Year 12 Accounting
CHAPTER 15
ACCOUNTING FOR NON CURRENT ASSETS
CREDIT PURCHASES OF
NON-CURRENT ASSETS
 Given the large outlays of cash that are sometimes
required to purchase non-current assets these items may
be purchased using credit.
 Where a business purchases a non-current asset on
credit, the transaction must be recorded in the General
Journal before it is posted to the General Ledger.
 See Max’s Mart example p. 334.
 Rather than Creditors Control, a new account – Sundry
creditor – Max’s Mart – has been used to record the
purchase of the office furniture. This is because Creditors
Control is used only for amounts owed for the purchase
of stock.
Sundry Creditors
 A Sundry Creditor account must be created in the
General Ledger. The Sundry Creditor is still a current
liability, but has its own account in the General
Ledger, and would be reported separately in the
Balance Sheet.
 Payments made to these Sundry Creditors must then
be recorded in the Sundries column of the Cash
Payments Journal (not the Creditors column), and
will be reported as Investing Outflows in the Cash
Flow Statement.
Study Tip
 We now have two investing outflows in the
Cash Flow Statement: Cash purchase of noncurrent asset, and Payment to Sundry
Creditor.
The cost of a non current asset
 Where other costs exist (e.g. installation), they must
be included in the cost price of the asset recorded in
the General Journal.
 See Johnson’s Deliveries example.
 Note the service contract does not extend for the life
of the asset, so it is not part of the cost of the delivery
van. Instead, it should be recorded as a current asset
– Prepaid service contract. (It may not yet be paid,
but when the cash is paid to the creditor to settle the
debt, $800 will be for the purchase of this current
asset.)
Johnson’s Deliveries
 The full cost of the van ($21 500) is debited to
Delivery van, Prepaid Service Contract is debited
$800, and the total GST is debited to GST Clearing
($2230). The total invoice price ($24 530) is credited
to Sundry creditor – Jane Motors to show the total
owing for the van, the service contract, and the GST .
You!
 Review Questions 15.1.
 Q’s 2 – 6.
Depreciation of Non-Current Assets
 The process of depreciation is applied for calculating
Depreciation Expense – this is the part of the cost of
the non-current asset that has been consumed, or
incurred, the current Reporting Period.
 The General Journal entries to record Depreciation
Expense are:
DR Depreciation Non-current Asset (E)
CR
Accumulated Dep. – NCA (-A)
 This balance day adjustment has the effect of
increasing expenses in the Income Statement.
Depreciation of Non-Current Assets
 It also decreases the carrying value of the NCA in the
Balance Sheet by increasing the negative asset of
Accumulated Depreciation.
 You!


Review Questions 15.2
Q1 – 4.
Reducing Balance Method
 Ch. 11 introduced only one method – the straight line




method.
The Reducing Balance Method is used for when assets
contribute more to revenue when they are new and less
as they age.
Calculating Depreciation Expense using the Reducing
Balance Method calculating as a percentage of the
carrying value.
See p. 341, 342 for the Finch Fabrics example.
Note you do not need to know the formula. You just need
to realise that the formula calculates each year on the
carrying value (therefore the expense decreases).
Reducing Balance Method
 If the depreciation is for less that a full year, again
you will need to adjust by the number of months
involved (see p. 342).
Comparing Methods
 Refer to p. 343, 344.
 Selecting a depreciation method – simply consider
the revenue earning pattern of the asset.
 You!


Review Questions 15.5
Q’s 1 – 4.
RECORDING THE CASH SALE OF A
NON-CURRENT ASSET
 As we have noted, recording a cash sale of stock in the
ledger involves recording the loss of stock at one amount
(the cost price), and recording the cash received at a
different amount (the selling price). It is in fact two
double-entries.
 A similar principle applies to the sale or disposal of noncurrent assets; we must record the value of the noncurrent asset that has been disposed of (in effect, its cost
price), and also the revenue that has been earned from its
disposal (its selling price). The difference between these
two amounts will produce a profit or loss on the disposal
of the asset (this is covered in detail later in this chapter).
Three Steps
 (Although non-current assets will frequently be sold,
they will sometimes be traded in, so we will refer to
the disposal rather than the sale of the asset.)
 Recording the disposal of a non-current asset thus
involves three steps:



