Fixed Assets Depre Deferred Taxes

8/12/2019 Fixed Assets Depre Deferred Taxes

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Assets Reporting and

Depreciation

MANAC I


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Inventory - revise ..

1. Inventory is reported in the Balance Sheet as

an ___________

2. The inventory method which assumes thatgoods are sold in the reverse order of their

acquisition is know as ________ method

3. A company should select the ____ inventory

method if it wishes to keep its taxes to

minimum


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Inventory - revise ..

1. Inventory is reported in the Balance Sheet as

an_CURRENT ASSET

2. The inventory method which assumes thatgoods are sold in the reverse order of their

acquisition is know as_LIFO_ method

3. A company should select the_LIFO_inventory

method if it wishes to keep its taxes to

minimum


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Issues to be discussed

What are the Fixed Assets/ Non-monetary

Assets?

What constitute the value of Fixed Assets?

and How much to value?

Usage/consumption of fixed assets

Depreciation


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Required to read (but not exhaustive)

AS 10

AS 6

HBR Note-Asset Reporting

AHM-Chapter 07

If you are interested, you can read AS 8, AS 26 & AS 28


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Nature of Fixed Assets

Benefits obtained from expenditures on goods or

services are either

Obtained in current period (expenses) or

Expected to be obtained in future periods (capitalized).

Capital assets provide benefits to future periods

Note: it is like prepaid insurance


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3 Steps to recognize the ASSET

1. Resources are owned

or controlled by the firm

2. Resources are expected

to provide future economicbenefits sufficient to recover

their cost

3. The future economic

benefits are measurablewith a reasonable degree

of certainty

The ASSET


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Types of Fixed assets

Tangible asset

Asset with physical substance

Fixed Assets

Property, plant, and equipment = called fixedasset in US

Intangible asset

Intellectual property. No physical substance

Examples are patent rights, copyrights


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Write journal entry for the following

SK Corporaton purchased a machine that was

billed as follows: invoice price, 20000; cash

discount, 300; delivery charges, 535;

insurance, 40; and installation 800


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Component of Cost

Cost of an item of fixed asset comprises itspurchase price, including import duties and

other non-refundable taxes or levies and any

directly attributable cost of brining the assetto its working condition for its intended use

Directly attributable costs may include:

Site preparation

Initial delivery and handling costs

Installation cost, like foundations for plant etc.

Profession fees like consultancy etc.


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Component of Cost (cont.)

The interval between the date of project is

ready to commence commercial production

and the date at which commercial production

actually begins all expenses incurredduring this period are charged to..


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The interval between the date of project is

ready to commence commercial production

and the date at which commercial production

actually begins all expenses incurredduring this period are charged to..

Either to profit and loss account or Deferred revenue expenditure


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When fixed asset is acquired in exchange for

another asset, its cost is usually determined

by reference to the fair market value of the

consideration given


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Depreciation or Amortization

Various methods to consider

SLM

SYD

WDV

Subsequently, we discuss each one of them in detial


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Types of FA and Depreciation or

amortization Tangible Assets

LandWHAT

Plant and equipmentWHAT .

Natural resourcesWHAT

Intangible Assets

Limited life Intangible assetsWHAT

Indefinite life Intangible assetsWHAT

Deferred chargesWHAT

Research & developmentWHAT


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Types of FA and Depreciation or

amortization Tangible Assets

Land - no depreciation

Plant and equipment - depreciation.

Natural resources - depletion Intangible Assets

Limited life Intangible assetsamortization

Indefinite life Intangible assetsno amortization,

impairment tests

Deferred chargesamortization/write offs

Research & developmentnot capitalized


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Improvements and Repairs to Fixed Assets

Improvement

Repairs


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Improvements and Repairs to Fixed Assets

Improvement

Expenditures related to an item of fixed asset should be

added to its book value only if they increase the futurebenefits from the existing asset beyond its previously

assessed standard of performance

Repairs


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Disposal of FA

Losses arising from the retirement or gains or

losses arising from disposal of FA which is

carried at cost should be recognized in the

P&L account


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Disposal of FA

A machine was originally acquired for 25000.

The accumulated depreciation at years end

is 7500. It is sold for 19500 at the beginning

of the year. What is the book value of the assets?

Did they make profit or loss on sale?


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Useful terms

Deterioration = physical process of wearing out.

Obsolescence = loss of usefulness because of

change in technology or tastes.

Physical life = time until asset wears out.

Service life = shorter of either time until asset

becomes obsolete or time until asset wears out.

Book value = net book value = original cost -accumulated depreciation to date.


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Disclosure requirement

AS 1 - Disclosure of Accounting policies

AS 6Depreciation Accounting

Further

Gross Block

Expenditure incurred on account of fixed assets in

the course of construction or acquisition


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Depreciation methods

Straight Line Method

Accelerated method

Written down value method

Sum of the years digits method


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Straight Line Method (SLM)

An auto is purchased for 20000 with an

expected salvage value of 2000. The autos

estimated life is eight years. Depreciation per

year equals


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Sum of the years digits method (SYD)

An auto is purchased for 20000 with an

expected salvage value of 2000. The autos

estimated life is eight years.

What will be the depreciation through out theperiod?


