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Expenditure
Benefits beyond this period
20
100 20
1. Assets that provide services for several future years 2. An asset which is not easily convertible to cash or not expected to become cash within the next year
Types of Asset Tangible asset that has a physical substance Intangible asset that has no physical substance
Intangible
Goodwill Research and Development Cost Intellectual Property (Patent, Copyrights)
Non Current Assets are Recorded at Cost Distinction between Asset and Expense TYPE OF EXPENDITURE Low-cost items Betterment Repairs and Maintenance TREATMENT Expensed Capitalized Expensed
Property Plant and Equipment Depreciation Natural Resource Depletion Intangible Assets Amortization
Items included in cost all expenditures that are necessary to make the asset ready for its intended use
Self-Constructed Assets
When a company constructs a building or item of equipment for its own use, the amount of capitalized cost includes all the costs incurred in construction Building Permits Architects Fees Contract Price Interest on financing
NonCash Costs
When a capital asset is purchased using non cash items such as a common stock, the value of the equipment company is recorded by: 1. The Fair Market Value of the consideration given 2. If the FMV of the consideration given is not feasible to determine its value, then the FMV of the new asset will be used.
Depreciation
The accounting process of this gradual conversion of plant and equipment capitalized cost into expense is called depreciation Original Cost Residual Value Dep Exp = -------------------------------------------------Service Life
Example:
Date of Purchase Equipment 7/1/2005 Cost P1,000,000 Useful Life 5 years Residual Value P 100,000
JE 1) 7/1/05
2) 12/31/05 Depreciation Expense 90,000 Accumulated Depreciation 90,000 to record depreciation of equipment
Annual Depreciation
Example: Date of Purchase Equipment 1/1/2005 Cost P1,000,000 Useful Life 5 years Residual Value P 100,000
Year Depreciation Accumulated Depreciation Net Book Value -----------------------------------------------------------------------------------------2005 180,000 180,000 820,000 2006 180.000 360,000 640,000 2007 180,000 540,000 460,000 2008 180,000 720,000 280,000 2009 180,000 900,000 100,000
Lapsing Schedule Year Depreciation Accumulated Depreciation Net Book Value -----------------------------------------------------------------------------------------2005 180,000 180,000 820,000 2006 180.000 360,000 640,000 2007 180,000 540,000 460,000 2008 180,000 720,000 280,000 2009 180,000 900,000 100,000
Accumulated Depreciation
180,000 180,000
12/31/05 12/31/06
180,000
180,000 180,000
12/31/07
12/31/08 12/31/09
2009 2008 2007 2006 2005 ---------------------------------------------------------------------------------PPE 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 Less Acc. Dep 900,000 720,000 540,000 360,000 180,000 -------------------------------------------------------------------Net Book Value 100,000 280,000 460,000 640,000 820,000 Income Statement Dep Exp 180,000 180,000 180,000 180,000 180,000
Methods of Depreciation 1. Straight Line Method 2. Double Declining Balance Method 3. Sum of the Years Digit
Straight Line Method Original Cost Residual Value Dep Exp = -------------------------------------------------Service Life Annual Depreciation Expense 1,000,000 - 100,000 = ------------------------------------------ = 180,000 5
Date of Purchase Equipment 1/1/2005 Cost P1,000,000 Depreciation Rate 36% Useful Life 5 years Residual Value 100,000 Year Particular Depreciation Accumulated Depreciation Net Book Value ----------------------------------------------------------------------------------------------------------------2005 1,000,000 x 36% 360,000 360,000 640,000 2006 640,000 x 36% 230,400 590,400 409,600 2007 409,600 x 36% 147,456 737,856 262,144 2008 262,144 x 36% 94,372 832,228 167,772 2009 167,772 x 36% 67,772 900,000 100,000
Sum of the Years Digit Method provides for depreciation that is computed by multiplying the depreciable amount by a series of fractions whose: numerator is the digit in the life of the asset and denominator uses the sum of the digits of the life of the asset computed using the formula SYD = Life (Life+ 1) ------------------2