Step 1 Transferring the carrying value (the cost price)
Step 2 Recording the proceeds from the sale (the selling price)
Step 3 Transferring the profit or loss on disposal.
Paris (just thought you should know)
Step 1: Transferring the carrying value
(the cost price of the asset)
 When a non-current asset is disposed of, the firm loses
the asset in much the same way that is loses stock or
prepaid rent as it is consumed. It is in fact incurring an
expense by incurring an outflow – or loss – of an
economic benefit, in the form of a decrease in assets
(namely the asset which has been sold), which also
decreases owner’s equity. However, the business is not
losing the historical cost of the asset, as it will have
already consumed some of the asset’s value, via
depreciation. This means that the value that is lost when
the asset is sold is measured by its carrying value – i.e.
its historical cost less its accumulated depreciation. This
loss of the asset – valued at its carrying value – is the
first thing that must be recorded when the asset is sold.
Drake Industries example
 See p. 346.
 The equipment is removed from the accounts by crediting the
Equipment account. This entry is recorded at Historical cost
($12 000). Simultaneously, the accumulated depreciation that
accompanies the equipment is also removed by debiting the
Accumulated depreciation – equipment account ($10 000).
Both amounts are transferred to a new account – Disposal of
equipment.
 (Note that although this example refers to a sale of a noncurrent asset, the entries would be identical if the asset were
traded-in.)
 At this stage, the Disposal of equipment account has a debit
balance of $2000, representing the carrying value of – and
the expense incurred for – the equipment sold.
Step 2: Recording the proceeds on
disposal
 At the same time as the asset is lost, the firm will also
receive some form of revenue from whoever is taking the
asset. In the case of a cash sale, the proceeds from the
sale of the asset is an inflow of an economic benefit
(cash), in the form of an increase in assets (Bank), which
increases owner’s equity.
 This amount ($1100 in the example) would, of course, be
reported as an Investing Inflow in the Cash Flow
Statement.
 Whereas transferring the carrying value into the Disposal
of equipment account recognised the expense related to
the disposal, recording the proceeds recognises the
revenue earned from the disposal. With this information,
the profit or loss on the disposal can be calculated.
Step 3: Transferring the profit or loss
on disposal
 Only the net effect – the overall profit or loss on the
disposal – will be reported in the Profit and Loss
Statement. Thus the Disposal of Asset account must
be closed, and its balance transferred to a separate
account called either Profit on Disposal of Asset or
Loss on Disposal of Asset.
Transferring a loss on sale
 Because the carrying value of the asset ($2000) is greater
than the proceeds from its sale ($1100), a loss on disposal
of asset, in this case equipment, (of $900) has occurred.
 This loss is also reflected by the balance of the Disposal of
Asset account. The Disposal of Equipment account above has
a debit balance (of $900), just like an expense account. This
confirms that there has been a loss on disposal of equipment.
Transferring a loss on sale
 See General Journal & General Ledger entries p. 349.
 The Disposal of Equipment account has been
emptied – it now has a zero balance – and the Loss
on Disposal of Equipment account shows the overall
loss incurred on the sale. This overall loss – of $900
– will be closed to the Profit and Loss Summary
account at the end of the period, and reported in the
Profit and Loss Statement as an Other Expense.
Transferring a profit on sale
 If the Disposal of asset account has a credit balance – like
a revenue account – it would represent a profit because
the carrying value would be less than the proceeds from
the sale.
 In this case, the Disposal of asset account would be
closed to Profit on disposal of asset. See pp. 350 – 351.
 As a revenue account, Profit on Disposal of Furniture
would be closed to the Profit and Loss Summary account
at the end of the reporting period with other revenues
like Sales, Stock Gain and Discount Revenue. In the
Profit and Loss Statement, it would be reported (with
Discount revenue) as Other Revenue.
Note
 In relation to the Disposal of Asset account:
 A debit balance means the Disposal of Asset account will be
closed to Loss on Disposal of Asset – an expense account
 A credit balance means the Disposal of Asset account will be
