Accounting

HI5001 Accounting for Business Decisions
Lecture 10
Non-current Assets
Click to edit Master title style
Overview
Lecture Lecture Topic Readings/Preparation
1 Role of Accounting for Decision Making Textbook Chapter: 1
2 Financial Statements & Decision Making Textbook Chapter: 2
3 Recording Business Transactions Textbook Chapter: 3
4 Adjusting Entries & Preparing Financial Statements Textbook Chapter: 4
5 Completing The Accounting Cycle Textbook Chapter: 5
6 Accounting Systems Textbook Chapter: 7
7 Cash Management & Control Textbook Chapter: 11
8 Receivables Textbook Chapter: 12
9 Inventories Textbook Chapter: 6 & 13
10 Non-current Assets Textbook Chapter: 14 & 15
11 Liabilities Textbook Chapter: 16
12 Analysis & Interpretation of Financial Reports Textbook Chapter: 19
Applied Business Statistics for Managers Holmes Institute

Overview
Lecture 9 Lecture 10
B
Inventories Non-current
B Assets
b
Illegal

Topics
Click toCovered In This
edit Master titleLecture
style
Here’s what you will learn from this lecture:
1 Nature of property, plant and equipment
2 Determining the cost of property, plant and equipment
3 Apportioning the cost of a lump-sum acquisition
4 Nature of depreciation

Topics
Click toCovered In This
edit Master titleLecture
style
Here’s what you will learn from this lecture:
5 Depreciation methods
6 Subsequent costs
7 Derecognition of property, plant and equipment
8 Other Non-current Assets

Click to
What is Property,
edit Master
Plant
title&style
Equipment?
Balance sheet
Assets Liabilities
Current Assets Current liability
-Cash
-Receivables
Lecture -Inventories
Non-current liability
-Other
7,8 & 9 Non-Current Equity
Assets
Lecture -Property, plant,
equipment Paid in capital
10 -Intangibles
-Other Investments Retained Earning

Click to
What is Property,
edit Master
Plant
title&style
Equipment?
• Any asset with physical substance that is expected to be used

over more than 1 year
• Future economic benefit of property, plant and equipment will
be received over 2 or more accounting periods
• Therefore depreciable amount must be allocated in a
systematic manner over useful life to measure depreciation

Determining
Click to editCost
Master
of Property,
title stylePlant & Equipment
• AASB116 Property, Plant and Equipment
• Assets acquired are initially recorded at their cost, i.e., cash
or cash equivalents paid or the purchase consideration
• Purchase consideration is the fair value at acquisition date of
all assets given up or all liabilities undertaken by the acquiring
entity plus any incidental costs
• Cost of an item of property, plant and equipment comprise:
• Its purchase price
• Directly attributable costs
• Initial estimate of the costs of dismantling, removing and restoring
cost
Example: acquisition
Click to edit Master cost
title of a machine
style
Example
List price of machine $22,000
Less: Trade discount (10% of $22,000) (2,200)
Net price $19,800 Purchase Price
Less: GST (1/11) 1,800
Purchase consideration $18,000
Freight inwards (net of GST) 820
Directly Attributable Costs
Installation costs (net of GST) 675
Cost of acquisition $19,495

title of a machine
style
Journal entry:
Machine 19,495
Cash at bank/Accounts Payable 19,495

Acquisition of property & equipment

title of PPE
style
Example
ANE Ltd purchased a block of land in order to build a new office building on
the land. Below are the costs incurred:
Price paid to the seller for the land $800,000

Commission paid to the real estate agent 5,000
Title-search and survey fees 4,000
Stamp duty on land 50,000
Cost to demolish the old building on the land 6,000
What is the cost of the land that should be recognized?

