CHAPTER 14

Non-current assets:
acquisition and
depreciation
PowerPoint Presentation by
Phil Johnson
©2015 John Wiley & Sons
Australia Ltd
 LEARNING OBJECTIVES
1. Explain the nature of property, plant and equipment
2. Compute the cost of property, plant and equipment
3. Apportion the cost of a lump sum payment for multiple asset acquisitions
4. Describe the basics of the acquisition of assets under a lease agreement
5. Discuss the nature of depreciation and determine the amount of depreciation
expense using several different cost allocation methods
6. Describe how to account for subsequent costs incurred in relation to property,
plant and equipment
7. Record property and plant records in the property and plant subsidiary ledger
8. Illustrate the reporting requirements for property, plant and equipment and
depreciation in an entity's financial records
9. Analyse and interpret information on property, plant and equipment and
appreciate the critical nature and importance of management decision in relation
to property, plant and equipment
 WHAT IS PROPERTY,
PLANT AND EQUIPMENT?
• Any asset with physical substance that is
expected to be used over more than one year
– Fixed assets/ Non-current assets
• Future economic benefit of property, plant and
equipment will be received over two or more
accounting periods
• Therefore the depreciable amount must be
allocated in a systematic manner over useful
life to measure depreciation
 DETERMINING COST OF PROPERTY,
PLANT AND EQUIPMENT
• Must be accounted for at cost#
– The amount of cash or the fair value of other consideration given
to acquire an asset
– Cost includes
• Purchase price (including duties/taxes)
• Any directly attributable costs (e.g. transport/installation)
• Estimate of required costs of dismantling, removing and restoring
• Fair value has its usual definition

• # All cost involved in acquiring and preparing the PPE into

usable condition and location.
EXAMPLE – DETERMINING COST OF
PROPERTY, PLANT AND EQUIPMENT
List price of the machine $22 000

Less: Trade discount (10% x $22 000) 2 200

19 800

Less: GST (1/11) 1 800

Purchase price 18 000

Freight inwards (net of GST) 820

Installations costs (net of GST) 675

Cost of machine $19 495

 DETERMINING COST OF PROPERTY,
PLANT AND EQUIPMENT
• Other Issues
– Cost recognised should only include reasonable and
necessary expenditures
– Deferred payment may require recognition of interest
component (present value calculation)
– Land and land improvements
– Borrowing costs
– Qualifying assets
– Equipment acquired for safety or environmental reasons
 APPORTIONING THE COST OF LUMP-
SUM ACQUISITIONS
• Purchase of many assets at once:
– Total cost apportioned over the identifiable assets
– Cost allocated on basis of fair value
– Each asset recorded at individual cost
• Why allocate cost?
– Systematic allocation of purchase price
– Reported in different accounts
– Different useful lives (or no depreciation – land)
 EXAMPLE – APPORTIONING THE
COST OF LUMP-SUM ACQUISITIONS
• Assume that land, office building and office
equipment are acquired for $800 000 (plus
GST).
Fair value of specific asset
x Total = Cost allocated
Total fair value Cost to specific asset
Estimated Allocated
Asset Fair Value % Cost
Building $595 000 70 $560 000
Land 170 000 20 160 000
Equipment 85 000 10 80 000
Total $850 000 100 $800 000
 EXAMPLE – APPORTIONING THE
COST OF LUMP-SUM ACQUISITIONS
• The acquisition is recorded with the following
entry
General Journal
Jan 2 Buildings 560 000
Land 160 000
Office Equipment 80 000
GST Outlays 80 000
Cash at Bank 880 000
(Acquisition of property and equipment)
 DEPRECIATION
• Nature of depreciation
– Expected usage
– Expected wear and tear
– Technical and commercial obsolescence
– Legal or similar limits
• Cost needs to be apportioned over expected
useful life
 DETERMINING THE
AMOUNT OF DEPRECIATION
• Useful life is defined as
– The period over which an asset is expected to be
available for use by an entity; or
– The number of production or similar units expected to
be obtained from the asset
• Residual value
– the estimated amount that an entity could currently
obtain from disposal of the asset after deducting the
estimated costs of disposal
• Depreciable amount = cost - residual value
 DEPRECIATION METHODS
STRAIGHT-LINE METHOD
• Allocates an equal amount of depreciation to
each full accounting period in asset’s useful
life
Depreciable amount
= Annual Depreciation
Useful life

e.g. Cost $10,000; Useful life 5 yrs; Residual value $2,000

• Annual depreciation = (10,000 – 2,000)/ 5 yrs = $1,600
 EXAMPLE –
STRAIGHT-LINE METHOD
– On 1 July, assume a machine has a cost of
$33 000 (net of GST), a residual value of $3000, and a
useful life of 4 years.
Depreciable amount
Annual Depreciation =
Useful life
$33 000 - $3 000
=
4 years
= $7 500 p.a.

