Semester 1 Week 5 PP (Non-current assets) Flashcards
Under standard IAS 16, what do we capitalise?
Under the standard we should capitalise:
Direct costs.
Any costs to get to “current state and current location” for example delivery fees, customs duties, installation costs etc.
Any health and safety equipment is also capitalised.
Stop capitalising when the asset is ready for use.
Carol Ltd. Purchases a piece of machinery from China, the cost of the machine is £100,000. Carol requires to pay delivery costs of £2,000 and Customs Duty of £3,000.
The cost of installing the machine is £4,000.
Prepare the journal to account for Carol’s purchase.
Dr Machinery cost 109,000
Cr Bank/creditors 109,000
Being purchase of machinery
It would be impossible for Carol to use the machinery without paying for delivery, installation and customs duty. Therefore it is capitalised as part of the cost.
What is Subsequent Expenditure?
Subsequent expenditure (for example servicing or repairs) is usually not capitalised. It generally only gives access to economic benefits the entity already has.
Would only be capitalised if it somehow improves the asset.
P&P Ltd. Buy a vehicle for £21,000 in 20X1. In 20X2, £1,000 is spent on repairing and servicing the vehicle.
Prepare the journal to account for the servicing.
Dr P/L repairs and maintenance 1,000
Cr Bank 1,000
Being repairs to vehicle
P&P had a vehicle and still have a vehicle, repairing it hasn’t made it a longer lasting or better vehicle. While certainly not repairing could cause damage the repairs cost hasn’t given them anything they didn’t already have. It has only given access to existing benefits.
RDB Ltd. Acquired an office building in 20X3 for £1.8m, the office building is subdivided and leased out to a variety of short term tenants.
In 20X7, RDB embarked on a major redevelopment program, spending £600,000 on refurbishing and extending the building.
As a result of this work the rental income from the building has increased 35% and the extension allows an additional 4 tenants.
Prepare the journal to account for the redevelopment work.
Dr Buildings cost £600,000
Cr bank/creditors £600,000
Being additional expenditure on building
This can be capitalised – the additional expenditure makes it a better, more valuable building as seen from the increase in the rental income and the additional tenants that can be accommodated.
What are Borrowing costs and how do we treat them?
Where construction of a large asset is being funded through borrowing the cost of borrowing (interest) is effectively a cost of the construction and should be capitalised alongside other costs.
This is done by reference to the payment date as this is when the money is required.
This is covered under standard IAS 23.
Joe Ltd. is building a factory/warehouse complex, they are currently in the year ended 31 December 20X1.
On 1 April 20X1 they drew down £40,000 on their loan to fund construction expenses. On 1 September 20X1 they drew down a further £35,000. The loan currently charges interest at 4.5%.
Calculate the interest to be capitalised for the year ended 31 December 20X1.
(£40,000 x 4.5%) x 9/12 = £1,350
(£35,000 x 4.5%) x 4/12 = £525
Total interest capitalised = £1,875
When do we depreciate and what types are there?
Depreciation should start when the asset is ready for use, regardless of if it is actually being used or not.
The asset should be decrepitated over its Useful Economic Life (UEL) the shorter of:
How long the asset is expected to last.
How long the asset is expected to be used in the business.
Usually depreciation is either on a straight line basis or by reducing balance.
The three steps when doing depreciation are:
Calculate total depreciation to date,
Calculate the value remaining to depreciate,
Calculate new depreciation using either the new useful life or residual value.
What do we get after depreciation? (The end of a UEL)
We get Residual value.
Residual value is what the asset will be worth at the end of its useful economic life.
Depreciation is therefore = (cost-residual value)/UEL
Residual value is often ignored if it is insignificant.
Mybeck Ltd. have purchased a large piece of earthmoving equipment for £200,000. The equipment will last for 8 years after which it will have to be scrapped at £nil.
Mybeck are planning to use the equipment in a 5 year contract, after which it will be sold.
The estimated value of the equipment after 5 years is £20,000.
Calculate depreciation for one year.
Depreciation = (£200,000-£20,000)/ 5 years = £36,000/year.
SKK Ltd. purchased a piece of machinery for £100,000, at the date of purchase it was estimated that the machinery would last for 10 years and there was no residual value.
After four full years of depreciation it was no considered that the item would only last for three more years.
Calculate the depreciation and prepare the appropriate journal for year 5.
Original depreciation = £100,000/10 years = £10,000
Therefore value after 4 years is £100,000 – (4 x £10,000)
= £60,000
New depreciation = £60,000/3 years = £20,000/year
Dr P/L depreciation expense £20,000
Cr machinery accumulated depreciation £20,000
Being annual depreciation
Volksmith Ltd. purchased a truck for £400,000. Initially it was considered that the truck would last for 5 years, at the end of the 5 years the truck could be sold on for £40,000.
After 2 full years of depreciation Volksmith now consider that the asset will have no remaining value after 5 years. The useful life of the asset remains 5 years.
Calculate the depreciation and prepare the appropriate journal for year 3.
Original depreciation = (£400,000 - £40,000)/5 years
=£72,000/year
Therefore value after 2 years = £400,000 – (£72,000 x 2)
=£256,000
New depreciation = £256,000/3 years = £85,333/year
Dr P/L depreciation 85,333
Cr Vehicles accumulated depreciation 85,333
Being annual depreciation
When should assets be derecognised?
Assets should be derecognised when:
Sold
No further economic benefits are expected from either using or selling the asset (i.e. getting thrown out)
The difference between the proceeds (if any) and the NBV are a gain or loss on sale and are recorded through the P/L.
The cost and the accumulated depreciation are removed.
Blue Room Ltd. has a vehicle which is no longer needed by the business and is therefore sold for £12,000.
The vehicle was originally purchased for £25,000 and at the date of sale had accumulated depreciation of £15,000.
Prepare the journal to account for the sale.
NBV = £25,000 - £15,000 = £10,000
Gain on sale = £12,000 - £10,000 = £2,000
Dr Bank £12,000
Dr Vehicle accumulated depreciation £15,000
Cr Vehicle cost £25,000
Cr P/L gain on sale £2,000
Being disposal of vehicle
Isolair Plc. purchased a property in Glasgow in 1981 for £30,000. They have depreciated the building since and it currently has a net book value of £8,000 (£22,000 accumulated depreciation).
A local surveyor has said that based on the current market, if Isolair were to sell the building it would likely sell for £250,000.
Does it give a true and fair view that the building is still held at £8,000?
The current market value of Isolair Plc.’s property, assessed at £250,000 by a local surveyor, significantly exceeds its net book value of £8,000. To provide a true and fair view of the company’s financial position, Isolair should revalue the property to reflect its market value, resulting in a revaluation surplus of £242,000. This adjustment accurately reflects the property’s value and enhances transparency for stakeholders.
