Session 1 Accounting For Assets 2013

Slide 1
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HI5020
Corporate Accounting
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Session 1
Accounting for Assets
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Holmes Institute 2013
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Slide 2
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HI5020 Corporate Accounting
Welcome to HI5020 Corporate Accounting!

Course overview:
12 weeks of sessions (no mid-semester break)
Study week (week 13)
Exam week (week 14)
Assessments:
Two class assessments (tests), each test carries a
mark equal to 20% of the total assessment.
Final Examination is equal to 60% of total assessment
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Slide 3
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HI5020 Course Topics

Week
Topic
Chapter
Accounting for Assets
Accounting for Liabilities
10
Accounting for Owners Equity
13
Income and Changes in Equity
Cash-flow Statements
Segment reporting and related parties
Group Structures
27
Accounting for intra-group transactions
28
16
19
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24 & 25
Non-controlling interest
29
10
Indirect interest
30
11
Changes in degree of ownership
31
12
Accounting for equity investments
32
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Slide 4
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Course Text / Materials

Deegan, C. (2012) Australian Financial Accounting
7th edition. McGraw-Hill .ISBN: 9780071012409.
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Course slides & notes are provided on Blackboard.
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Slide 5
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Session Objectives
Understand what an Asset is and the various
classifications under AASB.
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Disclosure requirements to AASB 101

Understand how to recognise costs
Recognition issues
Methods of recognising asset value
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Methods of accounting for assets
Capitalisation of expenditure subsequent to

acquisition
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Allocation of costs to individual items

Deferred payments on acquisition
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Slide 6
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What is an Asset?
According to the AASB Framework, an asset
is something that:
1. Is expected to provide future economic benefits to
the entity;
2. Must be controlled by the entity (but does not have
to be legally owned);
3. A transaction or event giving rise to the control
must have already occurred.
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Slide 7
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Further Clarification
AASB Paragraph 89 provides recognition of assets
being:
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It is probable that the future economic benefits

embodied in the asset will eventuate, and the asset
possesses a cost or other value that can be
measured reliably.
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Slide 8
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Relevant accounting standards

There are three standards of particular relevance.
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A. AASB 116 Property, Plant and Equipment
Requirements for revaluations, depreciation

and determining acquisition cost of property,
plant and equipment
B. AASB 138 Intangible Assets
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A. Revaluation of intangible assets and other issues
C. AASB 136 Impairment of Assets When to
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recognise an impairment loss

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Slide 9
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Assets
Assets can be classified according to Asset classes
namely fixed assets, investments, intangible assets,
current assets and deferred costs.
Under AASB 101 Presentation of Financial
Statements, assets are classified as:
a) Current Assets
b) Non-current Assets (consisting of Fixed Assets
and Intangible Assets).
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Slide 10
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Current Assets
Assets that are expected to be consumed, sold or
converted into cash within the next twelve months
such as:
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Cash/Bank
Accounts Receivable
Prepayments such as rent, insurance, etc.
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Stock/Inventory/Supplies
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10
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Slide 11
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Non-current Assets
Assets not categorised as Current Assets, used to
derive a future economic benefit.
A. Fixed Assets include:
Land and Buildings (separated)
Motor Vehicles
Plant and Equipment
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B. Intangible Assets include:
Goodwill
Patents
Copyrights
Deferred Tax Assets
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Slide 12
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Balance Sheet Entries

All current Assets are shown first, generally the
most liquid so cash first, then debtors, followed

by stock, prepayments, etc.
Then Non-current Assets, with Fixed Assets listed
first, followed by Intangible Assets.
And as most students would be aware, each
asset classification is recognised in the Chart of
Accounts in financial records, assets commencing
with the number 1.
e.g. 1.100 Cash
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Slide 13
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Cost of a Fixed Asset

A fixed asset, when purchased will often include
more than just that actual cost of the asset, e.g. A
company purchases a new piece of machinery for
the following:
Equipment
$250,000
Transport to site
$ 10,000
Lifting machine to relocate equipment $ 5,000
Wiring, etc.
$ 8,000
The total cost of the asset is
$273,000
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Slide 14
Acquisition of an Asset Using Fair Value

