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  • 1. TOPIC 6 :NON-CURRENT ASSET
  • 2. CLASSIFICATION OF NON-CURRENT ASSET
    DETERMINATION OF COST
    DEPRECIATION
    DISPOSAL OF ASSET
    TRADE IN ASSET
    REPORTING THE DEPRECIATION AND ACCUMULATED DEPRECATION
    INTANGIBLE ASSET
  • 3. 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
  • 4. 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
  • 5. Determine Cost
    Types of expenditures:
  • 6. Determination of Cost
    The cost may include:
    - Purchase price of the fixed asset
    - Transportation cost to get the fixed asset
    - Insurance on the purchase
    - Taxes on the purchase
    - Installation costs
  • 7. Determination of Cost
    How to determine the cost of Plant and Machinery ?
    RM
    Cash price 50,000
    Sales taxes 3,000
    Insurance 500
    Installation 1,000
    Cost of Plant & Machinery 54,500
  • 8. Depreciation
    Depreciation of an Asset :
    • Definition - is a process of allocation the depreciable amount of an asset over its estimated useful life.
    • 9. why we need to generate provision for depreciation? To comply:
    - Matching Concept
    - Prudence concept
  • 10.
    • Factor effecting useful life of an asset
    • 11. Physical
    - due to the wear and tear and exposure to the weather condition
    • Technology
    - the technology advancement makes the asset out of date (obsoletes)
    • Economy
    - the usage of the asset is no longer cost effective
    • Legislation
    - the useful life is limited to the year of lease.
  • 12. Method of Calculating Depreciation
    • Straight Line
    • 13. Sum of Years Digit
    • 14. Reducing Balance
    • 15. Unit of Activity
  • 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
  • 16. 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%
  • 17. Reducing Balance Method
  • 18. 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
  • 19. Sum of Years Digit Method
  • 20. 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
  • 21. Unit of Activity Method
    ** (RM13,000 – RM1,800)
  • 22. DISPOSAL OF ASSET
    • Asset can be disposed in three ways:
    Retirement
    Sale
    Exchange
    • At the time of disposal:
    Determine the book value of the asset
    Depreciation for the fraction of the year to the date of disposal
  • 23. Retirement
    Herbert Enterprise retires its computer printers, which cost RM18,000. The accumulated depreciation on this printer is RM14,000
  • 24. Journal Entry:
  • 25. 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
  • 26. 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:
  • 27. 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
  • 28. 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”
  • 29. 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:
  • 30. Journal Entry:
  • 31. 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:
  • 32. Journal Entry
  • 33. Reporting the Depreciation and Accumulated Depreciation
    Income Statement
    Depreciation Expenses 8,000
    Balance Sheet
    Motor Van 50,000
    (-) Acc. Depreciation (8,000)
    42,000
  • 34. 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)
  • 35. 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.
  • 36. 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.
  • 37. Accounting Treatment:
    Recognized as asset
    - need to amortized
    Journal Entry:
  • 38. Accounting Treatment:
    2. Recognized as an expense
    - written off the whole amount in the income statement
    Journal Entry:
  • 39. 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.
  • 40. 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)
  • 41. 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.
  • 42. 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.