TOPIC 6 :
NON-CURRENT ASSET
1. CLASSIFICATION OF NON-
CURRENT ASSET
2. DETERMINATION OF COST
3. DEPRECIATION
4. DISPOSAL OF ASSET
5. TRADE IN ASSET
6....
CLASSIFICATION OF FIXED ASSET
• 1. Tangible Fixed Asset : FRS116
Eg. Property, Land and Equipment
- tangibles resources th...
Determination of Cost of an Asset :
- according to historical cost concept:
Asset is recorded at cost price not
market pri...
Determine Cost
Types of expenditures:
Capital expenditure Revenue expenditure
To increase the operating
efficiency, produc...
Determination of Cost
The cost may include:
- Purchase price of the fixed asset
- Transportation cost to get the fixed ass...
Determination of Cost
• How to determine the cost of Plant
and Machinery ?
RM
Cash price 50,000
Sales taxes 3,000
Insuranc...
Depreciation
Depreciation of an Asset :
Definition - is a process of allocation
the depreciable amount of an asset
over i...
 Factor effecting useful life of an asset
• Physical
- due to the wear and tear and exposure to
the weather condition
• T...
Straight Line
Sum of Years Digit
Reducing Balance
Unit of Activity
Method of Calculating
Depreciation
Straight Line Method
Depreciation = Cost - Salvage Value
Useful Life ( years)
Example :
Van costs RM45,000, has a useful l...
The amount of depreciation is reduced
every years
Depreciation = 1 – n r/c
n = estimated useful life
r = salvage value
c ...
Reducing Balance Method
Year Beginning
Book Value
Rate Annual
Depreciation
Expenses
Accumulated
Depreciation
Book
Value
1 ...
Sum of Years Digit Method
Calculate an asset’s cost with sum of years
digit ratio
Example :
Machine cost RM43,000, estimat...
Sum of Years Digit Method
Years Depreciable
Amount
Ratio Depreciation
1 43,000 - 3,000 4/10 16,000
2 43,000 - 3,000 3/10 1...
Unit of Activity Method
Depreciable = Depreciable Cost
(Per unit) Total units of activity
Annual = Depre. Cost X Units of ...
Unit of Activity Method
** (RM13,000 – RM1,800)
Year Unit of
Activity
Depreciatio
n Rate
Annual
Depreciatio
n Expenses
Acc...
DISPOSAL OF ASSET
 Asset can be disposed in three ways:
i. Retirement
ii. Sale
iii. Exchange
 At the time of disposal:
a...
Retirement
Herbert Enterprise retires its
computer printers, which cost
RM18,000. The accumulated
depreciation on this pri...
Journal Entry:
Dt Cr.
Acc. Depreciation 14,000
Loss in disposal 4,000
Printing Equipment 18,000
(to record retirement of a...
Sale of Asset
The book value of the asset is
compared with the proceeds received
from the sale
Sale Proceed > book value =...
Example: Gain in Disposal
Machine bought at cost RM60,000 is disposed after 3 years at
price RM20,000. Using a straight-li...
Using the previous example: Loss in Disposal
If the machine could be sold at a price of RM10,000 cash.
Workings:
Cost 60,0...
TRADE IN ASSET
Assets are being exchange either from
similar or
dissimilar assets.
• It is important to determine:
i. The ...
Example: Loss in Trade In
Rowland exchanges old office equipment for a new
office equipment. The book value of old equipme...
Journal Entry:
Dt Cr
Office Equipment (new) 91,000
Acc. Depreciation 44,000
Loss in disposal 16,000
Office Equipment (old)...
Example: Gain in Trade In
Rowland exchanges old office equipment for a new
office equipments. The book value of old equipm...
Journal Entry
Dt Cr
Office Equipment (new) 22,000
Acc. Depreciation 28,000
Office Equipment (old) 40,000
Cash 3,000
Gain o...
Reporting the Depreciation and
Accumulated Depreciation
Income Statement
Depreciation Expenses 8,000
Balance Sheet
Motor V...
INTANGIBLE ASSET
• Definition:
– Right, privileges and competitive
advantage that result from the ownership
of long-lived ...
Intangible Assets
• Intangible assets can be separated
into:
a. Identifiable
– Must be capable of being separated or
divid...
Intangible Asset : Goodwill
• Types:
There are two types of goodwill:-
i. Inherent goodwill
- no need to record in the com...
Accounting Treatment:
1. Recognized as asset
- need to amortized
Journal Entry:
Dt Cr
Goodwill XXX
Cash XXX
(To record the...
Accounting Treatment:
2. Recognized as an expense
- written off the whole amount in
the income statement
Journal Entry:
Dt...
Accounting for Intangible Assets
(cont’d)
Amortisation
• This is the term used to describe the
allocation of the cost of a...
Accounting for Intangible Assets
(cont’d)
Example:
• Patent costs $60 000 and has an
estimated useful life of 8 years.
• A...
Types of Intangible Assets
1. Patents
– Exclusive right granted by IP Australia
enabling recipient to manufacture, sell or...
Types of Intangible Assets
4. Trademarks and brand names
– Words, phrases, jingles or symbols that
distinguish or identify...
