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Non-Current Assets: Plant Assets and Intangible Assets Chapter 10 HORNGREN ♦ HARRISON ♦ BAMBER ♦ BEST ♦ FRASER ♦ WILLETT.

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Presentation on theme: "Non-Current Assets: Plant Assets and Intangible Assets Chapter 10 HORNGREN ♦ HARRISON ♦ BAMBER ♦ BEST ♦ FRASER ♦ WILLETT."— Presentation transcript:

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2 Non-Current Assets: Plant Assets and Intangible Assets Chapter 10 HORNGREN ♦ HARRISON ♦ BAMBER ♦ BEST ♦ FRASER ♦ WILLETT

3 10 - 2 Horngren ♦ 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 depreciation 3.Select the best depreciation method for income tax purposes 4.Account for the disposal of a non-current asset 5.Account for the revaluation of a non- current asset 6.Account for intangible assets and amortisation

4 10 - 3 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Asset Account Related Expense Account Plant Assets Land………………………………………None Buildings, Machinery and Equipment, Furniture and Fixtures, and Land Improvements………………Depreciation Natural Resources………………………..Depletion Intangibles…………………………………..Amortisation Non-current Assets

5 10 - 4 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Measure the cost of a non-current asset. Objective 1

6 10 - 5 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia 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 of all of the costs incurred to bring the asset to its intended purpose. The cost of an asset equals the sum of all of the costs incurred to bring the asset to its intended purpose. Cost Principle

7 10 - 6 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Land and Land Improvements Purchase price of land$ 500,000 Add related costs: Back property taxes$ 40,000 Stamp duty 8,000 Removal of buildings 5,000 Survey fees 1,000 54,000 Total cost of land$ 554,000 Purchase price of land$ 500,000 Add related costs: Back property taxes$ 40,000 Stamp duty 8,000 Removal of buildings 5,000 Survey fees 1,000 54,000 Total cost of land$ 554,000

8 10 - 7 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Paving Fences Sprinkler systems Lights in parking lot Paving Fences Sprinkler systems Lights in parking lot Land Improvements l All improvements located on the land but subject to decay:

9 10 - 8 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Buildings – Construction Architectural fees Building permits Contractor’s charges Interest during construction Architectural fees Building permits Contractor’s charges Interest during construction Materials Labour Overhead Materials Labour Overhead

10 10 - 9 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Buildings – Purchasing Purchase price Agents commissions Stamp duty Repairing or renovating building for its intended purpose Purchase price Agents commissions Stamp duty Repairing or renovating building for its intended purpose

11 10 - 10 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Machinery and Equipment Purchase price (less trade discounts) Transportation charges Insurance in transit Customs duties Installation cost Expenditures to test asset before it is placed in service Purchase price (less trade discounts) Transportation charges Insurance in transit Customs duties Installation cost Expenditures to test asset before it is placed in service

12 10 - 11 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Finance Leases l What are finance leases? l They are lease arrangements similar to instalment purchases. l Finance leases are reported as assets, even though the company does not own the asset. l Leasehold improvements are similar to land improvements.

13 10 - 12 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Capitalising the Cost of Interest l Suppose on January 2, 2004, Coats Hire borrows $1,000,000 on a two-year, 10% loan, to build a warehouse. l Total interest for the financial year ended 30/6/04 is 6/12 x $100,000 = $50,000.

14 10 - 13 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia June 30, 2004 Building 50,000 Interest Payable (or cash) 50,000 Accrued interest of construction loan June 30, 2004 Building 50,000 Interest Payable (or cash) 50,000 Accrued interest of construction loan Capitalising the Cost of Interest Note Interest Expense was not debited.

15 10 - 14 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Lump-Sum Purchases Example l Andrea Lim paid $110,000 for a combined purchase of land and a building. l The land is appraised at $90,000 and the building at $60,000. l How much of the purchase price is allocated to land and how much to the building?

