ACCT10002 Chapter Notes - Chapter 8: Finance Lease, Operating Lease, Stamp Duty
22 May 2018
School
Department
Course
Professor
Business context and decision making
Tuesday, 29 August 2017 10:07 AM
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Property, plant and equipment are assets that have physical substance, are used in the operations of an
entity for more than one period and are not intended for sale to customers
This decline must be recognised on a systematic basis over an asset's useful life as depreciation
expense
-
The future economic benefits of PPE assets decline over their useful lives
PPE determine the entity's capacity and ability to satisfy customers
Keep assets in good operating condition
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Replace worn
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out or outdated facilities
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Expand its productive resources as needed
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It is important for a business entity to
Property
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land (building sites, land improvements such as driveways and fences) and buildings
(stores, offices, factories, warehouses)
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Plant and equipment (cash registers, computers, office furniture, factory machinery, motor
vehicles)
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PPE assets are often subdivided into
Land held for resale or other assets held for resale are classified as inventory
Cost = fair value of all expenditures necessary to acquire the asset and make it ready for its
intended use (purchase price, freight costs paid by the purchaser, installation costs)
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Fair value = price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date
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PPE assets are initially recorded at cost
Cost of a major overhaul that extends an asset's useful life is also capital expenditure
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Debited to an asset account
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Capital expenditures are expenditures that increase an asset's capacity or efficiency or extend its useful
life
Debited to an expense account
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Revenue expenditure are expenditures that do not extend an asset's capacity but merely maintain the
asset in its working order
After initial recognition of an asset at cost, an entity may choose to revalue its non
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current assets to fair
value
Property:
Cash purchase price
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Settlement costs
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Stamp duty
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Accrued property taxes on the land assumed by the purchaser
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Cost of land includes
All necessary costs incurred are debited in the land account
Subsequent interest payments are recorded as debits to interest expense
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Interest costs incurred to finance the project are included in the cost of the asset within the construction
period
Plant and equipment:
Purchase price
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Freight charges
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Insurance during transit paid by the purchaser
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Expenditures required in assembling, installing, testing
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Cost of equipment includes
Property, plant and equipment
Tuesday, 29 August 2017 10:08 AM
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Expenditures required in assembling, installing, testing
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Motor vehicle registration and accident insurance are treated as expenses
Frequency of the cost
1.
Benefit period
2.
To determine the cost of equipment consider
Leasing as an alternative to purchasing:
Lessor owns the asset agrees to allow the lessee to use the asset for an agreed period of time at an
agreed price
Reduced risk of obsolescence
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lease terms often allow the lessee to exchange the asset for a
more modern one if it becomes outdated
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Little or no deposit
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leasing an asset requires little or no deposit
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Shared tax advantages
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lessor gets the tax advantage which it passes onto the lessee in the form
of lower lease payments
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Assets and liabilities not reported
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using forms of finance that are not reported on the statement
of financial position is referred to as off
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balance
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sheet financing
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Advantages of leasing an asset
Both the leased asset and the lease obligation are recognised in the statement of financial position
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Cost of the asset = present value of the minimum lease payments at the inception of the lease
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Leased asset is amortised over the asset's useful life
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A finance lease is where the lessor transfers to the lessee all the risks and rewards incidental to
ownership of the leased asset
Lease payments are recognised as rental expenses
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An operating lease is where the lessor effectively retains substantially all the risks and rewards
incidental to ownership of a leased asset
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Document Summary
Property, plant and equipment are assets that have physical substance, are used in the operations of an entity for more than one period and are not intended for sale to customers. The future economic benefits of ppe assets decline over their useful lives. This decline must be recognised on a systematic basis over an asset"s useful life as depreciation expense. Ppe determine the entity"s capacity and ability to satisfy customers. It is important for a business entity to. Property - land (building sites, land improvements such as driveways and fences) and buildings (stores, offices, factories, warehouses) Plant and equipment (cash registers, computers, office furniture, factory machinery, motor vehicles) Land held for resale or other assets held for resale are classified as inventory. Cost = fair value of all expenditures necessary to acquire the asset and make it ready for its intended use (purchase price, freight costs paid by the purchaser, installation costs)