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Topic 6 Non Current Asset

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Topic 6 Non Current Asset

  1. 1. TOPIC 6 : NON-CURRENT ASSET
  2. 2. 1. CLASSIFICATION OF NON- CURRENT ASSET 2. DETERMINATION OF COST 3. DEPRECIATION 4. DISPOSAL OF ASSET 5. TRADE IN ASSET 6. REPORTING THE DEPRECIATION AND ACCUMULATED DEPRECATION 7. INTANGIBLE ASSET
  3. 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. 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. 5. Determine Cost Types of expenditures: Capital expenditure Revenue expenditure To increase the operating efficiency, productive capacity or useful life of the asset To maintain the operating efficiency and productive life of the asset Incurred infrequently and material in amount Incurred frequently and small amount Eg. Addition and improvement Eg. Ordinary repair
  6. 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. 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. 8. Depreciation Depreciation of an Asset : Definition - is a process of allocation the depreciable amount of an asset over its estimated useful life. why we need to generate provision for depreciation? To comply: - Matching Concept - Prudence concept
  9. 9.  Factor effecting useful life of an asset • 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.
  10. 10. Straight Line Sum of Years Digit Reducing Balance Unit of Activity Method of Calculating Depreciation
  11. 11. 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
  12. 12. 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% Reducing Balance Method
  13. 13. Reducing Balance Method Year Beginning Book Value Rate Annual Depreciation Expenses Accumulated Depreciation Book Value 1 33,000 45% 14,850 14,850 18,150 2 18,150 45% 8,168 23,018 9,983 3 9,983 45% 4,492 27,510 5,490 4 5,490 45% 2,471 29,980 3,020
  14. 14. 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
  15. 15. Sum of Years Digit Method Years Depreciable Amount Ratio Depreciation 1 43,000 - 3,000 4/10 16,000 2 43,000 - 3,000 3/10 12,000 3 43,000 - 3,000 2/10 8,000 4 43,000 - 3,000 1/10 4,000
  16. 16. 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
  17. 17. Unit of Activity Method ** (RM13,000 – RM1,800) Year Unit of Activity Depreciatio n Rate Annual Depreciatio n Expenses Accumulate d Depreciation Book Value 1 15,000 0.12 1,800 1,800 11,200** 2 30,000 0.12 3,600 5,400 7,600 3 20,000 0.12 2,400 7,800 5,200 4 25,000 0.12 3,000 10,800 2,200 5 10,000 0.12 1,200 12,000 1,000
  18. 18. DISPOSAL OF ASSET  Asset can be disposed in three ways: i. Retirement ii. Sale iii. Exchange  At the time of disposal: a) Determine the book value of the asset b) Depreciation for the fraction of the year to the date of disposal
  19. 19. Retirement Herbert Enterprise retires its computer printers, which cost RM18,000. The accumulated depreciation on this printer is RM14,000
  20. 20. Journal Entry: Dt Cr. Acc. Depreciation 14,000 Loss in disposal 4,000 Printing Equipment 18,000 (to record retirement of an equipment at loss)
  21. 21. 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
  22. 22. 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: Dr Cr Accumulated Depreciation 45,000 Cash 20,000 Machine 60,000 Gain in disposal 5,000
  23. 23. 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 Dr Cr Accumulated Depreciation 45,000 Cash 10,000 Loss in disposal 5,000 Machine 60,000 (to record sale of machine at loss)
  24. 24. TRADE IN ASSET Assets are being exchange either from similar or dissimilar assets. • It is important to determine: i. The cost of asset acquired ii. The gain and loss on the asset given up i. Cost of the exchange Asset “ cash equivalent price paid” ii. Gain or loss on the asset “ the different between the fair market value and the book value of the asset given up”
  25. 25. 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: Fair Market Value (old) Cash RM10,000 81,000 Cost of New Equipment RM91,000 Book Value (old) Fair Market Value (old) RM26,000 10,000 Loss on Disposal RM16,000
  26. 26. Journal Entry: Dt Cr Office Equipment (new) 91,000 Acc. Depreciation 44,000 Loss in disposal 16,000 Office Equipment (old) 70,000 Cash 81,000 (to record exchange of old office equipment)
  27. 27. 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: Fair Market Value (old) Cash RM19,000 3,000 Cost of New Equipment RM22,000 Book Value (old) Fair Market Value (old) RM12,000 19,000 Gain on Disposal RM7,000
  28. 28. Journal Entry Dt Cr Office Equipment (new) 22,000 Acc. Depreciation 28,000 Office Equipment (old) 40,000 Cash 3,000 Gain on disposal 7,000 (to record exchange of old office equipment)
  29. 29. Reporting the Depreciation and Accumulated Depreciation Income Statement Depreciation Expenses 8,000 Balance Sheet Motor Van 50,000 (-) Acc. Depreciation (8,000) 42,000
  30. 30. INTANGIBLE ASSET • 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)
  31. 31. 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.
  32. 32. Intangible Asset : Goodwill • Types: There are two types of goodwill:- i. 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.
  33. 33. Accounting Treatment: 1. Recognized as asset - need to amortized Journal Entry: Dt Cr Goodwill XXX Cash XXX (To record the goodwill amount) Goodwill Expenses XX Goodwill XX (to record the amortized figure)
  34. 34. Accounting Treatment: 2. Recognized as an expense - written off the whole amount in the income statement Journal Entry: Dt Cr Goodwill Expenses XXX Cash XXX (To record the goodwill amount)
  35. 35. 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.
  36. 36. 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)
  37. 37. 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.
  38. 38. 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.
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