Meaning
Features of depreciation
Causes of depreciation
Need & importance of depreciation
Factors determining the amount of depreciation
Methods of allocating depreciation
Illustration
Exercise
Contract Costing is a difficult one for accounting.
Basics of which, can be seen in this PPT. I hope it will help to understand what is Contract Costing and how its accounting can be done. Please Like if it proves to be helpful for you.
Meaning
Features of depreciation
Causes of depreciation
Need & importance of depreciation
Factors determining the amount of depreciation
Methods of allocating depreciation
Illustration
Exercise
Contract Costing is a difficult one for accounting.
Basics of which, can be seen in this PPT. I hope it will help to understand what is Contract Costing and how its accounting can be done. Please Like if it proves to be helpful for you.
For civil engineer quantity surveying and estimation costing is very important for any project.
In this presentation we study about the Important terms used in estimation and costing, contingencies, work charge establishment, tools and plants, etc. types of estimates and their functions.
How to start a construction company as a contractorAnusha Mona
This presentation describes you about the life cycle of how to start a construction industry as a contractor.
There is a case study of a sample civil furnishing work (BLOCK WORK) and explained everything starting from the tender work, to billing to payment process.
For civil engineer quantity surveying and estimation costing is very important for any project.
In this presentation we study about the Important terms used in estimation and costing, contingencies, work charge establishment, tools and plants, etc. types of estimates and their functions.
How to start a construction company as a contractorAnusha Mona
This presentation describes you about the life cycle of how to start a construction industry as a contractor.
There is a case study of a sample civil furnishing work (BLOCK WORK) and explained everything starting from the tender work, to billing to payment process.
1Acquisition cost of long-lived assets the following items repr.docxfelicidaddinwoodie
1
Acquisition cost of long-lived assets: the following items represent expenditures (or receipts) related to construction of a new home office for Lowery company.
Cost of land site, which include an old apartment building appraised at $75,000 $165,000
Legal fees, including fee for title search $2100
Payment of apartment building mortgage and related interest due at time of sale $9300
Payment for delinquent property taxes assumed by the purchaser $4000
Cost of razing the apartment building $17,000
Proceeds from sale of salvaged materials ($3800)
Grading to establish proper drainage flow on land site $1900
Architects fee on new building $300,000
Proceeds from sales of excess dirt (from basement excavation) to owner of adjoining property (that was used to fill in a low area on property) ($2000)
Payment to building contractor $5,000,000
Payment of medical bills of employee accidentally injured while inspecting building construction
$1400
Special assessment for paving city sidewalks (paid to city) $18,000
Cost of paving driveway parking lot $25,000
Cost of installing lights in parking lot $9200
Premium for insurance on building during construction $7500
Cost of open house party to celebrate the opening of new building $8000
Required
From the given data, calculate the proper balances for land, building, and land improvements accounts of Lowery Company.
2
Depreciation method: on January 2, Roth Inc. purchased a laser cutting machine to be used in the fabrication of a part for one of its key products. The machine cost $80,000, and its estimated useful life was four years or 1 million cuttings, after which it could be sold for $5000.
Required
Calculate the depreciation expense for each year of the machines useful life under each of the following depreciation methods:
a. straight-line
b. double declining balance
c. Units of production. Assume annual production and cuttings of:
a. 200,000
b. 350,000
c. 260,000
d. 190,000
3
Depreciation method: on January 2, 2012, Alvarez Company purchased an electroplating machine to help manufacture a part for one of its key products. The machine cost $218,700 and was estimated to have a useful life of six years or 700,000 pleadings, after which it could be sold for $23,400.
Required
a. calculate each year’s depreciation expense for the period 2012-2017 under each of the following depreciation methods:
1. straight-line
2. double declining balance
3. Units of production. (Assume annual production in pleadings of:
i. 140,000
ii. 180,000
iii. 100,000
iv. 110,000
v. 80,000
vi. 90,000
b. Assume that the machine was purchased on September 1, 2012. Calculate each year’s depreciation expense for the period 2012 through 2018 under each of the following depreciation methods:
1. straight-line
2. double declining balance
4
Accounting for planting and intangible assets: selected transactions of Continental publishers Inc., ...
Ch. 10 – Plant, Property, Equipment and IntangiblesI.TYPES OF .docxtidwellveronique
Ch. 10 – Plant, Property, Equipment and Intangibles
I.
TYPES OF LONG-LIVED ASSETS
A.
Characteristics of Plant, Property & Equipment
· Used in normal operations, not for resale or investment
· Long-term in nature (>1 yr. useful life)
· Possess physical substance (tangible in nature)
· Examples: Land, Building, Equip, Machinery, Furniture/Fixtures, Leasehold Improvements, Wasting Assets (i.e. natural resources)
B.
