YEAR 12 ACCOUNTING
ES5 - ACCOUNTING FOR NON-CURRENT ASSETS
Non-current assets are assets, other than current assets, that are purchased by the
business and are not intended for resale but are used within the operation of the business
to earn revenue, and will normally be kept and used for longer than one accounting period.
Current assets are those assets which are in the form of cash or will be converted into cash within
the financial year, such as inventories and accounts receivable.
When non-current assets are classified in the Balance Sheet, they are grouped under the following
headings:
Property, Plant and Equipment
Intangible Assets
Investments
_____________________
_____________________
____________________
_____________________
_____________________
____________________
_____________________
_____________________
____________________
_____________________
_____________________
____________________
These assets are specifically acquired because they will help the business grow, it is therefore
necessary to ensure appropriate controls are implemented over these long-term assets.
INTERNAL CONTROLS OVER PROPERTY, PLANT AND EQUIPMENT
The most important control over Property, Plant and Equipment is the Property, Plant and
Equipment register. When a business has more than one item of Property, Plant and Equipment, it
is desirable that a register be kept to record details of each asset. (Example p 345) A register
enables:

________________________________________________________________________
________________________________________________________________________
______________________________________________________________________
______________________________________________________________________

______________________________________________________________________
INTERNAL CONTROLS OVER THE PURCHASE OF PROPERTY, PLANT & EQUIPMENT
Authorisation – The purchase of an item of Property, Plant and Equipment is a major decision,
therefore requires higher level management to authorise such purchases.
Selection – As the purchase of an item of Property, Plant and Equipment will commit the business
to large payments of money, it is important all facts are known before purchase. Eg. Performance,
reliability, anticipated repair costs, cost of delivery, etc.
Proof of ownership – The purchase of Property, Plant and Equipment is usually accompanied by
proof of ownership, such as title deeds to property. These need to be kept in a safe or a bank
safety deposit box.
1
Payment of cash – Once the purchase is authorised, it becomes a normal cash payment and
details are recorded in the Property, Plant and Equipment register.
INTERNAL CONTROL OVER THE STORAGE OF PROPERTY, PLANT & EQUIPMENT
Location – All assets should be identified by some means, usually by a number. The Property,
Plant and Equipment register identifies assets owned and their location.
Maintenance – It is essential that all assets are kept in good working order.
Protection – The assets need to be protected against theft and damage. Adequate
insurance should also be maintained against any unforeseen circumstances.
INTERNAL CONTROL OVER THE DISPOSAL OF PROPERTY, PLANT & EQUIPMENT
Authorisation – To prevent an unauthorised employee selling valuable assets, proper
authorisation must occur when disposing of assets.
Physical disposal – This can take place in the form of outright sale, tender, trade-in
or scrapping. Whichever method is adopted, the best possible price should be
obtained, and this, too, should be authorised.
Receipt of cash – For all money received from the disposal of an asset, a receipt
must be issued and the money put through the cash receipts journal. Disposal of the asset is then
recorded in the Property, Plant and Equipment register.
Exercises: pages 392 - 393, 10.37 - 10.40
CAPITAL AND REVENUE EXPENDITURE
The distinction between capital and revenue expenditure is based on time and the nature of the
expenditure. Expenditure resulting in the acquisition and installation of an asset whose life will
extend over more than one accounting period is referred to as capital expenditure. This
expenditure is capitalised (treated as an asset) and appears in the Balance Sheet. The following
are capital expenses.



Expenditure to bring an asset into a location and condition ready for use. Eg. All freight,
legal costs, installation costs and other such expenses related to the purchase of an asset,
are placed into the relevant asset account.
Improvement or addition to existing assets. Eg. New bodies to delivery vans, extensions to
buildings, car parks and storage facilities would also be placed in the relevant asset
account.
Major expenditure to extend the life of the asset would also be capitalised. Eg. Fitting a
new or reconditioned motor to a vehicle to extend its useful life.
Revenue Expenditure is expenditure that will be consumed during the current accounting period.
These items are considered as expenses to the business and appear in the Income Statement.
The following are examples of revenue expenditure.


