NON-CURRENT ASSET: PROPERTY, PLAND AND

EQUIPMENT AND INTANGIBLES

CHARACTERISTICS OF PLANT ASSETS:

Are relatively expensive

Usually lasts several years
Plant asset maybe me sold or traded in.

Real or tangible assets: are assets whose physical characteristics define their utility or
usefulness, such as buildings, desks and equipment.

Intangibles assets: are assets whose value is mot derived from their physicality. For e.g.
software programs on a CD are intangibles assets. The physical CD is not the value-the
knowledge/programs on the CD really represent the asset.

Natural resources assets: are assets that come from the ground and can ultimately be used up.
For e.g. oil, diamonds and coal are all natural resources assets.

Plant assets have their own terminology for expense:

TANGIBLE DEPRECIATION
ASSETS

INTANGIBLE AMORTIZATION
ASSETS

NATURAL DEPLETION
RESOURCES
 MEASURING THE COST OF A PLANT ASSET

Plant assets are recorded at cost. This is consistent with the cost principle. Costs include not only
the purchase price, but all costs necessary to get the plant asset ready for its intended use.

COST OF AN ASSET = SUM OF ALL THE COSTS INCURRED TO BRING THE ASSET TO
ITS INTENDED PURPOSE

Land and land improvements

The Land is not depreciated! The cost of land includes the following costs paid by the purchaser:

 Purchase price
 Agent’s commission
 Government stamp duty and other charges
 Survey and legal fees
 Cost of clearing the land and removing any unwanted buildings

The cost of land does NOT include the following costs:

 Fencing
These are LAND IMPROVEMENTS
 Paving
and are subject to depreciation.
 Sprinkler
 Lighting
 signs

 Purchase price
EXAMPLE  Brokerage commission
SupposeSmartSurveytouch needs
and legal fees property and purchases land for $50000. Smart
touch also pays cash
 Property taxesas follows: $4000 in agent commission, $2000 in legal
in arrears
fees andstamp duty, $5000 to remove
Taxes assessed to transfer old building
the ownership andland
(title) on the a $1000 survey fee.
SupposesmartCost oftouch borrowed
clearing $50000
the land and to buy
removing the land
unwanted and pay cash for the
buildings
related cost.
The cost of land DOES NOT include the following costs:
Purchase price of land 50000
Add: related costs:
 Fencing
Agent’s
 Pavingfees 4000
These separate plant assets-called
Legal fees and stamp
 Sprinkler system duty 2000
LAND AND IMPROVEMENT are
Removal
 Lightingof building 5000
subject to DEPRECIATION.
Survey
 Signsfee 1000 12000
TOTAL COST OF LAND 62000
 Entry to record purchase of the land is:

Aug 1 Land (A+) $62,000

Loan payable (L+) $50,000
Cash (A+) $12,000

Smart touched CAPATALIZED, means expenditure added to the purchase price

of the plant asset. This means that asset account was debited (increased) with
an amount of $12000.

Suppose Smart touch then pays $20,000 for fences, paving, lighting,
landscaping and sings on 15 August 2015. The following entry records the
cost of these LAND IMPROVEMENTS:

Aug 15 Land improvements (A+) $20000

Cash (A-) $20000

LAND AND LAND IMPROVEMENTS ARE TWO SEPARATE ASSETS

ACCOUNTS.

Buildings
The cost of building includes the following costs paid by the purchaser:

Constructing a building
 Architectural fees
 Building permits
 Contractor charges
 Payments for material, labor and overhead
 Capitalized interest cost, if self-constructed

Purchasing an existing building

 Purchase price
 Costs to renovate the building to ready the building for use, which may include any of the
charge listed under ‘Constructing a building’

Machinery and equipment

The cost of machinery and equipment includes the following costs

 Purchase price (less any discount)

 Transportation charges
 Insurance when in transit
 Customs duty or similar charges
 Installation costs
 Cost of testing the asset before it is used
After the asset is up and operating, the company NO LONGER DEBITS THE COST of
insurance, taxes ordinary repairs and maintenance to the Equipment account. From that point on
these costs are recorded in as an EXPENSE.
CAPATALIZING THE COST OF INTEREST

In order to construct non-current asset, business may BORROW MONEY. The core principle for
BORROWING COST is that:

Borrowing costs that are directly attributable to the acquisition, construction or production of a
qualifying asset FORM part of the cost of that asset.

