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FIXED ASSETS (PROPERTY, PLANT, AND EQUIPMENT )

FIXED ASSETS (PROPERTY, PLANT, AND EQUIPMENT ). CHARACTERISTICS 1) They are acquired for use in operations and not for resale 2) They are long term in nature and usually subject to depreciation 3) They possess physical substance Examples of fixed assets (property, plant and equipment)

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FIXED ASSETS (PROPERTY, PLANT, AND EQUIPMENT )

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  1. FIXED ASSETS (PROPERTY, PLANT, AND EQUIPMENT)

  2. CHARACTERISTICS 1) They are acquired for use in operations and not for resale 2) They are long term in nature and usually subject to depreciation 3) They possess physical substance • Examples of fixed assets (property, plant and equipment) Land Building structures (offices, factories, warehouses) Equipment ( machinery, furniture, tools, vehicles)

  3. B. ACQUISITION OF PROPERTY, PLANT, AND EQUIPMENT Cost of property, plant and equipment includes all amount spent to get it in place and ready for use 1) Cost of acquiring land a) Purchase price f) Surveying fees b) sale taxes g) delinquent real estate c) permits from governmenth) Razing or removing d) Broker’s commissions unwanted buildings, e) Title fees less any salvage i) Grading and leveling j) Paving a public street bordering theland

  4. 2.) Cost of acquiring building - Architecs’ fees - Engineers’ fees - Insurance costs incurred during construction - Interest on manoey borrowed to finance contruction - Walkways to and pound the building - Sales taxes - Reapirs (purchase of existing building) - Reconditioning - Modifying for use - Permits from government agencies

  5. 3) Cost of acquiring land improvements - Trees and shrubs - Fences - Outdoor lighting - Paved parking areas 4) Cost of acquiring land machinery and equipment - Sales taxes - Freight - Installation - Repairs (purchase of used equipment) - Assembly - Modifying for use - Testing for use - Permits from government agencies

  6. RECORDING THE ACQUITITION

  7. DEPRECIATION • Depreciation is periodic transfer of cost to expense • Factors that course a decline in the ability of fixed asst - Physical depreciation - Functional depreciation • Factor involved in Depreciation Proces • Cost of fixed assets • Usefull life • Residual Value (salvage value)

  8. METHODS OF DEPRECIATION • Activity methods • Straight-line methods • Decreasing charge methods (accelerated) a) Sum-of-the years’-digits b) Declining – balance method • Special Depreciation Method a) Group and composite methods b) Hybrid or combination methods

  9. DATE USED TO ILLUSTRATE DEPRECIATION METHODS The following is fixed asset (machines) owned by Sine Furniture, Co: Purchased date January, 1, 2008 Cost of machines Rp. 500.000.00 Estimated useful life 5 years’ Estimated Residual Value Rp. 50.000.000 Estimated life in hours 30,000 hours Hours use this year 4,000 hours

  10. DEPRECIATION CALCULATIONS 1) Activity Method (Cost less residual ) x Hours this year Depreciation charge = --------------------------------------------------- Total estimated hours = (Rp. 500.000.000 – Rp. 50.000) x 4,000 ---------------------------------------------------- 30,000 = Rp. 60.000.000

  11. DEPRECIATION CALCULATIONS 2) Straight-Line Method Cost less residual Depreciation charge = ---------------------------- Estimated service life = Rp. 500.000.000 – Rp. 50.000 ---------------------------------------- 5 = Rp. 90.000.000

  12. DEPRECIATION CALCULATIONS 3) Decreasing charge methods (accelerated) a) Sum-of-the years’-digits

  13. Continue… Notes: (2) = Rp. 500.000.000 – Rp. 50.000.000 = Rp. 450.000.000 (4) Formula to calculate denominator of fraction (n+1) (5 + 1) n ------- = 5 --------- = 15 2 2 (5) = (2) x (4) * Book value 5th equivalent to residual value

  14. 3)Decreasing charge methods (accelerated) b) Declining – balance method DEPRECIATION CALCULATIONS

  15. DEPRECIATION CALCULATIONS Continue .. Notes: (3) 2 x the straight line rate = 2 x 20% * * Rp. 90.000.000/Rp.450.000.000 = 20% (4) = (2) x (3) **) Limited to Rp. 14.800.000 because book value should not be less than salvage

  16. Special Depreciation Method (Group and composite methods) This method is applied for group of fixed assets Calculation procedures as follows 1. Computing the annual depreciation for each asset based on straight line method 2. The composite depreciation rate calculate by the total annual depreciation dividing with the sum of cost all assets 3. Useful life of composite assets determined base on sum of depreciation cost all assets by annual depreciation

