FINANCIAL ACCOUNTING II
Muhammad Qasim Javed
BBA2020-05
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Case study:
Palfinger AG
Property, Plant & Equipment
A. Based on the description of Palfinger above, what sort of property and equipment do you
think the company has?
The business most likely owns a big amount of land, as well as many tools which are required to
produce large machinery, large structures, and land. They most likely have their own cranes for
moving heavy parts and a variety of huge machines to build the items.
B. The 2021 balance sheet shows property, plant, and equipment of €459,584. What does this
number represent?
The figure €459,584 reflects the buildings, investments in other people's buildings, plant &
machinery, fixtures, fittings, and equipment owned by the corporation less their depreciation
amounts.
C. What types of equipment does Palfinger report in notes to the financial statements?
According to the Palfinger report on notes to the financial statements, the company has different
equipment like hydraulic presses, fittings fixtures and many more.
D. In the notes, Palfinger reports “Prepayments and assets under construction.” What does
this subaccount represent? Why does this account have no accumulated depreciation?
Explain the reclassification of €3,858 in this account during 2021.
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Assets that the company is building on its own behalf are represented by this subaccount.
Depreciation cannot be applied to an asset that is currently being built because it is not yet finished
and not being used. Once a piece of property is in use, it can only be depreciated but with reference
to report it has accumulated depreciation of €926. The reclassification amount is €3,858 which is
reclassified because the machine went into use and now being depreciated.
E. How does Palfinger depreciate its property and equipment? Does this policy seem
reasonable? Explain the trade-offs management makes in choosing a depreciation policy.
According to the rules device by IFRS, the assets are depreciated as soon as they are being used.
However, Palfinger is performing a straight-line depreciation method over the prospective useful
life of relevant assets this policy of Palfinger does not seem reasonable since the straight-line
depreciation approach is preferable for buildings and office furniture because it allots an equal part
of an asset's cost to depreciation expense each period. Depreciation was distributed using the unitsof-production approach on a per-unit basis each period. This system, which would be more
appropriate for this organization since it uses several machines, distributes more depreciation in
periods of heavy use and less in periods of lesser use. The declining-balance technique distributes
more depreciation expense to an asset's early years of life.
F. Palfinger routinely opts to perform major renovations and value-enhancing modifications
to equipment and buildings rather than buy new assets. How does Palfinger treat these
expenditures? What is the alternative accounting treatment?
Palfinger renovate the old equipment and machinery rather than buying new ones. Palfinger named
this expense as the Capital Expenditure and record in its balance sheet as an asset.
G. Use the information in the financial statement notes to analyze the activity in the
“Property, plant and equipment” and “Accumulated depreciation and impairment”
accounts for 2021. Determine the following amounts:
I. The purchase of new property, plant and equipment in fiscal 2021.
The total amount which is spent on the purchase of new property, plant and equipment for the year
2021 is €872,639.
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ii. Government grants for purchases of new property, plant and equipment in 2021. Explain
what these grants are and why they are deducted from the property, plant, and equipment
account.
For the purchase of new real estate, machinery, and equipment, the government provided
incentives totaling EUR 2.717 thousand. The government is providing aid to the company through
these grants in exchange for Palfinger's land, buildings, plant, and machinery. Asset-related grants
must either be recorded as deferred income or subtracted from the asset's carrying value. Palfinger
decided to subtract their grants from the asset's value.
iii. Depreciation expense for fiscal 2021.
For Palfinger's property, plant, and equipment, depreciation costs totaled €54,031 in 2021.
iv. The net book value of property, plant, and equipment that Palfinger disposed of in fiscal
2021.
The property, plant, and equipment that was sold in 2021 had a net book value of €56,462. The
property, plant, and equipment had an acquisition cost of €872,639 and a depreciation cost of
€54,031.
❖ Netbook value = Disposal – Depreciation
= 56,462 – 54,031
= 2431
H. The statement of cash flows (not presented) reports that Palfinger received proceeds on
the sale of property, plant, and equipment amounting to €3,617 in fiscal 2021. Calculate the
gain or loss that Palfinger incurred on this transaction. Hint: use the net book value you
calculated in part G IV, above. Explain what this gain or loss represents in economic terms.
