AA015 Chapter 9

CHAPTER 9: ACCOUNTING
FOR NON-CURRENT ASSETS

Learning Objectives:-

9.1 To explain the definition and types of non-current
assets.

9.2 To compute and record the cost of fixed assets.
9.3 To explain the depreciation
concept.
To calculate and journalize the depreciation
based on:
Straight-Line Method
Reducing Balance Method
9.4 To explain and record the sales & trade-in of fixed
assets.

9.5 To show the presentation of fixed assets in the
Statement of Financial Position.

2

What should you know?

Definition and Types of Non-Current
Assets

Compute and Record the Cost of Fixed Assets
Depreciation of Fixed Assets

Disposal of Fixed Assets

Presentation of Fixed Assets in the Statement of
Financial Position

3

9.1 TYPES OF NON-CURRENT ASSETS

NON-CURRENT ASSETS

LONG TERM
INVESTMENT

Stock
investment

FIXED INTANGIBLE

1.Physical substance No physical existence
2.Used in operation Examples: Patents,
3.Not intended for sale Copyrights, Goodwill,
Examples: Property, Trademarks and Trade
Plant & Equipment, Names & Franchises
Machinery, Vehicles.

4

DEFINITION OF FIXED ASSETS

Assets which are purchased
for long term use in business

and not
intended for sale to customer.

5

CHARACTERISTICS OF FIXED ASSETS
(PLANT ASSETS)

They have a physical substance
(a definite size and shape).

They are used in the operations
of a business.

They are not intended for sale to customer.

6

EVENTS RELATED TO FIXED ASSETS

Three
Important Events

12 3
Disposals
Purchase Depreciation
(Acquisition)

7

9.2 DETERMINATION OF FIXED ASSETS
COST

CAPITAL • Cost that incurred to increase the
EXPENDITURES operating efficiency, productivity or useful
life of a fixed asset. Examples: Additions &
improvements increase company’s
investment in productive facilities.

• Cost will be charged to the FIXED
ASSETS.

REVENUE • To maintain the operating efficiency and
EXPENDITURES productive life of the unit.

• Usually are small amounts that occur
frequently. Examples: Ordinary repairs
and maintenance.

• Immediately charged as an EXPENSE.

8

DETERMINATION OF FIXED ASSETS COST

COST CONSISTS OF ALL
EXPENDITURES NECESSARY
TO ACQUIRE THE ASSET AND

MAKE IT READY FOR ITS
INTENDED USE.

9

DETERMINATION OF FIXED ASSETS COST

+Cost Price Cost to prepare the assets for

its intended use.

Price in Invoice

Transportation charges
Installation & testing
Sales Tax
Legal Fees

10

DETERMINATION OF FIXED ASSETS COST

1

Land Cost

Price Cost + Brokerage Commission + Lawyer Fees +
Other cost for cleaning and levelling the ground

2
Land Improvement Cost
Fencing + Paving + ‘PARKING LOT’ + Sprinkler
Systems + Basic Facilities

11

DETERMINATION OF FIXED ASSETS COST

3

Buildings
Purchase Price + Brokerage Commission +
Renovation Cost + Other cost to transfer the
ownership

4
Machinery and Equipment
Purchase Price + Transportation Charge + Sales Tax +
Insurance while in transit + Installation cost and testing
cost

12

EXAMPLE

On January 1, 2017 Syarikat Anggun buys a machine to be
used in business. Information on cost incurred with the
purchase of machine is as follows:

RM

Price in Invoice
8,000

Sales Tax 100
300
Transportation Charge
100
Installation Cost
200

Insurance while in transit

Fire Insurance 13
150

SOLUTION

Date General Journal Dr (RM) Cr (RM)

2017 Accounts and Explanation 8,700
Jan 1 8,700
Dr Machine
Cr Cash

(To record purchase of
machine)

Dr Prepaid Insurance 150
Cr Cash 150

(To record prepaid insurance)

Note: The fire insurance expense is not the cost of the asset.
That is not necessary to acquire the machine and make it
ready for its intended use.