What if the asset, say land was paid for via the following:
A. Cash
$200,000
B. Truck
Cost
$150,000
Accumulated Depreciation $ 60,000
Market Value
$ 75,000
C. Shares 5,000 shares with a market value of $8.00.
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How much should the asset value be recorded at?
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Slide 15
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Acquisition of Fixed Asset

It is necessary to recognise the value of the assets
based on Fair Value (market value), not at book
value, so the assets would have a value of:
Truck
$75,000
Shares
$40,000
Plus of course the cash of $200,000
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$200,000 + $75,000 + $40,000 = $315,000
Journal entries are shown on the next slide.
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Slide 16
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Recording the acquisition

Recording of acquisition would be:
Dr.
Land
315,000
Accumulated Dep. Truck
60,000
Loss on disposal of Truck
15,000
Cash
Share Capital
Truck
To record the purchase of land
Cr.
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200,000
40,000
150,000
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Slide 17
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1.1 Your turn

A machine purchased was paid for via the following:
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A. Cash
$350,000
B. Motor vehicle
Cost
$45,000
Accumulated Depreciation
$15,000
Market Value
$25,000
C. Shares
3,000 shares with a market value of $4.50.
How much should the asset value be recorded at?
Prepare the journal entry for the transaction.
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Slide 18
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Solution:
Dr.
388,500
15,000
5,000
Machine
Loss on disposal
Cash
Share Capital
Vehicle
To record purchase of machine
Cr.
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350,000
13,500
45,000
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Slide 19
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Acquisition of an Asset
Later in this session we will discuss the
Capitalisation of Expenditure incurred subsequent
to the acquisition of an asset.
Next, let us look at Recognition issues.
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Slide 20
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Recognition Issues
Based on the requirements on an entity, when
considering recognition, it would be expected

that a high-level of professional judgement
would be required when faced with the option of
categorising something as either an expense or
an asset.
The choice of options can have ramifications on
the balance sheet (considering factors such as
net assets to shares, etc.)
AL=C
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Slide 21
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Worked example 4.1 (pp. 145-146)

RSC Ltd. has assets of $4,300,000, liabilities of $2,700,000
so the equity must be $1,600,000. Number of issued shares
is 3,000,000.
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They designed and produced a machine that cost $640K to

manufacture a new style of container.
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Breakdown of costs are raw materials, $325,000, wages

(payable), $260,000 and depreciation of $55,000 (related to
other P&E used to make machine)
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Slide 22
Worked example 4.1 (pp. 145-146) (cont.)

If the expenditure is to be recognised as an asset
(satisfies the criteria):
Dr.
Cr.
Machinery
640,000
Wages Payable
260,000
Raw Materials
325,000
55,000
To record asset produced internally for incomeproducing purposes
Net assets will not change. Why?
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Slide 23
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Recognition Issues - Assets

Balance sheet, there will be an equal change in both
assets and liabilities.
Raw Materials (RM) CR, machinery use of raw
materials, DR, (they counter each other)
Lets see what the outcome is:
Increase in assets = $260,000 (being $640K less
RM of $325K and depreciation, $55K)
Increase in liabilities = $260K (wages payable).
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Next slide shows Balance Sheet accounts changes.

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Slide 24
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Recognition changes - assets

Old B/sheet
Assets
Liabilities
$4,300,000 $2,700,000
Equity
$1,600,000
-------------- ------------$4,300,000 $4,300,000
New balance sheet

Assets
Total Assets $4,300,000
Less RM used 325,000
$3,975,000
Plus Machine $640,000
Less Acc.Dep.
55,000 585,000
TOTAL
$4,560,000
Liabilities
$2,700,000
Plus
Acc.Wages 260,000
TOTAL $2,960,000
Equity $1,600,000
TOTAL $4,560,000
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Slide 25
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Recognition issues - Expense

If the consideration is that the asset will probably not
generate any future cash flows, then it would be
treated as an expense and the following journal
entry would apply:
Impairment loss-machinery
Accumulated Impairment loss
To record the loss on impairment
Dr.
640,000
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Cr.
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640,000
Write-off of the asset will see net assets fall by this amount.
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Slide 26
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1.2 Your turn

