Session 9 Non-current assets
  Main contents:
  1.Basic concepts of non-current assets
  2.Depreciation of non-current asset
  3.Disposal of non-current asset
  4.R*uation of non-current asset
  9.1 Non-current assets
  Non-current assets are distinguished from current assets by the following characteristics: they are
  - Long-term in nature
  - Not normally acquired for resale
  - Could be tangible or intangible
  - Used to generate income directly or indirectly for a business
  - Not normally liquid assets (i.e.not easily and quickly converted into cash without a significant loss in value.)
  ●Capital and revenue expenditure
  Capital expenditure:
  - Expenditure on the acquisition of non-current assets required for use in the business, not for resale.
  - Expenditure on existing NCA aimed at increasing their earning capacity.
  - Long-term in nature: the business intends to receive the benefits of the expenditure over a long period of time.
  Revenue expenditure:
  - Expenditure on current assets
  - Expenditure relating to running the business ( such as administration costs.)
  - Expenditure on maintaining the earning capacity of NCA e.g.repairs and renewals.
  ●Non-current registers
  A record of the NCA held by a business.These form part of the internal control system of an organization.
  Details held may include:
  - Cost
  - Date of purchase
  - Description of asset
  - Serial/reference number
  - Location of asset
  - Depreciation method
  - Expected useful life
  - Net book value
  ●Acquisition of a non-current asset
  Initial cost:
  - The cost of a NCA is any amount incurred to acquire the asset and bring it into
  working condition.
  - All non-current assets must initially recognized at cost.
  Cost = purchase price
  - Trade discount
  - Rebates
  + Direct cost (Delivery cost, Legal)
  Delivery cost is the cost that bringing it into working condition for
  Its intended use
  Initial costs excludes: admin costs
  General overheads
  Abnormal costs
  Any costs incurred after asset is ready for use
  e.g.Excludes: revenue expenditure such as
  ●Repairs
  ●Renewals
  ●Repainting
  Subsequent expenditure:
  Can only be recorded as part of the cost (or capitalized), if it enhances the benefits of the asset, i.e.increases the revenues capable of being generated by the asset.
  The correct entry to record the double entry is:
  Dr.Non-current asset
  Cr.Cash/ Bank/ Payables
  A separate cost account should be kept for each category of non-current asset, e.g.motor cars, fixture and fittings
  Example:
  Bilbo Baggins started a business providing limousine taxi services on 1 January 20x5.In the year to 31 December he incurred the following costs:
  $
  Office premises                   250,000
  Legal fees associated with purchase of office    10,000
  Cost of materials and labour to paint office in     300
  Bilbo’s favourite colour, purple
  Mercedez E series estate cars            116,000
  Number plates for cars                 210
  Delivery charge for cars                180
  Road licence fee for cars                480
  Drivers’ wages for first year of operation     60,000
  Blank taxi receipts printed with Bilbo         450
  Baggin’s business name and number
  What amounts should be capitalized as “ Land and buildings” and “ Motor vehicles”?
  Land and     Motor
  Buildings    Vehicles
  $         $
  A.            260,000      116,390
  B.            250,000      116,870
  C.            250,300      116,390
  D.            260,300      116,870
  Solution:
  The correct answer is A
  Land and buildings
  $
  Office premises     250,000
  Legal fees        10,000
  260,000
  ●The cost of the purple paint does not form part of the cost of the office and so should not be capitalized.Instead it should be taken to the income statement as a revenue expense.
  Motor vehicles
  $
  3 Mercedes E series    116,000
  Number plates         210
  Delivery charges        180
  116,390
  - The number plates are one-off charges which form part of the purchase price of any car.
  - The road licence fee, drivers’ wages and receipts are ongoing expenses, incurred every year.They cannot be capitalized, but should be taken to the income statement as expenses.
  9.2 Accounting treatment of depreciation: - a mechanism to reflect the cost of using a non-current asset
  (i)Depreciation is charged as an expense in the profit and loss account
  (ii)The corresponding credit is accumulated in the provision for depreciation account in the balance sheet to offset against the original cost of the fixed assets.
  ●Method of depreciation:
  Straight-line method
  The depreciable amount is spread evenly across the useful life of the fixed asset, resulting in same amount of depreciation charged every year.
  Depreciation charge = Cost of asset minus residual value
  Expected useful life of the asset
  Residual value: the estimated disposal value of the asset at the end of its useful life.
  Example:
  A non-current asset costing $60,000 has an estimated life of five years and a residual life of $7,000.The annual depreciation charge using the straight line method would be calculated as follows:
  $( 60,000 – 7,000)= $10,600 per annum
  5 years
  The net book value of the fixed assets would reduce each year as follows:
  After 1 year after 2 years after 3 years after 4 years after 5 years
  $       $       $        $       $
  Cost     60,000    60,000    60,000     60,000     60,000
  Accumulated 10,600    21,200    31,800     42,400     53,000
  Depreciation
  Net book value 49,400   38,800    28,200     17,600    7,000 (estimated residual value)
  Reducing balance method
  A fixed depreciation rate ( percentage)is applied to the fixed asset’s net book value( cost less accumulated depreciation)every year.Since net book value diminishes yearly, the depreciation charge falls every year.
