Tag Archives: Chapter 8

Noncurrent assets

Noncurrent assets are the assets that are expected to be converted into cash after a year or normal operating cycle, whichever is longer.
Noncurrent assets include property, plant and equipment (PP&E), intangible assets and long-term investments.
Property, plant and equipment include land, buildings, equipment, vehicles, furniture and fixtures.
Intangible assets do not have physical substance, so that they are not tangible. Intangible assets include goodwill, patents, trademarks and copyrights.
Noncurrent assets also include long-term investment assets that are expected to be converted into cash after a year.

Property, Plant and Equipment (PP&E)
In the property, plant and equipment section, the following assets are presented:
1. Land
2. Buildings
3. Machinery and equipment
4. Vehicles
5. Furniture and fixtures

[Note]
Accumulated depreciation is a contra-asset account that is subtracted from property, plant and equipment.

Intangible Assets
The following assets are the examples of intangible assets:
1. Goodwill
2. Patents
3. Trademarks
4. Copyrights

Long-term Investments
If the entity has the intention to keep the investments in debt and equity securities for more than a year from the end of the reporting period, such investments are presented as long-term investments.

Review Questions
1. What is a noncurrent asset?
Noncurrent asset is an asset that is expected to be converted into cash after a year.

2. What are the examples of noncurrent assets?
Property, plant and equipment, intangible assets and long-term investments are the examples of noncurrent assets.

3. What are the examples of property, plant and equipment?
Land, buildings, machinery, equipment, vehicle, furniture and fixtures are the examples of property, plant equipment.

4. What are the examples of intangible assets?
Goodwill, patents, trademarks and copyrights are the examples of intangible assets.

 

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Property, plant and equipment (PP&E)

Property, plant and equipment include the assets that are expected to be used in operations for more than a year.
Assets classified as property, plant and equipment are tangible assets that have physical substance.
Property, plant and equipment include tangible assets that have physical substance, such as land, buildings, machinery, equipment, vehicles, furniture and fixtures.
Because these assets are expected to be used over multiple accounting periods, they are called as long-lived assets.
Property, plant and equipment are recorded at the acquisition cost when they are initially recorded.
In subsequent periods, accumulated depreciation is subtracted from the acquisition cost to report the carrying amount of the asset, except for land. Land is not depreciated and the acquisition cost of land is reported as carrying amount in the financial statements.
All property, plant and equipment other than land are depreciated over the useful life of the asset.
Depreciation is the process of allocating the cost of property, plant and equipment over the life of the asset.
Depreciation expense is reported in the income statement.
Accumulated depreciation is a contra-asset asset account that is subtracted from property, plant and equipment in the statement of financial position.
If the fair value of property, plant and equipment is lower than the carrying amount, the asset is impaired and an impairment loss is recognized.

Acquisition Cost
Acquisition cost includes all the expenditures required to make an asset ready for the intended use are included in the acquisition cost of the asset. Cost of demolishing an old building on land purchased is included in the acquisition cost of land.

Depreciation
Except for land, the cost of property, plant and equipment is allocated over the life of the asset through depreciation process. The cumulative amount of depreciation is recorded in the accumulated depreciation account.

Carrying Amount (Book Value)
Carrying amount, also called as book value, of an asset is calculated by subtracting the accumulated depreciation from the cost of property, plant and equipment.

Impairment of an Asset
An asset is impaired if the fair value of the asset is lower than the carrying amount (book value) of the asset. If an asset is impaired, the carrying amount is reduced to the fair value and the difference between fair value and carrying amount is recognized as an impairment loss.

Gain or Loss on Disposal
If an asset is sold at the price higher than the carrying amount of the asset at the time of sale, gain on sale of asset is recognized. If the amount recovered from the sale or disposal of the asset is lower than the carrying amount, loss on disposal of asset is recognized.

Review Questions
1. How is the acquisition cost of property, plant and equipment determined?
(1) Expenditures required to make an asset ready for the intended use are included in the acquisition cost of the asset.
(2) Cost of demolishing an old building on land purchased is included in the acquisition cost of land.

2. How is the carrying amount (book value) of property, plant and equipment calculated?
Carrying amount = Acquisition cost – Accumulated depreciation

Exercise 1
Company T had the following balances.
Property, plant and equipment = $720,000
Accumulated depreciation = $170,000
What is the amount of net property, plant and equipment?

Net property, plant and equipment
= Property, plant and equipment – Accumulated depreciation
= $720,000 – $170,000 = $550,000

Exercise 2
Company S had the following balances.
Cost of equipment = $300,000
Accumulated depreciation for equipment = $80,000
What is the amount of book value of equipment?

Book value of equipment
= Cost of the asset – Accumulated depreciation
= $300,000 – $80,000 = $220,000

 

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Depreciation Methods

Depreciation is the process of allocating the cost of property, plant and equipment over the life of the asset.
Depreciation method should be rational and systematic.
Straight-line depreciation method allocates same amount of depreciation expense in each period.
Declining-balance depreciation method allocates more depreciation expense during the earlier periods and less depreciation expense during the later periods. Declining-balance depreciation method is an accelerated depreciation method.
Usage-based depreciation method allocates depreciation expense based on the usage of the asset during the period.

Straight-line Method
Depreciation expense = (Cost – Salvage value) x (1/ Useful life) x (# of months/12)

Double-declining Balance Method
Depreciation expense = Beginning book value x (1/Useful life x 200%)

Usage-based Method
Depreciation expense = (Cost – Salvage value) x (Units incurred during the current period / Total units expected from the asset)

Exercise 2
On September 1, 20×1, Company M purchased a building at $1,200,000.
Buildings are depreciated using the straight-line depreciation method.
Useful life of the building is 40 years.
Salvage value of the building at the end of useful life is estimated as $120,000
What is the amount of depreciation expense for 20×1?
What is the book value of the building at December 31, 20×1?

 Annual depreciation expense
= ($1,200,000 – $120,000) x (1/40) = $1,080,000 x (1/40) = $27,000
Depreciation expense for the period from September 1, 20×1 to December 31, 20×1
= $27,000 x (4/12) = $9,000
Book value of the building at December 31, 20×1
= $1,200,000 – $9,000 = $1,191,000


Exercise 5
On January 1, 20×1, Company G purchased equipment at $80,000.
Residual value (salvage value) at the end of useful life is estimated as $8,000.
The equipment was designed and manufactured to be used for 20,000 hours in production.
In 20×1, Company G used this equipment of 5,000 hours in production.
What is the depreciation expense for 20×1?

¬†Depreciation expense for 20×1
= ($80,000 – $8,000) x (5,000 hours / 20,000 hours)
= $72,000 x (1/4) = $18,000

 

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