ACCT5930 Chap.6 Non-Current Assets
Non-Current Assets
Non-current assets provide economic benefits across multiple reporting periods. Initial measurement includes purchase price and costs necessary to bring the asset to the location and condition required for intended use. Routine operating or maintenance costs are expenses unless they create a separately recognisable future benefit.
Straight-line depreciation allocates depreciable amount, which is cost less residual value, evenly across useful life. Accumulated depreciation records allocations to date and is deducted from cost to obtain carrying amount. Disposal accounting first updates depreciation to the sale date, then removes the asset cost and accumulated depreciation and compares proceeds with carrying amount.
Gains and losses are based on carrying amount, not original cost.
What this chapter covers
- 01
Initial asset cost includes expenditures necessary to prepare the asset for use
- 02
Routine maintenance is distinguished from capital expenditure
- 03
Depreciable amount equals cost less residual value
- 04
Straight-line depreciation allocates equal amounts across useful life
- 05
Accumulated depreciation is deducted to determine carrying amount
- 06
Estimate changes affect future allocation from the current carrying amount
- 07
Disposal requires depreciation to be updated to the sale date
- 08
Proceeds above or below carrying amount create a gain or loss
Worked example · free
Update depreciation and calculate a disposal loss
- +1Annual depreciation is ($110,000 minus $10,000) divided by 5 = $20,000.
- +1Two full years of depreciation equal $40,000.
- +1Three additional months equal $20,000 × 3/12 = $5,000, so accumulated depreciation is $45,000.
- +1Carrying amount is $110,000 minus $45,000 = $65,000.
- +1Proceeds $57,000 minus carrying amount $65,000 = negative $8,000, so recognise an $8,000 loss.
Key terms
- Asset Cost
- The purchase price and directly attributable expenditures needed to bring an asset to the condition and location required for use.
- Residual Value
- The estimated amount expected from disposal at the end of useful life after considering disposal conditions.
- Useful Life
- The period over which the entity expects to consume the asset's economic benefits.
- Depreciable Amount
- Asset cost less estimated residual value, allocated across useful life.
- Carrying Amount
- The amount at which an asset is reported after deducting accumulated depreciation and relevant impairment adjustments.
- Disposal Result
- The gain or loss determined by comparing disposal proceeds with carrying amount at the disposal date.
Non-Current Assets FAQ
Does depreciation measure market value decline?
No. Depreciation allocates depreciable amount across the periods that use the asset's benefits. Market value can move differently. Carrying amount is an accounting amount based on cost, allocation and other adjustments, not a routine market appraisal.
Why is accumulated depreciation kept separately?
Separating it from original cost preserves useful information about both the gross investment and total allocation to date. The two amounts combine to produce carrying amount while avoiding a direct reduction of the asset's recorded cost.
How are useful-life estimate changes handled?
Use the current carrying amount and revised residual value or remaining life to calculate future depreciation. A genuine change in estimate works prospectively; it does not automatically rewrite correctly calculated past expense.
What creates a gain or loss on disposal?
Compare cash or other proceeds with carrying amount after updating depreciation to the disposal date. Proceeds above carrying amount create a gain; proceeds below carrying amount create a loss. Original cost alone is not the comparison base.
Exam move
Use a three-stage asset timeline: acquisition, use and disposal. At acquisition, classify each expenditure as part of asset cost or current expense. During use, calculate depreciable amount and maintain cost, accumulated depreciation and carrying amount as separate figures. At disposal, update depreciation first, then remove the gross cost and contra asset and solve the gain or loss.
Rebuild the journal entry from the arithmetic so equal debits and credits provide an independent check. Practise partial-year timing only after full-year straight-line calculations are automatic. Prepare an acquisition schedule that separates costs necessary to bring the asset to its intended location and condition from routine repairs, training and operating costs. Explain the classification in words before adding amounts.
For each depreciation question, write cost, residual value, depreciable amount, useful life, annual charge and elapsed fraction on separate lines; never confuse accumulated depreciation with the current-period expense. At disposal, draw a four-step bridge from gross cost to accumulated depreciation, carrying amount, proceeds and gain or loss. Use the updated sale-date carrying amount, not the previous year-end balance.
Finish with the full disposal entry and verify that removing both the asset and its contra account produces the same gain or loss as the arithmetic. This sequence also exposes impossible results, such as depreciating below residual value without changed estimates. Change the sale proceeds while holding carrying amount constant to practise switching cleanly between a gain and a loss.
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