Topic 6 N O N C U R R E N T A S S E T


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Topic 6 N O N C U R R E N T A S S E T

  1. 1. TOPIC 6 :NON-CURRENT ASSET<br />
  3. 3. CLASSIFICATION OF FIXED ASSET<br />1. Tangible Fixed Asset : FRS116<br /> Eg. Property, Land and Equipment<br /> - tangibles resources that are used in the <br /> operation of a business and not for sale<br /> - long lived asset which exceeds more than one accounting period<br />2. Intangible Fixed Asset : FRS116<br /> Eg. Impairment of Assets: Goodwill, Patent and Copyright<br /> - intangibles resources that cannot be hold, touch but the asset could give a future benefit<br />
  4. 4. Determination of Cost of an Asset :<br /> - according to historical cost concept:<br /> Asset is recorded at cost price not market price<br /> - Cost : all expenditures necessary to acquire the asset and make it ready for its intended use.<br />Determination of Cost<br />
  5. 5. Determine Cost<br />Types of expenditures:<br />
  6. 6. Determination of Cost<br />The cost may include:<br />- Purchase price of the fixed asset<br />- Transportation cost to get the fixed asset<br />- Insurance on the purchase<br />- Taxes on the purchase<br />- Installation costs<br />
  7. 7. Determination of Cost<br />How to determine the cost of Plant and Machinery ?<br /> RM<br />Cash price 50,000<br />Sales taxes 3,000<br />Insurance 500<br />Installation 1,000<br />Cost of Plant & Machinery 54,500<br />
  8. 8. Depreciation<br />Depreciation of an Asset :<br /><ul><li>Definition - is a process of allocation the depreciable amount of an asset over its estimated useful life.
  9. 9. why we need to generate provision for depreciation? To comply:</li></ul> - Matching Concept<br /> - Prudence concept<br />
  10. 10. <ul><li>Factor effecting useful life of an asset
  11. 11. Physical</li></ul> - due to the wear and tear and exposure to the weather condition<br /><ul><li>Technology</li></ul> - the technology advancement makes the asset out of date (obsoletes)<br /><ul><li>Economy</li></ul> - the usage of the asset is no longer cost effective<br /><ul><li>Legislation</li></ul> - the useful life is limited to the year of lease.<br />
  12. 12. Method of Calculating Depreciation<br /><ul><li>Straight Line
  13. 13. Sum of Years Digit
  14. 14. Reducing Balance
  15. 15. Unit of Activity</li></li></ul><li>Straight Line Method<br />Depreciation = Cost - Salvage Value<br /> Useful Life ( years)<br />Example :<br />Van costs RM45,000, has a useful life of 5 years and salvage value of RM5,000<br /> Depreciation = 45,000 – 5,000<br /> 5<br /> = RM8,000 per year<br />Journal Entry:<br /> Dt. Depreciation Expense 8,000<br /> Cr. Accumulated Depreciation 8,000<br />
  16. 16. Reducing Balance Method<br />The amount of depreciation is reduced every years<br />Depreciation = 1 – n r/c <br /> n = estimated useful life<br /> r = salvage value<br /> c = cost of asset<br /> Example :<br /> Van is bought at cost RM33,000, with salvage value RM3,000 and useful life of 4 years<br /> Depreciation = 1 – 4 3,000/33,000<br /> = 45%<br />
  17. 17. Reducing Balance Method<br />
  18. 18. Sum of Years Digit Method<br />Calculate an asset’s cost with sum of years digit ratio<br />Example :<br />Machine cost RM43,000, estimated useful life is 4 years and salvage value RM3,000<br />Sum of years digit = 1 + 2 + 3 + 4<br /> = 10<br /> If the asset has long useful life, use formula:<br /> S = n (n + 1)<br /> 2<br />
  19. 19. Sum of Years Digit Method<br />
  20. 20. Unit of Activity Method<br /> Depreciable = Depreciable Cost<br /> (Per unit) Total units of activity<br /> Annual = Depre. Cost X Units of Activity during<br /> Depreciation Per unit the year<br />Example :<br />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.<br />Depreciation Cost per unit = (13,000 – 1,000)/100000<br /> = RM0.12<br />
  21. 21. Unit of Activity Method<br />** (RM13,000 – RM1,800)<br />
  22. 22. DISPOSAL OF ASSET<br /><ul><li>Asset can be disposed in three ways:</li></ul>Retirement<br />Sale<br />Exchange<br /><ul><li>At the time of disposal:</li></ul>Determine the book value of the asset<br />Depreciation for the fraction of the year to the date of disposal<br />
  23. 23. Retirement<br /> Herbert Enterprise retires its computer printers, which cost RM18,000. The accumulated depreciation on this printer is RM14,000<br />
  24. 24. Journal Entry:<br />
