academy 2019/2020 advanced financial accounting lecture 5 · advanced financial accounting...

Advanced Financial Accounting– Academy Lecture 5

Professional, Practical, Proven

Academy 2019/2020

Advanced Financial AccountingLecture 5

Property, Plant & Equipment / Accounting for Inventory

1) Property, Plant & Equipment

• Recognition

• Capitalisation

• Subsequent Expenditure

• Revaluations

• Depreciation

• De-recognition

• Disclosure

2) Accounting for Inventories

• Cost –v- NRV (determination)

• Cost –v- NRV (double entry)

• Disclosure

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Learning Outcomes

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Section 17 – FRS 102

Property, Plant & Equipment

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Introducing & Depreciating non – current assets

Asset @ Cost A/C Acc Dep A/C

Dep Exp A/C

SOFP

SOCI

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Asset @ Cost A/C Acc Dep A/C

Dep Exp A/C

SOFP

SOCI

1) Introduce (i.e. Purchase a non-current asset by cheque – value of €40,000)

2) The asset has a useful life of 10 years, show the depreciation charge for year 1.

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Asset @ Cost A/C

Bank 40,000

Acc Dep A/C

Year 1 4,000

Dep Exp A/C

Year 1 4,000

SOFP

SOCI

1) Introduce (i.e. Purchase non-current assets by cheque – value of €40,000)


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Asset @ Cost A/C

Bank 40,000

Acc Dep A/C

Year 1 4,000

Dep Exp A/C

Year 1 4,000

SOFP

SOCI

1) Introduce (i.e. Purchase a non-current asset by cheque – value of €40,000


The journal for depreciation shows the

reduction in value in the asset through

use etc (Acc Dep in the SOFP),

and shows the expense of using the

asset in this financial period (Dep Exp

in the SOCI).

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Disposing of non – current assets

Asset @ Cost A/C

Bank 40,000

Acc Dep A/C

Year 1 4,000Year 2 4,000

Disposal A/C

SOFP

1) Dispose of non-current assets at end of two years– value @ cost of €10,000

2) 9k received for asset Account for the gain

The Disposal A/C is a temporary a/c,

used to calculate/identify the

profit/loss made on disposal; this

figure is transferred to the SOCI.

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Asset @ Cost A/C

Bank 40,000 Disposal 10,000

Acc Dep A/C

Disposal 2,000 Year 1 4,000Year 2 4,000

Disposal A/C

@ Cost 10,000 Gain 1,000

11,000

Acc Dep 2,000 Bank 9,000

11,000

SOFP


2) 9k received for asset Account for the gain





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Asset @ Cost A/C

Bank 40,000

Acc Dep A/C

Year 1 4,000Year 2 4,000

Disposal A/C

SOFP


2) 7k received for asset Account for the loss





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Asset @ Cost A/C

Bank 40,000 Disposal 10,000

Acc Dep A/C

Disposal 2,000 Year 1 4,000Year 2 4,000

Disposal A/C

@ Cost 10,000

_____10,000

Acc Dep 2,000 Bank 7,000Loss 1,000

10,000

SOFP


2) 7k received for asset Account for the loss





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Preparatory Notes reAdv FA Manual section 6.2: Question - ABC Limited (p.67)

Calculate depreciation for the assets b/f• after disposal if there is no depreciation in the year of sale• before disposal if there is a full years depreciation in the year of sale• or pro rate as necessary

Calculate depreciation for any acquired assets• Taking particular note of the policy for depreciation

Always review the dates of the financial year!

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Adv FA Manual section 6.2: Question - ABC Limited

The following balances appeared in the SOFP of ABC Limited as at 31.03.2005:

In the year ended 31.03.2006 the following transactions took place:

• Plant which cost €100,000 with a written down value of €40,000 was sold for €45,000 on 01.12.05

• New plant was purchased for €180,000 on 1st October 2005.

The Company’s depreciation policy is 10% per annum on a straight line basis, with a proportionate charge in the year of acquisition and no charge in the year of sale.

Requirement: Prepare ledger accounts recording these transactions.