16 10 - 15 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia 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

17 10 - 16 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Does the expenditure increase capacity or efficiency or extend useful life? Does the expenditure increase capacity or efficiency or extend useful life? YESNO Capital Expenditure Debit Non-current Assets accounts Capital Expenditure Debit Non-current Assets accounts Expense Debit Repairs and Maintenance account Expense Debit Repairs and Maintenance account Distinction Between Capital Expenditures and Expenses

18 10 - 17 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Cost Estimated useful life Estimated residual value Measuring the Depreciation of Property, Plant & Equipment

19 10 - 18 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Objective 2 Account for depreciation.

20 10 - 19 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Straight-Line (SL) Units-of-Production (UOP) Reducing-Balance (RB) Depreciation Methods

21 10 - 20 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Depreciation Methods Example l Donishia and Richard Catering, purchased a delivery van on July 1, 2004, for $22,000. l They expect the van to have a trade-in value of $2,000 at the end of its useful life. l The van has an estimated service life of 100,000 km or 4 years.

22 10 - 21 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia (Cost – Residual value) ÷ years of useful life ($22,000 – 2,000) ÷ 4 = $20,000 ÷ 4 = $5,000 Year 1 Depreciation:$ 5,000 Year 2 Depreciation: 5,000 Year 3 Depreciation: 5,000 Year 4 Depreciation: 5,000 Total Depreciation:$20,000 Year 1 Depreciation:$ 5,000 Year 2 Depreciation: 5,000 Year 3 Depreciation: 5,000 Year 4 Depreciation: 5,000 Total Depreciation:$20,000 Straight-Line Method Example

23 10 - 22 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia ($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-Production Method Example

24 10 - 23 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Reducing-Balance Method Example l Straight-line rate is 100% ÷ 4 = 25% l Reducing-balance is approximately 1.5 times the straight-line rate = 37.5% l What is the book value of the van at the end of the first year? l $ 22,000 × 37.5% = $ 8,250 l $ 22,000 – $ 8,250 = $ 13,750

25 10 - 24 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Reducing-Balance Method Example June 30, 2005 Depreciation Expense $ 8,250 Accumulated Depreciation $ 8,250 To record depreciation expense for a one-year period June 30, 2005 Depreciation Expense $ 8,250 Accumulated Depreciation $ 8,250 To record depreciation expense for a one-year period

26 10 - 25 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Reducing-Balance Method Example l Remember the book value of the van at the end of the first year? l $ 22,000 – $ 8,250 = $ 13,750 l Depreciation for the second year is l $ 13,750 × 37.5% = $ 5,156 l Giving a book value of l $ 13,750 - $ 5,156 = $ 8,594

27 10 - 26 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Comparing Depreciation Methods

28 10 - 27 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Comparing Depreciation Methods l The $ 1,357 difference in reducing balance is due to the inaccuracy of using 1.5 times the straight line method. l Using the formula on page 416 of the textbook the rate is.451% l This gives depreciations of l $9,922 + $5,447 + $2,990 + $1,641 = l $20,000

29 10 - 28 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Objective 3 Select the best depreciation method for income tax purposes.

30 10 - 29 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Relationship Between Depreciation and Taxes l Most businesses use straight line depreciation for financial reporting. l For tax purposes businesses can use; ä ‘Prime Cost’ which is straight line. ä ‘Diminishing Value’ which is reducing balance at 1.5 times the straight line rate.

31 10 - 30 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia 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 l Assume that Donishia and Richard Catering, owned the van for 3 months. l How much is the van’s depreciation?

32 10 - 31 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Remaining useful life Revised SL depreciation = Cost – Accumulated depreciation – New residual value ÷ Revising Depreciation Rates

33 10 - 32 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Objective 4 Account for the disposal of a non-current asset.

34 10 - 33 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Disposing of Non-current Assets – selling – exchanging – discarding (scrapping it) l Gain/loss is reported on the Statement of Financial Performance... – and closed to Profit and Loss Summary.