Expenses to maintain as asset in an efficient working condition. Eg. Repairing a
damaged motor, repainting a building, replacing tyres on a truck, replacing blown
light bulbs and cleaning floors are placed into relevant expense accounts.
Expenses that are associated with assets but which will be consumed during the
accounting period. Eg. Motor vehicle registration, insurance, petrol and oils.
2
If revenue expenditure is incorrectly capitalised, the result would be an overstatement of the
period’s profit (because expenses are understated). If capital expenditure is incorrectly recorded as
a revenue expense, the result would be an understatement of the period’s profit (because
expenses are overstated).
ACCOUNTING FOR THE PURCHASE OF PROPERTY, PLANT AND EQUIPMENT
Purchasing of non-current assets can be for cash or on credit.
Eg. March 1 Purchased new machinery from Glover Machinery for $22 000, including GST.
Date
Mar
General Journal
F
1
Particulars
Machinery
GST Credits Received
Glover Machinery
(Purchased Machinery on credit)
Debit
Credit
20 000
2 000
22 000
If purchasing the asset for cash the entry would be the same, except the Cash at Bank account
would be credited instead of the Accounts Payable account.
All expenses involved in purchasing Property, Plant and Equipment (customs duty, freight and
installation costs, etc.) must be capitalised. However, any GST involved is NOT capitalised.
Eg. March 31 Paid freight $550, insurance during transit $660, and installation expenses $1650 on
machinery purchased. 10% GST was included on all these items.
Date
Mar 31
Particulars
Machinery
GST Credits Received
Cash at Bank
(Paid freight on machinery)
General Journal
F
Machinery
GST Credits Received
Cash at Bank
(Paid insurance on machinery)
Machinery
GST Credits Received
Cash at Bank
(Paid installation on machinery)
Debit
Credit
500
50
550
600
60
660
1 500
150
1 650
3
Prepare the ledger for the machinery account:
DATE
PARTICULARS
F
Ledger
DR
CR
BALANCE
N
Machinery a/c
Exercise: page 327, 9.3
DEPRECIATION AND AMORTISATION
Depreciation is the allocation of the depreciable amount of an asset over its useful life. The
term is usually used in relation to physical assets.
Depreciable amount is the cost of the depreciable asset less the net amount expected to be
recovered on disposal of the asset at the end of its useful life.
Amortisation refers to the gradual writing off of the cost of certain assets through the
passing of time or depletion. It usually refers to the writing off of intangible assets and
natural resources.
A non-current asset usually diminishes in value over its useful life. There are a number of reasons
for this.




