unit 1 plant and non-current assets v2

8/3/2019 Unit 1 Plant and Non-Current Assets v2

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Unit 1

Plant Assets and Non-Current

Assets


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Called Property, Plant, & Equipment/

Fixed Assets

Called Property, Plant, & Equipment/

Fixed Assets

Plant Assets (FRS 116)

Expected to Benefit Future Periods

Expected to Benefit Future Periods

Actively Used in Operations

Actively Used in Operations

Tangible in Nature

Tangible in Nature


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Declineinassetvalue

overitsusefullife

Use

2. Allocate cost to periods

benefited.

3. Account for subsequent

expenditures.

Use

2. Allocate cost to periods

benefited.

3. Account for subsequent

expenditures.

Disposal

4. Record disposal.

Disposal

4. Record disposal.

Plant Assets

Acquisition

. Compute cost.

Acquisition

. Compute cost.


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AcquisitionCost

AcquisitionCost

The initial estimate of the costs ofdismantlementand removingthe

item and restoringthe site on

which it is located, the obligation

of which an entity has incurred.

The initial estimate of the costs ofdismantlementand removingthe

item and restoringthe site on

which it is located, the obligation

of which an entity has incurred.

Allexpenditures

needed to

prepare theasset for itsintended use

Allexpenditures

needed to

prepare theasset for itsintended use

Purchase

price

Purchase

price

Cost Determination


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Land is not depreciable.

Land is not depreciable.

Purchase

price

Purchase

price

Real estate

commissions

Real estate

commissions

Title insurance premiums

Title insurance premiums

Delinquent

taxes

Delinquent

taxes

Surveying

fees

Surveying

fees

Title search and transfer fees

Title search and transfer fees

Land


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Land Improvements

Parking lots, driveways, fences, walks,shrubs, and lighting systems.

Parking lots, driveways, fences, walks,shrubs, and lighting systems.

Depreciate over

useful life ofimprovements.


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Cost of purchase or

construction

Cost of purchase or

construction

Brokerage

fees

Brokerage

fees

TaxesTaxes

Title feesTitle fees

Attorney feesAttorney fees

Buildings


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Purchase

price

Purchase

price

Installing,

assembling, and

testing

Installing,

assembling, and

testing

Insurance while

in transit

Insurance while

in transit

TaxesTaxes

Transportation

charges

Transportation

charges

Machinery and Equipment


9/60

On January 1, Matrix, Inc. purchased land and

building for RM200,000 cash. The appraised

values are building, RM162,500, and land,

RM87,500.How much of the RM200,000 purchase price

will be charged to the building and land

accounts?

On January 1, Matrix, Inc. purchased land and

building for RM200,000 cash. The appraised

values are building, RM162,500, and land,

RM87,500.How much of the RM200,000 purchase price

will be charged to the building and land

accounts?

Lump-Sum Asset Purchase

The total cost of a combined

purchase of land and building

is separated on the basis of

their relative market values.

The total cost of a combined

purchase of land and building

is separated on the basis of

theirrelative market values.


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Appraised % of Purchase Apportioned

Asset Value Value Price Cost

a b* c b cLand 87,500$ 35% 200,000$ = 70,000$

Building 162,500 65% 200,000 = 130,000

Total 250,000$ 100% 200,000$

*$87,500 $250,000 = 35%

$162,500 $250,000 = 65%

Appraised % of Purchase Apportioned

Asset Value Value Price Cost

a b* c b cLand 87,500$ 35% 200,000$ = 70,000$

Building 162,500 65% 200,000 = 130,000

Total 250,000$ 100% 200,000$

* $87,500 $250,000 = 35%

$162,500 $250,000 = 65%

Lump-Sum Asset Purchase


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Revaluation of Plant Assets

Revaluation is permissible under FRS 116 Revalued amount should be supported by

market-based evidence or appraisal. If revalued amount> carrying

amount=Revaluation Surplus

Credit to Revaluation Reserve If revalued amount< carrying

amount=Revaluation DeficitDebit to Statement of ComprehensiveIncome as revaluation deficit expense


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Depreciation is the process of allocatingthe cost of a plant asset to expense in the

accounting periods benefiting from its use.

