NON-CURRENT ASSETS

• - Assets of substantial amounts and extended

lives of more than 1 year.
• Examples:
1. Land
2. Fixed Assets or Depreciable assets
a) Buildings
b) Equipment
3. Investments
FIXED ASSETS AND INTANGIBLE ASSETS
• Fixed assets: long-term (useful for more than
one year), relatively permanent such as
– equipment,
– machinery,
– Buildings; and
– land.
 CHARACTERISTICS OF FIXED ASSETS

1. They are physical, tangible assets and long

life (more than one year).
2. They are owned and used by the company in
its normal operations.
3. They are not offered for sale as part of
normal operations.
4. They are of significant amounts to justify the
recording effort and cost
 FIXED ASSETS
• Long life means productive or usable for more
than one year
• Difference between inventory and fixed asset:
inventory EXPECTED to be used up within 1
year from balance sheet date.
• Quennie’s question: What if the inventory is
not used within one year?; it is still a current
asset but a problematic one; need to dispose
or sell it even at a low price.
 CLASSIFYING COSTS
• A cost that has been incurred for a tangible
asset not normally for resale or sale, may be
classified as a/an:
1. Expense,
2. Fixed asset, or
3. Investment (e.g. stocks as pointed out by Austin)
 STEPS IN CLASSIFYING COSTS
• Step 1. Is the purchased item (cost) of significant
amount?
1. If no, the item is expensed
2. If yes, Proceed to Step 2
• Step 2. Is the purchased item (cost) long-lived
(more than 1 year)?
1. If no, the item is classified and recorded as an expense
2. If yes, the item is capitalized as an asset on the
balance sheet as either a fixed asset or an investment.
Proceed to Step 3
 STEPS IN CLASSIFYING
COSTS( Continuation)
• Step 3. Is the asset used in normal operations?
1. If yes, the asset is classified and recorded as a
fixed asset.
2. If no, the asset is classified and recorded as an
investment
 STEPS IN CLASSIFYING COSTS
.

1 Is item of significant amount?

YES NO

Is the item long lived (more than

2 1 year)?
EXPENSE

NO
YES

Is the asset used in normal EXPENSE

3 operations?
YES NO

Fixed Asset Investment

 THE COST OF FIXED ASSETS
• The costs of acquiring fixed assets include all
amounts spent to get the asset in place and
ready for use.
EXCLUSIONS FROM COST OF FIXED ASSETS

• Unnecessary costs that do not increase the

asset’s usefulness are recorded as an expense.
For example the following costs are not
capitalized but are expensed:
1. Vandalism
2. Mistakes in installation
3. Uninsured theft
4. Damage during unpacking and installation
5. Fines for not obtaining proper permits from
government agencies
 FIXED COSTS ITEMS
Building Machinery Land
- Architect’ fees -Freight - Purchase price
- Engineers’ fees -Installation - Gov’t. permits
- Construction insurance - Repairs (used mach.) Broker’s commissions
-Interest during - Reconditioning (used - Title fees
construction mach.)
-Repairs (existing bldg.)
-Reconditioning (existing -Insurance - Surveying fees
bldg.)
- Modifying use Modifying for use - Delinquent real estate
taxes
- Gov’t permits Testing and commissioning -Clearing
-- Grading and leveling
 CAPITAL VS REVENUE
EXPENDITURES
• Revenue Expenditure or Ordinary
maintenance and repair:
– recorded as expense for the period; benefit only
the current period.
• Capital Expenditure : Costs that:
1. improve the asset; or
2. extend its useful life.
 CAPITAL EXPENDITURES
• Asset Improvement: after a fixed asset in
service, costs incurred to improve the asset;
recorded as increases to the fixed asset
account (Fixed asset account debited)
• Extension of life/extraordinary repair: after a
fixed asset in service, costs incurred to extend
the useful life. Such costs are capital
expenditures and are recorded as a decrease
in an accumulated depreciation account
(Debit to Accumulated depreciation)
 REVENUES VS CAPITAL EXPENDITURES DIAGRAM

Benefits Ordinary
REVENUE Debit
only repairs and
EXPENDITURE Repairs and
current maintenance
maintenanc
period e expense

Debit Fixed
Asset
COST Asset Adds service
improvement value to asset

CAPITAL Debit
Benefits EXPENDITURE Accumulate
current d
Extends the
and Extraordinary depreciation
asset’s useful
future repair
life
periods
Revise current
and future
depreciation
 DEPRECIATION
• Fixed assets except land lose their ability, over
time, to provide services because of:
1. Wear and tear, and
2. Technological obsolescence
• Costs of fixed assets recorded as expense over
the useful lives
• Depreciation: periodic recording of the cost as
an expense (adjustment)
 MISUNDERSTANDINGS ON
DEPRECIATION
• Depreciation not equal to decline in market
value (can be closely related but not the
same); net book value not the same as market
value
• Depreciation does not provide cash to replace
the asset as they wear out; not a cash outlay
(an adjustment for which cash disbursed in
the past)
 FACTORS IN COMPUTING
DEPRECIATION
1. Initial cost:400
2. Expected life (economic life): 2 years
3. Residual or salvage value: 100

Depreciation/year = (Initial cost – salvage

value)/economic life
= (400 – 100)/2 = 150
Initial cost – salvage value = depreciable value
 DEPRECIATION
• Depreciation is an expense, but a non-cash
expense
• Total deoreciation or accumulated
depreciation cannot exceed depreciable value
• Accumulated depreciation is a contra fixed
asset account, i.e., it is credited rather than
fixed asset in the adjusting entry paired with
debit to depreciation in order to preserve the
initial cost in the balance sheet
 DEPRECIATION
• In the balance sheet the report is as follows:
• Fixed asset 400
• Less: Accumulated depreciation 150
• Net Fixed Asset 250
• Since total depreciation or accumulated
depreciation cannot exceed the depreciable
value, the depreciation is zero and the
accumulated depreciation stays at the
depreciable value if asset held beyond
economic life assumed
 GAIN/(LOSS) ON SALE OF FIXED
ASSET
• The Net Book Value (Fixed Asset –
Accumulated Depreciationi) is the reference to
determine a gain or loss
• Sale above NBV results in a gain (Credit Gain
on Sale of FA); a sale below NBV results in a
loss (Debit Loss on Sale of FA)
• The gain or loss should be the balancing item
after the debits to cash and accumulated
depreciation and credit to Fixed Asset