  Depreciation charge = X% x net book value
  Net book value = Cost of an asset – accumulated depreciation
  Asset bought/sold in the period:
  - full year’s depreciation in the year of acquisition and none in the year of disposal
  - monthly or pro rata,based on the exact number of months that the assets has been owned.
  Exercise 1 :
  Hopkins who makes up accounts to 31 December, buys a car on 1 January 20x1 for $5,000. The depreciation policy is 20% pa(每年), using the reducing balance method. What is the depreciation charge for each of the first five years?
  Year  20%on      Depreciation  Accumulated   Net book
  net book value   charge     Dep.      value
  20x1   20% of $5,000   $1,000    $1,000     $4,000
  20x2   20% of $4,000    800     1,800     3,200
  20x3   20% of $3,200    640     2,440     2,560
  20x4   20% of $2,560    512     2,952     2,048
  20x5   20% of $2,048    410     3,362     1,638
  20x6   20% of $1,638    328     3,690     1,310
  Exercise 2:
  The following information relates to B & S, a car repair business:
  Machine 1       Machine 2
  Cost      $12,000       $8,000
  Purchase date 1 August 20x5    1 October 20x6
  Depreciation  20% straight line  10% reducing balance
  Method     pro-rata       pro- rata
  What is the depreciation charge for years ended 31 December 20x5 and 31 December 20x6?
  20x5       20x6
  $        $
  A.   2,400      2,600
  B.   1,000      2,600
  C.   2,400      3,200
  D.   1,000      3,200
  Solution:
  - for machine 1:
  20x5: 20% x 12,000 x 5/12 = 1,000
  20x6: 20% x 12,000= 2,400
  - for machine 2:
  20x6: 10% x 8,000 x 3/12=200
  Total depreciation: 20x5: 1,000
  20x6: 2,400 + 200 = 2,600
  Answer: B
  ●Accounting for depreciation: - whichever method is used to calculate depreciation, the accounting remains the same:
  Journal entry is:
  Dr. Depreciation
  Cr. Accumulated Depreciation ( provision for depreciation)
  Accumulated depreciation account is cumulative, i.e. reflects all depreciations to date.
  Cost            X
  Accumulative Depreciation (X)
  NBV             X
  ●Consistency and subjectivity when accounting for depreciation:
  - The following are all based on estimates made by the management of a business:
  Depreciation method
  Residual value
  Useful life
  - Different estimates would result in varying levels of depreciation, and
  consequently, profits.
  - It can be argued that these subjective areas could therefore result in manipulation of the accounts by management.
  - In order to reduce the scope for such manipulation and increase consistency of treatment, IAS 16 Property, Plant and Equipment requires the following:
  depreciation method should be reviewed at each year end and changed if the method used no longer reflects the pattern of the use of the asset.
  residual value and useful life should be reviewed at each year end and changed if expectations differ from previous estimates.
  Ex 3. A purchased a non-current asset for $100,000 on 1 January 20x2 and started depreciating it over 5 years. Residual value was taken as $10,000.
  At 1 January 20x3, a review of asset lives was undertaken and the remaining useful life was estimated at 8 years. Residual value was estimated nil.
  Calculate the depreciation charge for the year ended 31 December 20x3 and subsequent years.
  Solution:
  Initial depreciation charge (100,000-10,000)/5 = 18,000
  NBV at date of charge: 100,000-18,000 = 82,000
  New depreciation charge: 82,000/8 = 10,250
  9.3 Disposal of fixed assets
  ●Profit or loss on disposal
  - Proceeds (Selling price- cash or part disposal allowance)
  Proceeds > NBV at disposal date Profit
  - Proceeds < NBV at disposal date Loss
  - Proceeds = NBV at disposal date Neither
  ●Disposal for cash consideration
  Step 1. Remove the original cost of the non-current asset from the “non-current asset” account.
  Dr. Disposal
  Cr. Non-current asset original cost non-current asset
  Step 2. Remove accumulated depreciation on the non-current asset from the “accumulated depreciation” account.
  Dr. Accumulated depreciation X
  Cr. Disposals X
  Step 3. Record the cash proceeds
  Dr. Cash proceeds
  Cr. Disposal
  ●Disposal through a part exchange agreement
  - it arises where an old asset is provided in part payment for a new one, the balance of the new asset being paid in cash.
  - The procedure to record the transaction is very similar to the three-step process seen for a cash disposal.
  - But there is the fourth step:
  Step 1. Remove the original cost of the non-current asset from the “non-current asset” account.
  Dr. Disposal X
  Cr. Non-current asset original cost non-current asset X
  Step 2. Remove the accumulated depreciation on the non-current asset from the “accumulated depreciation” account.
  Dr. accumulated depreciation X
  Cr. Disposals X
  Step 3. Record the part exchange allowance (PEA) as proceeds
  Dr. non-current asset (= part of the new asset) PEA
  Cr. Disposal (= sale proceeds of the old assets) PEA
  Step 4. Record the cash paid for the new asset
  Dr. non-current asset cash
  Cr. Cash
  Again, the balance on the T account is the profit or loss on disposal.