€

Plant and Equipment (at Cost) 840,000

Accumulated Depreciation 370,000

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Adv FA Manual section 6.2: Question - ABC Limited

1. Establish your Opening Balances

2. Strip the ‘disposed’ asset out of the asset @ cost account and the accumulated depreciation account & depreciate it as indicated e.g. Pro rata according to the policy(You may sometimes only have the option to deal with NBV accounts)

3. Introduce the acquired asset to the asset @ cost account & remember to depreciate it as indicated.

4. Depreciate the assets you have been in possession of for the full financial period.

Remember:

Dr Depreciation Expense A/C (SOCI) xCr Accumulated Depreciation A/C (SOFP) x

Section 17 – Initial Recognition

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Recognition:

• When it is probable that future economic benefits associated with the item will flow to the business

• When the cost of the item can be measured reliably

Cost of an asset

• All costs necessary to bring the asset to working condition for its intended use.

• Costs of construction, acquisition, preparation

• Any costs directly attributable to bringing the asset to the location and condition necessary for it to operate in the intended manner.

• Initial estimate of Costs of relocation of the non-current asset

• Borrowing costs that are directly attributable to acquisition, construction or preparation.

• Relevant Professional fees

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Excluded Costs (that cannot be capitalised):

• Recognition of Costs ceases when the item is in the location and condition necessary for operation intended by management (e.g. if idle).

• Costs of relocating or reorganising part or all of the business’s operation

• Abnormal Costs

• Industrial disputes, design errors, wastage etc.

• Initial Operating Losses

• General administration i.e. During construction etc

• Re-design costs

Where costs are not capitalised they are expensed to the Statement of Comprehensive Income.

Measurement of Assets

subsequent to Initial Recognition

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Cost Model

• Cost less Accumulated depreciation

Revaluation Model

• Fair Value (at date of revaluation) less subsequent depreciation

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Provisions with respect to Revaluations:

• The fair value of property, plant and equipment is usually the market value determined by a professionally qualified valuer.

• If an item of PPE is revalued, the entire class to which that asset belongs must also be revalued

• Revaluations should be carried out regularly (i.e. So that the carrying amount does not become ‘out-of-date’)

• Where there is no market-based evidence of fair value then the entity should estimate fair value using an income or a depreciated replacement cost approach.

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Revaluing non – current assets

Asset @ Cost A/C

X

Acc Dep A/C

X

Net Book Value

In order to revalue the NBV of the asset to its ‘fair value’

we must make the appropriate adjustments to both accounts involved i.e.

1) The asset @ Cost A/C

2) the Accumulated Depreciation A/C

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Asset @ Cost A/C

B/d 500

Acc Dep A/C

b/d 100

Revaluation Reserve A/C

You currently have an asset with a NBV of 400k, (as above).

You are instructed to revalue the asset to €700k as at the Statement of Financial Position date

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Asset @ Cost A/C

B/d 500Reval 200

700

b/d 700

b/f 700___700

Acc Dep A/C

Reval 100100

b/d 100100

Revaluation Reserve A/C

@ cost 200Acc dep 100

You currently have an asset with a NBV of 400k, (as above).

You are instructed to revalue the asset to €700k as at the Statement of Financial Position date

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Adv FA Manual page 78:

ABC Limited owns a building that cost €100,000 on January 1st 2015.It has been depreciated at 5% per annum on a straight line basis, with a proportionatecharge in the years of purchase, sale or revaluation.

The building is to be revalued to €210,000 at:

Question 1) 1st January 2015

Question 2) 30th June 2015

The estimated useful life of the building remains the same.

Requirement:Prepare the ledger accounts for each of the two proposed dates for revaluation.

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Adv FA Manual page 78:

1. Establish your Opening Balances

2. Calculate the WDV as at the date of revaluation

3. Depreciation already provided on the asset being revalued must be transferred out to the revaluation reserve

4. So strip the accumulated depreciation to the date of revaluation out of the accumulated depreciation account:i.e. Dr Accumulated Depreciation A/C

Cr Revaluation Reserve A/C

5. Introduce a balance to the asset @ cost account to achieve the revalued amount

6. Remember to then depreciate the revalued asset as indicated

7. Depreciation on the revalued amount is apportioned over the remaining useful life of the asset (unless indicated otherwise).

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Change of Depreciation method

Change in estimation technique

Changes do not need to be applied retrospectively

Remember: Asset @ Cost

(Residual Value) (Similarly)

Value to be depreciated Carrying Value

length of useful life length of useful life

= depreciation charge per annum = dep charge p.a.

Asset @ Cost

(Accumulated depreciation)

W/Down Value / Carrying Value

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Remember:

The depreciable amount (Cost/valuation less prior depreciation if applicable and

less residual value) should be allocated on a systematic basis over its useful

economic life.

A change in accounting estimate will affect the period in which the change

occurred, and if applicable, future accounting periods.

