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ASSETS

ASSETS. Learning Objectives. Determine whether an item meets the definition & recognition criteria for assets Calculate initial value of an asset Calculate depreciation using various methods. DEFINITION & RECOGNITION CRITERIA. Based on Conceptual Framework. 1.a Definition.

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ASSETS

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  1. ASSETS

  2. Learning Objectives • Determine whether an item meets the definition & recognition criteria for assets • Calculate initial value of an asset • Calculate depreciation using various methods

  3. DEFINITION & RECOGNITION CRITERIA Based on Conceptual Framework

  4. 1.a Definition An asset must meet 3 criteria • Future economic benefits • Value in use e.g. PP&E • Value in exchange e.g. Inventory

  5. 1.a Definition • Controlled by the entity (not necessarily owned) • Legal right to use e.g. title • Restrict others from using it • Based on past event or transaction • e.g. Purchase or Transfer of Title

  6. Example

  7. 1.b Recognition Criteria An asset must also meet 2 recognition criteria • Reliability of Measurement • Verifiable i.e. supporting invoices or independent valuation • Probability that benefits will be received • >50% chance

  8. Example

  9. INITIAL VALUE OF ASSETS Capitalization

  10. 2.a Cost of Assets Include all expenditure incurred to • Acquire the asset • Purchase cost (invoice price) • Transport it to the place of business • Freight • Protect it while in transit • Insurance • Install it • e.g. special platform, engine

  11. 2.b Constructed Assets Include cost of • Raw Materials • Direct Labour • Overheads (including professional fees) Also include cost of borrowing • Relating specifically to the construction • Until the asset (or a part of it) is substantially complete

  12. 2.c Assets with no Cost • Donated Assets • Use fair value of assets received • Assets Received in Exchange • Use fair value of consideration given • e.g. giving shares in exchange for property

  13. Example Mango Bay Ltd acquires a machine from Jets Ltd for the following consideration Cash Rs20,000 Land costing Rs100,000 (fair value Rs140,000) Assume Jets bank loan of Rs30,000 Required Calculate the cost of the machine

  14. Exercise 10 Acquisition Cost

  15. 2.d Subsequent Costs Capitalize expenditure that increases • Economic life e.g. installing a new vehicle engine • Productive capacity e.g. extending the flying range of an aircraft

  16. DEPRECIATION

  17. 3.a Purpose Allocate cost of the asset • Over its useful life Based on estimates • Useful life • Residual Value • Consumption of benefits

  18. 3.b Depreciation Methods Based on consumption of benefits

  19. 3.c Calculations

  20. 3.c Calculations

  21. Example A machine is acquired for Rs110,000. Before it is efficiently operational, it requires installation costing Rs20,000 & modifications costing Rs10,000 It is expected to have a useful life of 6 years & salvage value of Rs15,000 Required Calculate depreciation for the first 2 years

  22. Straight-Line

  23. ATTENTION COMMERCE STUDENTS ACCOUNTING(FINANCIAL & COST) OF ICMAP STAGE 1,2,3,4 (NEW CLASSES) CA..MODULE B,C,D PIPFA (FOUNDATION,INTERMEDIATE,FINAL) ACCA-F1,F2,F3 BBA,MBA B.COM(FRESH),M.COM MA-ECONOMICS..O/A LEVELS KHALID AZIZ….. 0322-3385752 0342-2302870 0300-2540827 JOIN COST ACCOUNTANTS

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