Lump-Sum Acquisition
• Purchase of many assets at once:
✓ Total cost apportioned over the identifiable assets
✓ Each asset recorded at individual cost
✓ Cost allocated on basis of fair value
• Fair value is the amount for which the asset can be

exchanged between a knowledgeable, willing seller and a
knowledgeable willing buyer in an arm’s length transaction

Example
Click to of a Lump-Sum
edit Acquisition
Master title style
▪ Why allocate cost?
✓ Reported in different accounts
✓ Land not subject to depreciation
✓ Office furniture and building have different economic lives
▪ Example
✓ Purchased a small office building to accommodate expanding
business
✓ Purchase included land, office building and office equipment
✓ Total price of $800,000 (plus GST) was paid on 2 January

Example
edit Acquisition
Master title style
Cost allocated to specific asset
𝑭𝒂𝒊𝒓 𝒗𝒂𝒍𝒖𝒆 𝒐𝒇 𝑺𝒑𝒆𝒄𝒊𝒇𝒊𝒄 𝒂𝒔𝒔𝒆𝒕
= X 𝑻𝒐𝒕𝒂𝒍 𝑪𝒐𝒔𝒕
𝑻𝒐𝒕𝒂𝒍 𝑭𝒂𝒊𝒓 𝑽𝒂𝒍𝒖𝒆
Asset Estimated % Allocation Est. Life

fair value of total
Land $595,000 70 $560,000 Indefinite
Building 170,000 20 160,000 30 years
Furniture 85,000 10 80,000 8 years
Totals $850,000 100 $800,000

Example
edit Acquisition
Master title style
Journal entry to record acquisition
January 2 Buildings 560,000

Land 160,000
Office equipment 80,000
GST Outlays 80,000
Cash at bank 880,000
Acquisition of property & equipment

Click to edit Master
Pause Point 1title style
Pause the lecture here and take a few moments to check your learning.

The Nature
Click of Depreciation
to edit Master title style
✓Nature of depreciation
✓Expected usage
✓Expected wear and tear
✓Technical and commercial obsolescence
✓Legal or similar limits
Ordinary
✓Cost needs to be apportioned over

expected useful life
Depreciation – Reduction in value of
asset

The Nature
Legal or Expected
similar limits usage
Nature of
depreciation
Technical &
Expected
commercial
wear &
obsolescence
tear

The Nature
Legal or Expected
Nature of
depreciation
Technical &
Expected
commercial
wear &
obsolescence
tear

The Nature
Legal or Expected
Nature of
depreciation
Technical &
Expected
commercial
wear &
obsolescence
tear

The Nature
Legal or Expected
Nature of
depreciation
Technical &
Expected
commercial
wear &
obsolescence
tear

Determining
Click to editthe Amount
Master of style
title Depreciation

Determining
Click to editthe Amount
Master of style
title Depreciation
• Useful life is defined as

✓ The period over which an asset is expected to be available for use by
an entity, or
✓ The number of production or similar units expected to be obtained
from the asset
▪ Residual value is the estimated amount that an entity could
currently obtain from disposal of the asset after deducting the
estimated costs of disposal
▪ Depreciable amount is cost less residual value

Depreciation
Click to editMethods
Master title style
Units of Straight
production line
method method
Depreciation
Methods
Sum of Diminishing
years balance
digits method

1. Straight-line
Click Methodtitle style
to edit Master
▪ Allocates an equal amount of
depreciation to each full accounting
period in asset’s useful life
Straight line method
▪ Annual depreciation
𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑏𝑙𝑒 𝑎𝑚𝑜𝑢𝑛𝑡
=
𝑈𝑠𝑒𝑓𝑢𝑙 𝐿𝑖𝑓𝑒
$2000 $2000 $2000

1. Straight-line
Click Methodtitle style
to edit Master
Example of straight line depreciation
Cost $33,000
Residual $ 3,000
Estimated useful life of 4 years
$𝟑𝟑,𝟎𝟎𝟎 −$𝟑,𝟎𝟎𝟎
Annual depreciation = = $7,500
𝟒 𝒚𝒆𝒂𝒓𝒔
Entry to record depreciation expense at end of each year
June 30 Depreciation expense – Machinery 7,500