Wear and Tear occurs on some assets, especially mechanical and electrical ones. Repairs
and maintenance can be carried out, but eventually the asset will expend its useful life.
Obsolescence – in today’s technological world, new inventions may make existing assets
obsolete before the end of its useful life. Similarly, an asset may become obsolete as it is no
longer suitable for use in the business.
Passing of time – certain assets, such as a 20-year patent, lessen in worth each year. The
worth of the patent diminishes by one-twentieth until, at the end of 20 years, it has no value.
Depletion – The quantity of natural resources available from mines, quarries and forests
diminishes as material is removed from them. This is known as ‘depletion’.
FACTORS DETERMINING THE DEPRECIATION CHARGE
1.
The asset’s cost price - original cost of buying the asset plus all expenses necessary to bring
the fixed asset into location and condition ready for use (capital expenditure).
2.
Useful life of the asset - usually expressed in units of use or years.
3.
Anticipated residual value - anticipated worth to the business of the asset at the end of its
estimated life. This depends on a large degree of estimation and opinion from a valuer.
4.
The method of calculating the depreciation charge.
4
METHODS OF CALCULATING THE DEPRECIATION CHARGE
A number of methods can be used to calculate depreciation. The method chosen must be based
on careful evaluation of all factors so the depreciation charge is as accurate as possible. Once the
method has been chosen, consistency should be employed to ensure comparability from one
period to the next. If the method is changed, all relevant details concerning the change must be
disclosed. The two acceptable methods for use in Australia are:
1.
Straight line (prime cost) method – Each accounting period is allocated a uniform portion
of the cost of the non current asset less any residual value. Some examples of assets with
uniform use throughout a period are: storage tanks, fencing, surface paving, pipelines, and
furniture. The information needed is the original cost of the asset (including any necessary
expenses, but excluding GST), estimated life of the asset and estimated residual value of the
asset.
Advantages of this method include: it is simple to use and is more appropriate where the
benefits from the asset are roughly equal in each period.
Disadvantages of this method include: it does not take into consideration the degree of
usage, age or efficiency of the non current asset, and it does not allow for the likelihood of
greater costs of repairs in the later life of the asset due to wear in earlier accounting periods.
The formula is: Original cost - Estimated residual value
Estimated Life
Eg. Furniture is purchased for $13860 (including GST). Freight of $220 (including GST) is
also paid. The estimated life of the furniture is five years and the estimated residual value is
$800. Calculate the annual depreciation.
Depreciation = 12 800 – 800
5
= $2 400 per annum
To obtain the cost of 12800 = purchase price $13 860 – GST ($1260) + freight ($220) - GST ($20)
Exercise: page 331, 9.7
2.
Diminishing (reducing) balance method - The allocation of the cost of an asset using the
diminishing balance method will result in a decreased depreciation expense over time.
Therefore it is most suitable for assets that give most of their service potential in their early
life. Some practical examples are highly technical equipment and motor vehicles. The
information required for this method – original cost of the asset (including necessary
expenses and excluding GST), accumulated depreciation and rate of depreciation to be
applied.
Advantages of the diminishing balance method are: It is suitable for use where the
service rendered by the asset is greatest in the early years of its life, i.e. the greatest charges
against revenue occur in the periods where the greatest benefits are obtained. The
depreciation charge is lower as the asset becomes older and as there is a likelihood of higher
maintenance costs, and this has the effect of evening out the overall charge against each
period’s revenue.
Disadvantages include: The depreciation charge in the final year may need to be adjusted
unless the formula is used.
The formula is: Rate x (Original Cost - Accumulated depreciation)
(original cost – accumulated depreciation = diminished balance )
5
eg. A motor vehicle is bought on July 1 for $33000 (including GST) and has an estimated
residual value of $12000. The rate of depreciation is 20% of the diminishing balance.
Calculate the depreciation for each of the four years, after which time the vehicle will be sold.
YEAR
1
CALCULATION
20% of $30000
2
20% of $24000
3
20% of $19200
4
20% of $15360
(adjustment needed to bring residual value
to $12000)
AMOUNT DIMINISHED BALANCE
$6000
$30000 - $6000 =
$24000
$4800
$24000 - $4800 =
$19200
$3840
$19200 - $3840 =
$15360
$3072
$ 288
$15360 - $3360 =
$12000
Exercises: page 333, 9.9 - 9.10
ACCOUNTING FOR DEPRECIATION
Once the depreciation has been calculated an entry must be made in our accounting records. The
entry is only to be recorded at the end of the accounting period as a balance day adjustment or
when the asset is sold. The entry will be:
Depreciation on ….
Accumulated depreciation on …
(Depreciation allowed for the year)
DR
CR
xxx
xxx
Furniture costing $4 620 (including GST) was purchased on 1 July 2011. The estimated life of the
furniture was 5 years and it has an estimated residual value of $200. You are to calculate the
depreciation for the year ended 30 June 2012, using the straight line method and record this in the
General Journal. Prepare the General Journal entry in the space provided.
Date
Particulars
General Journal
F
Debit
Credit
Exercises: page 336, 9.12 - 9.13
DISPOSAL OF A PROPERTY, PLANT AND EQUIPMENT ASSET
Each Property, Plant and Equipment account is a control account and may contain information on
