ACCA F3 (INT) Financial Accounting - 2010 - Study text

Подождите немного. Документ загружается.

Chapter 5: Inventory

6 At 1 April 2009, a business had 200 units of an inventory item, each costing $80. During

the year to 31 March 2010, the following purchases and sales of this inventory item

occurred.

20 May 2009: Purchased 400 units at $83 each

8 July 2009: Sold 300 units

17 January 2010: Purchased 200 units at $87 each

3 March 2010: Sold 200 units.

The business uses the average cost method of inventory valuation, on a continuous

basis.

What was the value of closing inventory for this item at 31 March 2010?

A $25,200

B $21,825

C $24,800

D $25,500

(2 marks)

Paper F3: Financial accounting (International)

136 Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP

Paper F3 (INT)

Financial Accounting

CHAPTER

Non-current assets

Contents

1 Non‐currentassets:definitionandcost

2 Depreciationandnetbookvalue(carrying

amount)

3 Methodsofchargingdepreciation

4 Acquisitionanddisposalofnon‐currentassets

5 Revaluationofnon‐currentassets

6 IAS16Property,plantandequipment

7 Intangibleassets

8 Researchanddevelopmentexpenditure

Paper F3: Financial accounting (International)

138 Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP

Non-current assets: definition and cost

 Definition of non-current assets: tangible and intangible assets

 The cost of non-current assets

 Capital and revenue items: capital and revenue expenditure

 Depreciation and non-current assets

1 Non-current assets: definition and cost

1.1 Definition of non-current assets: tangible and intangible assets

The accounting treatment of non-current assets is governed by IAS 16 Property,

plant and equipment. The detailed requirements of IAS 16 will be considered

further in a later section.

A non-current asset is an asset acquired by a business at a cost, and which will

be used by the business over a period of time (in excess of one year) to assist the

business to carry out its operations. Non-current assets are not held for re-sale in

the normal course of trading. IAS16 defines property, plant and equipment as

tangible assets that are:

 used for the production or supply of goods or services, for rental to others or for

administrative purposes, and

 expected to have a useful life that covers more than one accounting period.

Non-current assets may be:

 Tangible. These are physical assets, such as land and buildings, plant and

equipment, and motor vehicles.

 Intangible. These do not have a physical existence. Examples are the cost of

purchasing patent rights and goodwill.

In contrast to non-current assets, current assets are cash and money in the bank,

or assets that will soon be converted into money in the normal course of trading.

Examples of current assets are inventory, receivables, short-term investments,

bank balances and cash.

Current assets and non-current assets

Note: IAS 1 defines current assets and then states that all other assets should be

classified as non-current assets. A current asset is an asset that:

 is expected to be used or sold or ‘realised’ in the entity’s normal operating cycle,

 is held primarily for the purpose of being traded, or

 is expected to be realised within 12 months of the balance sheet date, or

 is cash (or a cash equivalent).

Chapter 6: Non-current assets

1.2 The cost of non-current assets

Non-current assets are initially recorded in the accounts of a business at their cost.

The cost of an item of property, plant and machinery consists of:

 its purchase price after any trade discount has been deducted, plus any import

taxes or non-refundable sales tax

 the directly attributable costs of ‘bringing the asset to the location and condition

necessary for it to be capable of operating in the manner intended by

management’ (IAS 16 Property, plant and machinery). These directly

attributable costs may include:

employee costs arising directly from the installation or construction of the

asset

the cost of site preparation

delivery costs (‘carriage inwards’)

installation and assembly costs

testing costs

professional fees directly attributable to the purchase.

 When the entity has an obligation to dismantle and remove the asset at the end

of its life, its initial cost should also include an estimate of the costs of

dismantling and removing the asset and restoring the site where it is located.

The cost of a non-current asset cannot include any administration costs or other

general overhead costs.