Accumulated depreciation – Machinery 7,500
Depreciation expense for the year

2. Diminishing
Click Balancetitle
to edit Master Method
style
▪ Results in decreasing depreciation

charge over the useful life of the asset
Diminishing balance method ▪ Asset more productive in its earlier
years and earns more revenue
𝒏 𝒓
𝑫𝒆𝒑𝒓𝒆𝒄𝒊𝒂𝒕𝒊𝒐𝒏 𝑹𝒂𝒕𝒆 = 𝟏 −
𝒄
n = useful life in years
r = residual value (in $)
c = original cost or gross revalued amt (in $)
3rd Year 2nd Year 1st Year

$2000 $3000 $4000

2. Diminishing
Click Balancetitle
style
Example: Diminishing-balance depreciation method
Cost $33,000
Residual $ 3,000
Depreciation rate = 1 – (3,000/33,000)¼
= 45% (approx)
Carrying amount Annual depreciation Carrying amount
Year at beg. of year Rate expense at end of year
1 $33,000 x 45% $14,850 $18,150

2 18,150 x 45% 8,168 9,982
3 9,982 x 45% 4,482 5,490
4 5,490 2,490 3,000

2. Diminishing
Click Balancetitle
style
Entry to record depreciation expense at end of year 1:

Entry to record depreciation expense at end of year 2:


3. Sum-of-years’-digits
Click Method
• Different way of applying
Sum of years digits
diminishing value method
• Depreciation each period is
determined by multiplying the
residual amount by successively
smaller fractions
Annual Depreciation = Depreciable amount x remaining life /
sum-of-years

3. Sum-of-years’-digits
Click Method
Example Sum-of-years digits depreciation
Cost $33,000
Residual $ 3,000
The sum of the years’ digits: 1 + 2 + 3 + 4 = 10
Depreciable Depreciation for Total Carrying
Year amount Fraction the year accumulated amount
depreciation
1 $30,000 x 4/10 = $12,000 $12,000 $21,000
2 30,000 x 3/10 = 9,000 21,000 12,000
3 30,000 x 2/10 = 6,000 27,000 6,000
4 30,000 x 1/10 = 3,000 30,000 3,000

4. Units-of-production
Click to edit Master Method
title style
▪ Determines fixed amount of
Units of production method
depreciation per unit of output
Operating Hours ▪ Annual depreciation is
Ordinary depreciable amount divided by
the production capacity or
useful life in units
Depreciation rate per Depreciable amount
operating hour = Operating hours

title style
Example Units-of-production depreciation

Cost $33,000
Residual $ 3,000
Estimated useful life of 15,000 hours
$𝟑𝟑,𝟎𝟎𝟎 −$𝟑,𝟎𝟎𝟎
Depreciation rate per operating hour = = $2 per hour
𝟏𝟓,𝟎𝟎𝟎 𝒉𝒐𝒖𝒓𝒔

title style
Assume the machine were operated for 2500 hours during the accounting
period
Depreciation expense for the period = 2500 hours x $2 = $5000
Entry to record depreciation expense at end of the year:


Comparison
Click to editofMaster
Depreciation Methods
title style
• Different annual charges

• Same total charge
• Generate revenue evenly → straight line
• Wear out with use → units of production
• Generate more revenue in early years → reducing balance

Comparison
title style
Comparison of Depreciation Methods
Straight line Unit of Diminishing

method production balance method
method
Different Annual $7500 $5000 $14850
charges

Comparison
title style
Comparison of Depreciation Methods
Straight line Unit of Diminishing

method production balance method
method
Different Annual $7500 $5,000 $14850
charges
Assumption principle Even revenue Machine wears out More revenue
for charging generation with use generated in early
depreciation years


Subsequent
Click to editCosts Incurred
Master In Relation To PPE
title style
Subsequent cost
Repairs Modification
Maintenance Improvements

Subsequent
Click to editCosts Incurred
Master In Relation To PPE
title style
Subsequent cost
Impact on Future
useful life economic
benefit
Repairs Modification
Maintenance Improvements

Recognition
Click to editPrinciple
Master title style
• According to the standard, the initial cost and subsequent

costs of an item of property, plant and equipment should be
recognised as an asset only under the following recognition
principle, i.e. if:
– it is probable that the future economic benefits associated
with the item will flow to the entity
– the cost(s) of the item can be measured reliably.