many assets of a particular type. When an asset is sold or otherwise disposed of it is desirable to
record such a sale through a special account called a Disposal account and not through the asset
itself. The Disposal account gathers together all information concerning the asset being disposed
of. It is therefore easier to find out whether a gain or loss has been made on the disposal.
Remember that if an asset is disposed of (physically leave the business), all the records in the
General Journal and Subsidiary ledgers must be adjusted accordingly.
6
Recording the disposal of an asset generally necessitates the following steps.
1
Depreciate the asset for that part of the current accounting period for which the
asset has been used.
2
Transfer the cost of the asset sold from the asset account to the Disposal account.
3
Transfer any depreciation that has accumulated on the asset sold from the
Accumulated Depreciation account to the Disposal account.
4
Record the disposal price of the asset (if any) in the Disposal account.
5
Determine whether a gain or loss has been made on the disposal of the asset. This
gain or loss would be shown in a Gain or Loss on Disposal account.
EXAMPLE
On 1 September 2011, J Smith had motor vehicles purchased for $26400 (including GST). At this
date, one car that had been purchased on 1 June 2008 at a cost of $6600 (including GST) was
sold for $3300 (including GST). On July 1 2011, the Accumulated Depreciation on Motor Vehicles
account had a credit balance of $12000. The firm’s policy is to depreciate motor vehicles at 20%
per annum using the straight line method. Assume there is no residual value and that 30 June is
the end of the financial year.
Step 1
Date
Sept 1
Step 2
Record depreciation for that part of year (2 months) for the vehicle sold.
General Journal
Particulars
F
Debit
Credit
Depreciation on Motor Vehicle
200
Accumulated Depreciation on Motor
Vehicle
(Depreciation 20% on $6000 for 2
months)
Transfer the cost price of the one vehicle sold to the Disposal account.
200
Date
Sept 1
Particulars
F
Debit
Credit
Disposal of Motor Vehicle
6 000
Motor Vehicle
6 000
(Transfer of Motor Vehicle to Disposal
account)
Step 3
Transfer the amount of accumulated depreciation on that vehicle sold to the
Disposal of Motor Vehicle account.
Date
Sept 1
Step 4
Date
Sept 1
Particulars
F
Debit
Credit
Accumulated Depreciation on Motor
3 900
Vehicle
Disposal of Motor Vehicle
(Transfer of Accumulated Depn to
Disposal a/c)
Record the disposal of the motor vehicle for cash $3300.
Particulars
Cash at Bank
Disposal of Motor Vehicle
GST Collected
(Disposed of motor vehicle for cash)
F
Debit
3 900
Credit
3 300
3 000
300
7
Step 5
Date
Sept 1
Determine the gain or loss and put this into our records.
Particulars
Disposal of Motor Vehicle
Gain on Disposal of Motor Vehicle
(Gain on sale of motor vehicle)
F
Debit
Credit
900
900
Draw up the time line used for this question in the space provided.
Post the General Journal entries to the ledger.
DATE
PARTICULARS
Ledger
F
DR
CR
BALANCE
N
Gain on Disposal of Motor
REVENUES
Vehicle a/c
Depreciation on Motor
EXPENSES
Vehicle
ASSETS
Motor Vehicle a/c
Accumulated Depreciation on Motor Vehicle
a/c
Disposal of Motor Vehicle
a/c
8
LIABILITIES
GST Collected a/c
The Gain on Disposal of Motor Vehicle account is closed off at the end of the accounting period to
the Profit and Loss account (along with other revenue and expense accounts) by the following
entry.
Date
Sept 1
Particulars
Gain on Disposal of Motor Vehicle
Profit and Loss
(Closing entry)
F
Debit
Credit
900
900
The gain on disposal is classified in the Income Statement as revenue. When a loss is made the
above journal entry would be reversed and classified as an expense.
DISPOSAL OF AN ASSET ON CREDIT OR USED AS A TRADE-IN
If an asset is disposed of on credit or used as a trade-in, the procedure for this is the same apart
from step 4. The person or firm to whom the asset is sold must be debited for the agreed sale
price or trade-in price. The general journal entry would be:
DATE
Sept 1
PARTICULARS
M Caldwell
GST Collected
Disposal of furniture
(Disposal of old furniture)
F
DR
DR
CR
CR
CR
xxx
xxx
xxx
Exercises: pages 341-343, 9.14 - 9.20, pages 354 – 356, 9.27 – 9.28 (spreadsheeting)
Additional Exercises: page 350, 9.23 - 9.24, page 357, 9.30, page 359, 9.33
9
REVISION
1
R Roberts purchased a new machine from Machinery Supplies on 1 January 2008 for $17
600. Freight and installation costs of $1 650 were paid by cheque. The estimated life of the
machine was five years and the residual value at that time was estimated to be $4 900.
Depreciation of 25% per annum is to be charged according to the diminishing balance method.
On 31 December 2011 the machine was traded in for $5 500 on a new model to Machinery
Suppliers. The new machine, which cost $22 000, is to be depreciated using the straight line
method of depreciation. Estimated life is 5 years and there is no residual value. Show the
journal entries to record the above for the financial year ended 30 June 2012. Show how the
Balance Sheet extract would appear on 30 June 2009, 2010, 2011 and 2012.
2
On July 1 2010, A Brown bought on credit from G Smith for two identical machines costing
$11000 each. The machines were expected to last for 5 years and have a residual value of $1
000 each. Delivery Expenses of $550 and Installation Costs of $1 100 were also paid, in cash,
for each machine. Depreciate the machines using the straight-line method. On April 1 2012,
one machine was traded in on a new machine costing $8 800. Simpson Bros gave Brown $6
600 for the old machine. The new machine is to be depreciated at a rate of 15% using the
Diminishing Balance method. Show the journal entries to record the above from 1 July 2010 to
30 June 2012. Show how the Balance Sheet extract would appear on 30 June 2011 and
2012.
3
On 1 October 2008, Sisley & Sons purchased two motor vehicles for $25 300 each. The