  25. 25. Sale of Asset<br />The book value of the asset is compared with the proceeds received from the sale<br /> Sale Proceed &gt; book value = GAIN<br /> Sale Proceed &lt; book value = LOSS<br />
  26. 26. Example: Gain in Disposal<br />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.<br />Workings:<br />Cost 60,000<br /> Acc. Depreciation 45,000 (60,000/4 = 15,000 x 3)<br /> Net book value 15,000<br /> Cash 20,000<br /> Gain on disposal 5,000<br />Journal Entry:<br />
  27. 27. Using the previous example: Loss in Disposal<br />If the machine could be sold at a price of RM10,000 cash.<br />Workings:<br />Cost 60,000<br /> Accumulated Depre. 45,000 (60,000/4 = 15,000 x 3)<br /> Net book value 15,000<br /> Cash 10,000<br /> Loss on disposal 5,000<br />Journal Entry<br />
  28. 28. TRADEIN ASSET<br />Assets are being exchange either from similar or <br />dissimilar assets.<br />It is important to determine:<br />The cost of asset acquired<br />The gain and loss on the asset given up<br />Cost of the exchange Asset<br /> “ cash equivalent price paid”<br />Gain or loss on the asset <br /> “ the different between the fair market value and the book value of the asset given up”<br />
  29. 29. Example: Loss in Trade In<br />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.<br />Workings:<br />
  30. 30. Journal Entry:<br />
  31. 31. Example: Gain in Trade In<br />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.<br />Workings:<br />
  32. 32. Journal Entry <br />
  33. 33. Reporting the Depreciation and Accumulated Depreciation<br />Income Statement<br />Depreciation Expenses 8,000<br />Balance Sheet<br />Motor Van 50,000<br />(-) Acc. Depreciation (8,000)<br /> 42,000<br />
  34. 34. INTANGIBLEASSET<br />Definition:<br />Right, privileges and competitive advantage that result from the ownership of long-lived assets that do not possess physical substance<br />Examples include:<br />Patents (e.g. Polaroid)<br />Franchises (e.g. McDonald’s)<br />Trademarks (e.g. swoosh of Nike)<br />
  35. 35. Intangible Assets<br />Intangible assets can be separated into:<br />a. Identifiable<br />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.<br />b. Unidentifiable <br />Cannot be separated from the entity itself.<br />Collectively referred to as goodwill.<br />
  36. 36. IntangibleAsset : Goodwill<br />Types:<br /> There are two types of goodwill:-<br />Inherent goodwill<br /> - no need to record in the company books<br />ii Purchased goodwill<br /> - goodwill arises from a business which bought another business.<br /> - this goodwill needs to be amortized at a maximum of 25 years.<br />
  37. 37. Accounting Treatment:<br />Recognized as asset<br /> - need to amortized<br />Journal Entry:<br />
  38. 38. Accounting Treatment:<br />2. Recognized as an expense<br /> - written off the whole amount in the income statement<br />Journal Entry:<br />
  39. 39. Accounting for Intangible Assets (cont’d)<br />Amortisation<br />This is the term used to describe the allocation of the cost of an intangible asset to expense.<br />Intangible assets are assumed to have a limited life and are amortised.<br />Patents are amortised over legal or useful life, whichever is shorter.<br />
  40. 40. Accounting for Intangible Assets (cont’d)<br />Example:<br />Patent costs $60 000 and has an estimated useful life of 8 years.<br />Annual amortisation expense<br /> $60 000 ÷ 8 = $7500<br />Recording annual amortisation<br />Dec 31 Amortisation Expense 7 500 Accumulated Amortisation - Patents 7 500 (To record patent amortisation) <br />
  41. 41. Types of Intangible Assets<br />1. Patents<br />Exclusive right granted by IP Australia enabling recipient to manufacture, sell or otherwise control an invention.<br />2. Research and development costs<br />Expenditures that may lead to patents, copyrights, new processes and new products.<br />3. Copyright<br />Gives the owner exclusive right to reproduce and sell an artistic or published work.<br />
  42. 42. Types of Intangible Assets<br />4. Trademarks and brand names<br />Words, phrases, jingles or symbols that distinguish or identify a particular business or product.<br />5. Franchises and licences<br />A contractual arrangement under the franchisee is granted certain rights.<br />6. Goodwill<br />Represents all favourable attributes that relate to an entity and is defined as future benefits from unidentifiable assets.<br />