Changes in estimation are not applied retrospectively.

Where an asset has been revalued, the current period’s depreciation charge is

based on:

1. The Revalued amount

2. The remaining useful economic life

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Section 13 – FRS 102

- Inventories

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Day 1:

We buy Teddy Bears that we intend to sell e.g. 3 teddy bears at €10 each

Day 3:


Day 4:


(We use the first in-first out basis of inventory rotation).

Day 5:

We sell 9 x Teddy Bears at €25 each

1. Prepare the Trading Account for Week 1

2. Perform a stock valuation at the end of week 1

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1. Prepare the Trading Account for Week 1

Sales 9 x €25 €225

Cost of Sales

Purchases 3 x €10 € 30

5 x €12 € 60

3 x €15 € 45

Closing Stock 2 x €15 (€30)

(€105)

Gross Profit €90

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1. Prepare the Trading Account for Week 1:

Starting with the Purchases in Cost of Sales (i.e. the expense of

buying Teddy Bears in order to make Sales in the Period)

3 x €10 = € 30

+ 5 x €12 = € 60

3 x €15 = € 45

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Deduct the Closing Stock (i.e. the Inventory at hand, at the end of the

period)……

3 x €10 = € 30

+ 5 x €12 = € 60

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Deduct the Closing Stock (i.e. the Asset ‘Inventory’ at hand, at the end

of the period)

3 x €10 = € 30

+ 5 x €12 = € 60

-2 x €15 = (€30)

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Deduct the Closing Stock (i.e. the Asset ‘Inventory’ at hand, at the end

of the period)

NB:

Dr Inventory, Asset, SOFP

Cr Closing Inventory, COS, IS

3 x €10 = € 30

+ 5 x €12 = € 60

-2 x €15 = (€30)

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1. Perform a stock valuation at the end of week 1

The two bears are reported as at current asset, in the Statement

of Financial position, at the end of week 1.

Current Assets:

Inventory € 30

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1. Consider Cost of Sales for Week 2:

e.g. Opening Inventory of 2 bears, 7 purchased at €20 each, 3

remaining with a NRV of €12 each

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Opening Inventory

2 x €15

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NB:

Dr Opening Inventory, COS, IS

Cr Inventory, Asset, SOFP

Opening Inventory

2 x €15

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Opening Inventory

2 x €15

+ 7 x €20 = € 140

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Opening Inventory

2 x €15

+ 7 x €20 = € 140

- 3 x €10 = €36

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Opening Inventory 2 x €15 € 30

Purchases 7 x €20 €140

Closing Inventory (3 x €12) ( €36)

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Key definitions and determinations under section 13 include:

• Inventories

• Cost of Inventory items

• Net realisable value of inventory items

Know these definitions!

The fundamental principle is that:

Inventory should be valued at the lower of cost and net realisable value

(on an item by item basis).

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• Assets held for Sale in the ordinary course of business e.g. Finished Goods

• Assets in the process of production for sale e.g. WIP

• Assets in the form of materials or supplies to be consumed in the production process or rendering of services e.g. Raw Materials

Inventories

• All costs of Purchase (incl. Taxes, duties, carriage etc) net of Trade discounts

• Costs of conversion

• Other costs incurred in bringing the inventories to their present location and condition

• Excluding: Abnormal waste or spoilage, factory idle time, storage costs (of finished goods), general admin overheads, marketing and other selling costs

Cost

• Estimated Selling Price in the course of normal business

• Less estimated costs of completion

• And less all costs incurred to sell and distribute the goods.

NRV

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Valuation of Inventory @ the year end:

1) Physical Stock Take establishes Quantity

2) Cost of the Items is then indentified

Acceptable Methods of Inventory valuation:

• Actual unit Cost

• First In First Out

• Weighted Average Cost (Periodic/Continuous)

• Standard Cost

• The retail method (Sales Value less % gross margin)

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Recommended Work

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Recommended Activity

• Chapter 6 & 7

• Read in full

• Attempt all practice questions

• Review Solutions

• Revise any (1st Year) areas of weakness

• Refer to Handout

DisclaimerCare has been taken to ensure that all data and information in Academy lectures is factual and that numerical values are accurate. To the best of our knowledge, all information in the Academy lectures is accurate at the time of publication. Accounting Technicians Ireland and its lecturers assume no responsibility for errors or misinterpretation of the information contained in these lectures or in its use.

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academy 2019/2020 advanced financial accounting lecture 5 · advanced financial accounting...

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