FINANCIAL CHAPTER 3 ACCOUNT ING FOR PROPERTY, PLANT AND EQUIPMENT Accounting AZUYARIA BINTI MAT PUZI MASLIZA IDANI BINTI MAHMOOD
FINANCIAL Accounting CHAPTER 3 ACCOUNT ING FOR PROPERTY, PLANT AND EQUIPMENT
Published by: POLITEKNIK KOTA KINABALU No. 4, Jalan Politeknik, KKIP Barat, Kota Kinabalu Industrial Park, 88460 Kota Kinabalu, Sabah Tel : 088-401800 Fax : 088-499960 Website : https://polikk.mypolycc.edu.my © Politeknik Kota Kinabalu First Edition, 2023 All rights reserved. No part of this publication may be reproduced, distributed, or transmitted in any form or by any means, including photocopying, recording, or other electronic or mechanic methods, without the prior written permission of the writer, except in the case of brief quotations embodied in reviews and certain other non-commercial uses. FINANCIAL ACCOUNTING - ACCOUNTING FOR PROPERTY, PLANT & EQUIPMENT
ACKNOWLEDGEMENT We would like to record our warmest appreciation and thanks to the many people who have provided encouragement and helpful comments towards the arrangement of this Accounting for Property, Plant and Equipment e-book. It is our hope that this e-book would help students and readers to gain better understanding of this course.
PREFACE This e-book is designed primarily for students who need clear understanding of Accounting for Property, Plant & Equipment. It is one of the additional reference sources for all students who take Financial Accounting 2 or who are interested in this topic. This topic covers a very significant part of the syllabus in Financial Accounting. Special care has been taken to keep the contents and explanations clear and concise without sacrificing depth. Concepts requiring calculations are explained with simple worked examples to increase clarity. Comprehensive examples enable students to apply their understanding to deal with issues of Financial Accounting. Hopefully this e-book will help students and readers in enhancing their knowledge and understanding of the depreciation and de-recognition of asset.
01 Introduction 01 Definition 02 Recognition & Measurement 06 Depreciation 14 De-recognition 22 Tutorial Exercise 32 Reference Table of Contents
Usage of asset Example of asset In the production of goods Machinery used to produce eyewear product In supplying goods Showroom to market the goods In servicing An engineer’s tool Rental to others Part of building is rented out For administrative purposes Computer used by administration staff Introduction 3.1.1 Definition of property, plant and equipment According to MFRS 116, property plant and equipment are tangible items that are : (a) held for use in the production or supply of goods or services, for rental to others or for administrative purposes ; and (b) expected to be used for more than one period 3.1 The nature of property, plant and equipment under MFRS 116 (MPERS : Section 17) 3.1.2 The category of property, plant and equipment Example of property, plant and equipment are based on the category of usage of as below : 1
Recognition Measurement &
3.2.1 The recognition criteria for initial and subsequent expenditures According to MFRS 116, property, plant and equipment are recognized as assets in the statement of financial position when: (a) It is probable that future economic benefits associated with the item will follow to the entity; and (b) The cost of the item can be measured reliably The recognition criteria for initial and subsequent expenditures by: i. Single asset ii. Group as single asset iii. Components 3.2 The recognition and measurement of property, plant and equipment under MFRS 13 and MFRS 116 Recognition and measurement 2
Purchased Assets Initial recognition includes all amounts incurred to acquire the asset (purchase price) and any amounts that can be directly attributable to bringing the asset into working condition Assets that are built or constructed by the company for its own use. Initial recognition for a self-constructed asset is based on its cost, i.e. all the related expenditures required to construct the asset before it can be ready for the company’s own use. Is referring to a situation whereby the asset, normally an old one, is traded-in with another new asset. The cost of an asset obtained by the way of exchange is measured by referring to the fair value of the asset given up unless the fair value of the asset received is more clearly evident. Self-constructed Assets Exchange Assets 3.2.2 Initial measurement by referring to the elements of cost 3