35 10 - 34 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Disposing by Discarding Example l Ly the manager of Ly’s Landscaping, is contemplating the disposal of an old piece of equipment: l Equipment cost:$ 36,000 l Residual value: $ 6,000 l Accumulated depreciation 30/6/05:$ 20,000 l Estimated useful life at acquisition: 10 years

36 10 - 35 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia ($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 Disposing by Discarding Example l Assume the equipment is discarded on 30/9/05. l What is the accumulated depreciation on September 30?

37 10 - 36 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Disposing by Discarding Example September 30, 2005 Accumulated Depreciation20,750 Carrying amount of asset 15,250 Equipment 36,000 To record discarding of equipment September 30, 2005 Accumulated Depreciation20,750 Carrying amount of asset 15,250 Equipment 36,000 To record discarding of equipment

38 10 - 37 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Selling a Non-current Asset Example l Assume the equipment is sold for $10,000. l September 30, 2005 Cash10,000 Proceeds of Sale N-C Asset10,000 Accumulated Depreciation20,750 Carrying amount of N-C Asset 15,250 Equipment 36,000 To record sale of equipment for $10,000

39 10 - 38 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Selling a Non-current Asset Example l AASB 1018 Statement of Financial Performance requires; ä The removal in the asset account and the related accumulated depreciation ä Proceeds from the sale be included in total revenue ä And the carrying amount of the assets sold be included in total revenue.

40 10 - 39 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Exchanging Non-current Assets l 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. l Cash payment is $24,000. l The trade in value is the proceeds from sale l The carrying value the expense l The cost of the new equipment $42,000

41 10 - 40 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Internal Control of Non-current Assets l Cornerstone of internal control is separating custody of assets from accounting for the asset l Also need physical controls – to prevent theft, maintain physical condition.

42 10 - 41 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Objective 5 Account for the revaluation of a non-current asset

43 10 - 42 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Revaluation l AASB 1041 Revaluation of Non-current Assets allows assets to be recorded at cost or ‘fair value’ l Upward revaluations are credited to owners equity (Asset Revaluation Reserve account) l Downward revaluations are debited to an expense. l For depreciable assets the accumulated depreciation is credited against the asset.

44 10 - 43 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Objective 6 Account for intangible assets and amortisation.

45 10 - 44 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Patents Copyrights Trademarks Franchises Goodwill Not physical in nature Intangible Assets

46 10 - 45 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Intangible Assets: Patents l Patents are government grants. l They give the holder the right to produce and sell an invention for 20 years. l Suppose a company pays $170,000 to acquire a patent on July 1. l The company believes that its expected useful life is 5 years. l What are the entries?

47 10 - 46 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia July 1 (this year) Patents170,000 Cash170,000 To acquire a patent June 30 (next year) Amortisation Expense 34,000 Patents 34,000 To amortise the cost of a patent Intangible Assets: Patents

48 10 - 47 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Literary compositions (novels) Musical compositions Films (movies) Software Other works of art Intangible Assets: Copyrights

49 10 - 48 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia 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

50 10 - 49 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Intangible Assets: Franchises l Franchises are privileges granted by private business or government to sell a product or service.

51 10 - 50 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Purchase price paid for Mexana Company$10 million Assets at market value9 million Less Mexana’s liabilities1 million Market value of Mexana’s net assets 8 million Goodwill$ 2 million Purchase price paid for Mexana Company$10 million Assets at market value9 million Less Mexana’s liabilities1 million Market value of Mexana’s net assets 8 million Goodwill$ 2 million Goodwill Example Intangible Assets: Goodwill

52 10 - 51 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia International accounting for goodwill Research and development Ethical Issue: Capitalise or expense expenditure Ethical Issue: Capitalise or expense expenditure Special Issues

53 10 - 52 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia End of Chapter 10


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