non current assets

8/3/2019 Non Current Assets

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Long-Lived Nonmonetary Assets and Their Amortization


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Expenditure

Benefitsbeyond this

period

Capitalize Expense

Asset AccountRetained Earnings

100 10020

20


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1. Assets that provide services for several future

years

2. An asset which is not easily convertible tocash or not expected to become cash within the

next year


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Types of AssetTangible

asset that has aphysical substance

Intangible

asset that has nophysical substance


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Types of AssetTangible

Land

Plant and EquipmentNatural Resources

Intangible

GoodwillResearch and Development CostIntellectual Property (Patent, Copyrights)


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Non Current Assets are Recorded at Cost

Distinction between Asset and Expense

TYPE OF EXPENDITURE TREATMENTLow-cost items ExpensedBetterment CapitalizedRepairs and Maintenance Expensed


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Method of Converting an Asset to Expense

TYPE OF ASSET METHOD

Property Plant and Equipment DepreciationNatural Resource DepletionIntangible Assets Amortization


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Items included in cost

all expenditures that are necessary to makethe asset ready for its intended use


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Self-Constructed AssetsWhen a company constructs a building or item of

equipment for its own use, the amount of capitalized cost

includes all the costs incurred in constructionBuilding PermitsArchitects FeesContract Price

Interest on financing


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NonCash Costs When a capital asset is purchased using non cash

items such as a common stock, the value of theequipment company is recorded by:

1. The Fair Market Value of the consideration given 2. If the FMV of the consideration given is not

feasible to determine its value, then the FMV of thenew asset will be used.


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DepreciationThe accounting process of this gradual conversion of plant

and equipment capitalized cost into expense is called

depreciation

Original Cost Residual ValueDep Exp = --------------------------------------------------

Service Life


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Example: Date of Purchase Equipment 7/1/2005Cost P1,000,000Useful Life 5 years

Residual Value P 100,000

JE 1) 7/1/05 Equipment 1,000,000Cash 1,000,000

to record purchase of equipment for cash

2) 12/31/05 Depreciation Expense 90,000

Accumulated Depreciation 90,000

to record depreciation of equipment

1,000,000 - 100,000Annual Depreciation = ------------------------------------------ = 180,000

5


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Example:Date of Purchase Equipment 1/1/2005

Cost P1,000,000Useful Life 5 yearsResidual Value P 100,000

Year Depreciation Accumulated Depreciation Net Book Value------------------------------------------------------------------------------------------

2005 180,000 180,000 820,000

2006 180.000 360,000 640,000

2007 180,000 540,000 460,000

2008 180,000 720,000 280,000

2009 180,000 900,000 100,000


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Lapsing ScheduleYear Depreciation Accumulated Depreciation Net Book Value

------------------------------------------------------------------------------------------

2005 180,000 180,000 820,000

2006 180.000 360,000 640,000

2007 180,000 540,000 460,000

2008 180,000 720,000 280,000

2009 180,000 900,000 100,000

Equipment Accumulated Depreciation

1/1/05 1,000,000

180,000 12/31/05

180,000 12/31/06

180,000 12/31/07

180,000 12/31/08

180,000 12/31/09


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Balance Sheet Presentation

2009 2008 2007 2006 2005

----------------------------------------------------------------------------------

PPE 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000

Less Acc. Dep 900,000 720,000 540,000 360,000 180,000

--------------------------------------------------------------------Net Book Value 100,000 280,000 460,000 640,000 820,000

Income Statement

Dep Exp 180,000 180,000 180,000 180,000 180,000


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Methods of Depreciation

1. Straight Line Method

2. Double Declining Balance Method3. Sum of the Years Digit


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Straight Line Method

Original Cost Residual ValueDep Exp = --------------------------------------------------

Service Life

Annual 1,000,000 - 100,000Depreciation = ------------------------------------------ = 180,000Expense 5

Depreciation Rate = 180,000/1,000,000 x 100%= 18%


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Date of Purchase Equipment 1/1/2005Cost P1,000,000 Depreciation Rate 36%Useful Life 5 yearsResidual Value 100,000

Year Particular Depreciation Accumulated Depreciation Net Book Value

-----------------------------------------------------------------------------------------------------------------

