ACCT 1311 Slides Chapter 5A PPE PDF

CHAPTER 5A: NON-CURRENT ASSETS PROPERTY, PLANT & EQUIPMENT FINANCIAL ACCOUNTING AND REPORTING: AN INTRODUCTION OCT 2024 EDITION  LEARNING OBJECTIVES 01 02 03 04 Identify the assets Understand the...

CHAPTER 5A: NON-CURRENT ASSETS PROPERTY, PLANT & EQUIPMENT FINANCIAL ACCOUNTING AND REPORTING: AN INTRODUCTION OCT 2024 EDITION  LEARNING OBJECTIVES 01 02 03 04 Identify the assets Understand the Understand and Understand the under PPE initial recognition explain the subsequent and measurement different measurement in of PPE measurement PPE used to in PPE 2  5.1 Introduction 5.2 Definition 5.3 Initial Recognition 5.4 Initial Measurement 5.5 Subsequent Measurement: Subsequent Costs CHAPTER 5.6 Subsequent Measurement: Depreciation CONTENT 5.7 Subsequent Measurement: Revaluation 5.8 Derecognition: Disposal of Assets 5.9 Comprehensive Example 5.10 Supplemntary Topic: Intangible Assets 5.11 Chapter Summary 5.12 Exercises 3  It expects to realise the asset, or intends to sell or consume it, within 12 months ASSETS Current Assets Hold primarily for the R e sou rce s t h at are purpose of trading con t rolle d by t h e c o m p any as a re su l t f ro m p ast eve n t s, an d f ro m wh i ch f u t ure Long term in nature e c o n o mic b e n e f its are ex p ecte d t o f l ow t o t h e Non-Current Assets com p any. Other than Current Assets 4  Property, plant and equipment Tangible assets that are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and are expected to be used for more than one accounting period Intangible assets NON-CURRENT An identifiable non-monetary asset without physical substance ASSETS Investment An asset, or an item, that is acquired for the purpose of generating income, or appreciation in value of investment in the future Long term investment - not converted into cash within 12 months after the reporting period 5 PROPERTY, PLANT & EQUIPMENT (PPE) 6  Tangible assets Held for use in the production or supply of goods or services, for rental to others, or for administrative purposes (i.e. Used in business DEFINITION OF operations) PPE (MFRS 116) Expected to be used for more than one accounting period E.g. Land, building, plant & machinery, motor vehicle, office equipment, furniture & fittings 7  Recognised as PPE if: oit is probable that future INITIAL economic benefits RECOGNITION associated with the item will flow to the entity othe cost of the item can be measured reliably 8  ▪ Purchase price, including: import duties purchase taxes, after deducting trade discounts and rebates. INITIAL ▪ Any costs directly attributable to bringing the asset to the location and condition MEASUREMENT necessary for it to be capable of operating in the manner intended by management. These are costs that would have been avoided if the asset had not been purchased or constructed. May include: To be measured initial delivery and handling costs at cost installation and assembly costs the cost of testing whether the asset is functioning properly, and professional fees, such as designer’s fee, legal fee 9  IDENTIFYING RM COST OF ASSET Purchase price 200,000 Installation cost 20,000 Example 5.1 Transportation cost 2,000 Total cost of machinery 222,000 On 1 June 2023, DOA Co. bought new machinery for Debit Credit their clothing factory. Date Detail (RM) (RM) Costs relating to the new 2023 PPE: Machinery 222,000 machinery are as follows: June 1 Cash 222,000 10  Purchase price RM 200,000 Installation costs 20,000 IDENTIFYING COST Transportation costs 2,000 OF ASSET Costs of dismantling 2,500 existing machinery (old) in the factory Example 5.2 Renovation costs to fit the 10,000 new machinery From previous example, we know that DOA Discount on purchase 5% purchased the machinery on 1 June 2023. 1,500 Costs of testing whether Let’s extend Example 5.1 further by taking the asset is functioning consideration of all cost that are directly properly attributable to bringing the asset to the 10% of location and bring it to the necessary condition to which it is supposed to function Legal fees and stamp duty purchase price or operates. 