non-current assets: plant assets and intangible assets chapter 10 horngren ♦ harrison ♦ bamber...

Non-Current Assets: Plant Assets andIntangible Assets

Chapter 10

HORNGREN ♦ HARRISON ♦ BAMBER ♦ BEST ♦ FRASER ♦ WILLETT

10 - 2Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia

Objectives

1. Measure the cost of a non-current asset.2. Account for depreciation3. Select the best depreciation method for

income tax purposes4. Account for the disposal of a non-current

asset5. Account for the revaluation of a non-

current asset6. Account for intangible assets and

amortisation


Asset Account Related Expense Account

Plant AssetsLand……………………………………… NoneBuildings, Machinery and Equipment,

Furniture and Fixtures,and Land Improvements……………… Depreciation

Natural Resources……………………….. DepletionIntangibles………………………………….. Amortisation

Non-current Assets


Measure the costof a non-current asset.

Objective 1


An asset must be carried on the statement of financial position at the amount paid for it.An asset must be carried on the statement of financial position at the amount paid for it.

The cost of an asset equals the sum ofall of the costs incurred to bring the asset

to its intended purpose.

The cost of an asset equals the sum ofall of the costs incurred to bring the asset

to its intended purpose.

Cost Principle


Land and Land Improvements

Purchase price of land $ 500,000Add related costs:Back property taxes $ 40,000Stamp duty 8,000Removal of buildings 5,000Survey fees 1,000

54,000

Total cost of land $ 554,000

Purchase price of land $ 500,000Add related costs:Back property taxes $ 40,000Stamp duty 8,000Removal of buildings 5,000Survey fees 1,000

54,000

Total cost of land $ 554,000


PavingFences

Sprinkler systemsLights in parking lot

PavingFences

Sprinkler systemsLights in parking lot

Land Improvements

All improvements located on the land but subject to decay:


Buildings – Construction

Architectural feesBuilding permits

Contractor’s charges Interest during construction

Architectural feesBuilding permits

Contractor’s charges Interest during construction

MaterialsLabour

Overhead

MaterialsLabour

Overhead


Buildings – Purchasing

Purchase priceAgents commissions

Stamp dutyRepairing or renovating building

for its intended purpose

Purchase priceAgents commissions

Stamp dutyRepairing or renovating building

for its intended purpose


Machinery and Equipment

Purchase price (less trade discounts)Transportation charges

Insurance in transitCustoms dutiesInstallation cost

Expenditures to test assetbefore it is placed in service

Purchase price (less trade discounts)Transportation charges

Insurance in transitCustoms dutiesInstallation cost

Expenditures to test assetbefore it is placed in service


Finance Leases

What are finance leases? They are lease arrangements similar to

instalment purchases. Finance leases are reported as assets,

even though the company does not own the asset.

Leasehold improvements are similar to land improvements.


Capitalising the Cost of Interest

Suppose on January 2, 2004, Coats Hire borrows $1,000,000 on a two-year, 10% loan, to build a warehouse.

Total interest for the financial year ended 30/6/04 is 6/12 x $100,000 = $50,000.


June 30, 2004

Building 50,000Interest Payable (or cash)

50,000

Accrued interest of construction loan

June 30, 2004

Building 50,000Interest Payable (or cash)

50,000

Accrued interest of construction loan

Capitalising the Cost of Interest

Note Interest Expense was not debited. Note Interest Expense was not debited.


Lump-Sum Purchases Example

Andrea Lim paid $110,000 for a combined purchase of land and a building.

The land is appraised at $90,000 and 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

Building: $60,000 ÷ $150,000 = 40%$110,000 × 40% = $44,000

Land: $90,000 ÷ $150,000 = 60%$110,000 × 60% = $66,000


Does the expenditure increase capacityor efficiency or extend useful life?

Does the expenditure increase capacityor efficiency or extend useful life?

YES NO

Capital ExpenditureDebit Non-current Assets accounts

Capital ExpenditureDebit Non-current Assets accounts

ExpenseDebit Repairs and

Maintenance account

ExpenseDebit Repairs and

Maintenance account

Distinction Between Capital Expenditures and Expenses


Cost

Estimated useful life

Estimated residual value

Measuring the Depreciationof Property, Plant & Equipment


Objective 2

Account for depreciation.


