Non-Current Assets

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.

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

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.

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 $100 000 Net removal cost of warehouse 6 000 Solicitor’s fee 1 000 Stamp duty 2 000 Cost of land $109 000

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 1 320 Painting and lettering 500 Cost of delivery truck $23 820

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.

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.

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.

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) 5 Estimated useful life (in kms) 100 000

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

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 2007 $12 000 20% $ 2 400 $ 2 400 $10 600 * 2008 12 000 20 2 400 4 800 8 200 2009 12 000 20 2 400 7 200 5 800 2010 12 000 20 2 400 9 600 3 400 2011 12 000 20 2 400 12 000 1 000 Total $12 000 * Cost $13 000 – Year 1 depreciation $2400 = Carrying amount $10 600 BILL’S PIZZAS

Depreciation (cont’d) Journal entry to record depreciation expense Dec 30 Depreciation Expense – Delivery Truck 2 400 Accumulated Depreciation – Delivery Truck 2 400 (To record depreciation expense for the year)

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

Depreciation (cont’d) Bill’s Pizzas Example: Depreciation per unit = $12 000/100 000 units = $0.12 per unit Depreciation expense = $0.12 x 15 000 units = $1 800

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 2007 15 000 $0.12 $ 1 800 $ 1 800 $11 200 * 2008 30 000 0.12 3 600 5 400 7 600 2009 20 000 0.12 2 400 7 800 5 200 2010 25 000 0.12 3 000 10 800 2 200 2011 10 000 0.12 1 200 12 000 1 000 Total 100 000 $12 000 * $13 000 - $1800 BILL’S PIZZAS

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.

Sale of PPE Assets Example (Gain on sale) Wright Ltd sells office furniture on 1 July 2007 for $160 000 cash. Original cost was $60 000. Accumulated depreciation to 1 January 2007 is $41 000. Depreciation expense for first 6 months of 2007 is $8000.

Sale of PPE Assets (cont’d) Recording depreciation Calculation of gain on disposal Jul 1 Depreciation Expense – Office Furniture 8 000 Accumulated Depreciation – Office Furniture 8 000 (To record depreciation expense for first 6 mths of 2007) Cost of office furniture $60 000 Less: Accumulated depreciation ($41 000+ $8000) 49 000 Carrying amount at date of disposal 11 000 Proceeds from sale 16 000 Gain on disposal of asset $ 5 000

Sale of PPE Assets (cont’d) Recording the sale of the asset Jul 1 Cash 16 000 Accumulated Depreciation – Office Furniture 49 000 Office Furniture 60 000 Gain on Disposal 5 000 (To record sale of office furniture at a gain)

Sale of PPE Assets (cont’d) Example (Loss on sale) Assume that office furniture was sold for $9000 rather than $16 000. Calculation of loss on disposal Cost of office furniture $60 000 Less: Accumulated depreciation ($41 000+ $8000) 49 000 Carrying amount at date of disposal 11 000 Proceeds from sale 9 000 Loss on disposal of asset $ 2 000

Sale of PPE Assets (cont’d) Recording the loss on sale of the asset Jul 1 Cash 9 000 Accumulated Depreciation – Office Furniture 49 000 Loss on Disposal 2 000 Office Furniture 60 000 (To record sale of office furniture at a loss)