11  Cost Explanation Items (RM) IDENTIFYING Purchase price Less: 200,000 Cost price Discount received COST OF Discount on purchase (10,000) not included as direct ASSET (5% x 200,000) Installation costs 20,000 costs Transportation costs 2,000 Costs of dismantling existing machinery (old) 2,500 in the factory Example 5.2 Renovation costs to fit the new machinery 10,000 Direct costs Costs of testing whether the asset is attributable of From previous example, we know that functioning properly 1,500 DOA purchased the machinery on 1 getting the asset June 2023. Legal fees and stamp duty ready for use 20,000 (10% x 200,000) Let’s extend Example 5.1 further by taking consideration of all cost that are Total cost of new machinery 246,000 directly attributable to bringing the asset to the location and bring it to the Debit Credit necessary condition to which it is Date Detail supposed to function or operates. (RM) (RM) 2023 PPE: Machinery 246,000 June 1 Cash 246,000 12  Revenue Capital Expenditure Expenditure SUBSEQUENT Expenses that Expenses that MEASUREMENT relate to specific relate to the revenue improvement or transactions or expansion of operating assets periods Increase capacity Incurred or extend useful Costs incurred periodically life after usage E.g. Repairs and E.g. Extension of maintenance building, renovation 13  IDENTIFYING SUBSEQUENT COST: RM Revenue Expenditure Purchase price 200,000 Installation cost 20,000 Transportation cost 2,000 Example 5.3 Maintenance and repair 500 Total cost of machinery 222,000 On 1 June 2023, DOA Co. bought a new machinery Debit Credit for their clothing factory. Date Detail (RM) (RM) At the end of the year, 2023 Maintenance and repair 500 costs relating to the new Dec 31 machinery are as follows: Cash 500 14  IDENTIFYING SUBSEQUENT COST: Revenue Expenditure Debit Credit Example 5.4 Date Detail (RM) (RM) 2023 Maintenance and repair 2,750 Cost of replacement of inks Dec 31 (RM2,000 + RM750) in the printing machine after Cash 2,750 100,000 units production: RM2,000. Cost of machine bulbs after 50,000 hours of usage: RM750. 15  Example 5.5 DOA AirFly owns a fleet of 5 commercial aircrafts, that servicing flights between Kuala Lumpur and Kota Kinabalu. The aircrafts were purchased on 1 January 2017. The aircrafts are required to undergo major inspection as required by the Aviation standards IDENTIFYING periodically. Otherwise, the aircrafts will be grounded SUBSEQUENT for any commercial use. The aircrafts are due for COST: inspection by 30 June 2023. The cost of the major inspection incurred for the year 2023 is RM400,000. Capital Expenditure Debit Credit Date Detail (RM) (RM) 2023 PPE: Aircrafts 400,000 Dec 31 Cash 400,000 16  SUBSEQUENT MEASUREMENT: DEPRECIATION Depreciation: the systematic allocation of the depreciable amount of an asset over its useful life Recognised as an expense in SOPL Debit Credit Date Detail (RM) (RM) 2023 Depreciation expense 20,000 Dec 31 Accumulated depreciation 20,000 Expenses → in SOPL Contra Asset → in SOFP 17  DEPRECIATION METHODS Reducing Balance Units-of-Production Straight-Line Method Method Method Allocating the An asset is expensed Allocating depreciable depreciable amount at a fixed percentage amount based on the evenly over the asset More depreciation in consumption of the useful life the beginning, less asset. towards the end of life. 18  Cost Purchase price + any costs to prepare the asset for its intended use Expected useful life How long the asset is expected to be used in IMPORTANT the business TERMS Depreciable asset cost/amount Cost less residual value Residual/Salvage/Scrap value Estimated value of asset at the end of its useful life 19  1) dividing across the useful lives Depreciation = Cost – Residual Value expense No. of Useful Life DEPRECIATION: STRAIGHT-LINE METHOD 2) equal distribution based on percentage across the useful lives Depreciation = Rate% x Depreciable expense asset cost 20  1 Identify the cost of the asset 2 Identify the depreciable asset cost by subtracting salvage value (if any) from the cost of asset. 