Accounting for

Fixed Assets
 Outline

 Accounting for plant asset

expenditure
 Depreciation methods
Property, Plant and Equipment (PPE)
 Fixed assets AKA property, plant and
equipment (PPE).
 Characteristics:
 Physical substance;
 Used in the operations of a business
 Are NOT intended for sale to customers
 Expected to be used by company for a
number of years
 How to determine the cost of PPE?

What is the cost of the Machinery?

 How to determine the cost of PPE?
 Historical Cost Principle:
Company must record fixed assets at cost.

PPE cost consists of ALL expenditures incurred to bring the

assets to the business’s location and to “ready for use”
condition.
 How to determine the cost of PPE?
Cost of PPE normally includes:
 Purchase price of PPE
 Delivery and handling costs
 Installation and assembly costs

PPE cost consists of ALL expenditures incurred to bring the

assets to the business’s location and to “ready for use”
condition.
How to determine the cost of PPE?

PPE cost include:

 Purchase price of the asset
 Delivery and handling cost
 Installation and assembly cost
Four major types of PPE
 Land

ALL necessary costs incurred in

making the land ready for its intended
use will be included as Land cost:
 Purchase price
 Settlement costs (E.g.: Title,
Attorney’s fees)
 Real estate agent’s commissions
 Other cost (e.g. accrued property
taxes, expenditures for demolition)
All Land cost are debited to Land
account (Asset account).
 Let’s try!

(Exercise 1)
Determining the Cost of Plant Assets

Illustration: Hayes Company acquires real estate at a cash cost

of RM100,000. The property contains an old warehouse that is
razed at a net cost of RM6,000. Additional expenditures are the
attorney’s fee, RM1,000, and the real estate broker’s
commission, RM8,000.

Required: Determine the amount to be reported as the cost of

the land.
Determining the Cost of Plant Assets
Required: Determine amount to be reported as the cost of the
land.
Land
Cash price of property (RM100,000) RM100,000
Net removal cost of warehouse 6,000
Attorney's fees (RM1,000) 1,000
Real estate broker’s commission (RM8,000) 8,000
Cost of Land RM115,000

Date Particular Dr (RM) Cr (RM)

Land 115,000
Bank 115,000
 Land Improvements
Structural additions made to land:
 Landscaping (E.g. trees and shrubs)
 Paved parking areas
 Fences
 Outdoor lighting
 Land Improvements
Cost of land improvements may include:
 Expenditure for landscaping, paving and fencing.
All Land Improvement cost are debited to Land Improvement account (Asset
account).
 Building

New construct building: Purchased building:

 Construction costs  Purchase price
 Architects’ fee  Settlement costs (E.g.:
 Excavation costs Title, Attorney’s fees)

 Building permits  Real estate agent’s

commissions
 Other costs to make the
building ready for use
(E.g. Plumbing and
wiring)
 Building

All Building cost are debited to Building

account (Asset account).
 Equipment

Cost of equipment include:

 Purchase price
 Delivery charges
 Insurance while in transit
 Installation cost
 Testing cost (Pre-run testing)

All Equipment cost are debited to Equipment

account (Asset account).
 Let’s try!

(Exercise 2)
 Determining the Cost of Plant Assets
Illustration: Lenard Company purchases a delivery truck at a cash
price of RM22,000. Related expenditures are sales taxes RM1,320,
painting and lettering RM500. Compute the cost of the delivery truck.

Truck
Cash price RM22,000
Sales taxes 1,320
Painting and lettering 500

Cost of Delivery Truck RM23,820

 Determining the Cost of Plant Assets
Illustration: Lenard Company purchases a delivery truck at a cash
price of RM22,000. Related expenditures are sales taxes RM1,320,
painting and lettering RM500. Compute the cost of the delivery truck.

Cost of Delivery Truck RM23,820

Date Particular Dr (RM) Cr (RM)

Delivery truck 23,820
Cash 23,820
 Capital expenditure and Revenue
expenditure
Expenditure = Spending Revenue Expenditure
Business spends to:
Run the business on day-to-day basis / normal
operation of business.
Business has
2 types of Business spends to:
Expenditure Maintain earning capacity of non-current asset (Do
(Spending) NOT add value to existing non-current asset)
Capital Expenditure
Business spends to:
Buy non-current assets / Long-term assets
Business spends to:
Improve earning capacity of non-current asset
(ADD value to existing non-current asset)
 Costs after acquisition of PPE
Any cost related to PPE that is incurred after the acquisition of asset can be treated in
2 ways:

Debit the PPE account.