Depreciation is the process of allocatingthe cost of a plant asset to expense in the

accounting periods benefiting from its use.

Cost

Allocation

Acquisition

Cost

Acquisition

Cost

(Unused)

Statement of Financial Position

(Used)

Statement of Compre

ExpenseExpense

Depreciation


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The calculation of depreciation involves thefollowing factors for each asset:

1. Cost

1. Salvage Value

1. Useful Life

2. Depreciation Methods used

Factors in Computing Depreciation


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1. Straight-line

1. Units-of-production

1. Double Declining-balance

2. Sum-of-digit

Depreciation Methods


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On January 1, 2007, equipment

was purchased for RM50,000

cash. The equipment has an

estimated useful life of five years

and an estimated residual value of

RM5,000.

Cost - Salvage Value

Useful life

Depreciation

Expense for Period=

Straight-Line Method


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Cost - Salvage Value

Useful life

Depreciation

Expense for Period=

RM9,0

00

Depreciation

Expense per Year=

RM50,000 -

RM5,000

5 years

=

Dr. Cr.

Depreciation Expense 9,000Accumulated Depreciation - Equipment 9,000

To record annual depreciation


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Depreciation Accumulated

Expense Depreciation Accumulated Book

Year (debit) (credit) Depreciation Value

50,000$

2007 9,000$ 9,000$ 9,000$ 41,0002008 9,000 9,000 18,000 32,000

2009 9,000 9,000 27,000 23,000

2010 9,000 9,000 36,000 14,000

2011 9,000 9,000 45,000 5,000

45,000$ 45,000$

Salvage ValueSalvage Value


Depreciation

Rate= (100% 5 years) = 20% per year


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De

preciation

Expense

Depreciation Expense

reported on the

Statement ofComprehensive

Income.RM0

RM1,000

RM3,000

RM5,000

RM7,000

RM9,000

2007 2008 2009 2010 2011

For the year ended December 31

Book Value

reported on theStatement of

Financial Position.

$41,000

$32,000

$23,000

$14,000

$5,000

$-

$5,000

$10,000

$15,000

$20,000$25,000

$30,000

$35,000

$40,000

$45,000

2007 2008 2009 2010 2011For the year ended December 31

BookValue


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Units-of-Production Method

Step 2:Depreciation

Expense =Depreciation

Per Unit

Number of

Units Producedin the Period

Depreciation

Per Unit= Cost - Salvage Value

Total Units of Production

Step 1:


20/60

On December 31, 2007, equipment waspurchased for RM50,000 cash. Theequipment is expected to produce 100,000units during its useful life and has anestimated salvage value of RM5,000.

If 22,000 units were produced in 2008, whatis the amount of depreciation expense?

On December 31, 2007, equipment waspurchased for RM50,000 cash. Theequipment is expected to produce 100,000units during its useful life and has anestimated salvage value of RM5,000.

If 22,000 units were produced in 2008, whatis the amount of depreciation expense?



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Step 2:

Depreciation

Expense = RM.45 per unit 22,000 units =RM9,900

Step 1:

Depreciation

Per Unit=

RM50,000 - RM5,000

100,000 units= RM.45 per

unit



22/60

Depreciation Accumulated Book

Year Units Expense Depreciation Value

50,000$

2008 22,000 9,900$ 9,900$ 40,1002009 28,000 12,600 22,500 27,500

2010 - - 22,500 27,500

2011 32,000 14,400 36,900 13,100

2012 18,000 8,100 45,000 5,000

100,000 45,000$

No depreciation expense if the equipment is idle.



