T O P I C 4

ACCOUNTING FOR
NON-CURRENT ASSETS
LEARNING OBJECTIVES
• Determine the value of property, plant
and equipment.
• Calculate the amount of the
depreciation using straight line and
reducing balance methods.
• Show the relevant entries for
depreciation of asset in the journal,
ledger, statement of comprehensive
income and statement of financial
position.
• Show the relevant entries for disposal
of asset in journal, ledger.
KEY POINTS
1. Cost of Non-current Assets

2. Depreciation of Non-current Assets

- Straight-line (on cost)
- Reducing balance (on NBV)

3. Sale/Disposal of Non-current Assets

 1. COST OF
NON-CURRENT
ASSETS
 W H AT I S 3 TYPES OF
NON-CURRENT ASSETS? NON-CURRENT ASSETS

• Non-current assets are long term or 1. Tangible Assets

relatively permanent assets. - Have physical existence
- e.g. Machinery, Building, Motor Vehicles
• They are owned and used by the
business and are not held for resale as 2. Intangible Assets
part of normal operations. - Cannot be physically touched
- e.g. Brand, Patent, Trademark

3. Long-term Investments
- Investment in shares/debentures in
another company
- e.g. investment in government bonds
and shares in subsidiary company
 COMPONENT OF COST

Purchase price or fair value of asset exchanged

Any directly attributable cost incurred in bringing

the asset into location and working condition for
its intended use. 6

Eg: Site preparation, installation cost, professional fees.

Land
✓Purchase price
✓Sales taxes
✓Permits from government
agencies
✓Broker’s commissions
✓Title fees
7

✓Razing or removing
unwanted buildings
✓Surveying fees
Buildings

✓Architects’ fees
✓Engineers’ fees
✓Insurance
✓Repairs & reconditioning
✓Sales taxes
✓Permits from government
agencies
Machinery and Equipment
✓Sales taxes
✓Delivery
✓Installation
✓Repairs (purchase of used
equipment)
✓Reconditioning (purchase
of used equipment)
✓Insurance
 In a nutshell...
The cost of an asset =
The sum of all the costs incurred to
bring the asset to the location and
condition necessary for its intended
use.

Purchase price + direct attributable costs

 Lecture Exercise 1

G&F Sdn. Bhd. purchased a land for RM 50,000. It paid

cash for the following: RM 4,000 for accrued property
taxes, RM 5,000 to remove an old building and RM
1,500 for survey fee. Two weeks later, G&F incurred
RM500 for fencing and RM2,000 for lighting. You are
required to calculate the total cost of the land.
 Lecture Exercise 2

Dinamik Growth Sdn. Bhd. bought a German-made set of

machinery worth RM 8,000,000. RM 4,500 had been
incurred for the transportation. Department of custom had
charged RM 40,000 for the duty import. Dinamik Growth
also employed an engineer from German to install the
machinery. The Engineer charged the company RM 20,000
for the expert fee. You are required to calculate the total cost
of the machinery.
 2. DEPRECIATION OF
NON-CURRENT ASSETS
 W H AT I S WHY NON-CURRENT ASSETS
D E P R E C I AT I O N ? LO S E T H E I R VA LU E ?

• Reduction in the value of an asset over 1. Physical depreciation

time. - occurs from wear and tear while in use
and from the action of the weather.
• All non-current assets except land lose - e.g. Motor Vehicle
their capacity to provide services.
2. Functional depreciation
• This loss of productive capacity is - occurs when non-current asset is no
recognized as Depreciation Expense. longer able to provide services at the
level for which it was intended.
• Will be charged to the SOPL for the - e.g. machine
particular accounting period.
3. Technical obsolescence
- the process of becoming out of date
- e.g. computer
 Depreciation Expense Factors
(3 factors we need to know when calculating
the depreciation amount)

COST USEFUL LIFE R E S I D UA L VA LU E

• Cost of non-current • The period over which the • Also known as ‘Scrap
assets. company expects to Value’ or ‘Salvage Value’.
derive economic benefits
• Purchase price plus from the asset. • The estimated value of an
direct attributable cost. asset at the end of useful
• Determined by factors life.
such as technological
progress and changes in
demand.
 Depreciation Methods
2 methods

