BPP LEARNING MEDIA Chapter 7 Tangible non-current assets

BPP LEARNING MEDIA Tangible non-current assets Objectives: —Depreciation —Define and explain the purpose —Calculate the annual depreciation charge —Account for depreciation —Account for the revaluation of non-current asset —Account for the disposal of a non-current asset

BPP LEARNING MEDIA Acquisition Cost Acquisition cost excludes financing charges and cash discounts All expenditures needed to prepare the asset for its intended use Purchase price Cost Determination(P147) C 1

BPP LEARNING MEDIA 1.Definition: (P 116) —Depreciation —Depreciable assets —Useful life —Depreciable amount 2. Three important elements about depreciation —Useful life —Residual value —Depreciation methods 预计残值 = 预计残料变价收入 - 预计清 理费用 Depreciation

BPP LEARNING MEDIA — 折旧 Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life.

BPP LEARNING MEDIA —Depreciable amount: Depreciable amount is the cost of an asset, or other amount substituted for cost, less its residual value.

BPP LEARNING MEDIA — 残值 : The residual value of an asset is the estimated amount that an entity would currently obtain from disposal of the asset, after deducting the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life.

BPP LEARNING MEDIA most important (P156) —The charge for depreciation is a cost or expense of the accounting period —The value of the non-current asset in the statement of financial position will be its “net book value “,which is its cost less accumulated depreciation.

BPP LEARNING MEDIA — 资产净值 : Carrying amount is the amount at which an asset is recognised after deducting any accumulated depreciation and accumulated impairment losses

BPP LEARNING MEDIA —Formula : —The annual depreciation charge =(cost of asset –residual value) / expected useful life —Comment: —The straight line method of depreciation is a fair allocation of the total depreciable amount between the different accounting periods. —provided that it is reasonable to assume that the business enjoys equal benefits from the use of the asset in every period of life. Depreciation methods （ 1 ） the straight line method

BPP LEARNING MEDIA Straight-Line Method P 1

BPP LEARNING MEDIA Balance Sheet Presentation Machinery $ 10,000 Less: accumulated depreciation 3,600 $ 6,400 P 1 Straight-Line Method

BPP LEARNING MEDIA Straight-Line Depreciation Schedule P 1 Salvage Value Salvage Value

BPP LEARNING MEDIA Continue …… —Assets acquired in the middle of an accounting period---- -”part-year” amount —Examination question often describe straight line depreciation in this way that : “depreciation is charged at the rate of X percent per annum on the cost of the asset”

BPP LEARNING MEDIA —Formula : —The annual depreciation charge = the rate of depreciation X net book value  the rate of depreciation is fixed  NBV = the cost of asset – accumulated depreciation  residual value is considered at last year ( 前面几年不考虑残值 ，最后一年的折旧 =NBV- 残值） (2) The reducing balance method

BPP LEARNING MEDIA Continue …… —Comment: —The annual charge for depreciation is higher in the earlier years,and lower in the later years —It is on the assumption that the benefits obtained by the business from using the asset decline over time —It is described by : the rate of depreciation should be x% of the NBV

BPP LEARNING MEDIA Double-Declining-Balance Method P 1

BPP LEARNING MEDIA Double-Declining-Balance Method P 1

BPP LEARNING MEDIA (3) Change in method of depreciation —Generally, the chosen method of depreciation should be applied consistently from year to year. —If there are any changes in the expected pattern of use of the asset, then the method used should be changed —The change is not retrospective. Only current and future periods are affected. The remaining NBV is depreciated under the new method. （折旧政策的变更不影响以前期 间已经计提的折旧）

BPP LEARNING MEDIA Change in expected useful life or residual value of an asset —New depreciation=(NBV-residual value)/revised useful life Depreciation is not a cash expense — 非付现成本

BPP LEARNING MEDIA Depreciation is an estimate Predicted salvage value Predicted useful life Changes in Estimates for Depreciation C 2

BPP LEARNING MEDIA Changes in Estimates for Depreciation C 2

BPP LEARNING MEDIA accumulated depreciation 1.Accumulated depreciation is the amount set aside as a charge for the wearing out of non-current assets 2. Accounting dr. depreciation expense cr. Accumulated depreciation account  the non-current asset accounts are unaffected by depreciation

BPP LEARNING MEDIA 3. Three basic aspects —A depreciation charge is an expense —Nearly all non-current assets are depreciable except Freehold land and non-current investment —The total accumulated depreciation is always getting larger,until the non-current assets is fully depreciated. ◆ Freehold : an estate held in fee or for life ( 享有全权的或 终身保有的不动产）

BPP LEARNING MEDIA —Measurement after recognition: An entity shall choose either the cost model in paragraph 30 or the revaluation model in paragraph 31 as its accounting policy and shall apply that policy to an entire class of property, plant and equipment.

