PPE assets
Step 2: Recording disposal of PPE & recognise gain/loss from disposal

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)

Calculation of gain on disposal

Cost of office furniture $60 000

Less: Accumulated depreciation ($41 000+ $8000) 49 000
Carrying amount at date of disposal 11 000
Proceeds from sale 16 000
Gain on disposal of asset $ 5 000

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6. Disposals of PPE assets
Example (Loss on sale)
– Assume that office furniture was sold for $9,000 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 11 000
Proceeds from sale 9 000
Loss on disposal of asset $ 2 000

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)

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Summary

After studying this presentation, you should be able to:

1. Describe how historical cost applies to property, plant and equipment
assets
2. Explain the concept of depreciation
3. Calculate depreciation using various methods and contrast the expense
patterns of the methods
4. Account for the revaluation of property, plant and equipment assets
5. Account for the disposal of property, plant and equipment assets

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