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Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia
PowerPoint to accompany
Chapter 11
Non-Current Assets:
Property, Plant and Equipment, and Intangibles
Learning Objectives
1. Measure the cost of a non-current asset
2. Account for depreciation3. Select the best depreciation method
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia
pfor income tax purposes
4. Account for the disposal of a non-current asset
5. Account for the revaluation of a non-current asset
6. Account for intangible assets
Non-current Assets
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia
Measure the costof a non current asset
Objective 1
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia
of a non-current asset.
An asset must be carried on the balance sheet at the
amount paid for it.
Cost Principle
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia
The cost of an asset equals the sum of all of the costs incurred to bring the asset to its intended purpose.
Land and Land Improvements
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia
Land Improvements
All improvements located on the land but subject to depreciation:
Fencing
Paving
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia
Paving
Sprinkler systems
Lighting
etc.
Buildings – Construction
Architectural fees
Building permits
Contractor charges
P t f t i l l b
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia
Interest during construction?(AASB 123 prefers expensing)
Payments for materials, labour
Buildings – Purchasing
Purchase price
Agents’ commissions
Stamp duty
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia
Repairing or renovating building for its intended purpose
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia
Machinery and Equipment
Purchase price (less any discounts)
Transportation charges
I i t it
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Insurance in transit
Customs duties
Installation costs
Expenditures to test asset before it is placed in service
Capitalising The Cost of Interest
Suppose on January 1, 20X1, In Motion T-Shirts borrows $50,000 on a two-year, 10% loan, to build a warehouse.
Total interest for the financial year
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Total interest for the financial year ended 30/6/X1 is 6/12 x $10,000 = $2,500.
AASB 123 (Borrowing Costs) allows capitalisation (record as asset) but prefers expensing (more conservative).
Jan-June 20X1
Building 50,000Cash at Bank 50,000
Building the warehouse
Capitalising The Cost of Interest
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia
Building the warehouse
June 30 20X1
Building 2,500Cash at Bank 2,500
Capitalising the interest
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia
Lump-sum Purchases
Business may purchase a group of assets (e.g. land and buildings)
For accounting purposes we need to indentify each separately
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia
indentify each separately
Using the relative-fair-value method (AASB3) we divide the cost according to their fair (market) values.
Lump-sum Purchases Example
In Motion T-shirts paid $100,000 for a combined purchase of land and a building.
The land is appraised at $30,000 and
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia
the building at $60,000. How much of the purchase price is
allocated to land and how much to the building?
Lump-sum Purchases Example
Land: $30,000 ÷ $120,000 = 25%$100,000 × 25% = $25,000
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia
Building: $90,000 ÷ $120,000 = 75%$100,000 × 75% = $75,000
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Does the expenditure increase capacityor efficiency or extend useful life?
YES NO
Distinction Between Capital Expenditures and Expenses
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Capital ExpenditureDebit
Non-currentAssets accounts
ExpenseDebit Repairs
and Maintenanceaccount
Distinction Between Capital Expenditures and expenses
This is easy in theory but allows choice in
Does the expenditure increase capacity or efficiency or extend
useful life?
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia
This is easy in theory but allows choice in practice.
There are cases where it is clearly an expense or clearly an asset.
But in cases where doubt exists this allows ‘earnings management’ – (legally produce higher or lower profit figures).
Depreciation is NOT a process of valuation
Measuring The Depreciationof Property, Plant and Equipment
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia
Depreciation does NOTprovide cash for the
replacement of the asset
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia
Cost
Measuring The Depreciationof Property, Plant and Equipment
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia
Estimated useful life
Estimated residual value
Objective 2
Account for d i ti
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia
depreciation.
Straight-Line (SL)
Depreciation Methods
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia
Units-of-Production (UOP)
Reducing-Balance (RB)
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia
Depreciation Methods Example
Qantas purchased a baggage-handling truck for $41,000.
It is expected to have a trade-in value of
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia
$1,000 at the end of its useful life.
The van has an estimated service life of 100,000 km or 5 years.
(Cost – Residual value) ÷ years of useful life
($41,000 – 1,000) = $40,000 ÷ 5 = $8,000
Straight-line Method example
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia
( , , ) , ,
Year 1 Depreciation: $ 8,000Year 2 Depreciation: 8,000Year 3 Depreciation: 8,000Year 4 Depreciation: 8,000Year 5 Depreciation: 8,000Total Depreciation: $40,000
($41,000 – 1,000) ÷ 100,000km = $.40/km
Year 1: 20 000 km =$ 8 000
Units-of-Production Method Example
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia
Year 1: 20,000 km =$ 8,000Year 2: 30,000 km = 12,000Year 3: 25,000 km = 10,000Year 4: 15,000 km = 6,000 Year 5: 10,000 km = 4,000
Total: 100,000 km =$40,000
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia
Reducing-Balance Method Example (approx)
Straight-line rate is 100% ÷ 5 = 20%
Reducing-balance is approximately 1.5 times the straight-line rate = 30%
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia
g
What is the book value of the van at the end of the first year?
