accounting for non-current assets Flashcards
Property, Plant and equipment (PPE)?
- tangible items
- with specific use within entity
- expected to be used during more than one period (non-current in nature)
what are PPE?
physical assets used in business to provide future economic benefits for a number of years
property includes:
land and building
plant and equipment include:
cash registers, computers, office furniture, factory machinery, motor vehicles
PPE assets initially recorded at?
cost
fair value is?
price that would be received to sell an asset or paid to transfer liability in an orderly transaction between market participants at measurement date
cost of an asset consists of?
fair value of all expenditure necessary to acquire the asset and make it ready for use, e.g. purchase price, freight costs paid, installation costs (capital expense)
recognition criteria of PPE?
- probable that economic benefits will flow to entity
- cost can be reliably measured
two measurement models?
cost model and revaluation model
depreciation expense in income statement recognises?
economic benefits derived from use of an asset recognised on systematic basis over asset’s useful life
depreciation is process of…
allocating to expense the cost of a PPE asset over its useful (service) life in a rational and systematic manner
what does land not do?
depreciate
calculation of depreciation involves consideration of:
cost (c) useful life (n) residual value (r)
cost is?
all expenditures necessary to acquire the asset and make it ready for intended use
useful life?
estimate of expected life based on intended use, need for repair, vulnerability to obsolescence and legal life
residual value?
estimate of asset’s value at end of its useful life
depreciable cost/amt?
cost - residual value
accumulation depreciation?
represents total amount of asset’s cost that has been charged to depreciation expense since asset was acquired.
carrying amount (book value)?
cost - accumulated depreciation
3 depreciation methods:
straight-line
diminishing balance
unit-of-production
Depreciation: Straight-line method
depreciation expense is…
same each year as benefit consumed at same rate each year
Depreciation: Straight-line method
calculation for annual charge:
(cost of asset - residual value) / useful life of asset
OR
(c - r)/n
Depreciation: Diminishing-balance method
depreciation expense…
decrease each year as greater benefits consumed earlier in assets life
Depreciation: Diminishing-balance method
calculation:
1 – (r / c)^1/n
Depreciation: Diminishing-balance method
depreciation expense calculation:
carrying amount x depreciation rate
Depreciation: Units-of-production method
useful life expressed in terms of:
total units of production/use expected from asset
Depreciation: Units-of-production method
calculation?
depreciation cost per unit:
depreciable cost / total units of production
Depreciation: Units-of-production method
depreciation expense calculation
depreciation cost per unit x yearly units of production
subsequent expenditures:
a. Ordinary repairs – Revenue expenditures
• Expenses in maintaining operating efficiency of the asset
• Expensed in operating statement Dr Repairs Expense
Cr Cash
b. Additions and improvements – Capital expenditures
• Costs incurred to increase operating efficiency
• Expenditure capitalised and depreciated over asset’s
remaining useful life
Dr Asset (e.g., Delivery Truck)
Cr Cash
PPE assets may be disposed of by
• Sales Equipment is sold to another party • Scrapping Equipment is scrapped or discarded • Exchange Existing equipment is traded for new equipment
SALE OF NON-CURRENT ASSETS
proceeds recorded as:
incomes at gross amount received
SALE OF NON-CURRENT ASSETS
carrying amount represent
expense
SALE OF NON-CURRENT ASSETS
selling price > carrying amount of asset:
there is gain on disposal - gain reported in income statement as past of income
SALE OF NON-CURRENT ASSETS
selling price < carrying amount
there is loss on disposal, which is reported as expense
Identify three key decisions involving non-current assets.
what non-current assets does the entity need to sustain or expand its future operations and profitability? How much of the entity’s resources should be tied up in non-current assets? Should an entity buy or rent?
What impact does GST have on accounting for non- current assets?
GST only impacts on accounting for the purchase and sale of non-current assets
Contrast the effects of the three depreciation methods explained in this chapter on annual depreciation expense.
(a) Straight-line - constant amount
(b) Diminishing-balance - decreasing amount
(c) Units-of-production - varying amount.
Distinguish between expenses and capital expenditures during an asset’s useful life.
Capital expenditures are additions and improvements incurred to increase the operating efficiency, productive capacity or the expected useful life of the asset - usually material in amount, incur infrequently and are recorded as debits to the PPE asset affected
expenses are expenditures for the ordinary repairs made to maintain the operating efficiency and expected productive life of the asset - usually occur frequently and are recorded as a debit to the Repairs and Maintenance Expense account as incurred and are an expense in the income statement.
implications for having one entity with longer depreciation period than other?
By selecting a higher estimated useful life, its spreading the PPE asset’s cost over a longer period of time. The depreciation expense reported in each period is lower and profit is higher.
choice of a shorter estimated useful life will result in higher depreciation expense reported in each period and lower profit. Therefore, longer may appear to be a better performer
which depreciation method preferred for tax purposes?
depre expense highest under unit of production method = higher expense, lower tax payment
depre method for profit of company?
depre method that result in lowest expense
