CLASSIFICATION OF NON-CURRENT ASSET DETERMINATION OF COST DEPRECIATION DISPOSAL OF ASSET TRADE IN ASSET REPORTING THE DEPRECIATION AND ACCUMULATED DEPRECATION INTANGIBLE ASSET
CLASSIFICATION OF FIXED ASSET 1. Tangible Fixed Asset : FRS116 Eg. Property, Land and Equipment - tangibles resources that are used in the operation of a business and not for sale - long lived asset which exceeds more than one accounting period 2. Intangible Fixed Asset : FRS116 Eg. Impairment of Assets: Goodwill, Patent and Copyright - intangibles resources that cannot be hold, touch but the asset could give a future benefit
Determination of Cost of an Asset : - according to historical cost concept: Asset is recorded at cost price not market price - Cost : all expenditures necessary to acquire the asset and make it ready for its intended use. Determination of Cost
Straight Line Method Depreciation = Cost - Salvage Value Useful Life ( years) Example : Van costs RM45,000, has a useful life of 5 years and salvage value of RM5,000 Depreciation = 45,000 – 5,000 5 = RM8,000 per year Journal Entry: Dt. Depreciation Expense 8,000 Cr. Accumulated Depreciation 8,000
Reducing Balance Method The amount of depreciation is reduced every years Depreciation = 1 – n r/c n = estimated useful life r = salvage value c = cost of asset Example : Van is bought at cost RM33,000, with salvage value RM3,000 and useful life of 4 years Depreciation = 1 – 4 3,000/33,000 = 45%
Sum of Years Digit Method Calculate an asset’s cost with sum of years digit ratio Example : Machine cost RM43,000, estimated useful life is 4 years and salvage value RM3,000 Sum of years digit = 1 + 2 + 3 + 4 = 10 If the asset has long useful life, use formula: S = n (n + 1) 2
Unit of Activity Method Depreciable = Depreciable Cost (Per unit) Total units of activity Annual = Depre. Cost X Units of Activity during Depreciation Per unit the year Example : Bought delivery truck cost RM13,000, expected salvage value is RM1,000 and estimated useful life of 5 years. Estimated useful life in miles 100,000 miles. Depreciation Cost per unit = (13,000 – 1,000)/100000 = RM0.12
Unit of Activity Method ** (RM13,000 – RM1,800)
Sale of Asset The book value of the asset is compared with the proceeds received from the sale Sale Proceed > book value = GAIN Sale Proceed < book value = LOSS
Example: Gain in Disposal Machine bought at cost RM60,000 is disposed after 3 years at price RM20,000. Using a straight-line method of depreciation. The expected useful life is 4 years and no scrap value. Workings: Cost 60,000 Acc. Depreciation 45,000 (60,000/4 = 15,000 x 3) Net book value 15,000 Cash 20,000 Gain on disposal 5,000 Journal Entry:
Using the previous example: Loss in Disposal If the machine could be sold at a price of RM10,000 cash. Workings: Cost 60,000 Accumulated Depre. 45,000 (60,000/4 = 15,000 x 3) Net book value 15,000 Cash 10,000 Loss on disposal 5,000 Journal Entry
TRADEIN ASSET Assets are being exchange either from similar or dissimilar assets. It is important to determine: The cost of asset acquired The gain and loss on the asset given up Cost of the exchange Asset “ cash equivalent price paid” Gain or loss on the asset “ the different between the fair market value and the book value of the asset given up”
Example: Loss in Trade In Rowland exchanges old office equipment for a new office equipment. The book value of old equipment is RM26,000 (RM70,000 less accumulated depreciation RM44,000) Its fair market value is RM10,000 and cash of RM81,000 is paid. Workings:
Example: Gain in Trade In Rowland exchanges old office equipment for a new office equipments. The book value of old equipment is RM12,000 (RM40,000 less accumulated depreciation RM28,000) Its fair market value is RM19,000 and cash of RM3,000 is paid. Workings:
Reporting the Depreciation and Accumulated Depreciation Income Statement Depreciation Expenses 8,000 Balance Sheet Motor Van 50,000 (-) Acc. Depreciation (8,000) 42,000
INTANGIBLEASSET Definition: Right, privileges and competitive advantage that result from the ownership of long-lived assets that do not possess physical substance Examples include: Patents (e.g. Polaroid) Franchises (e.g. McDonald’s) Trademarks (e.g. swoosh of Nike)
Intangible Assets Intangible assets can be separated into: a. Identifiable Must be capable of being separated or divided from an entity (whether sold, licensed, rented or exchanged) or must arise from contractual or other legal rights. b. Unidentifiable Cannot be separated from the entity itself. Collectively referred to as goodwill.
IntangibleAsset : Goodwill Types: There are two types of goodwill:- Inherent goodwill - no need to record in the company books ii Purchased goodwill - goodwill arises from a business which bought another business. - this goodwill needs to be amortized at a maximum of 25 years.
Accounting Treatment: Recognized as asset - need to amortized Journal Entry:
Accounting Treatment: 2. Recognized as an expense - written off the whole amount in the income statement Journal Entry:
Accounting for Intangible Assets (cont’d) Amortisation This is the term used to describe the allocation of the cost of an intangible asset to expense. Intangible assets are assumed to have a limited life and are amortised. Patents are amortised over legal or useful life, whichever is shorter.
Accounting for Intangible Assets (cont’d) Example: Patent costs $60 000 and has an estimated useful life of 8 years. Annual amortisation expense $60 000 ÷ 8 = $7500 Recording annual amortisation Dec 31 Amortisation Expense 7 500 Accumulated Amortisation - Patents 7 500 (To record patent amortisation)
Types of Intangible Assets 1. Patents Exclusive right granted by IP Australia enabling recipient to manufacture, sell or otherwise control an invention. 2. Research and development costs Expenditures that may lead to patents, copyrights, new processes and new products. 3. Copyright Gives the owner exclusive right to reproduce and sell an artistic or published work.
Types of Intangible Assets 4. Trademarks and brand names Words, phrases, jingles or symbols that distinguish or identify a particular business or product. 5. Franchises and licences A contractual arrangement under the franchisee is granted certain rights. 6. Goodwill Represents all favourable attributes that relate to an entity and is defined as future benefits from unidentifiable assets.