Maintain Asset Register

Maintain asset register

Contents

Key to resources

Introduction

Asset purchase

Definitions

Accounting standards

Asset cost

Depreciation

The assets register

Feedback to self testing exercises

This learning guide is based on the following resource:
Textbook
Duncan A (2006) Introductory Accounting, National Core Accounting Publications, Bondi
Note
A new edition of this textbook was being published at the same time as this resource.
Where possible, we have provided a second Key to resources to this new edition.

Key to resources

Resource / Textbook (2006 edition)
1 / Chapter 18 ‘Depreciation’, section 18.1—on definitions
2 / Chapter 18 ‘Depreciation’, section 18.7—on asset impairment
3 / Chapter 18, section 18.3—on accounting for the purchase of non-current assets
4 / Chapter 18, self-testing exercise 1
5 / Chapter 18, section 18.4—on the theory behind depreciation
6 / Chapter 18, example in section 18.4, p555
7 / Chapter 18, worksheet example for Aussie Gum Ltd, pp556–557
8 / Chapter 18, self-testing exercise 2, p557
9 / Chapter 18, Reducing balance (or diminishing value) method, pp557–558
10 / Chapter 18, example for Pal Printing, p558
11 / Chapter 18, self-testing exercise 3
12 / Chapter 18, Units of use method, p559
13 / Chapter 18, self-testing exercise 4
14 / Chapter 18, Units of use: depreciation schedule, p560
15 / Chapter 18, self-testing exercise 5
16 / Chapter 18, section 18.6 Accounting for depreciation
17 / Chapter 18, self-testing exercise 6
18 / Chapter 18, Fully depreciated assets, pp563
19 / Chapter 18, section 18.7—on asset impairment
20 / Chapter 18, section 18.8—on profit or loss on disposal
21 / Chapter 18, self-testing exercise 7 (including a disposal of non current asset account). Note that the answer is at the end of this learning guide.
22 / Chapter 18, Trading-in used assets on new, pp567–568
23 / Chapter 18, self-testing exercise 8. Note that the answer is at the end of this learning guide.
24 / Chapter 18, The assets register, pp569–570
Resource / Textbook (2007 edition)
1 / Chapter 16 ‘Depreciation’, section 16.1—on definitions
2 / Chapter 16, section 18.7—on asset impairment
3 / Chapter 16, section 16.3—on accounting for the purchase of non-current assets
4 / Chapter 16, self-testing exercise 1
5 / Chapter 16, section 16.4—on the theory behind depreciation
6 / Chapter 16, example in section 16.4, p531
7 / Chapter 16, worksheet example for Aussie Gum Ltd, pp 532 – 533
8 / Chapter 16, self-testing exercise 2, p 533
9 / Chapter 16, Reducing balance (or diminishing value) method,
pp 533 – 534
10 / Chapter 16, example for Pal Printing, p 534
11 / Chapter 16, self-testing exercise 3
12 / Chapter 16, Units of use method, p 535
13 / Chapter 16, self-testing exercise 4
14 / Chapter 16, Units of use: depreciation schedule, p 536
15 / Chapter 16, self-testing exercise 5
16 / Chapter 16, section 16.6 Accounting for depreciation
17 / Chapter 16, self-testing exercise 6
18 / Chapter 16, Fully depreciated assets, p539
19 / Chapter 16, section 16.7—on asset impairment
20 / Chapter 16, section 16.8—on profit or loss on disposal
21 / Chapter 16, self-testing exercise 7 (including a disposal of non current asset account). Note that the answer is at the end of this learning guide.
22 / Chapter 16, Trading-in used assets on new, pp 543 – 544
23 / Chapter 16, self-testing exercise 8. Note that the answer is at the end of this learning guide.
24 / Chapter 16, The assets register, pp 545 – 546

Introduction

This guide deals with those assets purchased by a business for use in its operations.

Asset purchase

The purpose of the asset purchase is to use the assets in the production of future goods and services with no intention to resell the asset in the ordinary course of business—that is, as trading stock.

Trading stock assets will usually be classified as current assets while assets used in the production of goods and services would normally be classified as non-current assets. The term fixed assets is also commonly used to describe non-current assets. The term ‘property, plant and equipment’ is also used to describe assets of this type.

The purchase price of non-current assets is usually high and the benefit to the business will extend over a number of accounting periods. This gives rise to two considerations:

matching the cost of the asset against the revenue earned in a period—depreciation
maintaining an asset register for each asset.

Definitions

/ Now go to Resource 1

Note the definitions for:

depreciation
depreciable asset
asset cost
useful life
residual value
depreciable amount
carrying amount
fair value
impairment loss.

With the definition of carrying amount the terms ‘book value’ and ‘written down value’ or ‘WDV’ mean the same thing.

Accounting standards

Two accounting standards are mentioned in the theory:

AASB 116 is the accounting standard dealing with property, plant and equipment
AASB 136 deals with impairment of assets.