estimated life was seven years and the residual value was anticipated to be $9 000 per
vehicle. Total insurance and registration of $1 573 was paid. Depreciate using the straight line
method. On 30 September 2011, it was decided to trade in one motor vehicle for $14 300 to
Anderson Motors. A new vehicle was purchased for $30 800. A new body costing $5 500 was
paid by cash; as was the insurance and registration of $825. Depreciate using the Diminishing
Balance method at 20% per annum. Show the journal entries to record the above for the
financial year ended 30 June 2012.
4
On July 1 2010, Bentwood Trading bought two machines for $6 600 each, on credit from Ace
Machinery. It was decided to depreciate the machines at 25% per annum using the
Diminishing Balance method. Insurance Expenses of $1 320 per machine along with
Installation Expenses of $3850 each were also paid. On 31 March 2012, one machine was
traded in to Ace Machinery for a new model, the price of which was $8 800. Ace Machinery
allowed the firm $5 500 for the old machine. It was decided to depreciate the new machine at
a rate of 40% per annum on the diminishing balance. Show the journal entries to record the
above from 1 July 2010 to 30 June 2012. Show the Balance Sheet extracts for each of these
years.
5
On 31 July 2008, Samuel Jackson bought a vehicle (no.1) on credit from Vroom Motor
Vehicles for $22 000. Mr Jackson intended to keep the vehicle for 5 years at which time it
was expected to have a residual value of $5000. Due to the nature of the vehicle, it was to
use the straight-line method of depreciation.
On the 1 September 2008, Samuel Jackson bought a second vehicle (no.2) from Elite
Machines at a cost of $11 000 on credit. Freight of $1 650 was paid (by cheque) to transport
this vehicle. Vehicle registration of $330 was also paid on this day. The vehicle was to have
an estimated life of 5 years and an estimated residual value of $2200. Mr Jackson decided to
use the diminishing balance method at the rate of 25% per annum for this vehicle.
10
On 1 February 2011, Samuel Jackson traded the vehicle (no.1) to Adams Motors for a new
vehicle (no.3) costing $33 000. This was a credit transaction. Adams Motors allowed $9 900
on the vehicle traded in. The new vehicle was to have an estimated life of 4 years, an
estimated residual value of $4000. Given that this vehicle was a replacement for (no.1), it
was decided to use the same method of depreciation that was used for vehicle (no. 1).
Additional information:
 All prices are GST inclusive.
 Round calculations off to the nearest dollar
You are required to complete the following up until the end of 30 June 2011:
a.
Provide the general journal entries necessary for the above transactions.
b.
Show how the asset account will appear in the Balance Sheet as at 30 June 2009,
2010 and 2011
THEORY REVISION
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
Differentiate between current and non current assets. Give examples to support your
explanation.
What is an intangible asset and give an example.
What is the purpose of an Accumulated Depreciation account and how is it classified?
Using examples, explain the difference between capital and revenue expenditure. How are
they accounted for in the books of a business?
Explain 4 reasons why an asset’s value diminishes over time.
Explain the difference between depreciation, amortisation and depletion.
What is a Property, Plant and Equipment Register and list 8 items it could contain?
Why are authorisation and physical disposal important considerations when disposing of non
current assets?
A new body for a motor truck was incorrectly recorded in the Repairs to Motor Vehicle
Account. Analyse the effect that this error will have on the year’s profit and total assets.
If the business buys a new item of Equipment for $50 000 and sells it for $40 000 one year
later, has the business made a loss? Explain.
“The Accumulated Depreciation Account represents funds that have been set aside for the
replacement of a non current asset.” Comment on this statement.
On 1 July 2010, S Roland bought a truck for $55 000 cash. This cost was debited to the
vehicle account in the ledger. A tray for the truck was purchased for $12 000 cash and
Registration of $650 was also paid on this date. These amounts were debited to the Motor
Vehicle Expenses Account. Depreciation was to be calculated using the diminishing balance
method at a rate of 25%. The estimated life of the vehicle is 5 years and the residual value is
estimated to be $17 000. Depreciation of $10 000 was recorded on 30 June 2011. Critically
evaluate the accounting procedures used, make recommendations to correct poor
procedures and explain the effects of this on the accounting reports of the business. No GST
was applicable in this business.
11
12 ACCOUNTING REVISION TEST
QUESTION 1
Luke Wayne, owner of Wayne Pty Ltd, bought a machine from Ace Machinery for $22000 on 1 July
2010. The supplier installed the machinery at a cost of $2 200. The annual insurance premium of
$440 was also paid at this stage. GST was included in all of these costs.
Luke estimated the life of the machinery to be 5 years and to have a residual value of $4 000. The
2010-2011 Tax Guide recommended that the rate of depreciation for machinery be 30%
diminishing balance.
Luke has recorded the purchase and deprecation of the asset for the year in his records as follows:
Date
2010
July 1
Particulars
MACHINERY ACCOUNT
F
Debit
Credit
Ace Machinery
Ace Machinery
Bank
Balance
20 000
2 000
400
N
20 000 Dr
22 000 Dr
22 400 Dr
ACCUMULATED DEPRECIATION ON MACHINERY ACCOUNT
2011
June 30
Depreciation on Machinery
3 600
3 600 Cr
Luke also feels that because he owns a large number of machines, it is very hard for him to
safeguard and keep control over this valuable asset.
As the firm’s accountant at the close of the financial year, you are required to present a report to
Wayne Pty Ltd which:

