Non Current Assets
-
Upload
sandee-angeli-maceda-villarta -
Category
Documents
-
view
229 -
download
0
Transcript of Non Current Assets
-
8/3/2019 Non Current Assets
1/44
Long-Lived Nonmonetary Assets and Their Amortization
-
8/3/2019 Non Current Assets
2/44
Expenditure
Benefitsbeyond this
period
Capitalize Expense
Asset AccountRetained Earnings
100 10020
20
-
8/3/2019 Non Current Assets
3/44
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
-
8/3/2019 Non Current Assets
4/44
Types of AssetTangible
asset that has aphysical substance
Intangible
asset that has nophysical substance
-
8/3/2019 Non Current Assets
5/44
Types of AssetTangible
Land
Plant and EquipmentNatural Resources
Intangible
GoodwillResearch and Development CostIntellectual Property (Patent, Copyrights)
-
8/3/2019 Non Current Assets
6/44
Non Current Assets are Recorded at Cost
Distinction between Asset and Expense
TYPE OF EXPENDITURE TREATMENTLow-cost items ExpensedBetterment CapitalizedRepairs and Maintenance Expensed
-
8/3/2019 Non Current Assets
7/44
Method of Converting an Asset to Expense
TYPE OF ASSET METHOD
Property Plant and Equipment DepreciationNatural Resource DepletionIntangible Assets Amortization
-
8/3/2019 Non Current Assets
8/44
Items included in cost
all expenditures that are necessary to makethe asset ready for its intended use
-
8/3/2019 Non Current Assets
9/44
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
-
8/3/2019 Non Current Assets
10/44
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.
-
8/3/2019 Non Current Assets
11/44
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
-
8/3/2019 Non Current Assets
12/44
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
-
8/3/2019 Non Current Assets
13/44
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
-
8/3/2019 Non Current Assets
14/44
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
-
8/3/2019 Non Current Assets
15/44
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
-
8/3/2019 Non Current Assets
16/44
Methods of Depreciation
1. Straight Line Method
2. Double Declining Balance Method3. Sum of the Years Digit
-
8/3/2019 Non Current Assets
17/44
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%
-
8/3/2019 Non Current Assets
18/44
-
8/3/2019 Non Current Assets
19/44
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
-
8/3/2019 Non Current Assets
20/44
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
-
8/3/2019 Non Current Assets
21/44
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
-
8/3/2019 Non Current Assets
22/44
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
-
8/3/2019 Non Current Assets
23/44
Methods of Depreciation
Straight Line Method
Double Declining Balance MethodSum of the Years Digit
Units of production methodWorking hours or service hours method
-
8/3/2019 Non Current Assets
24/44
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
-
8/3/2019 Non Current Assets
25/44
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
to record the sale of building
-
8/3/2019 Non Current Assets
26/44
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
to record the sale of building
-
8/3/2019 Non Current Assets
27/44
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
-
8/3/2019 Non Current Assets
28/44
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
-
8/3/2019 Non Current Assets
29/44
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
-
8/3/2019 Non Current Assets
30/44
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
-
8/3/2019 Non Current Assets
31/44
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
-
8/3/2019 Non Current Assets
32/44
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.
-
8/3/2019 Non Current Assets
33/44
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
Equipment PurchaseOrigina
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
Accumulated Depreciation 31,365
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
-
8/3/2019 Non Current Assets
34/44
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
Accumulated Depreciation 62,014
Equipment 96,000
Gain on Disposal 29,014
to record disposal of equipment
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
-
8/3/2019 Non Current Assets
35/44
7
SYD = 6 (6+1) = 21------------
2
Equipment PurchaseOrigina
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 record disposal of equipment
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
-
8/3/2019 Non Current Assets
36/44
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
-
8/3/2019 Non Current Assets
37/44
Problem 7-5 Cleanburn Coal Company
Building
Machinery
Equipment
TOTAL 23,733,750 22,280,000 291,250 1,162,500
Property Plant and EquipmentNatural
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
-
8/3/2019 Non Current Assets
38/44
Problem 7-5 Cleanburn Coal Company
Building
Machinery
Equipment
TOTAL 23,733,750 22,280,000 291,250 1,162,500
Property Plant and EquipmentNatural
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
-
8/3/2019 Non Current Assets
39/44
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
of the additional wing
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
Capitalized as part of the cost
of the additional wing
e Interest earned on money borrowed to
finance construction
Interest incurred during the
construction period is
capitalized and the remaining
intrest cost is expensed
-
8/3/2019 Non Current Assets
40/44
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
Capitalized as part of the cost
of the additional 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
-
8/3/2019 Non Current Assets
41/44
Case 7-2 Joan Holtz (c)2)
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
-
8/3/2019 Non Current Assets
42/44
Case 7-2 Joan Holtz (c)3)
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
-
8/3/2019 Non Current Assets
43/44
Case 7-2 Joan Holtz (c)4)
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 ( )
-
8/3/2019 Non Current Assets
44/44
Case 7-2 Joan Holtz (c)5)
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 .