1 2
STRAIGHT-LINE REDUCING BALANCE
(ON COST) ( O N N E T B O O K VA L U E )
The straight-line method is It charges a diminishing
widely used by firms because amount of depreciation to
it is simple, and it charges an each accounting period.
equal amount of depreciation
to each accounting period.
 2. DEPRECIATION OF
NON-CURRENT ASSETS
(CALCULATION)
 Straight-Line Method
• The non-current asset depreciates at the same charge in each of the year.
• Formula :-

Annual Cost – estimated residual value

= Estimated life
depreciation
OR

Rate of estimated
depreciation x Cost - residual value
 Example-Straight-line method
Original Cost RM24,000
Estimated Life in years 5 years
Estimated Residual Value RM2,000

Annual RM24,000 – RM2,000

depreciation =
5 years

= RM4,400
 Straight-Line Method
Accum Depn Depn Accum Depn Book Value
at the Beginning Expense at the End at the End
Year Cost of the Year for the Year of the Year of the Year
1 24,000 0 4,400 4,400 19,600
2 24,000 4,400 4,400 8,800 15,200
3 24,000 8,800 4,400 13,200 10,800
4 24,000 13,200 4,400 17,600 6,400
5 24,000 17,600 4,400 22,000 2,000

Cost (24,000) – Residual Value (2,000) Annual Depreciation

Estimated Useful Life (5 years) = Expense (4,400)

Notes:
1. Accumulated depreciation at the Beginning of the year = The sum of the previous years’
depreciations
2. Accumulated depreciation at End of the year = The sum of the previous years’
depreciations + current year depreciation expense
3. Net book value at end of year = Cost – Accumulated depreciation at the End of the year
 Reducing Balance Method
• The non-current asset depreciates at a fixed percentage.
• The depreciation amount will diminish with every successive period.
• Formula :-

Depreciation Rate of
Net Book Value
expense per = depreciation x
(NBV) of asset
annum (%)
NBV = Cost – Accum
Depreciation at the
Beginning of the year
 Reducing Balance Method
Book Value Depn Exp Accum Depn Book Value
at the Beginning for the Year at the End at the End
Year Cost of the year at 40% of the Year of the Year
1 24,000 24,000 9,600 9,600 14,400
2 24,000 14,400 5,760 15,360 8,640
3 24,000 8,640 3,456 18,816 5,184
4
24,000 5,184 2,074 20,890 3,110
5
24,000 3,110 1,244 22,134 1,866

Example: Depreciation= Expense :

Book value at the Beginning x 40%
Original cost RM24,000 Y1 : 24,000 x 40% = 9,600
Depreciation rate 40% Y2 : 14,400 x 40% = 5,760
Y3 : 8,640 x 40% = 3,456
Y4 : 5,184 x 40% = 2,074
Y5 : 3,110 x 40% = 1,244
 Comparing Straight-Line With the
Reducing Balance Method
Straight-Line Reducing-Balance
Method Method
Depreciation (RM) 5,000

4,000

3,000
23
2,000

1,000

0
1 2 3 4 1 2 3 4
Life (years) Life (years)
 2. DEPRECIATION OF
NON-CURRENT ASSETS
(RECORDING)
 Recording Depreciation in the Book
Record depreciation expense:

Dec 31 Depreciation – Office Equipment 4,400 00

Accumulated Depreciation—
Office Equipment 4,400 00

Depreciation – Office Accumulated Depreciation—

Equipment Office Equipment
Dec. 31 Acc. Depreciation 4,400 Dec. 31 Depreciation 4,400
 Recording Depreciation in the Book
Closing to the Statement of Profit or Loss:

Dec 31 Statement of Profit or Loss 4,400 00

Depreciation expense—
Office Equipment 4,400 00

Statement of Profit or Loss Depreciation Expense

Dec. 31 Accum depn 4,400 Dec. 31 SOPL 4,400
Dec. 31 Depreciation 4,400
 Recording Depreciation in the Book
(Journal entries)
Record depreciation expenses

Debit Depreciation Expense 4,400

Credit Accumulated Depreciation 4,400
Debit Statement of Profit or Loss (SOPL) 4,400
Credit Depreciation Expense 4,400

Close the depreciation expenses account

and transfer to SOPL
 2. DEPRECIATION OF
NON-CURRENT ASSETS
(REPORTING)
 The Statement of Profit or
Loss will show the
depreciation expense.