1. Day-to-day
Click to edit repairs
Masterand maintenance
title style
1 Day-to-day repairs and maintenance
June 6 Repairs & Maintenance expense 670

Non-GST Cash at bank 670
version: Repairs on delivery truck
June 6 Repairs & Maintenance expense 670

GST GST Outlays 67
version:
Cash at bank 737
Repairs on delivery truck

2. Overhauls
Click to editand replacement
Master of major parts
title style
2 Overhauls & replacement of major parts
Assume a delivery van was purchased for $34,000 and was estimated to have a
useful like of 5 years with a residual value of $4000. At the end of year 4, its carrying
amount is $10,000:
Cost $34,000
Less: Accumulated Depreciation (4 x $6,000) 24,000
Carrying amount: $10,000
At the beginning of year 5, it is decided to replace the van’s engine at a cost of

$4,500, after which the van will last for 3 more years. The residual value is extended
to $2,000. The old engine was considered to have a carrying amount of $500,
and was written off.

2. Overhauls
Click to editand replacement
Master of major parts
title style
2 Overhauls & replacement of major parts
July 4 Accumulated depreciation 24,000

Delivery van 24,000
Reversing accumulated depreciation
July 4 Delivery van 4,500

Cash at bank 4,500
Installation of a new engine
July 4 Expense on disposal 500

Delivery van 500
Disposal of old engine

3. Leasehold
Click to editimprovements
Master title style
3 Leasehold improvements
July 4 Leasehold improvements 10,000

Cash at bank 10,000
Payments for improvements to leased building
June 30 Depreciation expense – Leasehold Improvements 2,000

Accumulated depreciation – Leasehold Improvements 2,000
Depreciation of leasehold improvements

Property
Click to & Plant
edit Records
Master title style
• Divided into functional groups with separate accounts for

each group
• Subsidiary ledger for each individual asset
➢ Income tax
➢ Insurance

Property
Click to & Plant
edit Records
Master title style
Property, Plant & Equipment
Recorded at
Freehold individual cost Computer
land Office & Laptop
Land equipment
Leasehold Table &
land Chair
Plant Building Administrative

building building

Disclosure of Property,
Click to edit Plant
Master title & Equipment
style
XX LTD
Balance Sheet (partial)
As at 30 June 2019
Non-current assets as at 30 June ….
Property, plant & equipment
Land (at cost) $164,000
Buildings (at cost) $849,000
Less: Accumulated depreciation 231,500 617,500
Plant and equipment (at cost) $236,400
Less: Accumulated depreciation 172,000 63,800
$845,300


Derecognition of Non-current
title style Assets
Asset scraping
Illegal

Scrapping of non-current
Click to edit Master titleassets
style
Scrapping of non-current assets: No longer useful, no sales value
Example 1: scrapped fully depreciated asset

If a machine that has been fully depreciated by $7,000 is discarded because it
is worthless
July 2 Accumulated depreciation – Machinery 7,000

Machinery 7,000
Scrapped a fully depreciated machine

style
Example 2: scrapped partially depreciated asset
If the machine is discarded when it has an accumulated deprecation balance
of $6,500, a $500 expense is recorded when the asset is removed from the
accounts

Expense on disposal of machinery 500
Machinery 7,000
Scrapped a partially depreciated machine

style
Example 3: scrapped partially depreciated asset and
incurred disposal costs of $400

Machinery 7,000
Cash at bank 400
Scrapped a partially depreciated machine & incurred disposal costs of $400

style
Example 4: scrapped part way through the year
Sept 1 Depreciation expense – Machinery 200

Accumulated depreciation – Machinery 200
Depreciation on scrapped machine to date of disposal
Sept 1 Accumulated depreciation – Machinery 6,700

Machinery 7,000
Scrapped a partially depreciated machine

title style Assets
Asset Sale
Carrying value
Difference
Expense for
Net gain or loss
period
Asset sale – proceed recorded as income

Sale
Clickoftonon-current
edit Masterassets
title style
• Sale of non-current assets

• Proceeds recorded at the ‘gross amount received’ (income)
• Carrying value represents expense for the period
• The difference represents a net gain or loss on sale