2005 1,000,000 x 36% 360,000 360,000 640,000

2006 640,000 x 36% 230,400 590,400 409,600

2007 409,600 x 36% 147,456 737,856 262,144

2008 262,144 x 36% 94,372 832,228 167,772

2009 167,772 x 36% 67,772 900,000 100,000


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Sum of the Years Digit Methodprovides for depreciation that is computed by multiplying the depreciable amount by a series of

fractions whose:

numerator is the digit in the life of the asset anddenominator uses the sum of the digits of the life of

the asset computed using the formula

SYD = Life (Life+ 1)-------------------

2


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Date of Purchase Equipment 1/1/2005Cost P1,000,000 SYD = 5 (5 + 1) = 15Useful Life 5 years -------------Residual Value 100,000 2

Year Particular Depreciation Accumulated Depreciation Net Book Value

-----------------------------------------------------------------------------------------------------------------

2005 900,000 x 5/15 300,000 300,000 700,000

2006 900,000 x 4/15 240,000 540,000 460,000

2007 900,000 x 3/15 180,000 720,000 280,000

2008 900,000 x 2/15 120,000 840,000 160,000

2009 900,000 x 1/15 60,000 900,000 100,000


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Annual Depreciation Charges for Equipment with Net Cost of 900,000 and 5 year service life

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

1 2 3 4 5

Straight Line

Double Declining

SYD


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Methods of Depreciation

Straight Line Method

Double Declining Balance MethodSum of the Years Digit

Units of production methodWorking hours or service hours method


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Plant and Equipment Disposal

Suppose that at the end of 10 years Transtor Company sells its Building. At thattime 10/40 of the original cost, or $250,000 would have been built up in

Accumulated Depreciation account, and the net book value would be $750,000. Ifthe building is sold for $ 750,000, the account is charged as follows:

Cash 750,000Accumulated Dep 250,000

Building 1,000,000

to record the sale of building


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Plant and Equipment DisposalSuppose that at the end of 10 years Transtor Company sells its Building. At that

time 10/40 of the original cost, or $250,000 would have been built up inAccumulated Depreciation account, and the net book value would be $750,000. If

the building is sold for $ 650,000, the account is charged as follows:

Cash 650,000Accumulated Dep 250,000Loss on Sale 100,000

Building 1,000,000



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Plant and Equipment DisposalSuppose that at the end of 10 years Transtor Company sells its Building. At

that time 10/40 of the original cost, or $250,000 would have been built up inAccumulated Depreciation account, and the net book value would be

$750,000. If the building is sold for $ 850,000, the account is charged asfollows:

Cash 850,000Accumulated Dep 250,000

Building 1,000,000Gain on Sale 100,000



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Exchanges and Trade-InsSome items of property and equipment are disposed of by trading them in or exchanging

them for new assets. The amount used in this calculation depends on whether or not thetraded asset is similar to the new asset.

Trade In of Cost of New Asset

Similar Assets Net Book Value of theasset given + cashpayment

Dissimilar Assets Fair value of the assetgiven + cash payment


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Assume a company trades in two automobiles, each of which originally costs $20,000, of which

$15,000, each has a net book value of $5,000. Each has a fair value of $7,000 as a used car.

The fist automobile is traded for another automobile that also has a list price of $30,000 and

$18,000 is given to the dealer in addition to the trade-in.

Automobile (New) 23,000

Accumulated Depreciation 15,000Cash 18,000

Automobile (Old) 20,000

to record trade-in of similar assets

Value of New Automobile = 5,000 + 18,000


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Assume a company trades in two automobiles, each of which originally costs $20,000, ofwhich $15,000, each has a net book value of $5,000. Each has a fair value of $7,000 as aused car.

The second automobile is traded for a piece of equipment that also has a list price of $30,000

and $18,000 cash is given in addition to the trade in.

Equipment (New) 25,000Accumulated Depreciation 15,000

Cash 18,000Automobile (Old) 20,000

Gain on disposal 2,000to record trade-in of dissimilar assets

Value of New Automobile = 7,000 + 18,000


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Amortizationis the systematic allocation of the cost or revalued amount

of an intangible asset less any residual value, as an expense over

the assets useful life.