$ 41,000 × 30% = $ 12,300 depreciation
$ 41,000 – $12,300 = $ 28,700
Reducing-Balance Method Example
End of year 1
D i ti E $ 12 300
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia
Depreciation Expense $ 12,300Accumulated Depreciation $12,300
To record depreciation expense for a one-year period
Reducing-Balance Method Example
Remember the book value of the truck at the end of the first year?
$ 41,000 – $12,300 = $ 28,700
Depreciation for the second year is
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia
Depreciation for the second year is
$ 28,700 × 30% = $ 8,610
Giving a book value of
$ 28.700 - $ 8,610 = $ 20,090
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia
Reducing-balance method example (precise method)
The method used in the last few slides is a approximate method commonly used for its simplicity
Your textbook (pages 441-442) shows
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia
Your textbook (pages 441 442) shows the more precise method.
Comparing depreciation methods
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia
See Exhibit 11-10 on page 444 of your textbook
Comparing depreciation methods
The large amount in year 5 using the reducing balance is due to the inaccuracy of using 1.5 times the
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia
straight line method.
This is amount is used to totally depreciate the asset
Using the formula on page 442 of your textbook the rate is .524%
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia
Objective 3
Select the best d i ti
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia
depreciationmethod for income
tax purposes.
Relationship between depreciation and taxes
Most businesses use straight-line depreciation for financial reporting.
For tax purposes businesses can use;
‘Prime Cost’ which is straight line
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia
‘Prime Cost’ which is straight-line.
‘Diminishing Value’ which is reducing-balance at 1.5 times the straight-line rate.
Depreciation for partial years
Assume In Motion T-Shirts buys a building on 1 July for $100,000 with a RV of $40,000 and a useful life of 20 years.
How much is the building's depreciation on 31st of December?
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia
Prime cost method:3,000 × 6/12 = $1,500
Reducing-balance method:$2,250 × 1.5 = $2,250
on 31 of December?
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia
Revised SL depreciation
=Cost – Accumulated depreciation
Changing the useful life
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia
Estimated remaining useful life
–New residual value
÷
Objective 4
Account for the disposalof a non-current asset
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia
of a non-current asset.
Disposing of non-current assets
Sell, exchange, scrap.
First bring depreciation up to date, then:
Dr Accumulated Depreciation Cr Asset
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia
Dr Accumulated Depreciation, Cr Asset.
Gain/loss is reported on the Income Statement...
– and closed to Profit and Loss Summary.
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia
Disposing by scrapping an asset
Suppose you disposed of a piece of equipment that cost $6,000 and has no residual value. Accumulated depreciation is $6,000
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia
p $ ,
The entry to record the disposal is
Acc Dep’n Equipment 6,000
Equipment 6,000
Disposing by scrapping an asset
Assume we scrap the same piece of equipment a year earlier when accumulated depreciation was $5,000
The entry to record the disposal is
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia
The entry to record the disposal is
Acc Dep’n Equipment 5,000
Loss on disposal of equip 1,000
Equipment 6,000
Preferred disclosure instead of gains and losses show disposal proceeds as revenue and carrying amount as an expense
Dr Acc. Depn 5,000Cr Equipment 6 000
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Cr Equipment 6,000Dr Carrying Amount of Asset 1,000
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia
Disposing by selling example
You sell on old piece of furniture
Cost: $ 10,000
Residual value: $ 0
Purchased 1 January 20X6
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Purchased 1 January 20X6
Estimated useful life at acquisition: 10 yrs
Disposing by selling example
Assume the equipment is sold on 30/6/X9.
What is the accumulated depreciation J 30?
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$10,000 ÷ 10 = $1,000$1,000 * 6/12 = $500
$1000*3 + $500 = $3,500
on June 30?
Disposing by selling example
Assume the furniture is sold for $5,000.
June 30, 20X9
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia
Cash 5,000Accumulated Depreciation 3 500Loss on Sale of Furniture 1,500
Furniture 10,000
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Dr Accumulated Depreciation 3,500Cr Furniture 10,000Dr Cash 5,000Cr Disposal proceeds - revenue 5,000Dr Carrying amount – expense 6,500
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia
Exchanging non-current assets (e.g. trade-in) Domino’s Pizza trade in a delivery van
Old van cost $10,000 and accumulated depreciation of $8,000
A trade in of $2 500 is allowed
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia
A trade-in of $2,500 is allowed.
The new van costs $13,000
Thus the cash payment is $10,500.
Gain on sale is $500 (2,500 – 2,000).