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Diminishing balance method (WDV)

An asset costing 20000 has a life expectancy

of eight years. The rate of depreciation is

25% p.a. Depreciation expenses per year will

be.


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Exercises

On January 1, 2010, a machine was

purchased for 30,000. The estimated life is

six years and salvage value is 1,500.

Determine the annual depreciation using SLM for first 3 years

SYD for first 3 years

DBM for first 3 years (if rate of Depre 1/3)


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Exercises

A truck was purchased on October 1, 2009,

for 10,000. The estimated life is 5 years and

the salvage value is 500. Based on SLM,

what to be reported on the B/S at a. December 31, 2009

b. December 31, 2010


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Exercises

A truck was purchased on October 1, 2009,

for 10,000. The estimated life is 5 years and

the salvage value is 500. Based on SLM,

what to be reported on the B/S at a. December 31, 2009

b. December 31, 2010

What is the depreciation expense in 2009?

What is the depreciation expense in 2010?


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Natural Resources

Like unextracted coal, oil, other minerals and

gas

Cos own the right to extract

Theses are called wasting assets like

intangible assets

Depreciation or amortization is based on

Full cost method

Successful efforts methods

Eg. NTPC, Reliance, etc.


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Intangible assets

Amortization is direct charge to

intangible asset


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Intangible assets

Limited useful life

Patents, licenses etc.

Indefinite useful life

No amortization but impairment test


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Intangible assets

Good will

Actual

Not amortized but subject to annual impairment

testany write-down charge to income

Patents and copyrights .

Amortized over useful life

Leasehold Improvements

Any developments on leasehold property


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Exercise 1

Equipment costing 19,500 with accumulated

depreciation of 12,000 is discarded. There is

no salvage value. Prepare appropriate journal

entry for its disposal


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Exercise 1



no salvage value. Prepare appropriate journal

entry for its disposal

Accumulated Depre 12,000

Loss on disposal of FA 7,500 Equipment 19,500


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Exercise 2



no salvage value.

Prepare the entry and its effect if theequipment was sold for 9,000


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Exercise 3



no salvage value.

Prepare the entry and its effect if theequipment was sold for 5,000


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Jindal Steel & Power 2007-08


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Jindal Steel & Power 2007-08


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Infosys 2007-08


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Infosys 2007-08


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AXIS Bank 207-08


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AXIS Bank 207-08


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Usefulness

Check the proportion of FA over Total Assets

Gives an idea of nature of companies or type of

company

Manufacturing or service org.


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IT Act 1961 - provisions

WDV

Block of assets method

Broad category like

Building

Furniture

Plant and machinery

Intangible assets


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To be remembered - depreciation

Consistency

Change in the method

Recalculated from the beginning

Surplus or deficiency charge to P&L

Revalue the useful lives in case of major

fixed assets

In case of revaluation, new value will be

considered for depre

Test


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Test1. Start up costs are classified in the ______ section

of the B/S

2. A patent recorded at 20000 has remaining legal

life of 14 years. However, its economic life is now

estimated to be 10 years. The annual

amortization exp will be _____3. The value placed on fixed asset at the end of its

useful life is known as ________

4. The allocation of the cost of fixed asset to the

periods benefited from it is called ______

5. Internally generated intangibles which are not

specifically identifiable should be recorded as

_________


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Liabilities Reporting


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2 steps to call as a liability

FIRST

An obligation has been incurred

SECOND

The amount and timing of the obligation is

measurable with reasonable certainty


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Types of Liabilities

Current Liabilities

Non current liabilities/long term liabilities

Unearned (deferred) Revenue


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Noncurrent liabilities

Long term liabilities

Used to finance noncurrent assets

Key characteristics

Interest

Principal payment

With expectation that the return generated from thelong-term asset will be sufficient to meet the interest and

principal payment of the debt


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Bondsat Par, discount or premium

Coupon rate

Debenturesgenerally unsecured bond

Disclosed as

Secured Loan

Unsecured Loan


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b l


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Contingent Liabilities

Potential liabilities arising from previous

events

Uncertainty exists with regard to amount

It may arise from litigation, product warrantiesand additional tax assessments

Disclose as part of off-balance sheet item

Q i


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Question

There is a pending lawsuit against KBC Corp.

that may possibly result in future damages of

30,000. What recognition should be given to

it in the financial statements?

Q i


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Question

There is a pending lawsuit against KBC Corp.

that may possibly result in future damages of

30,000. What recognition should be given to

it in the financial statements? Ans:

Footnote disclosure should be given of the

particulars of the pending litigation.


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Q i hi k


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Question to think1. Key advantage of issuing bonds is that their

interest exp. is tax deductable2. Interest payment on bond is based on its

face value

3. Two types of liabilities are current and longterm

4. A debenture is an unsecured bond

5. In a Capital lease, the lessee records aliability for the present value of future

minimum rental payments to be made


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Differed Taxes

AS 22 (partly)

AHM Chp 10 (partly)

I b di d


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What is deferred tax?

Differed tax liability

Differed tax asset

I b di d


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What is deferred tax?

Permanent differences

Timing differences


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Questions

End of Module II

Documents

Fixed Assets Depre Deferred Taxes