Sale
edit Masterassets
title style
Example 1: carrying value less than selling price
Machine cost $1,000, accumulated depreciation $900, sold for $500
Date Cash at bank 500

Proceeds on sale of asset 500
To record gross proceeds from sale
net gain of
$400
Date Carrying amount of asset sold 100
Accumulated depreciation 900
Machine 1,000
To recognise as expense the carrying amount of the asset sold

Sale
edit Masterassets
title style
Example 1: carrying value less than selling price

An alternative entry:
Date Cash 500

Machine 1,000
Gain on sale of machine 400
To recognise the gain on sale of the machine

Sale
edit Masterassets
title style
Example 2: Carrying value more than selling price
Date Cash at bank 50

Proceeds on sale of asset 50
To record gross proceeds from sale
net loss of
$50
Date Carrying amount of asset sold 100
Machine 1,000
To recognise as expense the carrying amount of the asset sold

Sale
edit Masterassets
title style
Example 2: Carrying value more than selling price
An alternative entry:
Date Cash 50
Loss on sale of machine 50
Machine 1,000
To recognise the loss on sale of the machine

title style Assets
Asset exchange
My car My bike
keys keys
Illegal

Exchanging
Click to editnon-current assets
Master title style
Recognise the new machine Remove the old machine
Cash $26,000 Cost 22,000
Trade in allowance $4,000 Accumulated Depreciation 15,000
Feb 1 Feb 1
Machinery 30000 B
Carrying amt of machinery sold 7000
B
Cash at bank 26000 Who is
Accumulated depreciation
b 15000
Proceeds from sale of machinery 4000 involved with
Machinery 22000
accounting?
Exchange of new machine for trade-in of Recognition as an expense of the carrying
$4000 & payment of $26000 amount of the machine traded-in

Exchanging
Click to editnon-current assets
Master title style
Exchanging non-current assets

• Record disposal of old asset
• Record acquisition of new asset
• Trade-in amount is treated as income
• Difference between income and expense components
represents net gain or loss


Click to
Other Non-current
edit MasterAssets
title style
- Intangibles
• No physical substance
• Non-monetary
• Identifiable
• e.g. patents, trademarks, brand names
• Unidentifiable
• Goodwill

Click to
Other Non-current
edit MasterAssets
title style
- Intangibles
Categorization of intangible assets
Cost must be Separately Internally

Stringent test &
measured reliably acquired generated only few satisfy
to recognize as
asset intangibles intangibles criteria

Click to
Other Non-current
edit MasterAssets
title style
- Intangibles
✓ Amortisation
✓ Allocation of depreciable amount of intangibles to periods benefiting
from their use
✓ Method must reflect pattern in which asset’s future economic benefits
are consumed by the entity
✓ No amortisation if intangible asset has indefinite life
✓ Must test asset for impairment each period

Click to
Other Non-current
edit MasterAssets
title style
- Intangibles
Examples of identifiable intangible assets
1 2
Patent and
R&D Costs

Click to
Other Non-current
edit MasterAssets
title style
- Intangibles
1 22
Patent and Copyrights

R&D Costs

Click to
Other Non-current
edit MasterAssets
title style
- Intangibles
1 22 3
Trademark
Patent and Copyrights & brand
R&D Costs
name

Click to
Other Non-current
edit MasterAssets
title style
- Intangibles
1 22 3 4
Trademark
Patent and Copyrights Franchises
& brand
R&D Costs
name

Click to
Other Non-current
edit MasterAssets
title style
- Intangibles
✓ Patents and research and development costs

✓ A patent is an exclusive right to produce and sell a particular product
for a period of 20 years
✓ Most R&D costs charged to expense as incurred
✓ Copyrights
✓ An exclusive right to reproduce and sell an artistic or published work
(life + 70 years)

Click to
Other Non-current
edit MasterAssets
title style
- Intangibles
• Trademarks and brand names
➢ Main cost lies in advertising which should be charged to expense
when incurred
➢ Internally generated trademark or brand name cannot be recognised
as asset
• Franchises
➢ Right granted by a company to conduct business at a specific
location
➢ Initial cost should be capitalised and amortised over shorter of term
of franchise or useful life