Characteristics of Intangibles:
1. Lack physical substance
2. Provide future benefit (increases the revenue-producing ability of the company)
3.
They are not financial instruments.
Typical intangibles:
1.
Patents – legal life of 20 years from date granted. Legal fees for the successful defense of a patent are treated as a capital expenditure and added to the BV of the patent when incurred…not expensed.
2.
Copyrights – legal life is life of creator + 70 yrs.
3.
Customer Lists – usually 3 year life
4.
Franchises/Licenses/Permits – amortize over term of contract
5.
Trademarks/Trade names – indefinite # of renewals for periods of 10 yrs. (don’t amortize)
6.
Goodwill – indefinite life (do not amortize). Only occurs as a result of one company buying an entire other company. Goodwill represents the excess of the purchase price over the FMV of the Net Assets. (Net Assets = FMV Assets less all liabilities of the company purchased.) Goodwill is not a separately identifiable asset. It derives its value from the other assets that the company uses to produce earnings in excess of normal.
II.
Determining Original Cost
PP&E and intangibles can be acquired individually, lump sum purchase, using deferred payments, issuance of securities, by donation, thru exchange or self-construction
Historical cost is the usual basis for PP&E valuation.
Costs to Include in “Original Cost”:
· All costs incurred to bring the asset into its productive capacity
· Acquisition cost = cash paid or “cash equivalent value” (PV of note) + all costs of readying the asset for service.
Advantages of Historical Cost:
· Cost = Fair Value on date of acquisition
· Cost is reliable, objective & verifiable
· Cost is consistent with reporting most other assets, liabilities & equity
A.
Land - don’t depreciate - never “used up”
Cost = all expenditures made to acquire the land and make ready for intended use
Costs to capitalize:
Purchase price
+
Closing Costs/Attorney’s fees/Title fees/Broker’s commissions/past due property taxes
+ Cost of surveys
+
Costs to get the land ready for use (clear existing structures, level land)
(-)
Proceeds from sale of salvage
=
Historical Cost of Land
B. Land Improvements - Improvements with limited lives (like private driveways, parking lots, fences, sprinkler systems etc.) record as Land Improvements and depreciate separately.
C. Machinery -
· all expenditures normally incurred in acquiring the equipment and preparing it for use are included
· this includes purchase price less purchase discounts (if ...
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2. Capital and Revenue expenditure
Capital Expenditure means any expenditure incurred to :
1. Acquire an asset and bring it into working condition
2. Improve the efficiency or substantial working life of the asset
3. Improve the performance of the business
.
Eg. 1.Purchase of machinery
2. Fees paid for installation of machinery
3. Custom duty paid for import of machinery
3. Revenue Expenditure means any expenditure incurred to
maintain the assets in working condition and for the operation of
the business.
Examples
1. Repairs of furniture
2. Painting of building
3. Purchase of stationery
4. Salaries
4. Deferred Revenue expenditure means essentially a revenue
expenditure but the benefit of which is received over a period of
more than one year.
Examples :
1.Heavy research expenditure
2. Heavy advertisement expenditure
5. The most important factor affecting the classification is the nature of
business.
Need to classify expenses into capital and revenue
1. To adhere to Matching Principle
2. To enable a true and fair view of financial statements
3. To show correct financial results
6. Class exercise 1
Classify the following expenditure into capital , revenue and
deferred revenue.
1. Purchase of building
2. Legal fees paid for assessing title deeds for purchase of building
3. Repair expenses incurred on an second hand machinery
purchased
4. Salaries paid to staff
5. Expenses incurred for advertising the company’s product in local
newspaper
6. Expenses incurred for shifting the raw materials from one godown
to another
7. Replacement of a worn out part of machinery with a new part
8. The coal fired engine broke down and it was replaced with a gas
fired one.
7. 9. Freight paid on purchase of machinery
10. Installation and commisioning charges paid for erection of
machinery’
11. Built an extension to the factory building
12. Rebuilt a wall destroyed by storm
13. Repair expenses incurred on new machinery before installation.
14. Heavy expenditure on research for development of new product .
The research was successful
15 Heavy expenditure on research for development of new product .
The research was not successful
16. Heavy marketing expenditure incurred on launching a new product.
17.Purchase of second hand furniture
18. Purchase of motor car
19. Purchase of petrol for the new motor car
20. Purchase of new tyres for an old motor car
8. 21. Interest paid on loan taken for the purchase of machinery. The
commercial production has not yet begun
22. Interest paid on loan taken for the purchase of machinery. The
commercial production has begun.
