When an asset is purchased or sold at a time other than the beginning or end of an accounting period?
Part 3: Summary and detailed examples Show This is the final article in the series of three which consider the accounting for property, plant and equipment by applying IAS® 16, Property, Plant and Equipment. This is a particularly important area of the Financial Reporting (FR) syllabus and is also important assumed knowledge for the Strategic Business Reporting (SBR) exam. This article is designed to summarise some of the key issues outlined in the previous two articles and provide further examples for you to attempt, including some more detailed requirements. As outlined in the first two articles, the four key areas when accounting for PPE that you must ensure that you are familiar with are:
Initial measurementOne of the easiest ways to remember what should be included in the initial cost of an item of PPE is that you should capitalise all costs to bring an asset to its present location and condition for its intended use. Elements of the cost of an item of PPE include:
EXAMPLE 1 In addition to the above information, Yucca Co was granted a trade discount of 10% on the initial list price of the machine and a settlement discount of 5% if payment was received within one month of purchase. Yucca Co paid for the machine on 25 March 20X0. Required (See 'Related links' for the solution to Example 1.) EXAMPLE 2 The store was completed on 1 January 20X2 and brought into use following its opening on the 1 April 20X2. Ham Co took out a $25m loan on 1 April 20X1 to aid construction of the new store (which meets the definition of a qualifying asset per IAS 23, Borrowing Costs). The loan carried an interest rate of 8% per annum and is repayable on 1 April 20X4. Required (See 'Related links' for the solution to Example 2.) Subsequent
costs (a) it is probable that future economic benefits associated with the item will flow to the entity; and (b) the cost of the item can be measured reliably. Most subsequent expenditure is likely to be related to accessing the economic benefits already available (eg repairs and maintenance). Costs such as these should be charged to the statement of profit or loss in the period that they are incurred. However, if any costs do meet the recognition criteria noted above, then they should be capitalised as part of PPE. EXAMPLE 3 Required (See 'Related links' for the solution to Example 3.) Depreciation Depreciation methods
Required (See 'Related links' for the solution to Example 4.) Useful life and residual
value EXAMPLE 5 Required (See 'Related links' for the solution to Example 5.) Depreciation
of significant parts EXAMPLE 6 Required (See 'Related links' for the solution to Example 6.) RevaluationsIAS 16 principles
If the revaluation model is adopted, this should be applied to all assets in the entire class (ie if you revalue a building, you must revalue all land and buildings in that class of asset). Revaluations must also be carried out with sufficient regularity so that the carrying amount does not differ materially from that which would be determined using fair value at the end of the reporting period. Accounting for a revaluation The initial revaluation Revaluation gains Journal entry: Dr Non-current asset cost [difference between valuation and
original cost/valuation]
Required (See 'Related links' for the solution to Example 7.) Revaluation losses Journal entry: Dr Revaluation surplus [to maximum of original gain/balance in revaluation surplus if lower]
Required (See 'Related links' for the solution to Example 8.) Depreciation of revalued assets Reserves transfer Journal entry: Dr Revaluation surplus Be careful, in the exam a reserves transfer is only required if the examiner indicates that it is company policy to make a transfer to retained earnings in respect of excess depreciation on revalued assets. If this is not the case, then a reserves transfer is not necessary. This movement in reserves should also be disclosed in the statement of changes in equity, as should any revaluation gains and losses which impact the revaluation surplus. EXAMPLE 9 Required
(See 'Related links' for the solution to Example 9.) Exam focus However, if the revaluation takes place at the year-end, then the asset would first be depreciated for a full 12 months based on the original depreciation of that asset. This will enable the carrying amount of the asset to be known at the revaluation date, at which point the revaluation can be accounted for. A further situation may arise if the examiner states that the revaluation takes place mid-way through the year. If this were to happen the carrying amount would need to be found at the date of revaluation, and therefore the asset would be depreciated based on the original depreciation for the period up until revaluation. Once the asset has been revalued, the remaining depreciation for the year will be based on the revalued amount. This will be the most complicated situation and you must ensure that your workings are clearly structured to show the different amounts of depreciation charged across the year. EXAMPLE 10 Required
(See 'Related links' for the solution to Example 10.) EXAMPLE 11 Required
(See 'Related links' for the solution to Example 11.) Derecognition When PPE is to be derecognised, a gain or loss on disposal is calculated. This can be found by comparing the difference between: When the disposal proceeds are greater than the carrying amount there is a gain on disposal and when the disposal proceeds are less than the carrying amount there is a loss on disposal. EXAMPLE 12 Required (See 'Related links' for the solution to Example 12.) Disposal of previously revalued assets Journal entry: Dr Revaluation surplus Summary Written by a member of the Financial Reporting examining team When an asset is purchased or sold at a time other than the beginning or end of an accounting period depreciation is recorded for part of that period?When an asset is purchased (or disposed of) at a time other than the beginning or the end of an accounting period, depreciation is recorded for part of a year so that the year of purchase or the year of disposal is charged with its share of the asset's depreciation.
When an asset is purchased asset account is?Acquisition: Accounting for Purchase of Fixed Assets
To record the purchase of a fixed asset, debit the asset account for the purchase price, and credit the cash account for the same amount.
What is depreciation in accounting terms?The term depreciation refers to an accounting method used to allocate the cost of a tangible or physical asset over its useful life. Depreciation represents how much of an asset's value has been used. It allows companies to earn revenue from the assets they own by paying for them over a certain period of time.
What is fixed asset accounting process?Fixed asset accounting is the precise recordkeeping of your business's financial records about your capital assets. This details the lifecycle of an asset within five different stages.
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