ACC202

Financial and Managerial Accounting

Seminar 3

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 Financial and Managerial
Accounting
STUDY UNIT 3
LONG-TERM ASSETS, LIABILITIES AND EQUITY

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 Learning Outcomes
 By the end of this unit, you should be able to:
◦ Identify the cost of property, plant and equipment.
◦ Compute depreciation expense using straight-line and double
declining method.
◦ Account for the disposal of property, plant and equipment.
◦ Discuss the accounting for intangible assets.
◦ Compute total asset turnover to analyse a firm’s use of assets.
◦ Identify the current liabilities and account for estimated
liabilities.
◦ Analyse the times interest earned ratios.
◦ Explain characteristics of corporation and distribution of
ordinary and preference dividends.
◦ Analyse the earnings per share, price-earnings ratio, and
dividend yield.

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Financial and Managerial
Accounting
Chapter 1
Long term asset

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 Property, plant and equipment
(PPE)
Tangible in Nature

Acquired for long-term (more than 1

year) use in normal operation

By matching principle, needs to allocate

cost over useful life – depreciation*

Exception : land cost is not depreciated if it is a freehold

land i.e. has indefinite useful life.
Cost Determination
Purchase
price (plus tax, All expenditures
delivery costs, insurance fee
commission etc) needed to
prepare the
Acquisition asset for its
Cost intended use
(e.g. installing, testing
etc)

Acquisition cost excludes

financing charges and
cash discounts
Activity 3 Q1

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Factors in Computing Depreciation

The calculation of depreciation requires

three amounts for each asset:
1. Cost
2. Residual Value
3. Useful Life
Depreciation Methods
1. Straight-line
2. Declining-balance
Asset we will depreciate in future screens

Cost $10,000
Residual value 1,000
Depreciable amount $9,000
Useful life
Accounting periods 5 years
Units inspected 36,000 shoes
 Straight-Line Method
Cost $10,000
Residual value 1,000
Depreciable amount $9,000
Useful life
Accounting periods 5 years
Units inspected 36,000 shoes

Cost - Residual value $10,000 - $1,000

= = $1,800 per year
Useful life in periods 5 years

Dec. 31 Depreciation Expense 1,800

Accumulated Depreciation - Machinery 1,800
To record annual depreciation.
 Straight-Line Method

At the end of year 2:

Statement of Financial Position Presentation

Machinery $ 10,000
Accumulated depreciation (3,600) $ 6,400
 Straight-Line Depreciation
Schedule
Depreciation for the Period End of Period
Annual Depreciable Depreciation Depreciation Accumulated Carrying
Period Cost* Rate Expense Depreciation Amountꝉ
2010 - - - - $10,000
2011 $9,000 20% $1,800 $1,800 $8,200
2012 9,000 20% 1,800 $3,600 $6,400
2013 9,000 20% 1,800 $5,400 $4,600
2014 9,000 20% 1,800 $7,200 $2,800
2015 9,000 20% 1,800 $9,000 $1,000
ꝉ
* $10,000 - $9,000. Carrying amount is total cost minus accumulated depreciati
Double-Declining-Balance Method

Depreciation for the Period End of Period

Beginning of
Annual Period Depreciation Depreciation Accumulated Carrying
Period Carrying Rate Expense Depreciation Amountꝉ
Amount
2010 - - - - $10,000
2011 $10,000 40% $4,000 $4,000 $6,000
2012 6,000 40% 2,400 $6,400 $3,600
2013 3,600 40% 1,440 $7,840 $2,160
2014 2,160 40% 864 $8,704 $1,296
2015 1,296 40% 296* $9,000 $1,000
* Year 2015 depreciation = $1,296 - $1,000 = $296 (never depreciate carrying amount below residual value).
Activity 3 Q2, Q3 and Q4

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Disposals of property, plant and
equipment
Update depreciation
to the date of disposal.

Journalize disposal by:

• Recording • Recording gain/loss

cash • Dr/Cr Loss/Gain
received
If Cash > CA, record a gain (credit).
• Dr Cash If Cash < CA, record a loss (debit).
If Cash = CA, no gain or loss.