Straight-Line (SL)

Units-of-Production (UOP)

Reducing-Balance (RB)

Depreciation Methods


Depreciation Methods Example

Donishia and Richard Catering, purchased a delivery van on July 1, 2004, for $22,000.

They expect the van to have a trade-in value of $2,000 at the end of its useful life.

The van has an estimated service life of 100,000 km or 4 years.


(Cost – Residual value) ÷ years of useful life(Cost – Residual value) ÷ years of useful life

($22,000 – 2,000) ÷ 4 = $20,000 ÷ 4 = $5,000($22,000 – 2,000) ÷ 4 = $20,000 ÷ 4 = $5,000

Year 1 Depreciation: $ 5,000Year 2 Depreciation: 5,000Year 3 Depreciation: 5,000Year 4 Depreciation: 5,000Total Depreciation: $20,000

Year 1 Depreciation: $ 5,000Year 2 Depreciation: 5,000Year 3 Depreciation: 5,000Year 4 Depreciation: 5,000Total Depreciation: $20,000

Straight-Line Method Example


($22,000 – 2,000) ÷ 100,000km = $.20/km($22,000 – 2,000) ÷ 100,000km = $.20/km

Year 1: 30,000 miles = $ 6,000 Year 2: 27,000 miles = 5,400 Year 3: 23,000 miles = 4,600 Year 4: 20,000 miles = 4,000 Total: 100,000 miles = $20,000 (Actual mileage in year 4 was 22,000)

Year 1: 30,000 miles = $ 6,000 Year 2: 27,000 miles = 5,400 Year 3: 23,000 miles = 4,600 Year 4: 20,000 miles = 4,000 Total: 100,000 miles = $20,000 (Actual mileage in year 4 was 22,000)

Units-of-ProductionMethod Example


Reducing-Balance Method Example

Straight-line rate is 100% ÷ 4 = 25% Reducing-balance is approximately 1.5

times the straight-line rate = 37.5% What is the book value of the van at the

end of the first year? $ 22,000 × 37.5% = $ 8,250 $ 22,000 – $ 8,250 = $ 13,750



June 30, 2005

Depreciation Expense $ 8,250Accumulated Depreciation $ 8,250

To record depreciation expense for a one-year period

June 30, 2005

Depreciation Expense $ 8,250Accumulated Depreciation $ 8,250

To record depreciation expense for a one-year period



Remember the book value of the van at the end of the first year?

$ 22,000 – $ 8,250 = $ 13,750 Depreciation for the second year is $ 13,750 × 37.5% = $ 5,156 Giving a book value of $ 13,750 - $ 5,156 = $ 8,594


Comparing Depreciation Methods

Year SL UOP RB 1 $ 5,000 $ 6,000 $ 8,250 2 $ 5,000 $ 5,400 $ 5,156 3 $ 5,000 $ 4,600 $ 3,223 4 $ 5,000 $ 4,000 $ 2,014

Totals $20,000 $20,000 $18,643


Comparing Depreciation Methods

The $ 1,357 difference in reducing balance is due to the inaccuracy of using 1.5 times the straight line method.

Using the formula on page 416 of the textbook the rate is .451%

This gives depreciations of $9,922 + $5,447 + $2,990 + $1,641 = $20,000


Objective 3

Select the best 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.‘Diminishing Value’ which is reducing

balance at 1.5 times the straight line rate.


Prime cost method:$5,000 × 3/12 = $1,250

Prime cost method:$5,000 × 3/12 = $1,250

Reducing-balance method:$8,250 × 3/12 = $2,062

Reducing-balance method:$8,250 × 3/12 = $2,062

Depreciation for Partial Years

Assume that Donishia and Richard Catering, owned the van for 3 months.

How much is the van’s depreciation?


Remaining useful life

Revised SL depreciation

=

Cost – Accumulated depreciation

–

New residual value

÷

Revising Depreciation Rates


Objective 4

Account for the disposalof a non-current asset.


Disposing of Non-current Assets

– selling– exchanging– discarding (scrapping it) Gain/loss is reported on the Statement

of Financial Performance...– and closed to Profit and Loss Summary.