Defines the term “Non Current Assets”

Explains the difference between capital and revenue expenditure

Explains the concept of depreciation

Explains the advantages and disadvantages of using the diminishing balance method of
depreciation recommended by the Australian Taxation Office

Explains four controls which should be implemented to safeguard the machinery owned.

Critically evaluates the accounting procedures used by Luke Wayne

Recommends correct procedures wherever you consider Luke Wayne’s methods are
incorrect or unsuitable

Identifies and evaluates how different depreciation amounts can affect accounting reports
12
QUESTION 2
On 1 October 2009, Bramston Bros bought two Motor Vehicles for $27 500 each. A new body was
installed on Vehicle A for $5 500 cash to enable it to be used for the delivery of goods. Insurance
and Registration of $1 100 per vehicle was also paid by cheque. The estimated life of each vehicle
is 5 years and each is anticipated to have a residual value of $10000. The vehicles are to be
depreciated using the Straight Line method of depreciation.
On 31 March 2012 Vehicle A was traded in to Reef City Ford for $16 500 and a new motor vehicle
was purchased from them for $49 500. Registration and insurance of $748 was paid by cheque for
this new vehicle. This new vehicle has an estimated life of 6 years and an anticipated residual
value of $20 000. It is to be depreciated using the diminishing balance method at a rate of 25%.
You are required to:
1
Show journal entries to record the above information for the year ending 30 June 2012.
2
Show how the asset account will appear in the Balance Sheet as at June 30 2010, June 30
2011 and June 30 2012.
NOTE:
Closing entries are not required.
GST is included in all relevant amounts.
13