3 Identify the useful life and divide the amount that STEPS TO has been identified above (depreciable asset CALCULATE cost). DEPRECIATION: 4 Formula: Depreciation expense = Cost – Residual Value STRAIGHT-LINE No. of useful life 5 Journal entry: Dr. Depreciation Expense Cr. Accumulated Depreciation 21  Workings : Straight-line Method (1) EXAMPLE 5.7: SLM 1 Depreciable asset cost = RM2 million – RM500,000 = RM1,500,000 BEAN Factor y purchased a plant that had cost 2 Depreciation expense = RM2 million – RM500,000 them RM2 million on 2 10 years Januar y 2023. = RM150,000 per annum The plant has a useful life of 10 years. 3 Journal entry: The residual value at the Dr. Depreciation Expense RM150,000 end of the tenth year is Cr. Accumulated Depreciation RM150,000 RM500,000. It was noted that the plant is depreciated on a straight -line basis. 22  Workings : Straight-line Method (2) EXAMPLE 5.7: Depreciable asset cost = RM2 million – RM500,000 SLM 1 = RM1,500,000 BEAN Factor y purchased 2 Depreciation rate = 1/10 years a plant that had cost = 10% them RM2 million on 2 Januar y 2023. 3 Depreciation expense for 2022 The plant has a useful = 10% x RM1,500,000 life of 10 years. = RM150,000 The residual value at the end of the tenth year is 4 Journal entry: RM500,000. Dr. Depreciation Expense RM150,000 It was noted that the Cr. Accumulated Depreciation RM150,000 plant is depreciated on a straight -line basis. 23  1 Identify the cost of the asset 2 Identify the depreciable asset cost by subtracting salvage value (if any) from the cost of asset. STEPS TO 3 Calculate the DEPRECIATION PER UNIT. CALCULATE Formula = (Cost – SV) ÷ Expected lifetime production DEPRECIATION: 4 Formula: Depreciation Expense UNITS-OF- = Depn per Unit x No. of Units Produced PRODUCTION During the Year 5 Journal entry: Dr. Depreciation Expense Cr. Accumulated Depreciation 24  EXAMPLE 5.9: Workings : Units-of Production Method UOP Depreciable asset cost = RM2 million – RM500,000 1 = RM1,500,000 2 Depreciation per unit = RM1,500,000/1,000,000 units DOA Fact or y p u rchased a = RM1.50 p l ant t h at h ad cost t h e m R M2 m i l lion on 2 J anu ar y Depreciation expense for 2022 2 0 2 2. 3 = RM1.50 x 100,000 units Use f u l l i fe = 1 0 ye ars = RM150,000 R e si d u al val u e = R M5 0 0, 000 Journal entry (2022) Pro d u c tion ( 2 0 2 2) 4 = 1 0 0 ,000 u n i ts Dr. Depreciation Expense RM150,000 Produ ction ( 2 0 2 3) Cr. Accumulated Depreciation RM150,000 = 3 0 0 ,000 u n i ts E x p e cte d l i fe t ime p rod uc tion = 1 , 0 00,000 u n i ts 25  EXAMPLE 5.9: Workings : Units-of Production Method UOP Depreciation expense for 2023: 5 = RM1.50 x 300,000 units = RM450,000 DOA Fact or y p u rchased a 6 Journal entry (2023) p l ant t h at h ad cost t h e m Dr. Depreciation Expense RM450,000 R M2 m i l lion on 2 J anu ar y 2 0 2 2. Cr. Accumulated Depreciation RM450,000 Use f u l l i fe = 1 0 ye ars R e si d u al val u e = R M5 0 0, 000 Pro d u c tion ( 2 0 2 2) = 1 0 0 ,000 u n i ts Produ ction ( 2 0 2 3) = 3 0 0 ,000 u n i ts E x p e cte d l i fe t ime p rod uc tion = 1 , 0 00,000 u n i ts 26  PARTIAL YEAR DEPRECIATION Yearly basis Full year’s depreciation every year, regardless of the duration Month-to-month basis Proportionate according to period of ownership E.g., Purchased PPE on 1 Oct 2023, financial year ends on 31 Dec 2023 Period of ownership = 3 months Depreciation (2023) = Annual depreciation x 3/12 27  When the PPE no longer in use for business purpose When the PPE no longer bring Sell to another DERECOGNITION: economic benefit DISPOSAL OF party ASSETS Trade-in for new Ways of disposal asset Write-off or fully depreciated 28 END OF CHAPTER (FOR PPE) 29