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Double-Declining-Balance Method

Step 2:Double-declining-

balance rate = 2 Straight-line rate = 2 20% =

40%

Step 1:

Straight-line

rate= 100 % Useful life = 100% 5 = 20%

Step 3:

Depreciation

expense=

Double-declining-

balance rate

Beginning period

book value

40% RM50,000 = RM20,000 for

2008


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2008 Depreciation:

40% RM50,000 = RM20,000


2009 Depreciation:

40% (RM50,000 - RM20,000) = RM12,000


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Year Expense Depreciation Value

50,000$

2008 20,000$ 20,000$ 30,000

2009 12,000 32,000 18,000

2010 7,200 39,200 10,800

2011 4,320 43,520 6,480

2012 2,592 46,112 3,888

46,112$ Below salvage value



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50,000$

2008 20,000$ 20,000$ 30,000

2009 12,000 32,000 18,000

2010 7,200 39,200 10,800

2011 4,320 43,520 6,480

2012 1,480 45,000 5,00045,000$

We usually must force depreciation expense in the

last year so that book value equals salvage value.





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Sum-of-Digit Method

Year WeightedFactor (WF)

WF/15 x45,000

Yearlydepreciation

2008 5 45,000 x 5/15 15,000

2009 4 45,000 x 4/15 12,000

2010 3 45,000 x 3/15 9,000

2011 2 45,000 x 2/15 6,000

2012 1 45,000 x 1/15 3,000


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50,000$2008 15,000$ 15,000$ 35,000

2009 12,000 27,000 23,000

2010 9,000 36,000 14,000

2011 6,000 42,000 8,0002012 3,000 45,000 5,000

45,000$





Sum of-digit Method


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Comparing Depreciation

Methods

Method Formula Effect on AnnualDepreciation

Straight-line (Cost-Salvage value)/ Usefullife in periods

Consistent amount

Units-of-production

Depreciation per unit x Unitsproduced in period

Varying amount (depends onthe number of unitsproduced)

Double-

decliningbalance

Double-declining balance

rate x Beginning-period bookvalue

Decreasing amount

Sum-of-digit (Cost-Salvage value) xweighted factor/sum-of-thedigits

Decreasing amount


30/60

When a plant asset is

acquired during the year,

depreciation is calculated forthe fraction of the year the

asset is owned.

When a plant asset is

acquired during the year,

depreciation is calculated forthe fraction of the year the

asset is owned.

June

30

Partial-Year Depreciation


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Calculate the straight-line depreciation on

December 31, 2007, for equipment purchased on

June 30, 2007. The equipment cost RM75,000,

has a useful life of 10 years, and an estimatedsalvage value of RM5,000.

Calculate the straight-line depreciation on

December 31, 2007, for equipment purchased on

June 30, 2007. The equipment cost RM75,000,

has a useful life of 10 years, and an estimatedsalvage value of RM5,000.

Depreciation= (RM75,000 - RM5,000) 10

= RM7,000 for all 2007

Depreciation = RM7,000 6/12 = RM3,500

Depreciation= (RM75,000 - RM5,000) 10

= RM7,000 for all 2007

Depreciation = RM7,000 6/12 = RM3,500

Partial-Year Depreciation

Ch i E ti t f


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So depreciation

is an estimate.

Predicted

salvage value

Predicted

useful life

Over the life of an asset, new informationmay come to light that indicates theoriginal estimates were inaccurate.

Over the life of an asset, new informationmay come to light that indicates theoriginal estimates were inaccurate.

Change in Estimates for

Depreciation


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On January 1, 2004, equipment was purchased that cost

RM30,000, has a useful life of 10 years, and no salvage

value. During 2007, the useful life was revised to eight

years total (five years remaining).

Calculate depreciation expense for the year

ended December 31, 2007, using the

straight-line method.

On January 1, 2004, equipment was purchased that cost

RM30,000, has a useful life of 10 years, and no salvage

value. During 2007, the useful life was revised to eight

years total (five years remaining).

Calculate depreciation expense for the year

ended December 31, 2007, using the

straight-line method.