Amortization of Intangible Asset xxxxxIntangible Asset xxxxx

to record the amortization of intangible asset


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Depletionas an accounting procedure is the systematic allocation of the

cost of a natural resource over the periods benefited

Entry to record depletionDepletion xxxx

Accumulated Depletion xxxx


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Problem 7-2Higher company had the following disposals during 2006:

Equipment PurchaseOrigina

l Date of Disposal Useful Depreciation

ID Number Date Cost Disposal Proceeds Life Method

301 2/18/1998 70,300 10/3/2002 14,300 10 Straight line

415 7/3/2005 96,000 7/19/2008 63,000 5 150% declining Balance

573 6/15/2004 95,400 3/21/2002 38,000 6 Sum of the Year's Digit

Highers policy is to charge a full years depreciation in the year of purchase if an asset is purchased before July

1.For assets purchased after July 1, only years depreciation is charged. During the year of disposal, yearsdepreciation is charged is the asset is sold after June 30. No depreciation is charged during the year of disposalif the asset of sold before July 1.In all the cases above , estimated residual value at the time of the acquisitionwas zero.


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Problem 7-2

Annual Depreciation = 70,300 / 10 = 7,030

Year Depreciation Expense :

1998 7,030

1999 7,030

2000 7,030

2001 7,030

2002 3,515

------------------------31,365


l Date of DisposalUsefu

l Depreciation

ID Number Date Cost Disposal Proceeds Life Method

301 2/18/1998 70,300 10/3/2002 14,300 10 Straight line

Entry:Cash 14,300


Loss on Disposal 24,635

Equipment 70,300

to record disposal of equipment

Cost 70,300

Less: Accumulated Depreciation 31,365

Net Book Value 38,935

Proceeds 14,300

Loss on Sale 24,635

Problem 7-2


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Straight Line Depreciation Rate = 96,000/5 = 20%150% Declining Balance Rate = 20% x 150% = 30%

Equipment

Purchase

Original Date of Disposal

Useful Depreciation

ID

Number Date Cost

Dispos

al Proceeds Life Method

4157/3/200

596,00

07/19/20

08 63,000 5150% decliningBalance

Year ParticularsDepreciatio

nAccumulate

dNet Book

Value

Depreciation

2005

96,000 x

30% /2 14,400 14,400 81,600

200

6

81,60

0 x

30

% 24,480 38,880 57,120

2007

57,120 x

30% 17,136 56,016 39,984

2008

39,984 x

30% /2 5,998 62,014 33,986

Entry:

Cash 63,000


Equipment 96,000

Gain on Disposal 29,014


To compute for the gain/loss on the disposal:

Net book Value 33,986

Disposal Proceeds 63,000

-------------

Gain on Sale 29,014

Problem 7-2


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7

SYD = 6 (6+1) = 21------------

2


l Date of DisposalUsefu

l Depreciation

ID Number Date CostDisposa

l Proceeds Life Method

573 6/15/2004 95,4003/21/200

7 38,000 6 Sum of the Year's Digit

Entry:

Cash 38,000Accumulated Depreciation 45,429

Loss on Disposal 11,971

Equipment 95,400


To compute for the gain/loss on the disposal:

Net book Value 52,971

Disposal Proceeds 38,000

-------------

Gain on Sale 11,971

Year Particulars

Depreciation

Accumulated

Net BookValue

Depreciation

200

5

95,40

0 x

6/2

1 27,257 27,257 68,143

2006

95,400 x

5/21 22,714 49,971 45,429

2007

95,400 x

4/21 49,971 45,429

P bl Cl b C l C


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Problem 7-5 Cleanburn Coal Company

Building

Machinery

Equipment

Acquisition Cost 21,700,000 21,700,000

Exploration CostsSoil test of the purchased land 35,250 35,250

Soil tests of other sites 116,250 116,250

Test Permits 41,000 41,000

Development CostClearing of site 387,500 387,500

Storage Facilities and Office 291,250 291,250

Machinery 1,162,500 1,162,500

TOTAL 23,733,750 22,280,000 291,250 1,162,500

Property Plant and EquipmentNatural

ResourceCost

P bl Cl b C l C


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Building

Machinery

Equipment

TOTAL 23,733,750 22,280,000 291,250 1,162,500


ResourceCost

To compute for the depletion rate per unit:

