Accounting B- Non-current assets and depreciation PDF

Preview

Summary

Focused on
1. Purchasing a non-current asset
2. Using / depreciating a non-current asset
3. Selling a non-current asset
...

Description

Accounting B – Week one: Noncurrent asset Main focuses- all contain transactions 1. 2. 3. 

Purchasing a non-current asset Using / depreciating a non-current asset Selling a non-current asset Adjustments and intangibles

An asset is a resource controlled by an entity as a result of past events and from which future economic benefits are expected to arise. i.e. Inventory Non-current asset: any tangible resource that is expected to be ‘used in the normal course of operations’ for more than one year and is ‘not intended for resale’. i.e. Land, buildings, equipment Recording non-current assets Cost of the asset – how much its worth? Non-current assets are recorded at the cost of acquisition (historic cost: Cost principle), how much we paid. This includes all necessary cost incurred to get the asset: delivered, installed and ready to use. This includes: 1. 2. 3. 4.

Purchases price Taxes and duties paid on the purchase Delivery and delivery insurance costs Installation cost

Any other cost is specific to the asset is also included in the future value. i.e. Laptop case. However, we don’t include non-compulsory expenses i.e. non-compulsory insurance, anything that is not part of the asset is considered an operating expense. In other words, all cost excluding non-compulsory insurance used to get the asset to its condition and location for use are included in the cost / value of the asset. When recording the transaction in the general journal, we group all the transactions for the asset together except for the non-compulsory expenses. Expensing non-current assets (depreciation) -NOT A METHOD OF DETERMING ITS MARKET VALUE, its used to find the value of the asset to the business itself. Depreciation is the process of allocating the cost of a non-current asset over its useful life, occurs because of wear and tear. Depreciation is an application of the matching principle; because a noncurrent asset is used to generate revenues period after period, some of its cost should be expenses in, or matched to, those same periods. So, we record this expense at the end of the accounting period. Depreciation expense is calculated at the end of an accounting period and recorded with an adjusting journal entry. It is a portion of a non-current asset’s cost that is recognised as an expense in the current period. Dr Deprecation Expense Cr Accumulated depreciation (contra asset account).

Depreciation expense is reported on the statement of comprehensive income (profit and loss statement). Accumulated depreciation, the cumulated depreciation expense recognised to date on the non-current asset, it is reported on the balance sheet (Statement of financial position) Not all non-current assets can be depreciated, only non-current assets that have a limited useful life can be depreciated. Those that have an unlimited useful life such as land cannot be depreciated. We know if an asset has a limited useful life if its revenue-generating potential is limited by wear and tear. Amortization is depreciation for intangible assets Stamp duty: transfer the ownership of the asset to the business. Important as it makes the asset legally the company’s property.

Calculating depreciation Key numbers:    

Cost -how much asset is worth initially Residual value or salvage value -how much the asset is worth when we’re finished using it Useful life – How many years we plan to use it till the residual value Depreciation method Different methods of calculating and comparing depreciation 1. Straight-line: Depreciation is spread evenly over the useful life of an asset. The depreciation cost of the asset is divided by the useful life of the asset (in years) to yield the amount of depreciation expense per period. Formula:

Depreciation=

cost−residual value useful life

Cost – residual value = Total amount of value we can lose 2. Reducing-balance / Accelerated depreciation: An accelerated method that results in more depreciation expense in the early years of an asset’s life and less depreciation expense in the later years. Calculates depreciation as a percentage of carry amount Formula:

Depreciationexpense =2 ×

( Useful1 life ) × Carrying Amount=Depreciationrate ×Carryin

The formula is referred to as the 2 times the straight-line rate (ATO uses 2x). 1.5x is used sometimes. The keep using formula till depreciation expense reduces book value to residual value. A company may want more depreciation during the early stages as it can be taken advantaged for tax purposes, get tax benefits earlier. 3. Units-of-activity: is the process of recording depreciation by how many times we use the asset.

( cost−salvage value ) : useful life ∈ unit Depreciationexpense =Depreciationexpense per unit × Actual units of activity

Formula:

Depreciationexpense per unit =

Carrying amount 

How much the asset is currently worth (net book value), asset account minus accumulating depreciation balance.