Exchanging non-current assets (e.g. trade-in)
The journal entry is
Delivery van (new) 13 000
A D ’ ( ld) 8 000
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia
Acc Dep’n (old) 8 000
Delivery van (old) 10 000
Cash at Bank 10 500
Gain on Sale of Vehicle 500
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia
Dr Delivery van (new) 13,000Dr Accumulated depreciation (old) 8,000Cr Delivery van (old) 10,000Cr Cash at bank 10,500Cr Trade-in allowance – revenue 2,500Dr Carrying amount (old)- expense 2,000
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia
Dr Carrying amount (old) expense 2,000
Internal control ofnon-current assets
Cornerstone of internal control is separating custody of assets from
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accounting for the asset.
Also need physical controls – to prevent theft and maintain physical condition of the asset.
Impairment of non-current assets
AASB 136 Impairment of Assets requires, if ‘carrying amount’ is greater than its ‘recoverable amount’ then the carrying amount must be
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia
then the carrying amount must be reduced (‘written down’).
Recoverable amount = greater of selling price or ‘value in use’ (present value of future cash flows).
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia
Example
You own a block of land that cost you $100,000 and is recorded at cost
You have it valued and find its worth $80 000
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$80,000
The journal entry would be
Impairment loss – Land 20 000
Land 20 000
Example cont.
If the land had a building with carrying amount of $150,000 (cost $200,000) with a recoverable amount of $120,000
The journal entries would be
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The journal entries would be
Accumulated Dep’n 50 000
Building 50 000
Impairment Loss on Building 30 000
Building 30 000
Accumulated Dep’n 50 000Building 80 000
Impairment Loss on Building 30 000
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia
Objective 5
Account for the revaluation
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia
revaluationof a non-current asset.
Revaluation
AASB 116 Property, Plant and Equipment allows assets to be recorded at cost or ‘fair value’ (arm’s length sale).
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia
Upward revaluations are credited to owners equity (Revaluation Reserve account).
Downward revaluations are expenses.
This is ‘conservatism’.
Example
Land which cost $100,00 is revalued to $200,000
The entry would be:
Land 100 000
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Revaluation Reserve 100 000
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia
Examples
Building with carrying amount of $150,000 (cost $200,000) is revalued to $120,000
The journal entries would be
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia
The journal entries would be
Accumulated Dep’n 50 000
Building 50 000
Revaluation loss on Building 30 000
Building 30 000
Revaluation
For depreciable assets the accumulated depreciation is first credited against the asset.
No “offsetting” decreases against
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia
No offsetting decreases against increases is allowed.
Only when an asset was previously revalued upwards can a downwards revaluation be debited to ‘Revaluation Reserve’.
Examples
Assume the building before actually originally cost $130,000 and had been revalued to $200,000
Thus the entry would be
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia
Thus the entry would be
Accumulated Dep’n 50 000
Building 50 000
Revaluation Reserve 30 000
Building 30 000
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia
Objective 6
Account for intangible assets
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia
intangible assets.
Not physical in nature
Intangible assets
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PatentsCopyrightsTrademarksFranchises
Goodwill
Specific Intangibles
Intangible assets: Patents
Patents are government grants.
They give the holder the right to produce and sell an invention for 20 years
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years.
Suppose a company pays $200,000 to acquire a patent on 1 January.
The company believes that its expected useful life is 5 years.
What are the entries?
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Jan 1 (this year)Patents 200,000
Cash 200,000To acquire a patent
Intangible assets: Patents
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q p
Dec 31 (next year)Amortisation Expense–Patents 40,000
Accumulated Amort.–Patents 40,000To amortise the cost of a patent
Intangible assets: Copyrights
Literary compositions (novels) Musical compositions Films (movies)
S ft
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Software Other works of art
Intangible Assets: Trademarks
Trademarks, Trade Names,or Brand Names are assets that
represent distinctive identifications
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of a product or service
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Intangible assets: Franchises
Franchises and licences are privileges granted by private business or
government to sell a product or service.
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p
Purchase price paid for
Goodwill Example
Intangible assets: Goodwill
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia
p pTasman Stores $10 millionAssets at market value 9 millionLess liabilities 1 millionMarket value of Tasman net assets: 8 millionGoodwill $ 2 million
Accounting for goodwill
AASB 138 Intangible Assets does not allow the recognition of ‘internally generated goodwill’.AASB 3 B i C bi ti t t
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia
AASB 3 Business Combinations states that goodwill is not amortised.
AASB 136 Impairment of Assetsrequires the regular measurement of the current value of purchased goodwill – if it has decreased – then a loss is recorded.
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia
Research and development
Special issues
Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia
Capitalise or expense expenditure
Ethical Issue:
Capitalise or expense expenditure
PowerPoint to accompany
End of Chapter 11