ACCT1110 Chap.6 Balance Sheet: Non-current Assets
Balance Sheet: Non-current Assets
Cost is the purchase price plus every expenditure needed to bring the asset to the location and condition for its intended use: delivery, installation, commissioning, the pad the machine bolts to. Operator training and the first annual service are not part of it.
Getting this line wrong shifts every later figure for the whole life of the asset, and the papers set one trap here reliably: a cash price described as including GST of 10% must be divided by 1.1 before anything is depreciated.
Depreciation is allocation, not valuation. It spreads a cost already incurred across the periods that benefit, which is the matching idea applied to something lasting years.
Three methods do that: straight line divides the depreciable amount by the useful life, diminishing balance applies a rate to the carrying amount, and units of production charges the depreciable amount in proportion to output.
One difference carries most of the marks: straight line and units of production subtract the residual value at the outset, while diminishing balance does not and treats it only as a floor.
Disposal then reduces to a single comparison. Proceeds above the carrying amount give a profit, proceeds below give a loss, and an asset scrapped for nothing produces a loss equal to whatever carrying amount remained.
Three measures close the topic by describing the asset base itself: the average useful life, the average age, and asset turnover.
What this chapter covers
- 01
What belongs in cost and what does not
- 02
Stripping GST from an inclusive price
- 03
Depreciable amount against carrying amount
- 04
Straight line, and the part year fraction
- 05
Diminishing balance on the opening carrying amount
- 06
Units of production and why it needs no apportionment
- 07
The three part disposal entry
- 08
Average useful life, average age and asset turnover
One machine, three methods, two part years, then a scrapping
- +1Straight line: the depreciable amount is $240,000, so the annual charge is $30,000. Four months are held in 2025, giving $10,000, and 2026 takes the full $30,000.
- +1Diminishing balance in 2025: apply the rate to cost with no residual subtraction and apportion. $264,000 times 25% times 4/12 = $22,000, leaving a carrying amount of $242,000.
- +1Diminishing balance in 2026: the rate now applies to $242,000, not to the original cost, giving $60,500. Running year two on cost is the commonest slip in this family.
- +1Units of production: the rate is $240,000 divided by 30,000 hours = $8.00, so 1,900 hours give $15,200. No time fraction is applied, because those hours already cover only the months held.
Key terms
- Residual value
- The amount expected to be recovered at the end of an asset's useful life. It caps how far the carrying amount may fall under any method.
- Useful life
- The period over which the entity expects to use the asset, which is an estimate rather than a physical fact and is disclosed as such.
- Accumulated depreciation
- The running total charged against an asset since acquisition. It is a contra account, so it carries a credit balance against the asset's debit balance.
- Diminishing balance
- A method applying a fixed rate to the opening carrying amount, so the charge is largest in the first year and falls every year after.
- Units of production
- A method charging the depreciable amount in proportion to output or hours used, so the pattern follows the work done rather than the calendar.
- Disposal
- Removing an asset from the records by clearing both its cost and its accumulated depreciation, with the balancing figure recognised as a profit or loss.
- Asset turnover
- Net sales divided by average total assets, measuring how many dollars of sales each dollar of assets generates.
Balance Sheet: Non-current Assets FAQ
Why is GST stripped out before depreciating an asset?
Because a registered entity recovers the GST it pays, so that amount is never a cost of the asset. A cash price of $24,750 described as including GST of 10% is a cost of $22,500. Past papers combine an inclusive purchase price with a residual value stated as GST exclusive in the same sentence, so the conversion has to happen before any other step.
Why does diminishing balance ignore the residual value?
Because the rate is applied to the carrying amount, which already falls each year, so the charge shrinks automatically without any subtraction at the start. The residual value still matters as a floor: the carrying amount may not be depreciated below it. Subtracting the residual first and then applying the rate produces a plausible looking figure that is wrong.
How is depreciation handled in the first part year?
Charge only the months held. A straight line annual charge of $30,000 on an asset acquired on 1 September with a December year end becomes $10,000. Diminishing balance takes the same fraction, and the following year runs on the carrying amount after that reduced charge. Units of production needs no apportionment, because the usage figure already covers only the period held.
What figure is needed to work out a profit or loss on disposal?
Only the carrying amount and the proceeds. Compute accumulated depreciation up to the disposal date, subtract it from cost, and compare the result with what was received. The original cost matters only through the carrying amount, and an asset scrapped for nothing produces a loss equal to whatever carrying amount was left.
Exam move
Build one asset and run it through all three methods, then change the acquisition date and run it again. Doing the same asset twice exposes the two errors that cost the most marks: forgetting the part year fraction, and starting year two of a diminishing balance calculation from cost.
Then practise disposals in isolation.
Give yourself a cost, a date, a method and a sale price, and produce the carrying amount and the result in four lines. Half the disposals in past papers arrive with a GST inclusive purchase price attached, so make stripping the GST the reflex first step rather than something you remember afterwards.
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