= Cost of Natural Resource-Salvage Value/Estimated number of units to be extracted= P22,280,000 -2,325,000/ 800,000 tons of coal= P24.94 per ton

Year Units Extracted Depletion Rate Depletion Accumulated Depletion

1 30,000 24.94 748,200.00 748,200.002 70,000 24.94 1,745,800.00 2,494,000.00

3 70,000 24.94 1,745,800.00 4,239,800.00

170,000.00 4,239,800.00

P bl Cl b C l C


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Building

Machinery

Equipment

TOTAL 23,733,750 22,280,000 291,250 1,162,500


ResourceCost

To compute for the depreciation:

Using the straight line method for the Building

Annual Depreciation Expense = 291,250/10 years = 29,125

Using the sum of the years digit = 10(10+1) = 55

-----------------

2Year Building Machinery Equipment SYD Computation

1 29,125.00 211,363.36 (10/55 x 1,162,500)

2 29,125.00 190,277.73 ( 9/55 x 1,162,500)

3 29,125.00 160,090.91 ( 8/55 x 1,162,500)

87,375.00 561,732.00


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Case 7-2 Joan Holtz (c)1)

a. Architect's Fees Capitalized as part of the cost

of the additional wing

b. Cost of Snow Removal during

construction

Capitalized as part of the cost


c. Cash discounts eraned for prompt

payment on materials purchased for

construction

Deducted from the cost of

building

d The cost of building a combined

construction office and toolshed that

would be torn down once the factory

wing had been completed



e Interest earned on money borrowed to

finance construction

Interest incurred during the

construction period is

capitalized and the remaining

intrest cost is expensed


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Case 7-2 Joan Holtz (c)

f Local real estate taxes for the period of

construction on the portion of land to be

occupied on by the new wing



g The cost of mistakes made duringconstruction

Capitalized as part of the costof the additional wing

h The Overhead costs of the maintenance

department Expensed

i The cost of insurance during

construction

Expensed

Cost of damages and losses on anyinjuries not covered by insurance

Expensed


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A. When Archer company bought a piece of land, including the buildings thereon,( in other words the land andthe building is bought at a single cost) and Archer company bought the property with the INTENTION of

the razing the building, the cost of the building will be attributed to the cost of the Land

B. and its Costs for demolishing the old building to make room for a new building will be part of the cost of

the land account.

C. ref a) If a company owned this piece of land, with buildings there on, the cost of the land and the cost of thebuilding will be booked separately.

b) and if the company later decides to have the buildings razed to make room for a construction of a new

building,

then the net book value of the old building , if any, and the net cost of demolishing the building

should be charged to loss on retirement of the old building.

The cost of demolishing the old building cannot be charged to the cost of the new building becausethis Is part of the service cost related to the old building when retired from use.and

l


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A. The governing principle is that cost of an item or property, plant, or equipment includes allexpenditures that are necessary to make an asset ready for its intended use.

Since the installation of additional beams is necessary to make the machine ready for its intended

use, then the cost will form part on the cost of the new machine

B. Same answer with A.

C. No, sales related taxes will NOT form part on the cost of the machine

D. This will be classified as trade-in of similar assets, no gain or loss is recognized since an exchange of

similar assets does not result in the culmination of an earning process.

l


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Question: How will the cost on the application engineering on leased computers betreated?

Answer : Since the installation is necessary to make the computer ready for its intendeduse, then its cost will be capitalized and be amortized over the lease period.

C l ( )


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Question: The company have capitalizing all the costs, estimated at $500,000, that made the manufacturingequipment ready for its intended use. And the engineers believed that at least $50,000 of additional

debugging, fine tuning and testing would be required for the equipment to reach the 65 ppm quality

standard.

1) Should the additional $50,000 be capitalized, despite the fact that the equipment was already earning?

Answer :The additional $50,000 will be added to the cost of the asset, since this additional expenditure will

increase the quality of output that the equipment will produce.

2) If so, should the amount of depreciation for the initial production periods be adjusted?

Answer: No. The cost of a betterment which is a new unit is depreciated over the remaining life of the

equipment .

non current assets

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