The interest charged on the borrowed money is CAPATALIZED (debited in the asset account)
instead of an expense.

EXAMPLE
On January 1, 2016, Smart Touch borrows $50,000 at 10% interest to build a
warehouse. The interest cost for the financial year to 30 June 2016 on this loan
is $2500 ($50,000 x 10% = $2500).

The entry for the construction cost is:

Jan-Jun Building (A+) 50,000

Loan payable (L+) 50,000

The entry to CAPATALIZE the interest is:

Jun 30 Building (A+) 2,500

Cash (A-) 2,500

A LUMP-SUM (BASKET) PURCHASE OF ASSETS

A business may pay a single price for several assets as a group (basket purchase). The business
may use Relative-fair-value method to allocate the cost of each assets.
EXAMPLE
Suppose Smart touch paid a combined purchase price of $100,000 on 1 Aug
2015 for the land and building. A valuation includes that the land’s MARKET
(fair) Value is $30,000 and the building’s market (fair) value is $90,000.

Calculating cost of each asset:

Land Market value 30,000

Building market value 90,000
Total market value 120,000

Land: (30000/120000 x100) = 25%

25% of 100000 = 25000

Building: (90000/120000 x 100) = 75%

75% of 100000 = 75000
 The entry to record the purchase of the land and building is as follows:

Aug 1 Land (A+) 25000

Building (A+) 75000
Loan payable (L+) 100000

Difference between capital expenditure and expenses:

Capital expenditure – are funds used by company to acquire/upgrade physical assets. They are
debited to asset’s account because they increase asset’s capacity or efficiency and extend asset’s
useful life.

Expense – are not debited to asset’s account, they have separate account because they merely
maintain the asset in working order.

If the business expenses the cost by debiting Repairs and maintenance expense rather than
capitalizing it (debiting the asset), the business would be making an accounting errors. This
error:

 Overstates Repairs and maintenance expenses

 Understates profit
 Understates owner’s equity
 Understates the equipment account (asset) on the balance sheet

DEPRECIATION - Is the allocation if a non-current asset cost to expense over its useful-life.
Depreciation matches the expense against the revenue earnt by the asset to measure profit.

DEPRECIATION is NOT the process of VALUATION. Business do not record depreciation

based on the asset’s market (sales) value.

DEPRECIATION does NOT mean that the business set aside CASH to REPLACE an asset
when it is used up.

CAUSES OF DEPRECIATION

All asset except LAND wear out, wear and tear causes depreciation. Asset such as computers
and software become obsolete before they wear out. An asset is obsolete when newer asset can
do the job more efficiently.

Measuring Depreciation

Depreciation of non-current asset is based on three factors:

 Capitalized cost
 Estimated useful life – is the length of the service period expected from the asset.
  Estimated residual value – also called scrap value or salvage value - is the asset’s
expected cash value at the end of its useful life. Expected residual value is NOT
DEPRECIATED because you expect to receive this amount at the end.

Depreciable amount = Cost – Residual Value

Three Depreciation Method used:

Straight line method
Units if production
Reducing balance method

These methods work differently in how they derive the yearly depreciation amount, but they all
result in the same total depreciation over the total life of the asset.

EXAMPLE
Suppose Qantas purchased a baggage-handling truck. Below are the following details
about the truck:

Cost of truck: $41,000

Estimated residual value: $1000
Estimated useful life (in years): 5 years
Estimated useful life (in units): 100 000 km

STRAIGHT LINE METHOD:

Straight line depreciation = (Cost – Residual value) x 1/Life x #/12

= (41000 – 1000) x 1/5 x 12/12
= $8000 per year

# represents number of months used in a year

Straight line depreciation schedule for a truck

Date Asset Depreciable Depreciation Depreciation Accumulated Carrying

cost amount rate expense depreciation amount
201 41,000 41000
3
201 (41000-1000) x 1/5 x 12/12 = 8000 8000 33000
4
201 (41000-1000) x 1/5 x 12/12 = 8000 16000 25000
5
201 (41000-1000) x 1/5 x 12/12 = 8000 24000 17000
6
201 (41000-1000) x 1/5 x 12/12 = 8000 32000 9000
7
201 (41000-1000) x 1/5 x 12/12 = 8000 40000 1000
8
UNITS OF PRODUCTION (UOP) METHOD:

Units-of-production depreciation per unit of output = (Cost-residual value) x 1/life in units

= (41000-1000) x 1/100000
= $0.40 per kilometer

The truck in our e.g. is estimated to be driven 20,000 km during the first year, 30,000 in
the second, 25,000 in the third, 15,000 in the fourth and 10,000 during the fifth. The UOP
depreciates for each period varies with the number of units.