In determining the cost of property, plant and equipment it should include: (a) The purchase price including import duties and non-refundable purchase taxes after deducting trade discounts and rebates (b) Any cost directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner as intended by the management (c) The initial estimate of costs for dismantling and removing the items and restoring the site on which it is located, the obligation for which an entity incurs either when the item is acquired or as a consequence of having used the items during particular period for purposes other than to produce inventories during the period. dismantling / decommissioning costs and deferred payment 3.2.3 Subsequent costs that may be capitalized and written off including replacement of components and major inspection After an item of property, plant and equipment is acquired, additional costs would be incurred which include labour costs, consumables, ordinary repairs, maintenance, additions and improvements. Costs of day-to-day servicing of property, plant and equipment should be treated as expenses in the statement of profit or loss. These cost do not meet the asset’s recognition criterion, i.e. it is not probable that future economic benefits associated with the item would flow to the entity. Subsequent costs are capitalized as an asset when these costs can be measured reliably and it is probable that we can obtain future economic benefits. Evidence of future economic benefit would include: (a) Increase in useful life (b) Increase in quantity of product produced (c) Increase in quality of product produced ; and (d) Decrease in operational costs 4
3.2.4 Subsequent measurement based on cost model and revaluation model (inclusive of revaluation surplus or deficit) After recognition as an asset, an item of property, plant and equipment shall be carried at its cost less any accumulated depreciation and any accumulated impairment losses. After recognition as an asset, an item of property, plant and equipment whose fair value can be measured reliably shall be carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Revaluations shall be made with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the end of the reporting period. REVALUATION MODEL COST MODEL 5
Depreciation of Property, Plant & Equipment
Hey Haruka, What’s up? How are your classess going? Uhh.. I'm really confused about what depreciation is and its seems that i can’t do the calculations and record the account for depreciation Why don't you take a break and I'll teach you the depreciation method and how to record the account for depreciation. That sounds great, thanks you for helping me. DEPRECIATION of Property, Plant & Equipment 6
Let’s start with the definition. Depreciation mean decrease in the value of a non current asset due to their use in business, passage of time or obsolescence. There’s more… there are two types of depreciation methods. Yes, this one I remember... straight line method and reducing balance method Wowww… That’s great...Let’s go further. Now, i will show to you how to calculate depreciation using... Straight Line Method and Reducing Balance Method STRAIGHT LINE METHOD Basic Formula Alternative Formula REDUCING BALANCE METHOD Reducing Balance Method is a decreasing charge over the useful life Formula Depreciation is the process of rationally and systematically allocating to expand the cost of a plant asset over its useful life. WHAT IS DEPRECIATION? 7
Let’s discuss more! I will show you a sample of one year record and step by step solution. EXAMPLE 1 Cost of machine = RM22,000 Scrap value = RM2,000 Useful life = 10 years STEP 1 Calculate depreciation charge: Depreciation = RM22,000 - RM2,000 10 years = RM2,000 STEP 2 Prepare table of depreciation STEP 3 Journal Entry DEPRECIATION 8