Statement of Profit or Loss for the year ended dd mm yy (1st year)

Operating expenses :
Depreciation expense : Office equipment 4,400
 The Statement of Financial
Position would show the office
equipment at cost, less the
accumulated depreciation.

Statement of Financial Position as at dd mm yy (1st year)

30

Cost Accum Depn NBV

Non-current Assets
Office equipment RM24,000 4,400 19,600

Book
value
 The Statement of Financial
Position would show the office
equipment at cost, less the
accumulated depreciation.

Statement of Financial Position as at dd mm yy (2nd year)

31

Cost Accum Depn NBV

Non-current Assets
Office equipment RM24,000 8.800 15,200

Book
value
 The Statement of Financial
Position would show the office
equipment at cost, less the
accumulated depreciation.

Statement of Financial Position as at dd mm yy (3rd year)

32

Cost Accum Depn NBV

Non-current Assets
Office equipment RM24,000 13,200 10,800

Book
value
 The Statement of Financial
Position would show the office
equipment at cost, less the
accumulated depreciation.

Statement of Financial Position as at dd mm yy (4th year)

33

Cost Accum Depn NBV

Non-current Assets
Office equipment RM24,000 17,600 6,400

Book
value
 The Statement of Financial
Position would show the office
equipment at cost, less the
accumulated depreciation.

Statement of Financial Position as at dd mm yy (5th year)

34

Cost Accum Depn NBV

Non-current Assets
Office equipment RM24,000 22,000 2,000

Book
value
 Lecture Exercise 3
MedLab Bhd., a manufacturer of lozenges, purchased a new piece of equipment
which was priced at RM400,000 from an equipment manufacturer.

Transportation costs involved amounted to RM1,000 while the insurance against

damage for the equipment amounted to RM400. Installation costs amounted to
RM8,600.

MedLab Bhd uses the straight-line method for calculating depreciation. Assume that
the equipment can be used for 8 years and the salvage value is estimated to be
RM10,000. The company’s financial year ends on the 31st of December each year.

Calculate:
1) the depreciation charges
2) prepare the adjusting journal entries at the end of its accounting years.
 Lecture Exercise 4
Nizam started a marketing business three years ago, in January 2016.
Currently his non-current assets include a computer and a van at the cost
of RM15,000 and RM70,000 respectively. The computer was purchased
on 1st January 2020 as the business started whereas the van was
purchased later on 1st June 2022.

Both assets depreciated at a rate of 20% on net book value.

The company’s financial year ends on the 31st of December each year.

Calculate:
1) the total depreciation charges for 2023
2) prepare the adjusting journal entries at the end of 31st December
2023.
3. SALE/DISPOSAL OF
NON-CURRENT ASSETS
Accounting for Non-current Asset Disposals

When non-current assets lose their usefulness, they may

be disposed off in one of the following ways:
1. discarded,
2. sold,
3. traded (exchanged) for similar assets.
• An asset account must be credited to remove the
asset from the ledger. 38

• The related Accumulated Depreciation account must

be debited to remove its balance from the ledger.
 Sale of Non-current Assets
When non-current assets are sold, the owner
may break even, sustain a loss, or realize a gain.