Disposing by Discarding Example

Ly the manager of Ly’s Landscaping, is contemplating the disposal of an old piece of equipment:

Equipment cost: $ 36,000 Residual value: $

6,000 Accumulated depreciation 30/6/05: $ 20,000 Estimated useful life at acquisition: 10 years


($36,000 – $6,000) ÷ 10 = $3,000$3,000 ÷ 12 = $250$250 × 3 = $750$20,000 + $750 = $20,750

($36,000 – $6,000) ÷ 10 = $3,000$3,000 ÷ 12 = $250$250 × 3 = $750$20,000 + $750 = $20,750


Assume the equipment is discarded on 30/9/05.

What is the accumulated depreciation on September 30?



September 30, 2005

Accumulated Depreciation 20,750Carrying amount of asset 15,250

Equipment 36,000

To record discarding of equipment

September 30, 2005

Accumulated Depreciation 20,750Carrying amount of asset 15,250

Equipment 36,000

To record discarding of equipment


Selling a Non-current Asset Example

Assume the equipment is sold for $10,000. September 30, 2005

Cash 10,000

Proceeds of Sale N-C Asset 10,000

Accumulated Depreciation 20,750 Carrying amount of N-C Asset 15,250 Equipment 36,000

To record sale of equipment for $10,000


Selling a Non-current Asset Example

AASB 1018 Statement of Financial Performance requires;The removal in the asset account and the

related accumulated depreciationProceeds from the sale be included in total

revenueAnd the carrying amount of the assets sold

be included in total revenue.


Exchanging Non-current Assets

Assume the same equipment (with a cost of $36,000 and a book value of $15,250) is exchanged for new, similar equipment having a cost of $42,000 a trade-in of $18,000 is allowed.

Cash payment is $24,000. The trade in value is the proceeds from sale The carrying value the expense The cost of the new equipment $42,000


Internal Control ofNon-current Assets

Cornerstone of internal control is separating custody of assets from accounting for the asset

Also need physical controls – to prevent theft, maintain physical condition.


Objective 5

Account for the revaluation

of a non-current asset


Revaluation

AASB 1041 Revaluation of Non-current Assets allows assets to be recorded at cost or ‘fair value’

Upward revaluations are credited to owners equity (Asset Revaluation Reserve account)

Downward revaluations are debited to an expense.

For depreciable assets the accumulated depreciation is credited against the asset.


Objective 6

Account for intangibleassets and amortisation.


PatentsCopyrightsTrademarksFranchisesGoodwill

Not physical in natureNot physical in nature

Intangible Assets


Intangible Assets: Patents

Patents are government grants. They give the holder the right to produce

and sell an invention for 20 years. Suppose a company pays $170,000 to

acquire a patent on July 1. The company believes that its expected

useful life is 5 years. What are the entries?


July 1 (this year)Patents 170,000

Cash 170,000To acquire a patent

June 30 (next year)Amortisation Expense 34,000

Patents 34,000To amortise the cost of a patent

Intangible Assets: Patents


Literary compositions (novels)Musical compositionsFilms (movies)SoftwareOther works of art

Intangible Assets: Copyrights


Trademarks, Trade Names,or Brand Names are assets that represent

distinctive identifications of a product or service.

Trademarks, Trade Names,or Brand Names are assets that represent

distinctive identifications of a product or service.

Intangible Assets: Trademarks


Intangible Assets: Franchises

Franchises are privileges granted by private business or government to sell a product or service.


Purchase price paid forMexana Company $10 millionAssets at market value 9 millionLess Mexana’s liabilities 1 millionMarket value ofMexana’s net assets 8 millionGoodwill $ 2 million

Purchase price paid forMexana Company $10 millionAssets at market value 9 millionLess Mexana’s liabilities 1 millionMarket value ofMexana’s net assets 8 millionGoodwill $ 2 million

Goodwill Example

Intangible Assets: Goodwill


International accounting for goodwillInternational accounting for goodwill

Research and developmentResearch and development

Ethical Issue:

Capitalise or expense expenditure

Ethical Issue:

Capitalise or expense expenditure

Special Issues


End of Chapter 10

non-current assets: plant assets and intangible assets chapter 10 horngren ♦ harrison ♦ bamber...

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