STEP 4 Record ledger STEP 5 Record Financial Statement (extract) Thank you Natsumi... now i understand, ok it’s time to do the exercise. DEPRECIATION 9
EXAMPLE 2 On 1 January 2020, Tradisi Sdn Bhd bought a motor vehicle for RM50,000. The rate of depreciation for motor vehicles is 10% per annum using straight line method. At the end of accounting year ended 31th December 2020, 2021, 2022, you are required to: a) calculate depreciation charges b) show the ledger c) show the effect in Statement Profit and Loss and Statement of Financial Position DEPRECIATION a) Depreciation Depreciation = 10% x RM 50,000 = RM 5,000/year Table of depreciation Accounting period Depreciation (RM) Acc. Depreciation (RM) 31/12/2020 5,000 5,000 31/12/2021 5,000 10,000 31/12/2022 5,000 15,000 b) Ledger SOLUTION 10
DEPRECIATION c) Statement of Profit and Loss (extract) Statement of Financial Position (extract) 11
EXAMPLE 3 On 1 January 2020, barusaha Sdn Bhd bought a motor vehicle for RM50,000. The rate of depreciation for motor vehicles is 10% per annum using reducing balance method. At the end of accounting year ended 31th December 2020, 2021, 2022, you are required to: a) calculate depreciation charges b) show the ledger c) how the effect in Statement Profit and Loss and Statement of Financial Position DEPRECIATION b) Ledger SOLUTION a) Depreciation charge 12
DEPRECIATION c) Statement of Profit and Loss (extract) Statement of Financial Position (extract) 13
De-recognition of Property, Plant & Equipment
ASSET DISPOSAL DE-RECOGNITION What happen to you, Haruka? Are you okay? Oh, which part you don’t understand, Haruka? I will explain to you right now. I'm your superhero! Argghhhh!! I feel dizzy right now! This topic is too hard to understand. A Process Companies Get rid of an asset Their accounting records used by to from of Property, Plant & Equipment 14
Oh its easy Haruka. like eating peanuts...hahaha!! Let me teach you. I don’t understand how to calculate profit or loss from asset disposal Natsumi. Please help me. When a non-current asset is sold, there is likely to be a profit or loss on disposal. This is the difference between the net sale price of the asset and its net book value at the time of disposal. Sales price > Net book value = Profit on disposal Sales price < Net book value = Loss on disposal Paragraph 67 MFRS 116 stated that the carrying amount of an item of property, plant and equipment shall be derecognized: (a) on disposal; or (b) when no future economic benefits are expected from its use or disposal. the de-recognition of ppe under mfrs 13 & mfrs 116 15
Are you okay Haruka? Now, I will show you the accounting treatment. Yup, I’m super okay!! ACCOUNTING TREATMENT - LEDGER To close asset account: Dr Asset Disposal xxx Cr Asset xxx JOURNAL ENTRIES To close acc. dep. account: Dr Acc. Dep xxx Cr Asset Disposal xxx To record amount received on disposal of assets: Dr cash/bank xxx Cr Asset Disposal xxx To record gain: Dr Asset Disposal xxx Cr SOCI xxx To record loss: Dr SOCI xxx Cr Asset Disposal xxx 16
1. Calculate the asset’s accumulated depreciation amount. 2. Remove the cost of the asset: Dr Disposal a/c Cr Asset a/c 3. Remove the accumulated depreciation charged to date: Dr accumulated depreciation a/c Cr Disposal a/c 4. Record the sale amount of the asset Dr cash a/c Cr disposal a/c 5. Balance off disposal account to find the profit or loss on disposal. DISPOSAL17
As you could see, it is very easy to understand the topic. As long as you know how to use it and what it is for. DISPOSALNow, i understand about the topic. Thank you Haruka! Come, i will treat you to lunch. For others note, and exercise, please scan here! 18
EXAMPLE 4 Below is an Extract of Meen Sdn Bhd’s Statement of Financial Position on 1 January 2018. Asset Cost (RM) Acc. Dep. (RM) Furniture 30,000 6,000 Machine 90,000 30,000 Below are the transactions that have been made in year 2018. 1 January Bought furniture amounted to RM6,000 by cash 30 June Sold machine with the price of RM20,000 by cash. The motor vehicle was bought on 1 January 2015 at the cost of RM45,000 30 July One of the machine was exchanged with the new machine. The cost of new machine was RM33,000. Meen Sdn Bhd paid RM10,000 in cash to settle the differences. The old machine was bought on 1 July 2016 at the price of RM30,000. Depreciation for machine is 10% and for furniture at 20% by using straight line method. You are required to: a) show the calculation for the depreciation b) prepare Asset Account and Accumulated Depreciation Account c) prepare Disposal Asset d) prepare Financial Statement a) Calculation for depreciation SOLUTION 19