 Expenditure incurred to increase the operating efficiency,
productivity or useful life of PPE.
 Increase company’s investment in products facilities.
Debit the expense account.
 Expenditure incurred to maintain the operating efficiency
and productive life of the unit.
 Costs after acquisition
Example:

Additional spare part to make it more

efficiency RM10,000

Service fee RM800

Annual maintenance fee RM4,000

 Let’s try!

(Exercise 3)

Excel Guide
 Exercise 3
A business pays lawyer fees to purchase a used office building. After the
purchase, it buys bricks to expand the building. It also replaces broken
windows and upgrades wooden doors to steel doors. Every month, it spends
to clean and maintain the building.

Lawyer fees – Capital expenditure

Bricks – Capital expenditure
Replace broken window – Revenue expenditure
Upgrades wooden doors to steel doors– Capital expenditure
Clean and maintain – Revenue expenditure
 Let’s try!

(Exercise 4)

Excel Guide
 Exercise 4
Yong acquired a machine under the following terms:
RM
Initial list price of machine 80,000
Import duty 1,500
Delivery fees 2,000
Electrical installation costs 9,500
Pre-production testing 5,000
Purchase of a 5-year maintenance contract 10,000

What is the cost of machine to be capitalised?

RM80,000 + RM1,500 + RM2,000 + RM9,500 + RM5,000 = RM98,000

 Depreciation
Depreciation only applies to 3 classes of PPE:

Depreciable
Depreciation
asset
↓
Allocation ↓ of the
depreciable
Usefulness and
amount of PPE to
revenue-
expense over
producing its
ability
useful
will life in
decline a
over
rational
the PPE’s manner
useful
life
 Depreciation
Depreciation does NOT apply to:

Land
↓
Non-Depreciable
Asset
↓
Usefulness and
revenue-producing
ability remain intact
over time
Depreciation

Causes of depreciation:
 Wear and tear
 Obsolescence
 How to Determine Depreciation Amount?
Consider three aspects: 1. PPE cost
 Cost of PPE using historical cost
principle
 All expenditures necessary to
acquire the asset and make it
ready for intended use

3. Estimated salvage value /

Residual value
 Estimated value of the asset at
the end of useful life

2. Expected useful life

 How long do you expect the PPE
to service you?
 Depreciation method
Depreciation methods can be:- Once the method is selected, it needs to
be applied consistently over the useful
 Straight line method; life of asset
 Reducing balance method; ↓
 Units-of-activity method. Consistency Principle
 Depreciation (Journal Entry)
General journal entry to record Depreciation (regardless of which method used):

Dr Depreciation expense  SOPL

Cr Accumulated depreciation  SOFP
(To record depreciation of asset)

Depreciation affects SOFP through Accumulated Depreciation and SOPL through

Depreciation Expense.
 Depreciation
4.1.1 Straight Line Method

Under this method, depreciation is the same for each year of the PPE’s useful life.

OR
Let’s try!

Exercise 5

Excel Guide
 Depreciation
4.1.3 Reducing Balance Method

 This method produces a decreasing annual depreciation expense over the

PPE’s useful life.
 Depreciation using this method is based on net book value (Cost – Accumulated
depreciation).
 Depreciation
4.1.3 Reducing Balance Method

 Net book value at the beginning of the first year is the cost of PPE.
 In subsequent years, the net book value is the difference between cost and
accumulated depreciation.

Reducing balance method is compatible with a systematic allocation of the asset’s

economic benefits.
 The higher depreciation expense in early years is matched with the higher
benefits received in these years.
 On the other hand, lower depreciation expense is recognised in later years
when the PPE’s contribution to revenue is less.
Let’s try!

Exercise 6

Excel Guide
 Depreciation
4.1.4 Units-of-activity / Unit-of-production method

 Under this method, useful life is expressed in terms of the total units of
production from the PPE, rather than the time period.
 This method is ideally suited to factory machinery which production can be
measured in units of output or machine hours or kilometres driven.
 Let’s try!

(Exercise 7)

Excel Guide
 Let’s try!

(Exercise 8)

Excel Guide
 Let’s try!

(Exercise 9)

Excel Guide
 PPE Disposals
 PPE must be disposed in 3 ways: retirement, sales or exchange.
 When a PPE is disposed of, the business may have a gain or loss on the sale.
Disposal value / Disposal proceeds of PPE > Net Book Value = Gain
Disposal value / Disposal proceeds of PPE < Net Book Value = Loss

Disposal of PPE involves 4 steps:

1. Record depreciation of PPE disposed up to the date of disposal.
2. Derecognised the cost and accumulated depreciation of PPE disposed.
3. Record disposal proceeds of the PPE disposed.
4. Record gain or loss on disposal.
 Let’s try!

(Exercise 10)

Excel Guide
 Let’s try!

(Exercise 11)

Excel Guide
46