A broad understanding of the content of these two standards will assist your studies in this topic.

/ Now go to Resource 2

Asset cost

/ Now go to Resource 3
Note particularly in the example that GST does not form part of the cost of the asset. Note that the installation costs (excluding GST) are also included in the total purchase price of the asset.
/ Now go to Resource 4
Check the solution at the end of the chapter. Note that the painting of the vans and the installation cost of the shelves form part of the total purchase price of the vans.

Depreciation

/ Now go to Resource 5
The general journal entry to record a depreciation expense is usually dealt with as a balance day adjustment. Note that the account ‘depreciation expense’ is an expense that is transferred to the profit and loss account and that the account ‘accumulated depreciation’ is a negative non-current asset.
/ Now go to Resource 6
In the example in the textbook, the depreciation expense is shown as $12000 in the income statement and the accumulated depreciation of $32000 shown as a deduction from equipment in the balance sheet.

Methods of calculating depreciation

There are three methods for calculating depreciation:

the straight line method—which is sometimes known as the fixed instalment method
the reducing balance or diminishing value method
the units of use method.

We will look at each one of these methods in turn.

Straight line (fixed instalment) method

/ Now go to Resource 7
In the example for Aussie Gum Ltd, note especially that the residual (scrap) value of the asset is deducted from the cost to give the depreciable amount. The depreciable amount is then divided by the asset’s estimated useful life togive the amount for depreciation. In this example the asset is being depreciated for three full financial years. Note however that the depreciation charge will commence at the time it is purchased and ready for use and that depreciation will cease when the asset is sold. For example, if Aussie Gum Ltd purchased the asset on the 01/10/20x5 and sold it on the 31/03/20x8 then for the financial years ended year ended 30/06/20x6 and 30/06/20x8 the depreciation charge would be $7500 that is 9/12 of $10000.
/ Now go to Resource 8

Reducing balance method

/ Now go to Resource 9
Note particularly that any residual value is nottaken into account when calculating the depreciable amount. Note also the comments about the increasing acceptance of the reducing balance method and the reasons for that acceptance.
/ Now go to Resource 10
In the example for Pal Printing, note that under this method the depreciation charge is higher in the early years and decreases the longer the asset is held. Compare this with the straight line method where the depreciation charge is the same for each full year held. Note also that after the first year the calculation for depreciation is based on the opening written down value.
/ Now go to Resource 11

Units of use method

/ Now go to Resource 12
Note with the units of use method, any residual value istaken into account when calculating the depreciable amount. Check the example for calculating the rate.
/ Now go to Resource 13
/ Now go to Resource 14
Note the example, which is for a depreciation schedule using the units of use method, before you continue.
/ Now go to Resource 15
Remember to check your answers against those at the end of the chapter —and if you were uncertain of any of the questions revise the section on the units of use method.
/ Now go to Resource 16
Revisit the accounting entry for depreciation and its subsequent transfer to the profit and loss account as well as balance sheet presentation. The example for Tins and Things Ltd includes general journal and ledger account entries
/ Now go to Resource 17

Fully depreciated assets

/ Now go to Resource 18

When the carrying amount (written down value) of an asset is nil (that is, the total of accumulated depreciation is equal to the cost of the asset), no further depreciation entries in respect of that asset will be made.

Impairment of assets

/ Now go to Resource 19
Work through the example and note particularly the general journal entry required when an impairment loss needs to be recognised. Note that the ‘impairment loss on machinery’ account is an expense and will be transferred to the profit and loss account. In addition if the accumulated depreciation account includes an impairment loss it should be called ‘accumulated depreciation and impairment’.

Account for disposal of depreciable assets

/ Now go to Resource 20
Note especially that the asset should be depreciated up to the date of sale. The exercise in the textbook is more suitable for advanced studies involving a company. Based on the example in the textbook, it is suggested that the following procedure be adopted for a sale of a depreciable asset.
/

Step 1

Record the depreciation on the asset being sold from the end of the last financial year up to the date of sale. Remember the general journal is:

Debit: Depreciation expense – Machinery / 1000
Credit: Accumulated depreciation– Machinery / 1000
/

Step 2

Open a Disposal of non-current asset (DONCA) account in the general ledger and transfer to it the accumulated depreciation in regard to the asset being sold from the accumulated depreciation account. The general journal entry is:

Debit: Accumulated depreciation – Machinery / 15000
Credit: Disposal of non-current asset / 15000
/

Step 3

Transfer to the DONCA account the cost of the asset being sold. The general journal entry is:

Debit: Disposal of non-current asset / 25000
Credit: Machinery / 25000
/

Step 4

Record the sale proceeds of the asset: General journal entry is:

Debit: Bank / 8800
Credit: GST clearing / 800
Credit: Disposal of non-current asset / 8000
/

Step 5

The balance in the disposal of Non-current asset account represents a profit/loss on disposal–in this case a loss of $2000. Transfer this to a Loss on Disposal account.