Labour Ltd. has assets of $2,700,000, liabilities of
$2,100,000, equity of $600,000. Number of issued shares
is 1,000,000.
They designed and produced a machine that cost $410K
in order to manufacture a sellable product.
Breakdown of costs are raw materials, $235,000, wages
(payable), $150,000 and depreciation of $25,000 (related
to other P&E used to make machine).
Calculate and journalise for both asset and expense.
What are the considerations?
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Slide 27
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Solution
If recognised as an asset (will generate future returns), then:
Journal:
Dr.
Cr.
Machinery
410,000
Raw Materials
235,000
Wages Payable
150,000
25,000
To record asset produced internally for income-producing
Balance sheet
Increase in assets by $150,00 (410K (235K+25K))
Increase in liabilities by $150,000 (wages payable)
If recognised as an expense (will not generate future returns), then:
Dr.
Cr.
Impairment loss machinery
410,000
Accumulated Impairment Loss
410,000
To record impairment loss
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Slide 28
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Methods of Accounting for Assets
Three recognised method:
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1. Historical-cost accounting basis for
recognising the value of the asset on price paid

2. Present-value accounting basis for
recognising value of an asset based on netpresent value.
3. Market-value accounting assets recorded at
net market value, any changes in value treated as
profit or loss from previous period.
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Slide 29
Methods of Accounting for Assets (cont.)

Most companies in Australia favour the historical
method as it is easy to understand, based on an
actual costs and a measureable reduction in value
(pre-determined method and rate of depreciation).
Whilst may have changed in recent years, a
survey in 1995 of CFOs from Group of 100, 80%
favoured historical cost, but it could be assumed
that little change has occurred.
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Slide 30
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Capitalisation of Expenditure - Asset

Earlier we discussed what costs could be
recognised as being part of an asset. Now we will
look at those costs subsequent to an acquisition
which would be considered.
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Refer to worked example 4.4 (pp. 163-164).
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Slide 31
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Costs associated with an asset

We know that a business both the purchase price
of an asset as well as the set-up costs. But what
about costs for restoration and dismantling once
the asset has completed its useful life?
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Consider a mine. Dig the hole with a mining

machine but once the mine is exhausted, the
equipment needs to be dismantled, the land
restored to an approved level. These costs also
need to be considered.
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Slide 32
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Example: Libom Ltd.

Libom Ltd. purchase a drill for raw materials on 1/7/09. Cost of
drill is $3,455,000. Installation costs are the following:
Site access costs
$1,548,000
Transportation of drill
$ 330,500
Set-up
$ 190,000
Licence/consent
$ 854,900
Engineers fees
$ 250,000
Total
$3,173,400
Dismantling costs
$ 110,500 (in 6 years time)
Site clean-up
$1,749,000
Transport costs
$ 285,000
Replacement-Flora
$ 427,700
Total
$2,572,200
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Costs to be over life of the mine. Discount rate is 9%.

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Slide 33
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Example: Libom Ltd. (cont.)

We need to consider PV (Present value) of the cleanup/removal costs and use the equation:
(1+i)yx +/-p
Total costs is $2,572,200 for clean-up in 6 years so
PV will be:
(1.09)yx +/-6 = 0.596267326
0.596267326 x $2,572,200 = $1,533,719
Why PV, because $1.00 in 6 years will have less
value than $1.00 today.
Now we can journal this:
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Slide 34
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Dr.
8,162,119
Drill
Cr.
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Cash/Payables
6,628,400
Provision for Restoration
1,533,719
To record acquisition of drill and provision for
restoration.
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Lets consider following accounting periods. What is

the interest expense and provision for restoration
costs? Remember the discount rate is 9%.
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Slide 35
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Date
Opening
Balance
Interest (9%)
1/7/09
Balance
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1,533,719
30/6/10
1,533,719
138,035
1,671,754
30/6/11
1,671,754
150,458
1,822,212
30/6/12
1,822,212
163,999
1,986,211
30/6/13
1,986,211
178,759
2,164,970
30/6/14
2,164,970
194,847
2,359,817
30/6/15
2,359,817
212,383
2,572,200
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Slide 36
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30/6/10 Journal
Dr
Interest expense
138,035
Cr
Provision for restoration
138,035
To record the interest expense on restoration of drill site
30/6/11 Journal
Dr
Interest expense
150,458
Cr
Provision for restoration
150,458
To record the interest expense on restoration of drill site.
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Did you notice the balance in the final year matched the full
restoration amount ($2,572,200)?
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Slide 37
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1.3 Your turn: PHB Ltd.