14

9.3 DEPRECIATION CONCEPT

FRS (Financial Reporting Standard)

Define depreciation as :-

"The systematic allocation of the depreciable amount of
an asset over its useful life" (FRS 116)

- Pengagihan kos aset tetap secara sistematik
sepanjang tempoh usia guna aset.

Journal entry:

Dr Depreciation Expense xxx

Cr Accumulated Depreciation xxx

15

DEPRECIATION CONCEPT

DEPRECIATION ACCUMULATED
EXPENSE DEPRECIATION

• To recognize the • Total amount of
depreciation depreciation
expense for expended by the
current year. company over the
life of the asset.
• Disclose in the • Disclose in the
Statement of Statement of
Comprehensive Financial Position.
Income.
16

PRESENTATION OF
DEPRECIATION EXPENSE

Syarikat Ayu
Statement of Comprehensive Income (partial)

For the year ended December 31, 2017

Sales xx
(- ) Cost of Goods Sold xx
Gross Profit xx
( - ) Expenses
870
Depreciation Expense

17

PRESENTATION OF
ACCUMULATED DEPRECIATION

Syarikat Ayu

Statement of Financial Position (partial)

As at December, 31 2017

ASSETS

NON-CURRENT ASSETS

Machine

8700

( - ) Accumulated Depreciation-Machine 870

7,830

18

BASIS IN COMPUTING DEPRECIATION

BASIS
MONTHLY YEARLY

19

MONTHLY BASIS

MONTHLY

PURCHASE SELL@DISPOS
DATE E

DATE

1 – 15 1 – 15

Depreciation 16 – 31 16 – 31 No depreciation
expense fully expense
Depreciation allocated
allocated in the expense fully
allocated in the
month No depreciation month

expense allocated

20

YEARLY BASIS

YEARLY

PURCHASE SELL@DISPOSE
YEAR YEAR

Depreciation No
expense fully depreciation
allocated in the
allocated
month

21

CALCULATION OF DEPRECIATION

METHODS OF DEPRECIATION

1 2

STRAIGHT- REDUCING
LINE BALANCE
METHOD
METHOD

22

STRAIGHT-LINE METHOD

STRAIGHT-LINE METHOD

Expense the same amount of depreciation for each year
of the asset’s useful life.

Yearly Depreciation Expense
= Cost – Salvage Value

Useful Life
@

= Rate (%) x (Cost – Salvage Value)

NOTES: Rate (%) = 100%
Depreciable Cost
= Cost – Salvage Value Estimated useful life

24

STRAIGHT-LINE METHOD – Example 1

A machine has been purchased on January 1, 2011. The
cost of the asset is RM130,000. The salvage value is
RM10,000 and useful life is 5 years. Calculate the yearly
depreciation expense and journalize the depreciation
expense at December 31, 2011.

Answer: =
Yearly Depreciation Expense = RM130,000 –

RM10,000

5

RM24,000

25

STRAIGHT-LINE METHOD – Example 1

OR
% = 100 = 20%

5

Yearly Depreciation Expense
= 20% x (RM130,000 – RM10,000)
= RM24,000

2011
Dec 31 Depreciation Expense – Machine 24,000

Accumulated Depreciation – Machine 24,000
(To record depreciation on machine)

26

STRAIGHT-LINE METHOD – Example 1

Solution: Previous Acc. Dep. + Current Asset Cost –
Acc. Dep.
Dep. Exp.

Depreciation Accumulated Book Value

Year Expense Depreciation (RM)

(RM) (RM)

130,000 Asset Cost
Salvage Value
2011 24,000 24,000 106,000

2012 24,000 48,000 82,000
2013 24,000 72,000 58,000
2014 96,000 34,000
2015 24,000 120,000 10,000
24,000

Depreciable Cost

27

STRAIGHT-LINE METHOD – Example 1

Statement of Financial Position (partial)
As at 31 December

2011

Non-Current Assets 24,000

Machine
130,000

(-) Accumulated Depreciation-Machine

106,000

28

STRAIGHT-LINE METHOD – Example 2

If the same machine is purchased on January 20, 2011;

a) Monthly Basis

Depreciation is calculated in the following month (Feb).