b) Asset Account & Accumulated Depreciation Account 20
c) Disposal Account 21 d) Financial Statement
Tutorial Exercise
On 1 March 2021, a company bought a motorcycle which is cost was RM50,000. The rate of depreciation was 12% per annum. Required: Calculate and prepare Depreciation – Vehicle Account and Accumulated Depreciation – Vehicle Account for the year ended 31 December 2021, 2022 and 2023 using: a) Straight line method b) Reducing balance method QUESTION 1 QUESTION 2 Below is the information for vehicles for Company XYZ : Vehicles Date of purchase Cost (RM) Lorry 01/02/2017 154,000 Van (A) 30/06/2017 72,000 Motor car(A) 01/01/2018 56,000 Motor bike 30/06/2018 7,000 The company used straight line method to record the depreciation for fixed assets at a rate 20% per year. For the year ended 31 December 2019, the transactions below occurred : 01/03/2019 Purchased a motorcar (B) for RM48,000 31/08/2019 Purchased a van (B) for RM65,000 Required: Prepare the following account for the year ended 31 December 2019: a) Vehicles Account b) Accumulated Depreciation – Vehicles Account 22
Coldfield Sdn Bhd acquired an equipment at the cost of RM300,000on 1 January 2019. The equipment has a useful life of 6 years and no residual value. Coldfield opted for the revaluation model to value its equipment. An independent valuer was of the opinion that the fair value of the equipment at the end of year 2019 is RM252,000. On 30 April 2020, ColdfieldSdn Bhd disposed the equipment for RM210,000. Required: Assuming that Coldfield uses the restated net amount method, provide the journal entry to record the disposal of the equipment on 30 April 2020. QUESTION 3 QUESTION 4 Syarikat Berjaya bought a machine at a price RM28,000 on 1 January2016. On 30 November 2019, the machine have been sold by RM20,000and received cheque. The machine depreciated at a rate 20% per annum on cost. Required: Prepare the following accounts for the year ended 31 December 2019: a) Machinery Account b) Accumulated Provision for Depreciation – Machinery Account c) Machinery Disposal Account QUESTION 5 Syarikat Alahai bought 2 units of machine on 1 January 2017 that were Machine A at cost RM35,000 and Machine B at cost RM47,000. On 31 August 2019, Machine A have been sold at price RM25,000. The depreciation for machine was 20% per annum using reducing balance method. Required: Prepare the following accounts for the year ended 31 December 2019: a) Machinery Account b) Accumulated Depreciation – Machinery Account c) Machinery DisposalAccount 23
Below is the balance of accounts for Syarikat F & N on 30 June 2018: Vehicles on cost RM200,000 Accumulated depreciation – vehicles RM 80,000 On 1 February 2019, the old vehicle which have been purchased on 31 October 2016 by RM83,000 have been sold at price RM75,000. The depreciation rate was 10%per annum on cost. Required: Prepare the following accounts for the year ended 30 June 2019: a) Vehicle Account b) Accumulated Provision for Depreciation – Vehicle Account c) Vehicle DisposalAccount QUESTION 6 QUESTION 7 Syarikat Idaman bought an equipment by RM16,000 on 1 May 2017. On 30 September 2019, the equipment have been traded in with a new equipment valuing RM25,000. The trade in value was RM10,500. The depreciation rate was 10% per annum on cost. Required: Prepare the following accounts for the year ended 31 December 2019 : a) Equipment Account b) Accumulated Depreciation – Equipment Account c) Equipment Disposal Account 24
