TANGIBLE FIXED ASSETS

Vũ Quốc Thông (PhD.) 10/10/2020 Chapter Vũ Quốc Thông (PhD.) Compute depreciation, using the following methods: straight – line method, units-ofproduction method, and declining-balance method  Journalise entries for the disposal of fixed assets  Describe how depreciation expense is reported in a P/L statement, and prepare a B/S that includes fixed assets  Vũ Quốc Thông (PhD.) 10/10/2020  Fixed Assets  Purchase of Fixed Assets  Depreciation  Accounting for Depreciation  Disposal of Fixed Assets  Financial Reporting for Fixed Assets  They could be machines, plants, properties, etc Account: PPE account (Property, plant and equipment) Vũ Quốc Thông (PhD.) 10/10/2020  Main characteristics: • Permanent or long-term Used to earn Revenue  Fixed assets maybe purchase with cash or on credit (on account)  Dr PPE Cr Cash / Account payable Vũ Quốc Thông (PhD.)   10/10/2020 As time passes, fixed assets (except land) lose their ability to provide useful services Over time, they may be broken, and can not operate well any more as the beginning Depreciation • Decrease in usefulness Recorded as expenses  Fixed assets are presented on the B/S at their Net Book Value (Cost of Fixed Assets – Accumulated Depreciation) Vũ Quốc Thông (PhD.) 10/10/2020  Fixed asset’s cost: all amounts spent to get it to the business’ premises and be ready for use  Expected useful life: how long the fixed asset can be used by the business  Residual value: what the fixed asset item is worth at the end of its expected useful life Fixed asset’s cost Residual value Depreciation Cost Useful life 10 Vũ Quốc Thông (PhD.)  10/10/2020 Three methods of depreciation: Straight-line Units-of-production Declining-balance 11 12 Vũ Quốc Thông (PhD.)  10/10/2020 This method provides for the same amount of depreciation expense for each year of the asset’s useful life Depreciation Cost Annual Depreciation Expense Estimated useful Life 13  Example: • Assume that the initial cost of an asset is $40,000, its estimated residual value is $4,000, and its estimated useful life is 10 years • Annual Depreciation Expense = ? 14 Vũ Quốc Thông (PhD.)   10/10/2020 The amount of depreciation could be calculated for less than one accounting period Example: • An asset is bought at cost of $40,000 on 1st of March 20X0, its estimated residual value is $4,000, and its estimated useful life is 10 years • What is its depreciation expense for the year ended on 31st December 20X0 ? 15  This method is used when the usage of fixed asset varies from year to year  The idea is that the more depreciation should be recorded when the machine is used for more hours (or for more units produced) 16 Vũ Quốc Thông (PhD.) 10/10/2020  The useful life of fixed asset is now expressed in terms of estimated number of hours used or estimated number of units produced Depreciation Cost Depreciation for a unit-ofproduction Estimated number of hours used (or estimated number of units produced) 17  Example: • A machine with an initial cost of $100,000 and an estimated residual value of $5,000 is expected to produce 200,000 units during its useful life time • What is the depreciation expense of this machine? Assumption: during the accounting period, this machine produced 35,000 units 18 Vũ Quốc Thông (PhD.) 10/10/2020  This method provides for a declining (reducing) depreciation expense over the useful life of the asset  The highest amount of depreciation is recorded on the first year 19  Depreciation amount: • For the first year = cost of asset X declining- balance rate • After the first year = the net book value X declining-balance rate 20 10 Vũ Quốc Thơng (PhD.) 10/10/2020  Example: • The initial cost of an asset is $40,000, its estimated residual