1. Non-Current Assets

2. Property, Plant and Equipment
Property, plant and equipment (PPE) are physical assets used in the business to provide future economic benefits for a number of years.
FRS - economic benefits derived from the use of an asset must be recognised on a systematic basis over the asset’s useful life.
This decline is recognised as depreciation expense in the income statement.

3. Property, Plant and Equipment (cont’d)
Two classes of PPE assets:
Property
Includes land and buildings
Plant and equipment
Includes cash registers, computers, office furniture, factory machinery, motor vehicles

4. Determining the Cost of PPE
PPE assets are initially recorded at historical cost.
The cost of an asset
Includes all expenditure necessary to acquire the asset and make it ready for use.
e.g. purchase price, freight costs paid, installation costs (capital expenses)
Excludes non-capital expenditures which are expensed immediately.

5. Determining the Cost of PPE (cont’d)
Cost of Property
Includes:
purchase price
settlement costs
stamp duty
accrued property taxes assumed by purchaser
Example
Land
Cash price of property $
Net removal cost of warehouse
Solicitor’s fee
Stamp duty
Cost of land $

6. Determining the Cost of PPE (cont’d)
Cost of Plant and Equipment
Includes:
purchase price
freight charges
insurance during transit
installation costs
Example
Delivery Truck
Cash price $22 000
Airconditioning
Painting and lettering
Cost of delivery truck $23 820

7. 1. Depreciation
Depreciation is the process of allocating to expense the cost of a PPE asset over its useful (service) life in a rational and systematic manner.
Carrying amount equals cost less accumulated depreciation.

8. Depreciation (cont’d)
4 factors that contribute to the decline in value of a depreciable asset:
Usage of the asset.
Wear and tear through physical use of the asset.
Technical and commercial obsolescence.
Legal life.

9. Depreciation (cont’d)
Factors in calculating depreciation:
1. Cost
All expenditures necessary to acquire the asset and make it ready for intended use.
2. Useful life
Estimate of the expected life based on intended use, need for repair, vulnerability to obsolescence and legal life.
3. Residual value
Estimate of the asset’s value at the end of its useful life.

10. Depreciation (cont’d)
Depreciation methods
Straight line
Reducing balance
Units of production
Example
Delivery truck purchased by Bill’s Pizzas.
Cost $13 000
Expected residual value $1 000
Estimated useful life (in years)
Estimated useful life (in kms)

11. Depreciation (cont’d)
1. Straight-Line Method
Depreciation expense same each year as benefits are consumed at same rate each year.
Calculation for annual charge:
cost of asset – residual value useful life of the asset
Bill’s Pizzas Example:
Annual depreciation
($13,000 - $1,000) / 5 = $2,400

12. Depreciation (cont’d)
Straight-line depreciation schedule
Calculation End of year
Depreciable Depreciation Depreciation Accumulated Carrying
Year amount x rate = expense p.a depreciation amount
$ % $ $ $ *
Total $12 000
* Cost $ – Year 1 depreciation $2400 = Carrying amount $10 600
BILL’S PIZZAS

13. Depreciation (cont’d)
Journal entry to record depreciation expense
Dec 30 Depreciation Expense – Delivery Truck Accumulated Depreciation – Delivery Truck (To record depreciation expense for the year)

14. Depreciation (cont’d)
Units-of-Production Method
Useful life is expressed in terms of total units of production or use expected from the asset.
Calculation of depreciation cost per unit:
depreciable cost of asset useful life of the asset
Depreciation expense:
depreciation cost x yearly units of per unit production

15. Depreciation (cont’d)
Bill’s Pizzas Example:
Depreciation per unit
= $12 000/ units
= $0.12 per unit
Depreciation expense
= $0.12 x units
= $1 800

16. Depreciation (cont’d)
Units-of-production depreciation schedule
Calculation End of year
Units of Depreciation Depreciation Accumulated Carrying
Year production (km) x cost unit = expense p.a. depreciation amount
$0.12 $ $ $ *
Total $12 000
* $ $1800
BILL’S PIZZAS

17. 5. Disposals of PPE Assets
PPE assets may be disposed of by:
a. Sale
Equipment is sold to another party.
b. Scrapping
Equipment is scrapped or discarded.
c. Exchange
Existing equipment is traded for new equipment.

18. Sale of PPE Assets Example (Gain on sale)
Wright Ltd sells office furniture on 1 July 2007 for $ cash.
Original cost was $
Accumulated depreciation to 1 January 2007 is $
Depreciation expense for first 6 months of 2007 is $8000.

19. Sale of PPE Assets (cont’d)
Recording depreciation
Calculation of gain on disposal
Jul 1 Depreciation Expense – Office Furniture Accumulated Depreciation – Office Furniture (To record depreciation expense for first 6 mths of 2007)
Cost of office furniture $60 000
Less: Accumulated depreciation ($ $8000)
Carrying amount at date of disposal
Proceeds from sale
Gain on disposal of asset $

20. Sale of PPE Assets (cont’d)
Recording the sale of the asset
Jul 1 Cash Accumulated Depreciation – Office Furniture
Office Furniture
Gain on Disposal (To record sale of office furniture at a gain)

21. Sale of PPE Assets (cont’d)
Example (Loss on sale)
Assume that office furniture was sold for $9000 rather than $
Calculation of loss on disposal
Cost of office furniture $60 000
Less: Accumulated depreciation ($ $8000)
Carrying amount at date of disposal
Proceeds from sale
Loss on disposal of asset $

22. Sale of PPE Assets (cont’d)
Recording the loss on sale of the asset
Jul Cash Accumulated Depreciation – Office Furniture
Loss on Disposal
Office Furniture (To record sale of office furniture at a loss)