Current & Non Current Assets

INVENTORY – PERIODIC INVENTORY SYSTEM

In a Periodic Inventory System, no effort is made to keep up – to – date records of either the inventory or the cost of goods sold. Instead, these amounts are determined only periodically __ usually at the end of each year. It is used by very small businesses having manual accounting systems.

FIRST STAGE: - ACQUISITION OF PLANT ASSETS

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Question 1: - Wilmet College recently purchased new computing equipment for its library.

The following information refers to the purchase and installation of this equipment:

1. The list price of the equipment was $275, 000; however, Wilmet College qualified for an education discount of 25, 000.
2. Wilmet paid sales tax of $15, 000 at the date of purchase.
3. Freight charges for delivery of the equipment totaled $1, 000.
4.  Installation costs related to the equipment amounted to $5, 000.
5. During installation, one of the computer terminals was accidentally damaged by a library employee. It cost the college $300 to repair this damage.
6. As soon as the computers were installed, the college paid $4, 000 to print admission brochures, featuring the library’s new, state-of-the-art computing facilities.

Instructions:

• a. Compute the total cost debited to the college’s Computing Equipment account.
• b. Prepare a journal entry at the end of the current year to record depreciation on the computing equipment. Wilmet College will depreciate this equipment by the straight-line method (half-year convention) over an estimated useful life of 5 years. Assume a zero residual value.

SECOND STAGE: - DEPRECIATION OF PLANT ASSETS

Question 2:  On January 2, 2005, Jansing Corporation acquired a new machine with an estimated useful life of 5 years. The cost of the machine was $40, 000 with an estimated residual value of $5, 000. The depreciation rate per year is 40 %. a. Prepare a complete depreciation table under the two depreciation methods listed below. Assume that a full year of depreciation was taken in 2005.

1. Straight-line
2. Declining balance method (Depreciation Rate per year is 40 %)

Question 3: - On August 3, 2000, Srini Construction purchased special-purpose equipment at a cost of $1, 000,000. The useful life of the equipment was estimated to be 4 years, with a residual value of $50, 000. The depreciation rate is 50 % per year & the half-year convention is to be used.

• a. Compute the depreciation expense to be recognized each calendar year for financial reporting purposes under the straight-line depreciation method.
• b. Compute the depreciation expense to be recognized each calendar year for financial reporting purpose under the declining balance method with the per year depreciation rate of 50 %

THIRD STAGE: - DISPOSAL OF PLANT ASSETS Question 4: - During the current year, Ramirez Developers disposed of plant assets in the following transactions: Feb 10Office equipment costing Rs. 26, 000 was given to a scrap dealer at no charge. At the date of disposal, accumulated depreciation on the equipment amounted to Rs. 25, 800. Apr 01Ramirez sold land and a building to Claypool Associates for Rs. 900, 000, receiving Rs. 100, 000 cash and a five year, 9 percent note receivable for the remaining balance. Ramirez records showed the following records: Land Rs. 50, 000; Building, Rs. 550, 000; accumulated depreciation: Building (at the date of disposal), Rs. 250, 000.

Aug 15 Ramirez traded-in an old truck with a new one. The old truck had cost. 26, 000, and its accumulated depreciation amounted to Rs. 18, 000. The list price of the new truck was Rs. 39, 000, but Ramirez received a Rs. 10, 000trade-in allowance for the old truck and paid Rs. 29, 000 in cash. Ramirez includes trucks in its Vehicle account. Oct 01Ramirez traded in its old computer system as part of the purchase of a new system. The old system had cost Rs. 15, 000, and its accumulated depreciation amounted to Rs. 11, 000. The new computer’s list price was Rs. 8, 000. Ramirez accepted a trade-in allowance of Rs. 500 for the old computer system, paying Rs. , 500 down in cash, and issuing a 1-year, 8 percent note payable for the Rs. 6, 000 balance owed. Instructions: - Prepare journal entries to record each of the disposal transactions. (Meigs & Meigs – Problem 9. 4 / Pg 404) For Practice: - Fees & Warren – Ex. 11-12 & Ex. 11-13 Question 5: - On January 5, 2005, a machine was bought by J & P Traders at a list price of Rs. 43,000. The cost of its carriage was Rs. 800, installation and testing charges were Rs. 4,200 Its estimated useful life is 4 years and its estimated residual value is Rs. 2, 000.