General Journal
Jun 30 Depreciation Expense 7 500
Accumulated Depreciation – Machine 7 500
(Depreciation expense for the year)
 DEPRECIATION METHODS
DIMINISHING-BALANCE METHOD
• Results in decreasing depreciation charge
over the useful life of the asset
• Asset more productive in its earlier years and
earns more revenue

√
Rate  = 1 − 
n = useful life in years
nr
c

r = residual value (in $)

c = original cost or gross revalued amount (in $)
 EXAMPLE –
DIMINISHING-BALANCE METHOD
– On 1 July, assume a machine has a cost of
$33 000 (net of GST), a residual value of $3000,
and a useful life of 4 years.
=1-

Carrying amount Annual Carrying

at beginning of depreciation amount at
Year the year Rate expense end of year
1 $33 000 x 45% $14 850 18 150
2 18 150 x 45% 8 168 9 982
3 9 982 x 45% 4 492 5 490
4 5 490 x 45% 2 490 3 000
 DEPRECIATION METHODS
SUM-OF-YEARS-DIGITS METHOD
• Different way of applying diminishing value
method
• Depreciation each period is determined by
multiplying the depreciable amount by
successively smaller fractions
 EXAMPLE –
SUM-OF-YEARS-DIGITS METHOD
– On 1 July, assume a machine has a cost of
$33 000 (net of GST), a residual value of $3000,
and a useful life of 4 years.
Sum −of −years−digits  = 1+2+3+4 = 10
Annual Total
Depreciable depreciation accumulated Carrying
Year amount Fraction expense depreciation amount
1 $30 000 x 4/10 $12 000 $12 000 $21 000
2 30 000 x 3/10 9 000 21 000 12 000
3 30 000 x 2/10 6 000 27 000 6 000
4 30 000 x 1/10 3 000 30 000 3 000
 DEPRECIATION METHODS
UNITS-OF-PRODUCTION METHOD
• Determines fixed amount of depreciation per
unit of output (e.g. hours, kilometres, units)
• Annual depreciation is depreciable amount
divided by the production capacity or useful
life in units

Depreciable amount
= Depreciation per
operating hour
Operating hours
 EXAMPLE –
UNITS-OF-PRODUCTION METHOD
– On 1 July, assume a machine has a cost of
$33 000 (net of GST), a residual value of $3000,
and a useful life of 15 000 hours.
Depreciable amount
Depreciation per hour =
Operating hours

$33 000 - $3 000

=
15 000 hours

= $2 per hour
 COMPARISON OF
DEPRECIATION METHODS
• Different annual charges
• Same total charge
• Choice should match consumption of benefits
– Generate revenue evenly - straight line
– Accurately record usage - units of production
– Generate more revenue in early years -reducing
balance
 DEPRECIATION –
OTHER ISSUES
• Revision of depreciation rates and methods
– Depreciation is an estimate
– Rarely precise
– Residual values and useful lives should be reviewed (at
least annually)
– Depreciation charges adjusted over remaining useful life
• Accumulated depreciation does not represent
cash
– Contra asset representing portion of cost that has been
“used”
 SUBSEQUENT COSTS
• Additional costs after acquisition
– Repairs
– Maintenance
– Improvements
– Modifications
• Need to consider impact on useful life/future
economic benefits
 SUBSEQUENT COSTS –
DAY-TO-DAY REPAIRS AND MAINTENANCE

• No change to useful life or benefit

• Treated as expense

General Journal
Jun 6 Repairs and Maintenance Expense 670
GST Outlays 67
Cash at Bank 737
(Repairs on delivery truck)
SUBSEQUENT COSTS – OVERHAULS AND
REPLACEMENT OF MAJOR PARTS
General Journal
Jul 4 Accumulated Depreciation 24 000
Delivery Van 24 000
(Write off Acc. Dep. on delivery truck)
Delivery Van 4 500
GST Outlays 450
Cash at Bank 4 950
(Installation of a new engine)
Expense on Disposal 500
Delivery Van 500
(Disposal of old engine)
 SUBSEQUENT COSTS –
LEASEHOLD IMPROVEMENTS
General Journal
Jul 4 Leasehold Improvements 10 000
GST Outlays 1 000
Cash at Bank 11 000
(Payments for improvements to leased
building)
Jun 30 Deprecation Expense 2 000
Accumulated Depreciation – 2 000
Leasehold Improvements
(Depreciation of leasehold
improvements)
PROPERTY AND PLANT RECORDS

• Divided into functional groups with separate

accounts for each group
• Subsidiary ledger for each individual asset
– Income tax
– Insurance
– Adjusting entries
– Additions/disposals

26
 DISCLOSURE OF PROPERTY, PLANT
AND EQUIPMENT
Balance Sheet (partial)
as at 30 June 2013

NON-CURRENT ASSETS
Property Plant and Equipment
Land (at cost) $164 000
Buildings (at cost) $849 000
Less: Accumulated depreciation 231 500 617 500
Plant and Equipment (at cost) 236 400
Less: Accumulated depreciation 172 600 63 800
$845 300
ANALYSIS, INTERPRETATION AND
MANAGEMENT DECISIONS
• Analysis and interpretation
– Average percentage of useful life expired
– Average useful life (in years)
– Asset turnover (number of times)
– Average property, plant and equipment to net
sales
• Management decisions
– Capital budgeting (CAPEX)