PHB Ltd purchase a drilling rig for raw materials on 1/1/07. Cost of drill is
$5,125,000. Installation costs are:
Site access costs
$1,998,000
Transportation of drill
472,500
Set-up
364,000
Licence/consent
773,600
Engineer fees
326,400
Total
$3,934,500
Dismantling costs
$ 243,650 (in 5 years time)
Site clean-up
2,424,000
Transport costs
289,000
Replacement-flora
388,700
Total
$3,126,065
Costs to be over life of the mine. Discount rate is 7.5%.

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Slide 38
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Solution
Step 1:
Calculate the PV of the restoration costs.
(1.075)yx +/-5 = 0.696558632
0.696558632 x $3,126,065 = $2,177,488
Dr.
Cr.
Drill Rig
11,236,988
Cash/Payable
9,059,500
Provision for restore
2,177,488
To record acquisition of drill rig, installation and provision
for restoration
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Slide 39
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Solution (cont.)
Step 2:
Calculate Interest expense & provision for restoration
Date
1/1/07
31/12/07
31/12/08
31/12/09
31/12/10
31/12/11
O/Balance($) Interest(7.5%)($)
2,177,488
2,340,799
2,516,359
2,705,08
2,907,967
163,311
175,560
188,727
202,881
218,097
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C/Balance($)
2,177,488
2,340,799
2,516,359
2,705,086
2,907,967
3,126,065
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Slide 40
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Solution (cont.)
Step 3:
31/12/07
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Dr.
Cr.
Interest Expense
163,311
163,311
31/12/08
Dr.
Cr.
Interest Expense
175,560
175,560
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Slide 41
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Allocation of Costs
Q: How are costs allocated when a package
asset is purchased?
A: A valuer experienced in such matters would apply
a % rate totalling 100% across the assets
purchased.
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Example: Purchase Price of $8,500,000

E.g. Land
48% = $4,080,000
Buildings
27% = $2,295,000
Stock
10% = $ 850,000
Equipment
15% = $1,275,000
TOTAL
100% = $8,500,000
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Slide 42
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Allocation of Costs (cont.)

Journal entry would be:
Dr.
Cr.
Land
4,080,000
Buildings
2,295,000
Stock
850,000
Equipment
1,275,000
Bank
8,500,000
To record acquisition of Assets
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Note: Land and buildings recognised separately due to differing

accounting treatment (land-appreciate, buildings-depreciate, etc.)
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Slide 43
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Deferred Payments on Acquisition

It is common for an entity to acquire assets and
have a payment plan in place to pay for the asset
over a period of time.
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AASB 123 the cost of an item of property, plant and

equipment is the cash-price equivalent at the recognition
date. If payment is deferred beyond normal credit terms,
the difference between the cash-price equivalent and the
total payment is recognised as interest over the period of
credit unless such interest is recognised in the carrying
amount of the asset in accordance with the allowed
alternative treatment
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Slide 44
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Cost of an item must be determined by discounting
the amounts payable in the future to their present
value at the date of acquisition.
Refer to worked example 4.6 (page166)
Equation used is:
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1-(1+i)yx +/- p
i
i = interest rate, p = periods
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Slide 45
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RSC Ltd.
RSC Ltd acquired a drilling rig , paying $320,000 on
date of inception (1/7/10) and are required to make
an additional 6 annual payments of $400,000, first
annual payment due 30/6/11
Interest rate on borrowings is 9%.
We are required to calculate the amount payable and
then journalise for inception date and then for next
two years.
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Slide 46
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RSC Ltd. (cont.)