Depreciation

Book value at

date of change

Salvage value at

date of change

Remaining useful life at date of change



34/60


Depreciation

Asset cost 30,000$

Accumulated depreciation, 12/31/2006

($3,000 per year 3 years) 9,000

Remaining book value 21,000$Divide by remaining life 5

Revised annual depreciation 4,200$

Dr. Cr.

Dec. 31 Depreciation Expense 4,200

Accumulated Depreciation - Equipment 4,200

To record depreciation for 2007


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Reporting Depreciation

Property, plant, and equipment:

Land and buildings 150,000$

Machinery and equipment 200,000Office furniture and equipment 175,000

Land improvements 50,000

Total 575,000$

Less Accumulated depreciation (122,000)Net property, plant, and equipment 453,000$


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Additional Expenditures

If the amounts involved are not material, mostcompanies expense the item.

If the amounts involved are not material, most

companies expense the item.

Financial Statement Effect

Current Current

Treatment Statement Expense Income Taxes

Capital Balance sheetExpenditure account debited Deferred Higher Higher

Revenue Income statement Currently

Expenditure account debited recognized Lower Lower


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Revenue and Capital Expenditures

Type of Capital or

Expenditure Revenue Identifying Characteristics

Ordinary Revenue 1. Maintains normal operating condition.

Repairs 2. Does not increase productivity.

3. Does not extend life beyond originalestimate.

Capital 1. Major overhauls or partial

replacements.

2. Extends life beyond original estimate.

Betterments

and

Extraordinary

Repairs


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Recording cash

received (debit)

or paid (credit).

Recording cash

received (debit)

or paid (credit).

Removing accumulated

depreciation (debit).



Update depreciation

to the date of disposal.

Journalize disposal by:Journalize disposal by:

Removing the

asset cost (credit).

Removing the


Recording a

gain (credit)

or loss (debit).

Recording a

gain (credit)

or loss (debit).

Disposals of Plant Assets


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Update depreciation

to the date of disposal.

Journalize disposal by:

If Cash > BV, record a gain (credit).

If Cash < BV, record a loss (debit).

If Cash = BV, no gain or loss.

Discarding Plant Assets

Recording cash

received (debit)

or paid (credit).

Recording cash

received (debit)

or paid (credit).




depreciation (debit).Removing the


Removing the


Recording a

gain (credit)

or loss (debit).

Recording a

gain (credit)

or loss (debit).


40/60

On September 30, 2007, Evans Company

sells a machine that originally costRM100,000 for RM60,000 cash. The

machine was placed in service on

January 1, 2004. It was depreciated using

the straight-line method with an estimated

salvage value of RM20,000 and a useful

life of 10 years.

Selling Plant Assets


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Update Depreciation to Date of

Disposal

Annual Depreciation:

(RM100,000 - RM20,000) 10 Yrs. =

RM8,000

Depreciation to September 30, 2007:

9/12 RM8,000 = RM6,000

Annual Depreciation:

(RM100,000 - RM20,000) 10 Yrs. =

RM8,000

Depreciation to September 30, 2007:

9/12 RM8,000 = RM6,000

Dr. Cr.Sep. 30 Depreciation expense 6,000

Accumulated Depreciation - Machine 6,000

To update depreciation to date of disposal


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Determine Book Value of Asset

Co st 100,00$

A cc u m u l a te d D e p re c ia tio n :( 3 yrs. $8,0 00) + $6 ,000 =30,000

Bo o k V a lu e 70,000$


43/60

Determine Gain or Loss on

Disposal

Cost 100,000$

Accumulated depreciation 30,000

Book Value 70,000

Cash Received 60,000

Loss on disposal (10,000)$

If Cash > BV, record a gain (credit).

If Cash < BV, record a loss (debit).

If Cash = BV, no gain or loss.


44/60

Record the Disposal in the Journal

Dr. Cr.

Sep. 3 Cash 60,000

Accumulated Depreciation - Machi 30,000

Loss on Disposal of Asset 10,000

Machine 100,000

To record disposal of equipment


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Lets Talk About Natural

Resources!


