Session 1c Accounting For Assets
Session 1c Accounting For Assets
Session 1c
Accounting for Assets
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Session Objectives
•Understand what an Asset is and the various
classifications under AASB.
•Disclosure requirements to AASB 101
•Understand how to recognise costs
•Recognition issues
•Methods of recognising asset value
•Methods of accounting for assets
•Capitalisation of expenditure – subsequent to
acquisition
•Allocation of costs to individual items
•Deferred payments on acquisition
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In-class Worked Example
PHB Ltd purchase a drilling rig for raw materials on 1/1/15. Cost of drill is
$5,125,000. Installation costs are:
Site access costs $1,998,000
Transportation of drill 472,500
Set-up 364,000
Licence/consent 773,600
Engineer fees 326,400
Total $3,934,500
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Solution
Step 1:
Calculate the PV of the restoration costs.
1/(1.075)^5= 0.696558632
0.696558632 x $3,126,065 = $2,177,488
Dr. Cr.
Drill Rig 11,236,988
Cash/Payable 9,059,500
Provision for restore 2,177,488
To record acquisition of drill rig, installation and provision for
restoration
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Solution (cont.)
Step 2:
Calculate Interest expense & provision for restoration
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Solution (cont.)
Step 3:
31/12/16
Dr. Cr.
Interest expense 163,311
Provision for restoration 163,311
To record the interest expense on restoration of drill site
31/12/17
Dr. Cr.
Interest expense 175,560
Provision for restoration 175,560
To record the interest expense on restoration of drill site
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Allocation of Costs
Q: How are costs allocated when a “package”
asset is purchased?
A: A valuer experienced in such matters
would apply a % rate totalling 100% across
the assets purchased.
Example: Purchase Price of $8,500,000
E.g. Land 48% = $4,080,000
Buildings 27% = $2,295,000
Stock 10% = $ 850,000
Equipment 15% = $1,275,000
TOTAL 100% = $8,500,000
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Allocation of Costs (cont.)
Journal entry would be:
Dr. Cr.
Land 4,080,000
Buildings 2,295,000
Stock 850,000
Equipment 1,275,000
Bank 8,500,000
To record acquisition of Assets
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Deferred payments on acquisition (cont.)
Cost of an item must be determined by
discounting the amounts payable in the future to
their present value at the date of acquisition.
Refer to worked example 4.6 (page 166)
Equation used is:
1-(1+i)yx +/- p
i
i = interest rate, p = periods
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RSC Ltd.
RSC Ltd acquired a drilling rig , paying $320,000
on date of inception (1/7/15) and are required to
make an additional 6 annual payments of
$400,000, first annual payment due 30/6/16
Interest rate on borrowings is 9%.
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RSC Ltd. (cont.)
Part A: Calculating the amount payable
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Deferred payments on acquisition
1/7/15 Journal entry
Asset-Drill Rig 2,114,367
Bank 320,000
Loan on asset 1,794,367
To record acquisition of drill rig recognising loan payable
30/6/16 Journal entry
Interest expense 161,493
Loan on asset 238,507
Bank 400,000
To record payment on asset acquired 1/7/10
30/6/17 Journal entry
Interest expense 140,027
Loan on asset 259,973
Bank 400,000
To record payment on asset acquired 1/7/10
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Opening Total Principle Closing Liability
Liabilities Installment Interest Repayment Payable
$ $ $ $
$ 1,555,860
2016 1,794,367 400,000 161,493 238,507
$ $ $ $
$ 1,295,887
2017 1,555,860 400,000 140,027 259,973
$ $ $ $
$ 1,012,517
2018 1,295,887 400,000 116,630 283,370
$ $ $ $
$ 703,644
2019 1,012,517 400,000 91,127 308,873
$ $ $ $
$ 366,972
2020 703,644 400,000 63,328 336,672
$ $ $ $
-$ 0
2021 366,972 400,000 33,027 366,972
Deferred Payments on Acquisition (cont.)
You will note that the interest payments
reduced from 2016 to 2017.
This is because the interest is calculated
against the OPENING BALANCE each year, not
the HISTORICAL BALANCE.
The reducing interest component means that
the payment on principal of the loan increases.
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In-class Worked Example
RIO Ltd acquired five trucks for their mine in
Western Australia, paying $1,800,000 on date of
inception (1/7/15) and are required to make an
additional 7 annual payments of $2,000,000, first
annual payment due 30/6/16.
Interest rate on borrowings is 8.5%.
Required:
Calculate the amount payable and then
journalise for inception date and then for the
next two years.
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Solution
Step 1: Calculate the amount payable
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Solution (cont.)
Step 2: Journalise
1/7/15
Trucks 12,037,027
Bank 1,800,000
Loan payable 10,237,027
To record acquisition of mine trucks
30/6/16
Interest expense 870,147
Loan payable 1,129,853
Bank 2,000,000
To record payment on asset (mine trucks) acquired 1/7/15
30/6/17
Interest expense 774,110
Loan payable 1,225,890
Bank 2,000,000
To record payment on asset (mine trucks) acquired 1/7/15
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Solution (cont.)
Checking payments to completion
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THE END
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