The definition of ‘cost’ for non-current assets has close similarities with the cost of

inventories, although non-current assets will often include more items of ‘other

expense’ within cost. For example when a business entity acquires a new building

the cost of the building might include professional fees such as the fees for an

architect and surveyor. Another accounting standard, IAS23 Borrowing costs, deals

with whether interest costs on borrowing to finance the construction of a non-

current asset should be included in the cost of the asset.

1.3 Capital and revenue items: capital and revenue expenditure

The difference between capital and revenue items, and between capital and revenue

expenditure was explained in an earlier chapter.

 Non-current assets are capital assets.

 Spending to acquire non-current assets is capital expenditure. Capital

expenditure either creates a new non-current asset or adds to the cost of a non-

current asset.

 Expenditure on a non-current asset after acquisition can be added to the cost

of the asset provided that it improves the condition of the asset above its

original level. An example is expenditure on constructing an extension to a

building: the cost of the extension is capital expenditure and is included in

the cost of the non-current asset.

Paper F3: Financial accounting (International)

140 Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP

Maintenance and repair costs: revenue expenditure

Expenditures on non-current assets after their acquisition are usually maintenance

and repair costs. These are expenses (= running costs) and so are included in the

income statement as expenses for the period in which they are incurred. These are

revenue expenditure, not capital expenditure.

1.4 Depreciation and non-current assets

Although capital expenditure creates non-current assets and is not revenue

expenditure, there are annual charges against profit for non-current assets, in the

form of depreciation or amortisation. Most non-current assets must be depreciated

or amortised.

Depreciation and amortisation are expenses in the income statement. Depreciation

relates to tangible non-current assets and amortisation relates to intangible non-

current assets.

Depreciation charges for non-current assets are normally calculated at the end of the

accounting period, which means that accounting for depreciation takes the form of

end-of-year adjustments.

Chapter 6: Non-current assets

Depreciation and net book value (carrying amount)

 Depreciation: definition

 Net book value (carrying amount)

 Accounting for depreciation

2 Depreciation and net book value (carrying amount)

2.1 Depreciation: definition

A useful simplified explanation of depreciation is that it is a method of spreading

the cost of a non-current asset over its expected useful life (economic life), so that an

appropriate portion of the cost is charged in each accounting period.

IAS 16 Property, Plant and Equipment defines depreciation more specifically as ‘the

systematic allocation of the depreciable amount of an asset over its useful life’

 ‘Depreciable amount’ is the cost of an asset (or its revalued amount, in cases

where a non-current asset is revalued during its life) less its residual value.

 ‘Residual value’ is the expected disposal value of the asset (after deducting

disposal costs) at the end of its expected useful life.

 ‘Useful life’ is the period over which the asset is expected to be used by the

business entity.

For example, suppose that an item of equipment cost $30,000 and has a residual

value of $5,000 at the end of its expected useful life of four years. Depreciation is a

way of allocating the depreciable amount of $25,000 (= $30,000 - $5,000) over the

four years of the asset’s expected life.

Depreciation should be charged as an expense in the income statement each year

over the life of the asset.

(The value of a non-current asset can be consumed in other ways. For example, a non-

current asset might lose value due to deterioration or obsolescence. Loss in value due to

deterioration or obsolescence should also be charged in the income statement, but

‘impairment losses’ of this kind are not in the syllabus for the examination.)

Most non-current assets must be depreciated or amortised, although there are some

exceptions to this rule. For example, land is not depreciated. Similarly, purchased

goodwill, an intangible non-current asset, is not depreciated.

2.2 Net book value (carrying amount)

Over time, a non-current asset loses value as depreciation is charged each year. The

total amount of depreciation charged on a non-current asset since it was acquired

(or re-valued) is the accumulated depreciation for the asset.

Paper F3: Financial accounting (International)

142 Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP

Net book value is the cost of the non-current asset less its accumulated depreciation

Non-current asset at cost (or valuation) X

Less accumulated depreciation (X)

Net book value X

The net book value of non-current assets is an item in the statement of financial

position. It is the carrying amount of the asset. (‘Carrying amount’ means the

amount at which a non-current asset is ‘carried’ or shown in the statement of

financial position.)