The general journal entry is:

Debit: Loss on disposal / 2000
Credit: Disposal of non-current asset / 2000

The Loss on disposal account is an expense account and will be transferred to Profit and loss account at the end of the financial year with other closing general journal entries.

The general ledger accounts will show:

Depreciation of machinery
Accumulated dep. – Machinery / (1) / 1000
Accumulated depreciation of machinery
Disposal of non-current asset / 15000 / (2) / Balance b/d / 72000
Balance c/d / 58000 / Depreciation / 1000 / (1)
73000 / 73000
Balance b/d / 58 000
Machinery
Balance b/d / 228000 / Disposal of non-current asset / 25000 / (3)
Balance c/d / 223000
228000 / 228000
Balance b/d / 223 000
Disposal of non-current assets
Machinery / 25000 / (3) / Accum. dep – Machinery / (2) / 15000
Bank(proceeds) / 8000 / (4)
Loss on disposal / 2000 / (5)
25000 / 25000
/ Now go to Resource 21
Note: The answer is at the end of this guide.

Trading-in used assets on new

/ Now go to Resource 22
When you checked the example, did you notice that there is no cash proceeds of sale? Note also that the trade-in figure of $5500 includes GST.

General journal entries using a disposal of non-current asset account are:

20x6
30/09 / Depreciation expense – Motor vehicle / 1800
Accumulated depreciation – Motor vehicles / 1800
Depreciation charge to date of sale
22 000 – 14000=8000 × 30% × 9/12
Accumulated depreciation – Motor vehicle / 15800
Disposal of non-current asset / 15800
Transferring accumulated depreciation up to date of sale
Disposal of non-current asset / 22000
Motor vehicle / 22000
Transferring original cost of asset sold
Motor vehicle / 33000
GST clearing / 2800
Disposal of non-current asset / 5000
Bank / 30800
Purchase of new motor vehicle and recording trade-in allowance of $5500 including GST
Loss on disposal / 1200
Disposal of non-current asset / 1200
Recording loss on disposal of motor vehicle
/ Now go to Resource 23
In self testing exercise 8, note that the trade-in allowance includes GST. Also, the Loss on Disposal account will be closed off to Profit and Loss at the end of the financial year. The answer is at the end of this learning guide.

The assets register

/ Now go to Resource 24
A record should be kept of each item of non-current asset held. Check the information in the asset register card for Dubbo Seed Cleaning Ltd. Note that the total of Motor Vehicles account in the general ledger should agree with the total of the cost price shown on the individual motor vehicle asset register card. The accumulated depreciation total in the general ledger should also agree with the totals shown on the asset register card.

Feedback to self-testing exercises

Self-testing exercise 7

(a)

General journal entries

20x6
March 31 / Depreciation – Office equipment / 435
Accumulated depreciation – Office equipment / 435
Depreciated up to date of sale
Accumulated depreciation – Office equipment / 6635
Disposal of non-current asset / 6635
Transferring accumulated depreciation up to date of sale
Disposal of non-current assets / 12 000
Office equipment / 12 000
Transferring original cost of asset sold
Bank / 4400
GST clearing / 400
Disposal of non-current asset / 4000
Recording proceedsof sale
Loss on disposal / 1365
Disposal of non-current asset / 1365
Transferring loss on disposal of office equipment

(b)

Depreciation – Office equipment

20x6
Mar 31 / Accumulated depreciation
Office equipment / 435

Accumulated depreciation – Office equipment

20x6 / 20x6
Mar 31 / Disposal of non-current asset / 6635 / Mar 31 / Balance b/d / 34500
Balance c/d / 28300 / Depr.– office equipment / 435
34 935 / 34 935

Office equipment

20x6 / 20x6
Mar 31 / Balance b/d / 56 000 / Mar 31 / Disposal of non-current asset / 12 000
Balance c/d / 44 000
56 000 / 56 000
Apr 1 / Balance b/d / 44 000

Disposal of non-current asset

20x6 / 20x6
Mar 31 / Office equipment / 12 000 / Mar 31 / Accum.depr. – O/equipment / 6 635
Bank / 4 000
Loss on disposal / 1 365
12 000 / 12 000

Self-test exercise 8

General journal

20x6
March 31 / Depreciation – Machinery / 500
Accumulates depreciation – Machinery / 500
Depreciated up to date of sale

eqn02
Accumulated depreciation – Machinery / 5 900
Disposal of non-current asset / 5 900
Transferring accumulated depreciation up to date of sale
Disposal of non-current assets / 10 000
Machinery / 10 000
Transferring original cost of assets sold
Machinery / 14 000
GST clearing / 1 100
Disposal of non-current asset / 3 000
Bank / 12 100
Purchasing of new machine and recording trade-in allowance of $3 300 including GST
Loss on disposal / 1 100
Disposal of non-current asset / 1 100
Transferring loss on disposal of machinery

Maintain asset register1