Instructions:

• a. Calculate the cost price of the machine and give a proper journal entry of the acquisition of tangible assets.
• b. Calculate the per year depreciation expense using the straight-line method.
• c. Prepare the depreciation schedule for all four years.
• d. Give the adjusting entries to record depreciation for the last useful year.
• e. After its useful life, the machine was traded-in for a new machine. The new machine’s list price was Rs. 58, 000. J & P Traders accepted a trade-in allowance of Rs. 3, 000 for the old machine, paying Rs. 9, 000 down in cash, and issuing a 1-year, 8 percent note payable for the Rs. 46, 000 balance owed.

Intangible assets

1. Plant Assets
2. Long-Lived
3. Recorded at cost
4. Cost is expensed over useful life in a systematic manner.

For Intangible assets, the Straight-line method over 40 years is followed. At disposal, the book value is eliminated, gain/loss is recorded.

TANGIBLE ASSETS| INTANGIBLE ASSETS

1. Has physical existence| Has no physical existence
2. Term “Depreciation” is used. | Term “Amortization” is used.
3. Cost Price = list price + all other necessary expenses. Cost Price = Purchase Price only
4. The depreciation period depends upon the estimated useful life. The amortization period cannot be longer than 40 years.
5. Depreciation Expense-equip Accumulated Depreciation-Equip.

Intangible Assets are rights and privileges that result from the ownership of long-lived assets that don’t possess physical substance.

GOODWILL

Largest Intangible asset on the company’s balance sheet under the head of Intangible assets. Recorded when the transaction involves the purchase of an entire business. Here goodwill is the excess of cost over the fair market value of net assets. (assets fewer liabilities) acquired. Value of all favorable attributes that relate to a business.

Includes

1. Exceptional management
2. Desirable location
3. Good customer relations
4. Skilled employees
5. High-quality products
6. Manufacturing efficiency
7. Weak Competition

PATENTS

A right by the government to manufacture, use, and sale of a product. To encourage the invention of a new product. When a patent is purchased from the inventor, the purchase price is debited by the account title of Patents. Are granted for 17 years (legal life). Obsolesce may cause the patent to be economically ineffective.

TRADEMARK / TRADE NAME

Name, symbol, or distinctive design that identifies a business and a product.  The permanent exclusive right to use a trademark, brand name, commercial symbol. Is obtained by registering it with the government. For a purchased trademark, the cost is substantial and amortized over 40 years.

FRANCHISE

It is the right granted by the company to conduct a certain type of business in a specific geographical area. The cost is quite substantial. Small cost – Amortized over a short period of 5 years. Material cost – 40 years. Amortization should be based on the life of the franchise.

COPYRIGHTS

Exclusive rights granted by the government to protect the production and sale of literary or artistic material for the life of the creator plus 50 years.

NATURAL RESOURCES

Examples: - Oil & Gas Reserves, gold, copper, coal mines, timber (forests), etc. As long as this asset is present in its natural environment, it is regarded as Property, Plant & Equipment. Once it is removed from its natural environment, it becomes inventory, i. e. a current asset.

Question 1: - Rainbow Minerals paid Rs. 45, 000, 000 (Rs. 45 million) to acquire the Super Coal Mine, which is believed to contain 10 million tons of coal. The residual value of the mine after all of the coal is removed is estimated to be Rs. 5 million.

Working: - Cost – Estimated Residual Value = Depletion Expense per ton Estimated Production In tons 45 million – 5 million = Rs. 4 Depletion Expense per ton 10 million Suppose in the first year, 2 million tons of coal was mined, the entry to record depletion would be 2010. The mine was estimated to contain 2. 5 million tons of copper and to have a residual value of Rs. 1 million. During the first year of mining operations at the Northern Tier Mine, 50, 000 tons of copper were mined of which 40, 000 tons were sold.

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