23. Heavy legal fees paid to lawyers for a suit filed against the
company. The case was successful.
24. Heavy legal fees paid to lawyers for a suit filed against the
company. The case was not successful.
25 Transport charges paid for purchase of furniture
26 Transport charges paid for purchase of goods
27 Temporary shed erected for storing materials for construction of
building
28. Payment made to security agencies for guarding the factory
building
29. Annual maintainance charges paid for computers
30. Payment made for purchase of raw materials.
9. FIXED ASSETS
Accounting for fixed assets involves the
following :
At what cost should an asset be recorded in
books ?
How should use of assets be recorded?
How should the sale, disposal, retirement of
asset be recorded ?
so that the assets in the Balance Sheet
show a true and fair view
10. Cost of acquisition of assets
Borrowing costs
12. Special class of assets
Natural resources.
Intangible assets
Goodwill , Brand , licenses, know how, patents, franchises etc.
Research and development costs
Computer Software costs
Accounting of assets of low unit cost
13. Revaluation of assets
Assets are shown in the balance Sheet at their historical
cost. It is often argued that such values do not reflect the
current worth of the assets . This is more so with land and
buildings whose value may increase due to inflation.
Hence many companies have adopted the practice of
revaluing the assets to reflect their current market price.
Revaluation should be done for the entire class of assets
or a systematic basis should be adopted for selective
revaluation of assets.
The increase in the value of assets is credited to
Revaluation reserve. Since such reserve is unrealised
profit, it is a capital reserve not available for distribution
as dividend or for issue of bonus shares.
14. Depreciation
Depreciation is based on 2 estimates :
Useful life of the asset
Expected salvage value of the asset
Hence depreciation =
cost of the asset – salvage value
estimated useful life
15. Methods of depreciation
1.Straight line method / original cost method
2.Accelerated methods
Written down value method
Sum of digits method
3. Production units method
16. Issues in depreciation accounting
1. Computing depreciation for partial accounting
periods
2. Revision of estimated lives and depreciation
rates
3. Group depreciation
17. Disposal of assets
Asset sold for cash
Discarded assets
Assets exchanged for other assets
19. Class exercise 1
ABC Ltd. took up an project to expand its existing capacities. All the costs incurred were debited to Project
Account as under :
Rs.
1. Cost of land 1200000
2. Commission paid to estate agents 50000
3. Cost of clearing and levelling the land 5000
4. Cost of construction of building 2000000
5. Cost of fencing 30000
6. Architects fees for building design 40000
7. Purchase price of machinery 1500000
8. Installation charges for machinery 100000
9. Cost of trial runs 15000
10. Registration charges for title deed of land 25000
11. Repair charges of building wall damaged during
installation of machinery 8000
12. Compensation paid to worker injured during const. 10000
The project was financed partly by borrowings of Rs.3000000 @ 12% interest. Interest paid was debited to
interest A/c. A supervisor was deputed for the project work. He spent 1 month for the selection and
preparation of land and 4 months for the construction of building and 2 months for machinery installation.
His annual salary of Rs.60000 is debited to Salary A/c
The project commenced on February’10 and plant was installed and commissioned in Sept’10.
Determine the costs at which land, building and machinery should be capitalised. Assume that the
borrowings were used equally for building and machinery.
20. 2. AB & Bros. purchased a automobile
showroom for Rs.5000000. The assets and
their FMVs are as under :
Land 2000000
Building 3000000
Equipment 500000
Furniture 200000
Tools Accessories 500000
At what value should AB & Bros. capitalise its
assets
21. 3. A Ltd. exchanges a motor car for a new
model costing Rs 500000. The seller
gives an allowance of Rs. 100000 for
the old car. The book value of the
motor car is 125000.
At what value should the new motor
car be capitalised in the books
22. 4. A plant was brought on January 1 2005 for Rs.15000. The
plant has an estimated useful life of 5 years. The company
follows the SLM method of depreciation . The plant was
revalued at Rs.25000 in Jan 2008. Calculate the amount to
be transferred to Revaluation Reserve.
5. Francis purchased the business of a senior solicitor for
Rs.200000 with the following assets and liabilities.
Books and journals – Rs.60000
Furniture – Rs.15000
Office building – Rs.100000
Staff salary payable – Rs.3000
Calculate the amount of goodwill / capital reserve.
23. 6. ABC transporters purchased a bus costing
Rs. 720000. The bus has an estimated
useful life of 200000 kms. Assuming that
the usage of the bus was 10000 km in the
first year, 30000 kms in the second year ,
20000 kms in the third and 50000 kms in
the fourth year. Calculate the depreciation
to be charged .