Syarikat FAR purchased 3 units of machine at a price RM25,000 each by cash on 1 June 2017. On 31 July 2019, 1 unit of these machine have been traded in with a new machine valuing RM32,000. The trade in value for old machine was RM17,800. All machine depreciated at a rate 20% per annum on cost. Required: Prepare the following accounts for the year ended 31 December 2019: a) Machine Account b) Accumulated Depreciation – Machine Account c) Machine Disposal Account QUESTION 8 QUESTION 9 The following data is the information of fixed assets for Syarikat A To Z on 1 January 2019. Fixed asset Cost (RM) Accumulated depreciation (RM) Vehicle – Perodua Kembara 51,000 10,200 Vehicle – Econovan 55,000 11,000 Office Equipment 11,500 1,150 The depreciation rate for vehicle was 20% per annum on cost and 10% for office equipment on carrying value. On 1 October 2019, the company bought a new 1 tonne lorry at cost RM85,000 by loan. On 30 November 2019, Perodua Kembara have been sold by RM38,000 to Bob Enterprise by cash. Required: Prepare the following accounts for the year ended 31 December 2019 : a) Vehicle Account and Office Equipment Account b) Accumulated Depreciation – Vehicle Account and Accumulated Depreciation – Office Equipment Account c) Vehicle Disposal Account 25
Below is the balance of fixed asset account for Syarikat NFA on 30 June 2018: Machinery on cost RM80,000 Accumulated depreciation – machinery RM24,000 RM56,000 On 1 November 2018, an old machine have been traded in with a new machine valuing RM26,000. The old machine have been purchased on 1 December 2016 at a price RM16,000. Trade in value was RM11,500. All machine depreciated at a rate 10% per annum on cost. You are required to prepare the following accounts for the year ended 30 June 2019: a) Machinery Account b) Accumulated Depreciation – Machinery Account c) Machinery Disposal Account QUESTION 10 QUESTION 11 The following data is the information of fixed assets for Fafau Enterprise on 31 December 2018. Fixed asset Cost (RM) Acc. depreciation (RM) Vehicle – Perodua Alza 48,000 16,000 (purchased on 30 April 2017) Vehicle – Toyota Hilux 85,000 34,000 Office equipment 10,400 1,400 The depreciation rate for vehicle was 20% per annum on cost and 10% per annum for office equipment on carrying value. On 30 September2019, Perodua Alza have been traded in with Proton Exora by RM33,000 to Amy Company by cash. The cost of Proton Exora is RM58,000. On 1 November 2019, bought new office equipment valuing RM2,800 by cheque. You are required to prepare the following accounts for the year ended 31 December 2019: a) Vehicle Account and Office Equipment Account b) Accumulated Depreciation – Vehicle Account and Accumulated Depreciation – Office Equipment Account c) Vehicle Disposal Account 26
QUESTION 10 QUESTION 12 The following data is the information of vehicle for a company on 31 December 2018. Vehicles Date of purchase Cost (RM) Wira 01/04/2015 54,000 Waja 31/05/2016 68,000 Kenari 01/03/2017 52,000 The company used straight line method at a rate 15% per year to record the depreciation for fixed assets. During the financial year ended 31 December2019, the transactions below occurred : 01/02/2019 Cash purchase of Kancil for RM28,000. 30/04/2019 Sold Wira by RM25,000 31/08/2019 Kenari have been traded in for RM38,000 and replaced by Kembara valuing RM60,000. The balance was paid by cheque. Required: Prepare the following accounts for the year ended 31 December 2019: a) Vehicle Account b) Accumulated Provision for Depreciation – Vehicle Account c) Vehicle Disposal Account 27
QUESTION 10 QUESTION 13 The following information is an extract of Adinda Enterprise’s Balance Sheet as at 1st January 2019. Cost (RM) Accumulated Depreciation (RM) Vehicle 128,000 35,200 Office Equipment 22,700 15,900 During the financial year ended 31st December 2019, the following transactions occured: 1 January Bought an equipment by cash RM4,800. 30 April Sold a vehicle by RM35,000. The vehicle have been purchased at a price RM44,000 on 1 April2017. 30 June A vehicle which bought on 30 June 2017 at RM36,000 have been traded in with a new vehicle valuing RM54,500. Trade in value was RM20,000. The depreciation of its vehicle at the rate of 20% and 10% for office equipment using straight line method. Required: Prepare the following accounts for the year ended 31 December 2019: a) Vehicle Account and Office Equipment Account b) Accumulated Depreciation Account for vehicle and office equipment c) Disposal Account for vehicle and office equipment d) The extract of Statement of Financial Position as at 31 December 2019 28