• If the sale price is equal to book value, there

will be no gain or loss.
• If the sale price is less than book value,
there will be a loss equal to the difference.
• If the sale price is more than book value,
there will be a gain equal to the difference.
 Sale of Non-current Assets

• Equipment costing RM10,000

• Depreciated at an annual straight-line rate of 10%.
• The equipment is sold for cash on 1 October 2023.
• Accumulated Depreciation (last adjusted 31
December 2022) has a balance of RM7,000.
• Company financial year ends every 31 December.
 Workings
Cost RM10,000
Sold on 1/10/2023
Depreciation = 10%
1. Depn (per year) = 10% x 10,000 = RM1,000

2. Accum Depn (1/10/2023) = 7,000+(1,000 x 9/12)

= 7,000+750
= RM 7,750

3. NBV = Cost – Accum Depn

= 10,000 – 7,750
= RM2,250
 Sale of Non-current Assets

Record of Depreciation expense into Journal

Depreciation expense for 2023 (up to disposal date, 1 October 2023) :

2023
October 1 Depreciation Expense—Equipment 750

Accumulated Depreciation—Equipment 750

 Sale of Non-current Assets
Assumption 1:
The equipment is sold for RM2,250, so there is no gain or loss.

*Gain / Loss = Selling Price – NBV

= RM2,250 – RM2,250
=0
2023
October 1 Cash 2,250
Accumulated Depreciation—Equipment 7,750
Equipment 10,000
10,000 10,000
 Sale of Non-current Assets
Assumption 2:
The equipment is sold for RM1,000, so there is a loss of RM1,250.

*Loss = Selling Price – NBV

= RM1,000 – RM2,250
= RM1,250
2023
October 1 Cash 1,000
Accumulated Depreciation—Equipment 7,750
Loss on disposal of equipment 1,250
Equipment 10,000
10,000 10,000
 Sale of Non-current Assets
Assumption 2:
The equipment is sold for RM2,800, so there is a gain of RM550.

*Gain = Selling Price – NBV

= RM2,800 – RM2,250
= RM550
2023
October 1 Cash 2,800
Accumulated Depreciation—Equipment 7,750
Gain on disposal of equipment 550
Equipment 10,000
10,550 10,550
 Journal entries for disposal of asset
Dr Disposal a/c
Cr Equipment a/c Remove disposed assets (at cost) from account

Dr Acc. depreciation a/c Remove accumulated depreciation of the

disposed asset from account
Cr Disposal a/c

Dr Bank/Cash a/c Record amount received from the sale of

disposed asset
Cr Disposal a/c

Dr SOPL - loss on disposal Record loss

Cr Disposal a/c
or
Dr Disposal a/c
Cr SOPL - Gain on disposal Record gain
 Lecture Exercise 5
Grace Bakery bought a new oven on 1st January 2021 for
RM200,000. It was decided that depreciation is at 10% p.a. on cost.
Accumulated depreciation up to 31st December 2023 will be
RM60,000. If the oven is sold at RM100,000 on 31st December 2023.
Required :
a) Prepare the journal entry for the disposal asset.
b) Prepare the accounts below as at 31 December 2023
(i) The Disposal Account
(ii) The Equipment Account
(iii) The Depreciation Account
(iv) The Accumulated Depreciation Account
 Lecture Exercise 6
Glad Bhd purchased a machine on 1st January 2021 for
RM60,000. It was sold on 31st December 2023 for RM30,000.
The asset was depreciated using the straight-line method. It
was estimated to have a useful life of 5 years and a scrap
value of RM20,000. On 31st December 2023, accumulated
depreciation amounted to RM24,000.

Show the following:

1) Working to calculate the gain or loss from disposal.
2) Journal and ledger entries for the disposal.
K E Y TA K E A WAY S
• Cost of non-current asset = purchase price + direct attributable cost

• 2 methods to calculate depreciation

- straight-line (on cost) – depn rate x cost
- reducing balance (on NBV) – depn rate x NBV (cost minus accum depn at the beginning period)

• Entries to record depreciation

DR Depreciation expense
CR Accumulated Depreciation

• Reporting depreciation
- Depreciation expense – report under expenses in SOPL
- Accumulated depreciation – report under non-current assets as a minus sign in SOFP

• Sale/disposal of non-current assets

- CR Non-current assets – remove the non-current assets
- DR Accumulated depreciation – remove the accum depn for the disposed non-current assets
- DR Cash/Bank – receive money for selling the non-current assets
- DR Loss on disposal OR CR Gain on disposal – actual selling price lower(loss) / higher(gain) than NBV
• Gain/loss on disposal = Selling Price Minus NBV (cost minus accum depn up till disposal date)
THE END