Units-of-production depreciation schedule for a truck

Date Asset Depreciation Number Depreciation Accumulate Carrying

cost per unit of units expense d amount
depreciation
2013 41000 41000
2014 0.40 x 20000 = 80000 8000 33000
2015 0.40 x 30000 = 12000 20000 21000
2016 0.40 x 25000 = 10000 30000 11000
2017 0.40 x 15000 = 6000 36000 5000
2018 0.40 x 10000 = 4000 40000 1000

REDUCING BALANCE METHOD

Reducing balance depreciation is accelerated. An accelerated depreciation method writes
off more depreciation near the start of an asset’s useful life than the straight line method
does.
(TEXT BOOK PAGE 466) schedule for reducing balance method.

COMPARING DEPRECIATION METHODS

Straight-line method – For an asset that generates revenue evenly over time, the straight line
method follows the matching principle. Each period shows an equal amount of depreciation each
year.

Unit-of-production – The UOP method works best for an asset that depreciates due to wear and
tear, rather than obsolescence. More use causes greater depreciation.

Reducing balance method – The accelerated method works best for assets that produce more
revenue in their early years. Higher depreciation in the early is matched against the greater
revenue.
DEPRECIATION AND INCOME TAXES

Most business use straight-line depreciation method for their financial statements. However, they
can use a different method for income taxes.

For tax purposes business can use:

‘Prime Cost’ which is straight line method.
‘Diminishing value’ which is reducing balance method at 2 times the straight line rate.

DEPRECIATION FOR PARTIAL YEAR

EXAMPLE
Suppose Qantas used the truck for 6 months of the year. The calculation
would be as follows:

Straight-line method depreciation = (Cost-residual value) x 1/Life x #/12

= (41000-1000) x 1/5 x 6/12
= 4000

CHANGING THE USEFUL LIFE OF A DEPRECIABLE ASSET

As the asset is used, the business may change its estimated useful life. For e.g. Qantas may find
that its truck lasts eight years instead of five years.

EXAMPLE
Suppose Qantas used the purchased truck for two years. Under the straight line
method, accumulated depreciation would be:

Straight line depreciation for 2 yrs = (41000-1000) x 1/5 x 12/12

= 8000 per year x 2 years
= 16000

Suppose Qantas believes that truck will remain useful for 6 more years. At the start
of year 3, the business would recalculate depreciation as follows:

Revised SL depreciation = (Cost – accumulated depreciation – new residual value)

Estimated remaining useful life

= (41000 – 16000 – 1000)/6 yrs

= 4000
DISPOSING OF A NON-CURRENT ASSET
When asset wears out or become obsolete. The owner may sell, exchange or scrap it. The over all
term for this process is Derecognition. The steps for journalizing disposal or exchange are
similar and are as follows:

Gain or loss is reported on the income statement and closed to profit and loss summary.

EXAMPLE
Greg’s Tunes purchased a truck worth $41,000 on 1 July 2013. Assume the
business recorded the depreciation using straight line method up to 30 June 2015.
Greg’s Tunes estimated residual value is $1000.

All options are assumed to take place on 30 September 2015.

SITUATION A – The truck is in an accident and is destroyed. The truck is

completely worthless and must be scrapped for $0.

SITUATION B – Greg’s Tunes sells the truck to Bob’s Burger House for $10,000
cash.

SITUATION C – Greg’s Tunes trades the old truck in for new Toyota truck. The fair
market value of the Toyota truck is $32,000.
SITUATION A – SCRAP THE TRUCK
If assets are scrapped before they are fully depreciated, there is a loss equal to the
asset’s carrying amount.

STEP 1 – Bring the Depreciation to date. (As stated earlier in the question, Greg;s
Tunes uses straight line depreciation method.