QUESTION 10 QUESTION 14 The following information is the information of fixed assetsfor Mickey Co. on 1 July 2018. Fixed Assets Cost (RM) Accumulated Depreciation (RM) Vehicle – Toyota Hilux 150,000 60,000 Machinery 55,000 10,450 During the financial year ended 30 June 2019, the following transactions occured: 1 September 2018 Bought a new motor van by loan RM67,000 30 November2018 Toyota Hilux have been sold by RM95,000 to Donald Enterprise and the buyer paid by cheque. 1 February2019 A machine which bought on 31 July 2016 at RM4,500 have been traded in with a new machine valuing RM6,750. Trade in value was RM1,300. The depreciation for vehicle was 20% per annum on cost and 10% for machinery on carrying value. Required: Prepare the following accounts for the year ended 30 June 2019: a) Vehicle Account and Machinery Account b) Accumulated Depreciation – Vehicle Account and Accumulated Depreciation – Machinery Account c) Vehicle Disposal Account and Machinery Disposal Account 29
QUESTION 10 QUESTION 15 The following data is the information of vehicle for a company on 30 April 2019. Vehicles Date of purchase Cost (RM) Van A 21/01/2015 58,000 Van B 16/05/2016 72,000 Car C 11/03/2017 45,000 The company used straight line method at a rate 20% per year to record the depreciation for fixed assets. During the financial year ended 30 April 2019, the transactions below occurred : 04/07/2018 Cash purchase of Car D for RM28,000. 17/11/2018 Sold Van A by RM35,000 10/02/2019 Van B have been traded in for RM40,000 and replaced by Van E valuing RM85,000. The balance was paid by loan. Required: Prepare the following accounts for the year ended 30 April 2019: a) Vehicle Account b) Accumulated Provision for Depreciation – Vehicle Account c) Vehicle Disposal Account 30
QUESTION 10 QUESTION 16 Johan Enterprise’s accounting year end is on 31 December every year. On 31 December 2018 his business had the asset with following balances: Motor vehicles RM180,000 Accumulated depreciation – motor vehicle RM 90,000 The following transactions occured during 2019: 30 April 2019 The business traded in Van A with a new van (Van Z) which cost was RM90,000. The trade in value was RM60,000 and the balance were paid by cheque. Van A was purchased on 1 July 2017 by RM82,000. 1 June 2019 The business has purchased a car for RM48,000 by loan. 30 November2019 Car B has been sold for RM38,000 by cash. It was originally bought on 31 May 2016 with cost RM51,000. Motor vehicle are depreciated using straight line method at a rate of 20% per annum. The business policy stated that fully depreciation charged on the year of purchased and no depreciation charged on the year of disposal. Required: Prepare the following accounts for the year ended 31 December 2019: a) Motor Vehicle Account b) Accumulated Depreciation – Vehicle Account c) Motor Vehicle Disposal Account 31
Azlina. et.al (2015). Financial Accounting and Reporting 1 (1st ed.) Malaysia : Oxford University Press Mohd Nizal, et.al (2018). Fundamentals of Financial Accounting (2nd ed.). Malaysia : Oxford University Press Malaysian Financial Reporting Standard (MFRSs). https://www.masb.org.my/pages.php?id=89 REFERENCES 32
ABOUT THE AUTHORS Azuyaria binti Mat Puzi is an Accounting Lecturer at Commerce Department, Politeknik Kota Kinabalu, Sabah. She holds a Master Degree in TVET Education from KUITTHO and Degree in Accounting from Universiti Utara Malaysia. She also has extensive experience teaching accounting courses, which specialization in Cost & Management Accounting and Financial Accounting. Masliza Idani binti Mahmood is an Accounting Lecturer at Commerce Department, Politeknik Kota Kinabalu, Sabah. She holds a Master Degree in TVET Education from KUITTHO and Degree in Accounting from Universiti Utara Malaysia. She also has extensive experience teaching accounting courses, which specialization in Cost & Management Accounting and Financial Accounting.