As we know that,
Gain or loss = Netbook value – Proceeds from sales
As from the report we come to know that, proceeds from sales of property, plant & equipment in
fiscal year 2021 is €3,617
Gain or loss = 2431 – 3617
= -1186
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Palfinger incurred a loss of €1186. Palfinger paid €1186 more for the property, plant, and
equipment than it was worth.
I. Consider the €14,974 added to “Other plant, fixtures, fittings, and equipment” during
fiscal 2021. Assume that these net assets have an expected useful life of five years and a
salvage value of €1,273. Prepare a table showing the depreciation expense and net book value
of this equipment over its expected life assuming that Palfinger recorded a full year of
depreciation in 2021 and the company uses:
Value added to “other equipment, operating and office equipment” = €14,974
Useful life
= 5 years
Salvage value
= €1,273
To calculate depreciation, we use the following formula:
Depreciation expense = cost – salvage value / useful life
= 14,974 – 1,273 / 5
=2740.2
➢ Straight-line depreciation:
Year
Computation
1
2
3
4
5
13,701 * 1/5
13,701 * 1/5
13,701 * 1/5
13,701 * 1/5
13,701 * 1/5
Dep Expense
2740.2
2740.2
2740.2
2740.2
2740.2
Ac depreciation
2740.2
5480.4
8220.6
10960.8
13701
NBV
14,974
12,233.80
9,493.60
6,753.20
4,013.20
1,273
Total= 13701
➢ Double declining method:
Year
Computation
1 14974* 40%
Dep Expense
5989.6
Ac depreciation
NBV
14,974
5989.6
8,984.40
4
2
3
4
5
8984.4* 40%
5390.64* 40%
3234.38* 40%
1940.63- 1273
3593.76
2156.25
1293.75
667.63
9583.36
11739.616
13033.36
13701
5,390.64
3,234.38
1,940.63
1,273
Total= 13701
J. Assume that the equipment from part I. was sold on the first day of fiscal 2022 for
proceeds of €18,000. Assume that Palfinger’s accounting policy is to take no
depreciation in the year of sale.
I.
Calculate any gain or loss on this transaction assuming that the company used
straight-line depreciation. What is the total income statement impact of the
equipment for the two years that Palfinger owned it? Consider the gain or loss
on disposal as well as the total depreciation recorded on the equipment.
The equipment would have been worth €12,233.8 when it was sold. If we assume that the proceeds
for 2022 is €18,000 then Palfinger would have a gain of €5,766.2
Gain = 18000 – 12233.8 = 5,766.
The gain will decrease the operating expenses because Palfinger books the difference between the
carrying amount and the net realizable value through the income statement in either the operating
income or operating expenses and a gain would be a receivable. The depreciation recorded while
Palfinger owned the equipment would be €2740.2 and this would need to be taken out of the
accumulated depreciation on the income statement. The 2740.2 that the equipment was worth
would need to be taken out of the equipment on the income statement as well. Also, the €18000
from the actual sale will need to be added or remove.
ii. Calculate any gain or loss on this transaction assuming the company used doubledeclining-balance depreciation. What is the total income statement impact of this equipment
for the two years that Palfinger owned them? Consider the gain or loss on disposal as well as
the total depreciation recorded on the equipment.
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The equipment would have been worth €8984.4 when it was sold. If we assume that the proceeds
for 2022 is €7,500, then Palfinger would have a lose of €1484.4 on the sales. This loss would
increase the operating expenses. The depreciation of €5989.6 would need to be taken out of the
income statement. The €8984.4 that the equipment was worth will need to be taken out of the
equipment on the income statement. The €7500 from the sale will be added or remove.
iii. Compare the total two-year income statement impact of the equipment under the two
depreciation policies. Comment on the difference.
Actually, the combined effects on the income statement for both depreciation techniques will be
the same. The loss for the double-declining approach and the gain for the straight-line method
cancel out the amount of depreciation.
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