Part A: Calculating the amount payable
1) Initial payment (no change)
2) 1-(1.09)yx +/- 6/0.09 = 4.48591859
4.48591859 x $400,000 =
Total
$ 320,000
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$1,794,367
$2,114,367
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We now know the value and can now journalise.
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Slide 47
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1/7/10 Journal entry
DR
Asset-Drill Rig
2,114,367
CR
Bank
320,000
CR
Loan on asset
1,794,367
To record acquisition of drill rig recognising loan payable
DR
Interest expense
161,493
DR
Loan on asset
238,507
CR
Bank
400,000
To record payment on asset acquired 1/7/10
DR
Interest expense
140,027
DR
Loan on asset
259,973
CR
Bank
400,000
To record payment on asset acquired 1/7/10
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Slide 48
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Deferred Payments on Acquisition
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You will note that the interest payments reduced

from 2010 to 2011!
This is because the interest is calculated against
the OPENING BALANCE each year, not the
HISTORICAL BALANCE.
The reducing interest component means that the
payment on principal of the loan increases.
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Slide 49
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1.4 Your turn

RIO Ltd acquired five trucks for their mine in
Western Australia, paying $1,800,000 on date of
inception (1/7/08) and are required to make an
additional 7 annual payments of $2,000,000, first
annual payment due 30/6/12
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Interest rate on borrowings is 8.5%.
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Required:
Calculate the amount payable and then journalise
for inception date and then for the next two years.
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Slide 50
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Solution
Step 1: Calculate the amount payable
Initial payment
1-(1.085)yx +/-7/0.085
= 5.11851352 x 2,000,000
TOTAL
$ 1,800,000
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10,237,027
$12,037,027
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Slide 51
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Solution (cont.)
Step 2: Journalise
1/7/08
DR
Trucks
12,037,027
CR
Bank
CR
Loan payable
To record acquisition of mine trucks
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1,800,000
10,237,027
30/6/09
DR
Interest expense
870,147
DR
Loan payable
1,129,853
CR
Bank
2,000,000
To record payment on asset (mine trucks) acquired 1/7/08
___________________________________
30/6/09
DR
Interest expense
774,110
DR
Loan payable
1,225,890
CR
Bank
2,000,000
To record payment on asset (mine trucks) acquired 1/7/08
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Slide 52
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Solution (cont.)
Checking payments to completion
Date
1/7/08
30/6/08
30/6/09
30/6/09
30/6/10
30/6/11
30/6/12
30/6/13
O/B($)
Interest($)
Loan($)
10,237,027
9,107,174
7,881,284
6,551,193
5,108,044
3,542,228
1,843,317
870,147
774,110
669,909
556,851
434,184
301,089
156,681
1,129,853
1,225,890
1,330,091
1,443,149
1,565,816
1,698,911
1,843,317
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C/B($)
10,237,027
9,107,174
7,881,284
6,551,193
5,108,044
3,542,228
1,843,317
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Slide 53
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Session Summary
This completes this session where a number of
aspects in the recognition and recording of assets
was covered.
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Next week, Accounting for Liabilities will be covered.
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Slide 1

HI5020 Corporate Accounting

Welcome to HI5020 Corporate Accounting!

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HI5020 Course Topics

Accounting for Assets

Accounting for Liabilities

Accounting for Owners Equity

Income and Changes in Equity

Segment reporting and related parties

Accounting for intra-group transactions

Changes in degree of ownership

Accounting for equity investments

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Course Text / Materials

Course slides & notes are provided on Blackboard.

classifications under AASB.

Disclosure requirements to AASB 101

Methods of accounting for assets

Capitalisation of expenditure subsequent to

Allocation of costs to individual items

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It is probable that the future economic benefits

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Relevant accounting standards

A. AASB 116 Property, Plant and Equipment

Requirements for revaluations, depreciation

A. Revaluation of intangible assets and other issues

C. AASB 136 Impairment of Assets When to

recognise an impairment loss

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B. Intangible Assets include:

Balance Sheet Entries

most liquid so cash first, then debtors, followed

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Cost of a Fixed Asset

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Acquisition of an Asset Using Fair Value

How much should the asset value be recorded at?

Acquisition of Fixed Asset

$200,000 + $75,000 + $40,000 = $315,000

Journal entries are shown on the next slide.

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Recording the acquisition

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1.1 Your turn

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considering recognition, it would be expected

Worked example 4.1 (pp. 145-146)

They designed and produced a machine that cost $640K to

Breakdown of costs are raw materials, $325,000, wages

Worked example 4.1 (pp. 145-146) (cont.)

Recognition Issues - Assets

Next slide shows Balance Sheet accounts changes.

Recognition changes - assets

New balance sheet

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Recognition issues - Expense

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1.2 Your turn

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