TOPIC 6 :NON-CURRENT ASSET

1. CLASSIFICATION OF NON-CURRENT ASSET

2. DETERMINATION OF COST

3. DEPRECIATION

4. DISPOSAL OF ASSET

5. TRADE IN ASSET

6. REPORTING THE DEPRECIATION AND ACCUMULATED DEPRECATION

7. INTANGIBLE ASSET

CLASSIFICATION OF FIXED ASSET

• 1. Tangible Fixed Asset : FRS116 Eg. Property, Land and Equipment

- tangibles resources that are used in the

operation of a business and not for sale

- long lived asset which exceeds more than one accounting period

• 2. Intangible Fixed Asset : FRS116 Eg. Impairment of Assets: Goodwill, Patent and Copyright

- intangibles resources that cannot be hold, touch but the asset could give a future benefit

Determination of Cost of an Asset :

- according to historical cost concept:

Asset is recorded at cost price not market price

- Cost : all expenditures necessary to acquire the asset and make it ready for its intended use.

Determination of Cost

Determine Cost

Types of expenditures:

Capital expenditure Revenue expenditure

To increase the operating efficiency, productive capacity or useful life of the asset

To maintain the operating efficiency and productive life of the asset

Incurred infrequently and material in amount

Incurred frequently and small amount

Eg. Addition and improvement

Eg. Ordinary repair

Determination of Cost

The cost may include:

- Purchase price of the fixed asset

- Transportation cost to get the fixed asset

- Insurance on the purchase

- Taxes on the purchase

- Installation costs

Determination of Cost

• How to determine the cost of Plant and Machinery ?

RM

Cash price 50,000

Sales taxes 3,000

Insurance 500

Installation 1,000

Cost of Plant & Machinery 54,500

Depreciation

Depreciation of an Asset :Definition - is a process of allocation

the depreciable amount of an asset over its estimated useful life.

why we need to generate provision for depreciation? To comply:

- Matching Concept

- Prudence concept

Factor effecting useful life of an asset• Physical

- due to the wear and tear and exposure to the weather condition

• Technology - the technology advancement makes the

asset out of date (obsoletes)

• Economy - the usage of the asset is no longer cost

effective

• Legislation - the useful life is limited to the year of lease.

Straight LineSum of Years DigitReducing BalanceUnit of Activity

Method of Calculating Depreciation

Straight Line MethodDepreciation = Cost - Salvage Value

Useful Life ( years)Example :Van costs RM45,000, has a useful life of 5 years

and salvage value of RM5,000Depreciation = 45,000 – 5,000

5 = RM8,000 per year

Journal Entry:Dt. Depreciation Expense 8,000 Cr. Accumulated Depreciation

8,000

The amount of depreciation is reduced every years

Depreciation = 1 – n r/c n = estimated useful lifer = salvage valuec = cost of asset

Example : Van is bought at cost RM33,000, with salvage value

RM3,000 and useful life of 4 years

Depreciation = 1 – 4 3,000/33,000 = 45%

Reducing Balance Method

Reducing Balance Method

Year Beginning Book Value

Rate Annual Depreciation Expenses

Accumulated Depreciation

Book Value

1 33,000 45% 14,850 14,850 18,150

2 18,150 45% 8,168 23,018 9,983

3 9,983 45% 4,492 27,510 5,490

4 5,490 45% 2,471 29,980 3,020

Sum of Years Digit Method

Calculate an asset’s cost with sum of years digit ratio

Example :Machine cost RM43,000, estimated useful life is 4

years and salvage value RM3,000

Sum of years digit = 1 + 2 + 3 + 4 = 10

If the asset has long useful life, use formula:S = n (n + 1)

2

Sum of Years Digit Method

Years Depreciable Amount

Ratio Depreciation

1 43,000 - 3,000 4/10 16,000

2 43,000 - 3,000 3/10 12,000

3 43,000 - 3,000 2/10 8,000

4 43,000 - 3,000 1/10 4,000

Unit of Activity Method

Depreciable = Depreciable Cost (Per unit) Total units of activity

Annual = Depre. Cost X Units of Activity during Depreciation Per unit the year

Example :Bought delivery truck cost RM13,000, expected salvage value is RM1,000 and estimated useful life of 5 years. Estimated useful life in miles 100,000 miles.

Depreciation Cost per unit = (13,000 – 1,000)/100000 = RM0.12

Unit of Activity Method

** (RM13,000 – RM1,800)

Year Unit of Activity

Depreciation Rate

Annual Depreciation Expenses

Accumulated Depreciation

Book Value

1 15,000 0.12 1,800 1,800 11,200**

2 30,000 0.12 3,600 5,400 7,600

3 20,000 0.12 2,400 7,800 5,200

4 25,000 0.12 3,000 10,800 2,200

5 10,000 0.12 1,200 12,000 1,000

DISPOSAL OF ASSET

Asset can be disposed in three ways:i. Retirementii. Saleiii. Exchange

At the time of disposal:a) Determine the book value of the assetb) Depreciation for the fraction of the

year to the date of disposal

Retirement

Herbert Enterprise retires its computer printers, which cost RM18,000. The accumulated depreciation on this printer is RM14,000

Journal Entry:

Dt Cr.

Acc. Depreciation 14,000

Loss in disposal 4,000

Printing Equipment 18,000

(to record retirement of an equipment at loss)

Sale of Asset

The book value of the asset is compared with the proceeds received from the sale

Sale Proceed > book value = GAIN

Sale Proceed < book value = LOSS

Example: Gain in DisposalMachine bought at cost RM60,000 is disposed after 3 years at price RM20,000. Using a straight-line method of depreciation. The expected useful life is 4 years and no scrap value.