Feb → Dec = RM24,000 x 11/12

Depreciation Expense = RM22,000

b) Yearly Basis
Depreciation is calculated for the full year of purchase.

Depreciation Expense = RM24,000

29

9.3 DEPRECIATION

Depreciation Expense Account

Depreciation Expense Account- Machine

2011 2011

Dec 31 Accumulated Dec 31 Statement of

Depreciation- 24,000 Comprehensive 24,000
Machine Income 24,000
24,000
2012 2012
Dec 31 Accumulated
Dec 31 Statement of
Depreciation-
Machine Comprehensive

24,000 Income

2013 2013
Dec 31 Accumulated
Dec 31 Statement of
Depreciation-
Machine Comprehensive

24,000 Income

30

9.3 DEPRECIATION

Depreciation Expense Account

Depreciation Expense Account- Machine

2014 2014

Dec 31 Accumulated Dec 31 Statement of

Depreciation- 24,000 Comprehensive 24,000
Machine Income 24,000

2015 2015
Dec 31 Accumulated
Dec 31 Statement of
Depreciation-
Machine Comprehensive

24,000 Income

31

9.3 DEPRECIATION

Accumulated Depreciation Account

Accumulated Depreciation Account- Machine

2011 2011
Dec 31 Balance c/f 24,000 Dec 31 Depreciation

Expense- Machine 24,000

2012 48,000 2012 24,000
Dec 31 Balance c/f Jan 1 Balance b/f 24,000
Dec 31 Depreciation

Expense- Machine

48,000 48,000

2013 2013 48,000
Dec 31 Balance c/f 72,000 Jan 1 Balance b/f 24,000

Dec 31 Depreciation
Expense- Machine

72,000 72,000

32

9.3 DEPRECIATION
Accumulated Depreciation Account

Accumulated Depreciation Account- Machine

2014 96,000 2014 72,000
Dec 31 Balance c/f Jan 1 Balance b/f 24,000
Dec 31 Depreciation
2015
Dec 31 Balance c/f Expense- Machine

96,000 96,000

2015 96,000
120,000 Jan 1 Balance b/f 24,000

Dec 31 Depreciation

Expense- Machine

120,000 120,000

33

REDUCING BALANCE METHOD

34

REDUCING BALANCE METHOD

- Reducing Balance Method charges
depreciation at a higher amount in the
earlier years of an asset.

- The amount of depreciation reduces as
the life of the asset progresses.

35

REDUCING BALANCE METHOD

Yearly Depreciation Expense
= Rate (%) x Net Book Value *

Rate: Fixed (%)
* Net Book Value = Cost – Accumulated Depreciation

36

REDUCING BALANCE METHOD- Example

Syarikat Maju purchased a machine in 2015 at a price of
RM50,000 which has a useful life of 4 years and the
salvage value of the machine is RM7,000. The depreciation
rate is 39%. Calculate the yearly depreciation expense
under the reducing balance method.

37

REDUCING BALANCE METHOD-
Solution

Year Depreciation Expense Accumulated Book
(RM) Depreciation Value
(RM)
0 (RM)
2015 39% x 50,000 = 19,500 50,000
19,500
30,500

2016 39% x 30,500 = 11,895 31,395 18,605

2017 39% x 18,605 = 7,255.95 38,650.95 11,349.05

2018 4,349.05* 43,000 7,000

*Last-year depreciation is the “plug figure” needed to reduce book value to

the salvage value (RM11,349.05 – RM387,000 = RM4,349.05)

DEPRECIATION

Depreciation Expense Account

Depreciation Expense Account- Machine

2015 2015

Dec 31 Accumulated Dec 31 Statement of

Depreciation- 19,500 Comprehensive 19,500
Machine Income

2016 2016
Dec 31 Accumulated
Dec 31 Statement of
Depreciation-
Machine Comprehensive

11,895 Income 11,895

2017 2017
Dec 31 Accumulated
Dec 31 Statement of
Depreciation-
Machine Comprehensive