Date of Purchase Equipment 1/1/2005 Cost P1,000,000 SYD = 5 (5 + 1) = 15 Useful Life 5 years ------------Residual Value 100,000 2 Year Particular Depreciation Accumulated Depreciation Net Book Value ----------------------------------------------------------------------------------------------------------------2005 900,000 x 5/15 300,000 300,000 700,000 2006 900,000 x 4/15 240,000 540,000 460,000 2007 900,000 x 3/15 180,000 720,000 280,000 2008 900,000 x 2/15 120,000 840,000 160,000 2009 900,000 x 1/15 60,000 900,000 100,000
Annual Depreciation Charges for Equipment with Net Cost of 900,000 and 5 year service life
400,000 350,000 300,000 250,000 Straight Line 200,000 150,000 100,000 50,000 0 1 2 3 4 5 Double Declining SYD
Plant and Equipment Disposal Suppose that at the end of 10 years Transtor Company sells its Building. At that time 10/40 of the original cost, or $250,000 would have been built up in Accumulated Depreciation account, and the net book value would be $750,000. If the building is sold for $ 750,000, the account is charged as follows: Cash 750,000 Accumulated Dep 250,000 Building 1,000,000 to record the sale of building
Plant and Equipment Disposal Suppose that at the end of 10 years Transtor Company sells its Building. At that time 10/40 of the original cost, or $250,000 would have been built up in Accumulated Depreciation account, and the net book value would be $750,000. If the building is sold for $ 650,000, the account is charged as follows:
Cash 650,000 Accumulated Dep 250,000 Loss on Sale 100,000 Building 1,000,000 to record the sale of building
Plant and Equipment Disposal Suppose that at the end of 10 years Transtor Company sells its Building. At that time 10/40 of the original cost, or $250,000 would have been built up in Accumulated Depreciation account, and the net book value would be $750,000. If the building is sold for $ 850,000, the account is charged as follows: Cash 850,000 Accumulated Dep 250,000 Building 1,000,000
Gain on Sale 100,000
Exchanges and Trade-Ins Some items of property and equipment are disposed of by trading them in or exchanging them for new assets. The amount used in this calculation depends on whether or not the traded asset is similar to the new asset.
Cost of New Asset Net Book Value of the asset given + cash payment Fair value of the asset given + cash payment
Dissimilar Assets
Assume a company trades in two automobiles, each of which originally costs $20,000, of which $15,000, each has a net book value of $5,000. Each has a fair value of $7,000 as a used car. The fist automobile is traded for another automobile that also has a list price of $30,000 and $18,000 is given to the dealer in addition to the trade-in. Automobile (New) 23,000 Accumulated Depreciation 15,000 Cash 18,000 Automobile (Old) 20,000 to record trade-in of similar assets Value of New Automobile = 5,000 + 18,000
Assume a company trades in two automobiles, each of which originally costs $20,000, of which $15,000, each has a net book value of $5,000. Each has a fair value of $7,000 as a used car. The second automobile is traded for a piece of equipment that also has a list price of $30,000 and $18,000 cash is given in addition to the trade in. Equipment (New) 25,000 Accumulated Depreciation 15,000 Cash 18,000 Automobile (Old) 20,000 Gain on disposal 2,000 to record trade-in of dissimilar assets Value of New Automobile = 7,000 + 18,000
Amortization
is the systematic allocation of the cost or revalued amount of an intangible asset less any residual value, as an expense over the assets useful life. Amortization of Intangible Asset Intangible Asset xxxxx xxxxx
Depletion
as an accounting procedure is the systematic allocation of the cost of a natural resource over the periods benefited
xxxx
Problem 7-2 Higher company had the following disposals during 2006:
Useful Life 10 5 6
Depreciation Method Straight line 150% declining Balance Sum of the Year's Digit
Highers policy is to charge a full years depreciation in the year of purchase if an asset is purchased before July 1.For assets purchased after July 1, only years depreciation is charged. During the year of disposal, years depreciation is charged is the asset is sold after June 30. No depreciation is charged during the year of disposal if the asset of sold before July 1.In all the cases above , estimated residual value at the time of the acquisition was zero.