Workings:

Cost 60,000

Acc. Depreciation 45,000 (60,000/4 = 15,000 x 3)Net book value 15,000Cash 20,000Gain on disposal 5,000

Journal Entry:

Dr Cr

Accumulated Depreciation 45,000

Cash 20,000

Machine 60,000

Gain in disposal 5,000

Using the previous example: Loss in DisposalIf the machine could be sold at a price of RM10,000 cash.

Workings:

Cost 60,000

Accumulated Depre. 45,000 (60,000/4 = 15,000 x 3)Net book value 15,000Cash 10,000Loss on disposal 5,000

Journal Entry

Dr Cr

Accumulated Depreciation 45,000

Cash 10,000

Loss in disposal 5,000

Machine 60,000

(to record sale of machine at loss)

TRADE IN ASSETAssets are being exchange either from

similar or dissimilar assets.• It is important to determine:

i. The cost of asset acquiredii. The gain and loss on the asset given up

i. Cost of the exchange Asset“ cash equivalent price paid”

ii. Gain or loss on the asset “ the different between the fair market value and the book value of the asset given up”

Example: Loss in Trade InRowland exchanges old office equipment for a new office equipment. The book value of old equipment is RM26,000 (RM70,000 less accumulated depreciation RM44,000) Its fair market value is RM10,000 and cash of RM81,000 is paid.

Workings:

Fair Market Value (old)Cash

RM10,00081,000

Cost of New Equipment RM91,000

Book Value (old)Fair Market Value (old)

RM26,00010,000

Loss on Disposal RM16,000

Journal Entry:

Dt Cr

Office Equipment (new) 91,000

Acc. Depreciation 44,000

Loss in disposal 16,000

Office Equipment (old) 70,000

Cash 81,000

(to record exchange of old office equipment)

Example: Gain in Trade InRowland exchanges old office equipment for a new office equipments. The book value of old equipment is RM12,000 (RM40,000 less accumulated depreciation RM28,000) Its fair market value is RM19,000 and cash of RM3,000 is paid.

Workings:

Fair Market Value (old)Cash

RM19,0003,000

Cost of New Equipment RM22,000

Book Value (old)Fair Market Value (old)

RM12,00019,000

Gain on Disposal RM7,000

Journal Entry

Dt Cr

Office Equipment (new) 22,000

Acc. Depreciation 28,000

Office Equipment (old) 40,000

Cash 3,000

Gain on disposal 7,000

(to record exchange of old office equipment)

Reporting the Depreciation and Accumulated Depreciation

Income Statement

Depreciation Expenses 8,000

Balance Sheet

Motor Van 50,000(-) Acc. Depreciation (8,000)

42,000

INTANGIBLE ASSET

• Definition:– Right, privileges and competitive

advantage that result from the ownership of long-lived assets that do not possess physical substance

• Examples include:– Patents (e.g. Polaroid)– Franchises (e.g. McDonald’s)– Trademarks (e.g. swoosh of Nike)

Intangible Assets

• Intangible assets can be separated into:

a. Identifiable– Must be capable of being separated or

divided from an entity (whether sold, licensed, rented or exchanged) or must arise from contractual or other legal rights.

b. Unidentifiable – Cannot be separated from the entity itself.– Collectively referred to as goodwill.

Intangible Asset : Goodwill

• Types:

There are two types of goodwill:-

i. Inherent goodwill

- no need to record in the company books

ii Purchased goodwill

- goodwill arises from a business which bought another business.

- this goodwill needs to be amortized at a maximum of 25 years.

Accounting Treatment:

1. Recognized as asset

- need to amortized

Journal Entry:Dt Cr

Goodwill XXX

Cash XXX

(To record the goodwill amount)

Goodwill Expenses XX

Goodwill XX

(to record the amortized figure)

Accounting Treatment:

2. Recognized as an expense

- written off the whole amount in the income statement

Journal Entry:

Dt Cr

Goodwill Expenses XXX

Cash XXX

(To record the goodwill amount)

Accounting for Intangible Assets (cont’d)

Amortisation• This is the term used to describe the

allocation of the cost of an intangible asset to expense.

• Intangible assets are assumed to have a limited life and are amortised.

• Patents are amortised over legal or useful life, whichever is shorter.

Accounting for Intangible Assets (cont’d)

Example:• Patent costs $60 000 and has an

estimated useful life of 8 years.• Annual amortisation expense

$60 000 ÷ 8 = $7500• Recording annual amortisation

Dec 31 Amortisation Expense 7 500 Accumulated Amortisation - Patents

7 500 (To record patent amortisation)

Types of Intangible Assets1. Patents

– Exclusive right granted by IP Australia enabling recipient to manufacture, sell or otherwise control an invention.

2. Research and development costs– Expenditures that may lead to patents,

copyrights, new processes and new products.

3. Copyright– Gives the owner exclusive right to

reproduce and sell an artistic or published work.

Types of Intangible Assets

4. Trademarks and brand names– Words, phrases, jingles or symbols that

distinguish or identify a particular business or product.

5. Franchises and licences– A contractual arrangement under the

franchisee is granted certain rights.6. Goodwill

– Represents all favourable attributes that relate to an entity and is defined as future benefits from unidentifiable assets.