value is $4,000, and its estimated useful life is years Declining-balance rate is 40% Compute the depreciation for this asset • Assume that the asset is purchased at the beginning of the year 21 Year Cost (A) Accum Depre (B) Open Net Book Value (C=A - B) Rate (D) Depre for Year (E=C*D) Close Net Book Value (F= C – E) $40,000 40% $16,000 $24,000 $40,000 $40,000 $16,000 $24,000 40% $9,600 $14,400 $40,000 $25,600 $14,400 40% $5,760 $8,640 $40,000 $31,360 $8,640 40% $3,456 $5,184 $40,000 $34,816 $5,184 $1,184 $4,000 22 11 Vũ Quốc Thông (PhD.)  10/10/2020 When fixed assets are no longer used: • Discarded (thrown away) • Sold • Traded in (exchanged)  Accounting treatment for above situation? 23  The fixed asset could be fully depreciated Dr Accumulated Depreciation Cr PPE 24 12 Vũ Quốc Thông (PhD.) 10/10/2020  If the fixed asset is not fully depreciated  Remember: • To calculate and include depreciation for the period prior to removing date • The net book value would be recorded as Loss on Disposal of Fixed Assets Dr Depreciation Expense Cr Accumulated Depreciation Dr Accumulated Depreciation Dr Loss on Disposal of FA Cr Fixed Asset 25  Example: • Assume that equipment costing $20,000 depreciated at a straight-line rate of 10% addition, assume that accumulated depreciated the beginning of 20X0 is $5,000 and the asset discarded on 30th June 20X0 • How would this transaction be recorded? is In at is 26 13 Vũ Quốc Thông (PhD.) 10/10/2020  If the selling price: < Net Book Value: Make a loss = Net Book Value: No gain no loss > Net Book Value: Make a profit  And always, write off the Accumulated Depreciation 27  Example: • Assume that equipment costing $20,000 is depreciated at a straight-line rate of 10% In addition, assume that accumulated depreciation at the beginning of 20X0 is $5,000 and the asset is sold on 30th June 20X0 • How would this transaction be recorded if:  Selling price is $12,000  Selling price is $14,000  Selling price is $16,000 28 14 Vũ Quốc Thông (PhD.) 10/10/2020 Step 1: Determine the depreciation expense prior selling point Depreciation = (6/12*$20,000*10%)= $1,000 Step 2: Find the Net Book Value (NBV) of the equipment: Net Book Value = $20,000 – ($5,000 + $1,000) = $14,000 Step 3: Compare NBV with selling price and record the transaction 29 Selling price is $12,000 < NBV: make a loss ($14,000 - $12,000 = $2,000) Dr Cash $12,000 Dr Acct Dep $ 6,000 Dr Loss on Disposal $ 2,000 Cr PPE $ 20,000 30 15 Vũ Quốc Thông (PhD.) 10/10/2020 Selling price is $14,000 = NBV: no gain or loss ($14,000 - $14,000 = $0) Dr Cash $14,000 Dr Acct Dep $ 6,000 Cr PPE $ 20,000 31 Selling price is $16,000 > NBV: make a profit ($16,000 - $14,000 = $2,000) Dr Cash $16,000 Dr Acct Dep $ 6,000 Cr PPE $ 20,000 Cr Profit on Disposal $ 2,000 32 16 Vũ Quốc Thông (PhD.) 10/10/2020  Old equipment could be traded in for new equipment Seller allows the buyer an amount for the old equipment traded in  This amount is called the trade-in allowance In addition, trade-in allowance could be more (>) or less ( NBV of old equipment: no gain is recognised for the exchange However, this unrecognised gain could be used to reduce the cost of new equipment Old equipment Accumulated depreciation NBV $20,000 $17,000 $ 3,000 New equipment (List price) $15,000 Unrecognised gain (4,000 - 3,000) $ 1,000 Cost of new equipment $14,000 37 • B) Trade-in allowance is $4,000 Dr Accumulated Depreciation Dr New Equipment Cr Old Equipment Cr Cash (15,000 – 4,000) $17,000 $14,000 $20,000 $11,000 38 19 Vũ Quốc Thông (PhD.)  10/10/2020 P/L: • Depreciation expense • Profit/Loss on Disposal of Fixed Assets  B/S: • Fixed Assets Cost • Accumulated Depreciation 39 (p 388 – 389, exclude C & H)  Multiple choice (p 389)  Matching 40 20