2.3 Accounting for depreciation

Each year, there is an annual charge in the income statement for depreciation of

non-current assets. A depreciation charge might be calculated for:

 individual non-current assets, or

 all non-current assets in the same category (for example, a depreciation charge for

all plant and machinery, a depreciation charge for all motor vehicles, and so on).

The accounting effect of depreciation

Charging depreciation has two effects in the financial statements.

 Depreciation is an expense in the income statement for each period.

 The depreciation charged in each accounting period adds to the accumulated

depreciation of the non-current asset. Accumulated depreciation increases over

time through use of the asset. It is a credit balance as it reduces the net book

value of the non-current assets.

In the statement of financial position the balance on the accumulated depreciation is

deducted from the cost or valuation of the assets. The statement of financial position

therefore shows the net book value (carrying amount) of the assets.

The book-keeping rules for depreciation

Depreciation charges are made as an end-of-year adjustment, just before preparing

the income statement (or statement of comprehensive income) and statement of

financial position for the period.

The double entry transaction in the ledger accounts is:

 Debit: Depreciation account (= expense)

 Credit: Accumulated depreciation account (= a credit balance)

The balance on the depreciation expense account is taken to the income statement as

an expense for the period.

Chapter 6: Non-current assets

The balance on the accumulated depreciation account is carried forward as a (credit)

balance at the end of the period and appears in the statement of financial position as

a deduction from the cost of the non-current assets.

Accounts in the ledger for non-current assets and accumulated depreciation

There is a separate account in the main ledger for:

 each category of non-current assets (for example, an account for land and

buildings, an account for plant and machinery, an account for office equipment,

an account for motor vehicles, and so on): these accounts record the amount of

the assets at cost or possibly at a re-valued amount

 the accumulated depreciation for each category of non-current assets.

This means that each category of non-current assets can be shown separately in the

financial statements.

Example

A company purchases a non-current asset in Year 1 for $90,000. In Year 1, the

depreciation charge is $15,000. These transactions should be recorded as follows:

Assetaccount

Year1 $ $

Cash/creditors 90,000 Balancec/f 90,000

 90,000 90,000

Year2  

Balanceb/f 90,000 



Accumulateddepreciationaccount

Year1 $ $

Balancec/f 15,000 Depreciation 15,000

 15,000 15,000

Year2  

Balanceb/f 15,000



Depreciationaccount

Year1 $ $

Accumulateddepreciation 15,000 Incomestatement 15,000

 15,000 15,000



At the end of Year 1, the net book value of the asset in the statement of financial

position is:



$

Non‐currentassetatcost(orvaluation) 90,000

Less:Accumulateddepreciation (15,000)

Netbookvalue 75,000

Paper F3: Financial accounting (International)

Example

Continuing the example, suppose that the depreciation charge In Year 2 is also

$15,000. The ledger accounts in Year 2 will be as follows:

Assetaccount

Year2 $ $

Balanceb/f 90,000 Balancec/f 90,000

 90,000 90,000

Year3  

Balanceb/f 90,000 



Accumulateddepreciationaccount

Year2 $ $

Balanceb/f 15,000

Balancec/f 30,000 Depreciation 15,000

 30,000 30,000

Year3  

Balanceb/f 30,000



Depreciationaccount

Year2 $ $

Accumulateddepreciation 15,000 Incomestatement 15,000

At the end of Year 2, the net book value of the asset in the statement of financial

position is:



$

Non‐currentassetatcost(orvaluation) 90,000

Less:Accumulateddepreciation (30,000)

Netbookvalue 60,000

Exercise 1

An item of equipment cost $40,000 at the beginning of Year 1. It has an expected life

of 5 years. The annual depreciation charge will be $8,000.

Required

Complete the following ledger accounts for Years 1 and 2:

(a) equipment account

(b) accumulated depreciation of equipment account

Calculate the net book value of the equipment at the end of Years 1 and 2.

ACCA F3 (INT) Financial Accounting - 2010 - Study text - Emile Woolf Publishing

Подождите немного. Документ загружается.