BPP LEARNING MEDIA —Cost model: 30. After recognition as an asset, an item of property, plant and equipment shall be carried at its cost less any accumulated depreciation and any accumulated impairment losses.

BPP LEARNING MEDIA —Revaluation model: 31. After recognition as an asset, an item of property, plant and equipment whose fair value can be measured reliably shall be carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairement losses. Revaluation shall be made with

BPP LEARNING MEDIA —Revaluation shall be made with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the balance sheet date.

BPP LEARNING MEDIA —If an item of property, plant and equipment is revalued, the entire class of property, plant and equipment to which that asset belongs shall be revalued.

BPP LEARNING MEDIA —If an asset’s carrying amount is increased as a result of a revaluation, the increase shall be credited directly to equity under the heading of revaluation surplus. However, the increase shall be recognised in profit or loss to the extent that it reverses a revaluation decrease of the same asset previouly recognised in porfit or loss.

BPP LEARNING MEDIA —If an asset’s carrying amount is decreased as a result of a revaluation, the decrease shall be recognised in profit or loss. However, the decrease shall be debited directly to equity under the heading of revaluation surplus to the extent of any credit balance existing in the revaluation surplus in respect of that asset.

BPP LEARNING MEDIA —The example of “true and fair view” 1. The amount of the revaluation is added to capital (a revaluation reserve) —Revaluation reserve = revalued amount –NBV = revalued amount –cost + accumulated depreciation 3 revaluation

BPP LEARNING MEDIA continue….. 2. The accumulated depreciation on the old cost is effectively “cleared out ”when the gain is transferred to the revaluation reserve. Dr: Accumulated depreciation Cr. Non-current asset Dr: Non-current asset Cr: Revaluation reserve

BPP LEARNING MEDIA 3. When a non-current assets is revalued, depreciation is charged on the revalued amount depreciation amount = revalue amount/ remaining useful life (p127) ★资产重估后以新的重估成本为基础计算折旧

BPP LEARNING MEDIA 4. Disposal —The gains or losses of disposal non-current asset are reported in the income and expenses part of the statement of comprehensive income. —they are referred to as “ profit on disposal of non- current assets” or “ loss on disposal”

BPP LEARNING MEDIA Recording cash received (debit) or paid (credit). Removing accumulated depreciation (debit). Update depreciation to the date of disposal. Journalize disposal by: Removing the asset cost (credit). Recording a gain (credit) or loss (debit). Recording a gain (credit) or loss (debit). Disposals of Plant Assets P 2

BPP LEARNING MEDIA Update depreciation to the date of disposal. Journalize disposal by: If Cash > BV, record a gain (credit). If Cash < BV, record a loss (debit). If Cash = BV, no gain or loss. If Cash > BV, record a gain (credit). If Cash < BV, record a loss (debit). If Cash = BV, no gain or loss. Discarding Plant Assets Recording cash received (debit) or paid (credit). Removing accumulated depreciation (debit). Removing the asset cost (credit). Recording a gain (credit) or loss (debit). Recording a gain (credit) or loss (debit). P 2

BPP LEARNING MEDIA Disposals (example:P132)

BPP LEARNING MEDIA Equipment costing $8,000, with accumulated depreciation of $6,000 on December 31 st of the previous year was discarded on July 1 st of the current year. The company is depreciating the equipment using the straight-line method over eight years with zero salvage value. Discarding Plant Assets Step 1: Bring the depreciation up-to-date. Step 2: Record discarding of asset. P 2

BPP LEARNING MEDIA Selling Plant Assets On March 31 st, BTO sells equipment that originally cost $16,000 and has accumulated depreciation of $12,000 at December 31 st of the prior calendar year-end. Annual depreciation on this equipment is $4,000 using straight-line depreciation. The equipment is sold for $3,000 cash. P 2 Step 1: Update depreciation to March 31 st. Step 2: Record sale of asset at book value ($16,000 - $13,000 = $3,000).

BPP LEARNING MEDIA Selling Plant Assets P 2 On March 31 st, BTO sells equipment that originally cost $16,000 and has accumulated depreciation of $12,000 at December 31 st of the prior calendar year-end. Annual depreciation on this equipment is $4,000 using straight-line depreciation. The equipment is sold for $2,500 cash. Step 1: Update depreciation to March 31 st. Step 2: Record sale of asset at a loss (Book value $3,000 - $2,500 cash received).

BPP LEARNING MEDIA Ledger accounts entries 1.ledger account : disposal of non-current asset 2.Steps of accounting 3.Write off non-current asset —Write off accumulated depreciation —Cash received —Transfer “disposal of non-current asset” to I&E

BPP LEARNING MEDIA 6. The asset register —An asset register is used to record all non-current assets and is an internal check on the accuracy of the nominal ledger. —Data kept in an asset register