closed to Profit on Disposal of Asset – a revenue account.
You!
 Review questions 15.2.
 All q’s.
Thursday
RECORDING THE TRADE-IN OF A
NON-CURRENT ASSET
 In some situations a firm will not sell an asset for cash, but rather
use that asset as a trade-in on a newer model. This would mean
that rather than receiving cash for the sale of the asset, the firm
would instead receive a reduction in the amount payable for the
purchase of a new asset.
 See Lexis Midnight Runners example p. 295.
 In the General Journal, the entries to transfer the carrying cost of
the asset (the blue entries) and transfer the loss on the sale (the red
entries) are exactly the same for a trade-in as they would be if the
asset had been sold for cash. The only difference is that for a tradein, the proceeds from the disposal (the green entries) are recorded
as a decrease in a liability (Sundry Creditor), rather than as an
increase to an asset (Bank) as would be the case for a cash sale. As a
consequence, the proceeds from a trade-in will be recorded in the
General Journal (rather than the Cash Receipts Journal).
Trade ins
 The trade-in is still revenue – a saving of an outflow of economic
benefits (less cash must be paid to the creditor), in the form of a
reduction in a liability (Sundry creditor – Irene Motors), which
increases owner’s equity. However, because there is no cash flow to
speak of, the proceeds – the trade-in – is not reported in the Cash
Flow Statement.
 The only remaining step is to record the purchase of the new van,
which is shown in the General Journal entry.
 See General Ledger p. 297. The accounts show that the old vehicle is
gone, and the new vehicle – valued at $30 000 – is recorded in the
Van account. The Sundry creditor – Irene Motors shows a credit
balance of $32 300: $30 000 for the new van (plus $3 000 GST),
less the $700 trade in on the old one. The disposal of van account
has been closed, and the $500 loss has been transferred to the Loss
on disposal of van account, which itself has been closed to the Profit
and Loss Summary account.
Study Tip
 This example assumes that the new asset is
purchased on credit.
 If the new asset is purchased using cash, the
entry to record the proceeds on the sale (the
green entries) would debit the asset account
directly, rather than Sundry creditor. The
credit entry would still be Disposal of asset.
You!
 Review Questions 15.3.
 Q’s 1 & 2.
REPORTING IN THE
PROFIT AND LOSS STATEMENT
 Only the overall profit or loss on the disposal of a
non-current asset is reported in the Profit and Loss
Statement.
 Because Loss on disposal of equipment is an
expense, it must be closed to the Profit and Loss
Summary account at the end of the Reporting period
along with all the other expenses to help in the
determination of Net profit. A Loss on sale of asset
decreases profit just like Cost of sales, Wages, or
Rent. (See Chapter 9 for closing revenue and expense
accounts.)
REPORTING IN THE
PROFIT AND LOSS STATEMENT
 In the Profit and Loss Statement, a Loss on disposal
of asset will be reported as an Other Expense, as is
shown in Figure 15.8.
 Obviously the opposite is true for Profit on disposal
of asset: it would be closed to the Profit and Loss
Summary account with the other revenue accounts,
such as Sales and Discount revenue, and reported in
the Profit and Loss Statement as Other revenue. This
is shown in Figure 15.9.
REASONS FOR PROFIT OR LOSS ON
DISPOSAL
 Given that depreciation is an attempt to calculate the
value of a non-current asset that has been consumed
over its life, the carrying value of that asset is also an
attempt to gauge the asset’s value at any point in
time. A profit or loss on the disposal of that asset
indicates that the carrying value – and the
depreciation that leads to this carrying value – was
in some way incorrect.
 If the carrying value of the asset is overstated, it is
because it has been under-depreciated; we have not
written off enough depreciation over the asset’s life.
REASONS FOR PROFIT OR LOSS ON
DISPOSAL
 Note ‘poor estimates’ is a poor explanation, as it does
not distinguish between over depreciation and under
depreciation.
 Under-depreciation of a non-current asset
means that:


the estimated scrap value was too high (or overstated)
and/or
the estimated useful life was too high (overstated).
 Over-depreciation of a non-current asset means
that:


the estimated scrap value was understated and/or
the estimated useful life was understated.
 See text for greater detail. Note factors like damage and
demand.
You!
 Read Summary.
 Do at least five end of chapter exercises.
 Read Chapter 16 Where are We Headed.