• Removing accumulated • Removing the

depreciation asset cost
• Dr Accum depreciation • Cr Asset
Selling property, plant and
equipment
On March 31st, BTO sells equipment that originally cost $16,000 and has
accumulated depreciation of $12,000 at December 31st of the prior
calendar year-end. Annual depreciation on this equipment is $4,000 using
straight-line depreciation. The equipment is sold for $3,000 cash.
Step 1: Update depreciation to March 31st.
Mar. 31 Depreciation Expense 1,000
Accumulated Depreciatuion - Equipment 1,000
To record 3 months' depreciation $4,000 x 3/12).

Step 2: Record sale of asset at carrying amount ($16,000 - $13,000 = $3,000).

Mar. 31 Cash 3,000

Accumulated Depreciatuion - Equipment 13,000
Equipment 16,000
To record sale of equipment for no gain or
loss.
Selling property, plant and
equipment
On March 31st, BTO sells equipment that originally cost $16,000 and has
accumulated depreciation of $12,000 at December 31st of the prior
calendar year-end. Annual depreciation on this equipment is $4,000 using
straight-line depreciation. The equipment is sold for $2,500 cash.
Step 1: Update depreciation to March 31st.
Mar. 31 Depreciation Expense 1,000
Accumulated Depreciatuion - Equipment 1,000
To record 3 months' depreciation $4,000 x 3/12).

Step 2: Record sale of asset at a loss (CA $3,000 - $2,500 cash received).
Mar. 31 Cash 2,500
Loss on Disposal of Equipment 500
Accumulated Depreciatuion - Equipment 13,000
Equipment 16,000
To record sale of equipment for a $500 loss.
Activity 3 Q5

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 Intangible Assets
• Noncurrent assets Often provide
without physical exclusive rights
substance. or privileges.
• Record at cost
(purch + legal fee) • With limited life
Intangible span,
Assets amortised using
Useful life and straight line
residual value are method
often difficult • With unlimited
to determine. life, check for
impairment
annually
 Total Asset Turnover
Total Asset = Net Sales
Turnover Average Total Assets

(Beginning assets + Ending assets)

Average assets =
2

Provides information about a company’s

efficiency in using its assets to generate sales.
 Chapter 2
Liabilities and Equity

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Liabilities
A liability is a probable future payment of assets or
services that a company is presently obligated to
make as a result of past transactions or events.
Current Liabilities Long-Term Liabilities

• Expected to be paid within • Not expected to be paid

one year or the company’s within one year or the
operating cycle, whichever company’s operating
is longer. cycle, whichever is longer.
• Eg: AP, expense accrual, • Eg: Long-term loan
unearned revenue
Uncertainty in Liabilities
Liabilities can also be classified as know
liabilities or estimated liabilities or contingent
liabilities
• Uncertainty in whom to pay
• Uncertainty in when to pay
• Uncertainty in how much to pay
 Accounting for liabilities – unearned
revenue
On June 30, Beyonce sells $5,000,000 in tickets
for eight concerts.

Aug. 31 Cash 5,000,000

Unearned Ticket Revenue 5,000,000
To record sale of concert
tickets.

On Oct. 31, Beyonce performs a concert.

Oct. 31 Unearned Ticket Revenue 625,000
Ticket Revenue 625,000
To record concert ticket revenues earned.

$5,000,000 / 8 = $625,000
Accounting for Estimated
Liabilities
An estimated liability is a known obligation of an uncertain
amount, but one that can be reliably estimated.
Example – warranty liabilities
On Dec. 1, 2011, a dealer sells a car for $16,000 with a maximum one-
year or 12,000 mile warranty covering parts. Past experience indicates
warranty expenses average 4% of a car’s selling price.
2011
Dec. 1 Warranty Expense 640
Estimated Warranty
Liability 640
To record estimated warranty expense.
On Jan. 9, 2012, the customer returns the car for repairs. The dealer
replaces parts costing $200.
2012
Jan. 9 Estimated Warranty Liability 200
Auto Parts Inventory 200
To record costs of warranty repairs.
Activity 3 Q6

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 Types of share capital
Ordinary shares
o rights to receive dividend if any
o vote at shareholders’ meetings
o purchase additional shares
o share equally in any assets
remaining after creditors are
paid in a liquidation
Preference shares
A separate class of shares, typically
having priority over ordinary shares
in…
◦ Dividend distributions
◦ Distribution of assets in case of
liquidation