46/60

Total cost,

including

exploration and

development,is charged to

depletion expense

over periods

benefited.

Extracted from

the natural

environmentand reported

at cost less

accumulated

depletion.

Natural Resources

Examples: oil, coal, goldExamples: oil, coal, gold


47/60

Cost Determination and Depletion

Step 2:

Depletion

Expense =

Depletion

Per Unit

Units Extracted

and Sold inPeriod

Depletion

Per Unit= Cost - Salvage Value

Total Units of Capacity

Step 1:


48/60

Apex Mining acquired a tract of land

containing ore deposits. Total costs of

acquisition and development were

RM1,000,000 and Apex estimates the landcontained 40,000 tons of ore. During the

first year of operations Apex extracted

and sold 13,000 tons of ore.

Apex Mining acquired a tract of land

containing ore deposits. Total costs of

acquisition and development were

RM1,000,000 and Apex estimates the landcontained 40,000 tons of ore. During the

first year of operations Apex extracted

and sold 13,000 tons of ore.

Depletion of Natural Resources


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Step 2:

Depletion

Expense= RM25 per ton 13,000 units =

RM325,000

Step 1:

Depletion

Per Unit=

RM1,000,000 - RM0

40,000 tons= RM25 per

ton

Depletion Expense


50/60

Plant Assets Used in Extracting

Natural Resources

Specialized plant assets may be required to

extract the natural resource.

These assets are recorded in a separate

account and depreciated.

Specialized plant assets may be required to

extract the natural resource.

These assets are recorded in a separate

account and depreciated.


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Lets Look at Intangible Assets!


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Noncurrent assets

without physical

substance.

Noncurrent assets

without physical

substance.

Useful life is

often difficult

to determine.

Useful life is

often difficult

to determine.

Usually acquired

for operational

use.

Usually acquired

for operational

use.

Intangible

Assets

Intangible

Assets

Often provide

exclusive rights

or privileges.

Often provide

exclusive rights

or privileges.

Intangible Assets (FRS 138)


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o Patents

o Copyrights

o

Leaseholdso Leasehold Improvements

o Franchises & Licenses

o Goodwill

o Trademarks & Trade

Names

Record at current

cash equivalent

cost, including

purchase price,

legal fees, and

filing fees.

Cost Determination and

Amortization


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Types of Intangibles

Patents

The exclusive right granted to its owner tomanufacture and sell a patented item or use a

process for 20 years. A patent is generally

amortized, using the straight-line method, over its

useful life not to exceed 20 years.


55/60


PatentsMatrix, Inc. purchased a patent for RM10,000. The

patent is expected to have a useful life of 10 years.

Dr. Cr.

Amortization Expense - Patents 1,000

Accumulated Amortization - Patents 1,000

To amortize patent costs


56/60


CopyrightsThe exclusive right to publish and sell a musical,

literary, or artistic work during the life of the

creator plus 70 years.

LeaseholdsThe rights the lessor grants to the lessee under

the terms of a lease. Most leases have adeterminable life.


57/60


Leasehold ImprovementsA lessee may pay for alterations or improvements

to the leased property such as partitions, painting,

and storefronts. These costs are usually amortizedover the term of the lease.

Franchises and Licenses

The right granted by a company or thegovernment to deliver a product or service under

specified conditions.


58/60


Trademarks and Trade Names

A symbol, name, phrase, or jingle identified with a

company, product, or service.


59/60

Occurs when onecompany buys

another company.

Occurs when onecompany buys

another company.

Goodwill is not amortized. It is testedeach year to determine if there has been

any impairment in carrying value.

Goodwill is not amortized. It is testedeach year to determine if there has been

any impairment in carrying value.

GoodwillGoodwill

Only purchasedgoodwill is an

intangible asset.

Only purchasedgoodwill is an

intangible asset.

Goodwill


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End of Unit 1

unit 1 plant and non-current assets v2

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