7,255.95 Income 7,255.95

39

DEPRECIATION

Depreciation Expense Account

Depreciation Expense Account- Machine

2018 2018

Dec 31 Accumulated Dec 31 Statement of

Depreciation- Comprehensive
Income
Machine 4,349.05 4,349.05

40

DEPRECIATION

Accumulated Depreciation Account

Accumulated Depreciation Account- Machine

2015 2015
Dec 31 Balance c/f 19,500 Dec 31 Depreciation

Expense- Machine 19,500

2016 31,395 2016 19,500
Dec 31 Balance c/f Jan 1 Balance b/f 11,895
Dec 31 Depreciation

Expense- Machine

31,395 31,395

2017 2017
Dec 31 Balance c/f
38,650.95 Jan 1 Balance b/f 31,395

Dec 31 Depreciation

Expense- Machine 7,255.95

38,650.95 38,650.95

41

DEPRECIATION
Accumulated Depreciation Account

Accumulated Depreciation Account- Machine

2018 2018
Dec 31 Balance c/f
43,000 Jan 1 Balance b/f 38,650.95
Dec 31 Depreciation

Expense- Machine 4,349.05

43,000 43,000

42

9.4 DISPOSAL OF FIXED ASSETS

DISPOSAL

12 3

DISCARD SELL EXCHANGE

(TRADE-IN)

43

DISPOSAL OF FIXED ASSETS

DISPOSAL STEPS

1 2 3 4

Bring the Remove the old, Record the Determine the
depreciation disposed-of asset value of any amount of gain
up to date. and associated cash received
(or paid) in the or loss
accumulated disposal of the
depreciation from asset.

the books.

44

DISCARD FIXED ASSETS AT THE END OF
USEFUL LIFE – FULLY DEPRECIATED
Example (a)

Example:
a) A machine is purchased on January 1, 2015 for

RM25,000. The estimated useful life is 5 years and no
salvage value. The machine is depreciated using the
straight line method. On 31 December 2019, the
machine is discarded without salvage value.

Answer:
Depreciation Expense = RM25,000 – 0 = RM5,000

5
Accumulated Depreciation = RM5,000 x 5 = RM25,000

45

General Journal

2019

Dec 31 Dr Depreciation Expense - Machine 5,000

Cr Accumulated Depreciation - Machine

5,000

(To record depreciation on machine)

2019

Dec 31 Dr Accumulated Depreciation - Machine 25,000

Cr Machine

25,000

(To record disposal of machine)

*discarded fully depreciated

DISCARD FIXED ASSETS AT THE END OF
USEFUL LIFE – FULLY DEPRECIATED
Example (b)

Example:
b) A machine is purchased on January 1, 2015 for

RM25,000. The estimated useful life is 5 years and no
salvage value. The machine is depreciated using the
straight line method. On 31 December 2019, the
machine is sold for RM2,500.

Answer:
Depreciation Expense = RM25,000 – 0 = RM5,000

5
Accumulated Depreciation = RM5,000 x 5 = RM25,000

47

DISCARD FIXED ASSETS AT THE END OF
USEFUL LIFE – FULLY DEPRECIATED
Example (b)

Answer:

Gain/ Loss = Cash Received – Book Value

= Cash Received [Asset Cost

– Acc. Dep.]

= RM2,500 – [RM25,000 –

RM25,000]

= RM2,500 (Gain)

48

General Journal

2019

Dec 31 Dr Depreciation Expense - Machine 5,000

Cr Accumulated Depreciation - Machine

5,000

(To record depreciation on machine)

2019

Dec 31 Dr Accumulated Depreciation - Machine 25,000

Cash

2,500

Cr Machine 25,000

Gain on Disposal

2,500

(To record disposal of machine and gain on

disposal)

*discarded fully depreciated

SELLING FIXED ASSETS BEFORE
END OF USEFUL LIFE

Gain / Loss
= Cash Received – Book Value

(Book Value = Cost – Accumulated Depreciation)

Book Value > Cash ⇒ LOSS
Book Value < Received ⇒ GAIN

Cash
Received

50