Click to
Other Non-current
edit MasterAssets – Goodwill
title style
• ‘Future benefits from unidentifiable assets’

➢ Non-current asset
• Purchased vs. generated goodwill
• Reassessment on regular basis

Key Take
Click Aways
Summary of Lecture 10
▪ Nature of property, plant and equipment

▪ Determining the cost of property, plant and equipment
▪ Apportioning the cost of a lump-sum acquisition
▪ Nature of depreciation
▪ Depreciation methods
▪ Subsequent costs
▪ Derecognition of property, plant and equipment
▪ Other Non-current Assets

End ofto
Click Lecture 10 title style
edit Master
• Recommended Readings:
Hoggett & Edwards - Chapter 14 &15
• Tutorial Questions
Hoggett & Edwards - Chapter End Questions
• Discussion Board & Drop-in Session

Post your questions in the discussion board
• Next Lecture

Accounting

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HI5001 Accounting for Business Decisions

Applied Business Statistics for Managers Holmes Institute

Applied Business Statistics for Managers Holmes Institute

1 Nature of property, plant and equipment

2 Determining the cost of property, plant and equipment

3 Apportioning the cost of a lump-sum acquisition

Applied Business Statistics for Managers Holmes Institute

7 Derecognition of property, plant and equipment

8 Other Non-current Assets

Applied Business Statistics for Managers Holmes Institute

Applied Business Statistics for Managers Holmes Institute

• Any asset with physical substance that is expected to be used

Applied Business Statistics for Managers Holmes Institute

Cost of acquisition $19,495

Applied Business Statistics for Managers Holmes Institute

Cash at bank/Accounts Payable 19,495

Applied Business Statistics for Managers Holmes Institute

Price paid to the seller for the land $800,000

What is the cost of the land that should be recognized?

Applied Business Statistics for Managers Holmes Institute

✓ Each asset recorded at individual cost

✓ Cost allocated on basis of fair value

• Fair value is the amount for which the asset can be

Applied Business Statistics for Managers Holmes Institute

Applied Business Statistics for Managers Holmes Institute

Asset Estimated % Allocation Est. Life

Applied Business Statistics for Managers Holmes Institute

January 2 Buildings 560,000

Applied Business Statistics for Managers Holmes Institute

Applied Business Statistics for Managers Holmes Institute

✓Cost needs to be apportioned over

Applied Business Statistics for Managers Holmes Institute

Applied Business Statistics for Managers Holmes Institute

Applied Business Statistics for Managers Holmes Institute

Applied Business Statistics for Managers Holmes Institute

Applied Business Statistics for Managers Holmes Institute

Applied Business Statistics for Managers Holmes Institute

• Useful life is defined as

Applied Business Statistics for Managers Holmes Institute

Applied Business Statistics for Managers Holmes Institute

$2000 $2000 $2000

Applied Business Statistics for Managers Holmes Institute

Entry to record depreciation expense at end of each year

June 30 Depreciation expense – Machinery 7,500

Applied Business Statistics for Managers Holmes Institute

▪ Results in decreasing depreciation

3rd Year 2nd Year 1st Year

Applied Business Statistics for Managers Holmes Institute

1 $33,000 x 45% $14,850 $18,150

Applied Business Statistics for Managers Holmes Institute

June 30 Depreciation expense – Machinery 14,850

Entry to record depreciation expense at end of year 2:

June 30 Depreciation expense – Machinery 8,168

Applied Business Statistics for Managers Holmes Institute

Applied Business Statistics for Managers Holmes Institute

Applied Business Statistics for Managers Holmes Institute

Applied Business Statistics for Managers Holmes Institute

Example Units-of-production depreciation

Applied Business Statistics for Managers Holmes Institute

Depreciation expense for the period = 2500 hours x $2 = $5000

Entry to record depreciation expense at end of the year:

June 30 Depreciation expense – Machinery 5,000

Applied Business Statistics for Managers Holmes Institute