Adjustments Adjustment occur when the estimates / assumption we make on the:  Changes in estimates o Useful life o Residual value  Additional expenditure to improve the non-current asset. Change because we have invested on maintaining or improving the operating capacity of the asset. o Capital expenditure  increase the useful life or productivity of the non-current asset o Revenue expenditure  maintains the expected useful life or productivity of the asset. Doesn’t improve the asset’s value  no impact on depreciation  Significant decline in the asset’s net realisable value o Technological factors When recording depreciation expense when there is a change / adjustment required i.e. the useful life of the asset is smaller than anticipated we change the expense amount from when the new useful life is realised onwards and leave the previous expenses alone. Asset impairment – the recoverable amount (how much we can sell it for) falls under its carrying amount. An impairment is an expense that lowers the value of a non-current asset. Under AASB we have to apply conservatism when adding entries from their carrying amount to their recoverable amount. i.e. We add depreciations and improvements as soon as possible. Accounting Standard AASB 136 impairment of Assets requires reporting entities to write impaired assets down to the higher of an asset’s fair value (seeling price) less costs to sell and its value in use. This is similar to the lower-of-cost-and-net realisable-value rule with inventory, its an application of the concept of prudence (conservatism). The Australian Securities and Investments Commission released ‘Impairment of non-financial assets: materials for directors’, which states that impairment testing is the process of reviewing the value of assets shown in the balance sheet of a company (carrying amount) to determine whether those value continue to be supportable or should be reduce. Financial reports should provide useful and meaningful for investors and other stakeholders so they can make informed decision. Journal entry DR Impairment expense – Asset CR Asset Land can’t depreciate  always holds its value or increases. Expenditure after acquisition Most non-current assets require expenditure throughout their useful lies. This includes expenditures such as servicing, minor, repairs and major repairs. The treatment of these expenses depends on whether they meet the ‘recognition criteria’ in AASB 116: ‘the cost of an item of property, plant and equipment shall be recognised as an asset if, and only if: (a) It is probable that future economic benefits associated with the item will flow to the entry; and (b) the cost of the item can be measured reliably’.

Example. Repairs and maintenance (revenue expenditure) maintain the expected useful life or productivity of the asset and are expensed in the period in which they incurred but don’t added to the cost of the asset.

Record the disposal of non-current assets. The accounting for the disposal of a non-current asset consists of: 1. Updating the depreciation on the asset: a. Record any necessary depreciation expenses to update the accumulated depreciation account  depends on when you choose to sell. 2. Calculate gains or losses on the disposal: a. Done by comparing the asset’s carrying amount to how much it was sold for. b. Example: You sell a car for $60,000 cash you originally purchased the car for $100,000. The carrying amount of the car is $45,000. Gain or loss on sale = Sale price minus Carrying amount = $60,000 - $45,000 = $15,000 Gain 3. Prepare journal entry that decreases the asset account and its related accumulated depreciation account a. Dr Cash 60,000 Cr Accumulated depreciation 100,000 – 45,000 = 55,000 4. Record the disposal: Gain or loss Gains are reported to the income statement as other revenue whereas losses are recorded as an expense.

Intangible assets Intellectual property: creative product of the human mind, these are long-term assets as they provide economic benefits and includes: o o o o

Patents – Inventions: a device, substance, method of process Trade marks – A distinctive sign used to distinguish goods or services Copyright – expression of an idea Designs – Visual feature of shape, configuration, pattern or ornamentation

Like tangible assets, intangibles are recorded a purchase price then ‘amortized’ (its version of depreciation). Amortisation only applies to intangibles with limited lives, like patents, those with indefinite lives such as trademarks and goodwill are instead examined periodically to check for impairment. Goodwill: when we purchase a company for more than the value of the net asset of the purchased company. Assets that ain’t recognised on the balance sheet such as highly skilled workers, its reputation, market share, research. Tax Benefits There is no right method of depreciation, and business are free to choose which method to use for their own reasoning. For tax purposes the depreciation method which is allowed and provides the earlies, largest duction is usually chosen. The depreciation method used in the financial reports does not need to be the same as chosen to calculate taxable income. Like all tax-deductible expenses, depreciation reduces taxable income, which in turn reduces income taxes. i.e. If depreciation is $50,000 and tax rate is 30% then tax-deduction = $15,000 Reducing-balance method is the method that realises more tax savings during the earlier years. This is beneficial to a company because they can temporarily use the cash that would of otherwise been paid to the ATO....