1 July 2013 to 30 June 2014 – (41000-1000)/5 x 12/12 = $8000 This depreciation is

1 July 2014 to 30 June 2015 – (41000-1000)/5 x 12/12 = $8000 already recorded in
the book.
As stated in the problem, the options took place on the 30 SEPTEMBER 2015. So three months
depreciation is:

1 July 2015 to 30 September 2015 – (41000-1000)/5 x 3/12 = $2000

Total Depreciation up to date = 8000 + 8000 + 2000 = 18000

STEP 2 – Remove the old, disposed of asset from the books. To remove the asset,
we must zero out both the asset and accumulated depreciation accounts.

STEP 3 – Then record the value of any cash ( or other accounts) paid or received.
Since Greg’s Tunes received $0 for the scrapped truck, there is nothing to add to
our disposal entry we are building from step 2.

STEP 3 – Finally, determine the difference between the total debits and total credits
made in this journal entry. Total debits are $18000 and total credits are $41000.
Credits>Debits, so we must record a debit for the difference, or 23000 (41000-
18000). This is a loss on disposal because we received nothing for the truck that
had net carrying amount (Cost-accumulated depreciation) of 23000.

Step 1 Sep 30 Depreciation expense (E+) 2000

Accumulated depreciation (CA+) 2000

Step 2, 3, Accumulated depreciation (16000+2000) 18000

4
Loss on disposal of truck (E+) 23000
Truck (A-) 41000

41000 – 18000 = 23000 (Carrying amount)

Scrapped truck for $0

So, 0 – 23000 = -2300 (Loss)

SITUATION B – SELL THE TRUCK FOR $10,000

Steps are same as stated in situation A. The journal entries for SITUATION B are:

Step 1 Sep 30 Depreciation expense (E+) 2000

Accumulated depreciation (CA+) 2000

Step 2, 3, Cash (A+) 10000

4
Accumulated depreciation (16000+2000) 18000
Loss on disposal of truck (E+) 13000
Truck (A-) 41000

41000 – 18000 = 23000 (Carrying amount)

Sold truck for $10000

So, 10000 – 23000 = -13000 (Loss)

SITUATION C – EXCHANGE THE TRUCK FOR TOYOTA TRUCK

The market value of Toyota truck is $23000. The steps are same as above. The
journal entries would be:

Step 1 Sep 30 Depreciation expense (E+) 2000

Accumulated depreciation (CA+) 2000

Step 2, 3, Accumulated depreciation (16000+2000) 18000

4
Truck Toyota (A+) 23000
Truck (A-) 41000
Gain on exchange of truck (R+) 90000
41000 – 18000 = 23000 (Carrying amount)
Market value of Toyota truck = 32000

So, 32000 – 23000 = 9000 (Gain)

REVALUATIOON OF NON-CURRENT ASSETS

Assets recorded at fair value must be revaluated regularly to ensure that the carrying amount of
each asset is maintained at its current fair value.

A revaluation can increase the carrying amount of an asset (a revaluation increment) or can
decrease its carrying amount (a revaluation decrement).

 Upward revaluations are credited to owners’ equity (Revaluation Reserve account).

 Downward revaluations are expenses.
This is ‘conservatism

EXAMPLE

Land which cost $100,00 is revalued to $200,000

 The entry would be:

Land 100 000

Revaluation Reserve 100 000

EXAMPLE 2:
For depreciable assets, first credit accumulated depreciation against the asset. A
building with an original cost of $200,000 and accumulated depreciation of $50,000
is revalued to $400,000. Its carrying amount before revaluation is $200,000 -
$50,000 = $150,000. The building therefore revalued UPWARD BY 250,000 (400,000-
150,000). The entries are:

Accumulated depreciation-building (CA-) 50,000

Building (A-) 50,000
Building (A+) 250,000
Revaluation surplus (E+) 250,000

EXAMPLE 3:
Assume the building in previous example, with carrying amount of 150,000
(200,000-50,000), is revalued DOWNWARDS by 30,000 to a value of 120,000
(150,000-30,000).
The entries would be:

Accumulated depreciation-building (CA-) 50,000

Building (A-) 50,000
Loss on revaluation (E+) 30,000
Building (A-) 30,000
 EXAMPLE
Assume the building before actually originally cost $130,000 and had been
revalued to $200,000
 Thus the entry would be

Accumulated Dep’n 50 000
Building 50 000
Revaluation Reserve 30 000
Building 30 000

ACCOUNTING FOR INTANGIBLE ASSETS

Not physical in nature

E.g. of Intangible assets are – Goodwill, patent, Copyrights, Trademarks etc.