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Accounti

ng for
inventory
tax
considera
tion

TOPIC VII:

Long-Lived
Nonmonetary Assets
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http://www.youtube.com/watch?v=7g_d-phoUrU
http://www.youtube.com/watch?v=n9jGDGx9Nv4

1.

Describe how the cost principle applies to plant assets.

2.

Explain the concept of depreciation.

3.

Compute periodic depreciation using different methods..

4.

Distinguish between revenue and capital expenditures,


and explain the entries for each.

5.

Explain how to account for the disposal of a plant asset.

6.

Explain the basic issues related to accounting for


intangible assets.

Method of Converting
to Expense

Type of Asset
Tangible assets:
Land
Plant and equipment
Natural resources
Intangible assets:
Goodwill
Patents, copyrights, etc.
Leasehold improvements
Deferred charges
Research & development costs

not amortized
depreciation
depletion
amortization*
amortization
amortization
amortization
not capitalized**
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IAS

16 Property, plant and equipment


IAS 38 Intangible assets
IAS 17 Leasing
IAS 20 Accounting for Goverment grants
IAS 36 Impairment of assets
IAS 40 Investment propesties
IAS 8 Changes in Accountng policies
IAS 23 Borrowing costs

IFRS

5 Non-current assets held for sale


IFRS 13 Fair-value measurement

a) Initial value:
Purchaising cost
Production cost
Fair-value
Utility value
b) Subsequent value:
Reevaluation value
Deveploment
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Purchase price
Sales tax
Transportation costs
Installation cost

Factors in Computing Depreciation


Cost

Useful Life

Salvage Value

Parish Corporation purchased a new machine for its assembly process on


January 2, 2007. The cost of this machine was $117,900. The company
estimated that the machine would have a salvage value of $12,900 at the
end of its service life. Its life is estimated at 5 years and its working hours
are estimated at 1,000 hours. Year-end is December 31.
Instructions: Compute the depreciation expense under the following
methods.

(a) Straight-Line.

(b) Units-of-Activity.

(c) Double-Declining Balance.

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The
Theexpected
expectedamount
amountto
to
be
berecovered
recoveredatatthe
theend
end
of
ofthe
theservice
servicelife.
life.

Depreciation Expense =

Original cost - Residual value


Service life (years)

The
Thenumber
numberof
of
accounting
accountingperiods
periodsover
over
which
whichthe
theasset
assetwill
willbe
be
useful
usefulto
tothe
theentity.
entity.
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Year

Depreciable
Base

2007
2008
2009
2010
2011

$ 105,000
105,000
105,000
105,000
105,000

Years
/
/
/
/
/

5
5
5
5
5

=
=
=
=
=

Annual
Expense

Accum.
Deprec.

$ 21,000
21,000
21,000
21,000
21,000
$ 105,000

$ 21,000
42,000
63,000
84,000
105,000

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($105,000 / 1,000 hours = $105 per hour)


Year
2007
2008
2009
2010
2011

Hours
Used
200
150
250

Rate per
Hour
x $105 =
x
105 =
x
105 =

Annual
Expense
$ 21,000
15,750
26,250

Accum.
Deprec.
$ 21,000
36,750
63,000

300
100
1,000

x
x

31,500
10,500
$ 105,000

94,500
105,000

105
105

=
=

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Annual Expense

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The annual journal entry to record depreciation is:


Depreciation Expense
Accumulated Depreciation

21,000
21,000

A fully depreciated building still in use (assume no


salvage value) would appear on the balance sheet as
follows:
Building, at cost
$1,000,000
(-)Accumulated depreciation1,000,000
Building, net
$0
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Companies dispose of plant assets in three ways


Retirement, Sale, or Exchange (appendix).

Record depreciation up to the date of disposal.


Eliminate asset by (1) debiting Accumulated Depreciation, and (2) crediting
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the asset account.

A building is sold for its book value of $750,000:


Cash
750,000
Accumulated Depreciation
250,000
Building
1,000,000
Assume instead that the building was sold for
$650,000:
Cash
650,000
Accumulated Depreciation
250,000
Loss on Sale of Building
100,000
Building
1,000,000
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A building is sold for its book value of $750,000:


Expenses with disposed assets
Accumulated Depreciation
Building

750,000
250,000

Account receivable
Revenues on assets disposal

750,000

1,000,000

750,000

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Goodwill
Patent
Copyrights
Franchise

rights
Leasehold improvements
Deferred charges
Research and development costs

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