  17. Plant Asset Record Account No : 13211 General Ledger Account: Office Equipment Item : Printer Serial No : P.HP.102 From Whom Purchased : DeComp, Co Estimated life : 10 years’ Estimated Residual Value : Rp. 500.000 Depreciation per year : Rp. 240.000 -------------------------------------------------------------------------------------------------------------- Asset Accumulated Depreciation Book Date Debit Credit Balance Debit Credit Balance Value 04/08/07 2.900.000 2.900.000 2.900.000 12/30/07 180.000 180.000 2.720.000 12/30/08 240.000 420.000 2.480.000

  18. Expenditures During Useful Life A. Revenue expenditure • Cost that benefit only the current period or costs incurred for normal maintenance and repairs • It is debited to expense account • Example: maintenance expense, repainting building, small repairs, etc

  19. B. Capital Expenditure • Costs of acquiring fixed asset, adding to fixed asset, improving fixed asset, or extending a fixed asset’s useful life • It debited to asset account or related to accumulated depreciation account • Types of capital expenditure 1) additions 2) betterments 3) extraordinary repairs

  20. Disposal of Fixed Assets • The entry to record the disposal of fixed asset removes the cost of the asset and it accumulated depreciation from the account • Ex: Assume that an item of equipment is acquired at cost of Rp. 25.000.000 is fully depreciated at Dec,31, the end of the preceding fiscal year. On Feb, 14 the equipment is discharged. • The entry to record it as follow:

  21. Ex: Assume that an item of equipment acquired at cost of Rp. 6.000.000, accumulated depreciated after adjusting entries is Rp. 4.750.000. At March, 24 removed from service. The entry to record it as follow: To record current depreciation Rp.6.000.000 x 3/12 = 150,000)

  22. Selling fixed assets • Example, assume a company has equipment as follows: Cost of equipment Rp, 10,000.000 Useful life 10 year’s Balance of accumulated depreciation at preceding Dec,31 Rp.7.000.000 It sold on Oct, 12 Depreciation method straight line • The entry to record it as follow:

  23. A. Sold at book value for Rp. 2.250.000. No gain or loss B. Sold below book value for Rp. 1.000.000. Loss Rp. 1.250.000

  24. C. Sold above book value for Rp. 1.000.000. LossRp. 2.800.000 • Gain Rp. 550.000

  25. Exchanging Similar Assets • It is old equipment traded in for new equipment having similar use. • The cost recorded for the new asset can be determined in either of two types ways: 1. Cost of new asset = List price of new asset – unrecognized gain or 2. Cost of new asset = cash given (or liability assumed) + Book value of old asset

  26. Continue • Illustration • Assume the folllowing exchange: Book value old equipment Rp. 14.000.000 List price of new equipment Rp. 50.000.000 A trade in allowance of the old equipment Rp. 15.000.000 Similar equipment acquired (new) List price 5.000.000 Trade-in allowance on old equipment 1.100.000 Cash paid at June, 19

  27. Cost of new equipment as follow Similar New equipment List price ……………………............... Rp. 5.000.000 Trade-in allowance of equipment.. Rp. 1.100.000 Cash paid at June 19, date of exchange Rp. 3.900.000 Equipment traded-in (old equipment) Cost of old equipment Rp. 4.000.000 Acc. Dep. at date of exchange Rp 3.200.000 Book value at June 19, date of exchange Rp 800.000

  28. Recorded cost of new equipment a. Method One: List price Rp. 5.000.000 Trade-in allowance on old equipment Rp. 1.100.000 Book Value of old equipment Rp. 800.000 Unrecognized gain on exchange ( Rp, 300.000) Cost of new equipment Rp. 4.700.000 b. Method Two Book Value of old equipment Rp. 800.000 Cash paid at date exchange Rp. 3.900.000 Cost of new equipment Rp. 4.700.000

  29. Journal entry to record new equipment

  30. Exchanging Similar Assets (Losses) • To illustrate as follows Similar New equipment List price Rp. 10.000.000 Trade-in allowance on old equipment Rp. 2.000.000 Cash paid at Sept, date of exchange Rp. 8.000.000 Equipment traded-in (old equipment) Cost of old equipment Rp. 7.000.000 Acc. Dep at date of exchange Rp 4.600.000 Book value at Sept date of exchange Rp 2.400.000 Trade-in allowance on old equipment Rp. 2.000.000 Loss on exchange Rp. 400.000

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