Dr Cash • Usually has a stated dividend rate

• Normally has no voting rights
Cr Share capital- • Do have rights to purchase add. shares
ord/pref
Shareholders receive a return on their investment in two
ways:
1. through increases in the market value of the shares and
2. through cash dividends.
 Treasury Shares
Treasury shares are a company’s own shares that
have been acquired. Corporations might acquire its own
shares to:
1. Use their shares to buy other companies.
2. Avoid a hostile takeover.
3. Reissue to employees as compensation.
On4.May
Support the
8, Whitt, market
Inc. price.
purchased 2,000 of its own shares in the open
market for $4 per share.
Dr Cr
May. 8 Treasury Shares-Ordinary 8,000
Cash 8,000
To record the purchase of 2,000 treasury shares at $4 per
shares.
Treasury shares are shown as a reduction in total
shareholders’equity on the statement of financial position.
 Cash Dividends
Regular cash dividends provide a return to investors
and almost always affect the share’s market value.

Corporation Dividends Shareholders

To pay a cash dividend, the corporation must have:

1. A sufficient balance in retained earnings; and
2. The cash necessary to pay the dividend.
 Accounting for Cash Dividends
Three On January 19, a $1 per share cash dividend
important is declared on Dana, Inc.’s 10,000 ordinary
dates shares outstanding. The dividend will be paid
on March 19 to shareholders of record on
Date of Declaration
February 19.
Record liability Dr Cr
Jan. 19 Retained Earnings 10,000
for dividend.
Ordinary Dividend Payable 10,000
To record the declaration of $1 per ordinary share cash dividend.
Date of Record
No entry No entry required on February 19, the
required. date of record.

Date of Payment Dr Cr
Mar. 19 Ordinary Dividend Payable 10,000
Record payment of
Cash 10,000
cash to shareholders.
To record the payment of $1 per ordinary share cash dividend.
Activity 3 Q7

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 Statement of Profit or Loss
and Other Comprehensive Income
IFRS Corp
Statement of Profit or Loss and Other Comprehensive Income
For Year Ended 31 December 31, 2018

Revenue $198,000
Cost of goods sold (100,000)
Gross profit 98,000
Other income 10,000
Selling expenses (30,000)
Administrative expenses (25,000)
Other expenses (14,500)
Interest expense (12,500)
Profit before tax 26,000
Income tax expenses (6,000)
Net profit 20,000
Other comprehensive income
Revaluation surplus on property, plant and equipment $40,000
Foreign currency transaction differences 8,000
Other comprehensive income for the year, net of tax 48,000
Total comprehensive income for the year $68,000
 Statement of Changes in Equity
IFRS Corp
Statement of Changes in Equity
For Year Ended 31 December 31, 2018
Share Retained Total
Reserves
Capital Earnings Equity
Balance as at December 31, 2017 $1,000,000 $570,000 - $1,570,000
Changes in accounting policy or
correction of prior period error - 1,000 - 1,000
Restated balance 1,000,000 571,000 - 1,571,000
Net profit - 20,000 - 20,000
Other comphrensive income - - 48,000 48,000
Issuance of shares 200,000 - - 200,000
Purchase of treasury shares - - (150,000) (150,000)
Dividends - (10,000) - (10,000)
Balance as at December 31, 2018 $1,200,000 $581,000 ($102,000) $1,679,000
 Reserves
 Most reserves result from accounting standards
to reflect certain measurement changes in equity
rather than the income statement, e.g. asset
revaluation reserve, foreign currency translation
reserve and other statutory reserves.
 Retained earnings are also called revenue
reserves. Ending Retained Earnings =
Beginning Retained Earnings + Net Profit – Dividends

A company’s cumulative net profit less any net losses and

dividends declared since its inception.
 Market Prospect Ratios
Basic
earnings = Net profit - Preference dividends
per share Weighted-average ordinary shares outstanding

Earnings per share is one of the most widely

cited accounting statistics.

Price–
Earnings Market value (price) per share
=
Ratio Earnings per share
This ratio reveals information about the stock market’s
expectations for a company’s future growth in earnings,
dividends, and opportunities.
 Market Prospect Ratios
Dividend Annual cash dividends per share
Yield =
Market value per share
Tells us the annual amount of cash dividends distributed to
ordinary shareholders relative to the share’s market price.

Shareholders’equity applicable
Book value per to ordinary shares
ordinary share = Number of ordinary shares outstanding

Reflects the amount of shareholders’ equity applicable to

ordinary shares on a per share basis.
Activity 3 Q8

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