Problem 7-2
Equipment
ID Number 301
Purchase
Date 2/18/1998
Date of
Disposal 10/3/2002
Disposal
Proceeds 14,300
Usefu l Life 10
Depreciation
Method Straight line
Annual Depreciation = 70,300 / 10 = 7,030 Year Depreciation Expense : 1998 7,030 1999 7,030 2000 7,030 2001 7,030 2002 3,515 -----------------------31,365
Entry: Cash 14,300 Accumulated Depreciation 31,365 Loss on Disposal 24,635 Equipment 70,300 to record disposal of equipment
Cost Less: Accumulated Depreciation Net Book Value Proceeds Loss on Sale
Problem 7-2
Equipme nt
Purcha se
Origin al Date of
Disposal
Usef ul
Life
Depreciation Method
ID Straight Line Depreciation Rate = 96,000/5 Cost = 20% Number Date 415 7/3/200 5
Dispos al Proceeds
Year
Particulars
d Depreciatio n
Value
200 5 200 6
96,00 0 x 81,60 0 x
14,400
38,880
To compute for the gain/loss on the disposal: Net book Value 33,986 56,016 Disposal Proceeds 63,000 ------------Gain on Sale 29,014
81,600
57,120 39,984
Entry: 200 57,12 63,000 30 Cash Accumulated Depreciationx 7 0 62,014 96,000 % Equipment Gain on Disposal 29,014 200 to record disposal of equipment 39,98 30
4 x
% /2 5,998
62,014
33,986
Problem 7-2
Equipment
ID Number
Purchase
Date
Origina l Cost
Date of Disposa l
Disposal
Proceeds
Usefu l Life
Depreciation
Method
Depreciati Accumulat Net Book 38,000 6 Sum of the Year's Digit on ed Value Depreciati on 27,257 22,714 27,257 49,971 68,143 45,429
Entry: Cash 38,000 Accumulated Depreciation 45,429 Loss on Disposal 11,971 Equipment 95,400 to record disposal of equipment
Net book Value 52,971 Disposal Proceeds 38,000 ------------Gain on Sale 11,971
Cost Acquisition Cost Exploration Costs Soil test of the purchased land Soil tests of other sites Test Permits Development Cost Clearing of site Storage Facilities and Office Machinery TOTAL 21,700,000
Natural Resource
To compute for the depletion rate per unit: = Cost of Natural Resource-Salvage Value/Estimated number of units to be extracted = P22,280,000 -2,325,000/ 800,000 tons of coal = P24.94 per ton
Year Units Extracted Depletion Rate 1 30,000 24.94 2 70,000 24.94 3 70,000 24.94 170,000.00
Depletion Accumulated Depletion 748,200.00 748,200.00 1,745,800.00 2,494,000.00 1,745,800.00 4,239,800.00 4,239,800.00
Natural Resource
To compute for the depreciation: Using the straight line method for the Building Annual Depreciation Expense = 291,250/10 years = 29,125 Using the sum of the years digit = 10(10+1) ----------------2 = 55
Year 1 2 3
Building Machinery Equipment SYD Computation 29,125.00 211,363.36 (10/55 x 1,162,500) 29,125.00 190,277.73 ( 9/55 x 1,162,500) 29,125.00 160,090.91 ( 8/55 x 1,162,500) 87,375.00 561,732.00
Interest incurred during the construction period is capitalized and the remaining intrest cost is expensed
g h i
Local real estate taxes for the period of construction on the portion of land to be occupied on by the new wing The cost of mistakes made during construction The Overhead costs of the maintenance department The cost of insurance during construction Cost of damages and losses on any injuries not covered by insurance
Capitalized as part of the cost of the additional wing Capitalized as part of the cost of the additional wing Expensed Expensed Expensed
C. No, sales related taxes will NOT form part on the cost of the machine
D. This will be classified as trade-in of similar assets, no gain or loss is recognized since an exchange of similar assets does not result in the culmination of an earning process.