Other Non-Current Assets

Other Non-Current Assets

Non-current assets are assets that a company holds for more than one year. They include property, plant, equipment, and other long-term investments. This topic focuses on other non-current assets, which may include items like intangible assets, long-term investments, and any other assets that do not fall under the typical categories of cash, receivables, inventory, or property, plant, and equipment.

Types of Other Non-Current Assets

Other non-current assets can be classified into several categories:

• Intangible Assets: These are non-physical assets that provide value to a company. Examples include patents, trademarks, copyrights, and goodwill.
• Long-Term Investments: These are investments that a company intends to hold for more than one year. Examples include stocks, bonds, and real estate investments.
• Deferred Tax Assets: These arise when a company has overpaid taxes or has tax losses that can be carried forward to offset future taxable income.

Accounting for Other Non-Current Assets

When accounting for other non-current assets, it is essential to record them accurately in the general ledger. This involves creating specific ledger accounts to track the cost, depreciation, and any realisation of these assets.

Example: Accounting for Intangible Assets

Consider a company that purchases a patent for R50,000. The company expects to use the patent for five years. The accounting entries for this transaction would be as follows:

1. Record the purchase of the patent:

Dr Intangible Assets (Patent) 50,000

Cr Bank 50,000

Here, the patent is recorded as an intangible asset at its purchase cost.

2. Calculate annual amortisation:

Amortisation is the process of gradually writing off the initial cost of the intangible asset over its useful life. In this case, the annual amortisation would be:

Annual Amortisation = Cost of Patent / Useful Life = R50,000 / 5 = R10,000

3. Record the amortisation for each year:

Dr Amortisation Expense 10,000

Cr Accumulated Amortisation (Patent) 10,000

This entry is made at the end of each financial year until the patent is fully amortised.

Example: Accounting for Long-Term Investments

Suppose a company invests R100,000 in shares of another company, intending to hold these shares for more than one year. The accounting entries would be:

1. Record the purchase of the shares:

Dr Long-Term Investments 100,000

Cr Bank 100,000

The shares are recorded as a long-term investment at their purchase cost.

2. If the investment appreciates in value, record the increase:

Assuming the investment increases in value to R120,000, the company does not record this increase until the shares are sold. Instead, the company will note this in its financial statements under fair value disclosures.

3. When the shares are sold for R120,000, record the sale:

Dr Bank 120,000

Cr Long-Term Investments 100,000

Cr Profit on Sale of Investments 20,000

This entry reflects the cash received from the sale of the shares, removes the cost of the shares from the books, and records the profit made on the sale.

Depreciation of Non-Current Assets

Depreciation applies primarily to tangible non-current assets, such as machinery and equipment. It spreads the cost of an asset over its useful life. The straight-line method is the most common method used for calculating depreciation.

Straight-Line Method

Under the straight-line method, the annual depreciation expense is calculated as follows:

Annual Depreciation Expense = (Cost of Asset - Residual Value) / Useful Life

For example, if a machine is purchased for R80,000, has a residual value of R10,000, and a useful life of 10 years, the annual depreciation would be:

Annual Depreciation Expense = (R80,000 - R10,000) / 10 = R7,000

Example: Depreciation of Machinery

Consider a company that purchases machinery for R100,000 with a residual value of R20,000 and a useful life of 10 years. The accounting entries for recording depreciation would be:

1. Calculate the annual depreciation:

Annual Depreciation Expense = (R100,000 - R20,000) / 10 = R8,000

2. Record the depreciation expense at the end of each financial year:

Dr Depreciation Expense 8,000

Cr Accumulated Depreciation 8,000

This entry records the depreciation expense for the period and accumulates the total depreciation against the asset.

Example: Ledger Accounts for Machinery

Let us prepare the ledger accounts for machinery, depreciation, accumulated depreciation, and machinery realisation for the year ended 31 December 20.3, based on the provided data:

(1) Machinery at Cost

Dr Machinery (at cost) Cr

20.3 R 20.3 R

Jan 1 Balance b/d 100,000

Jul 1 ZYP Company 100,000

Jul 1 Bank 5,000

Dec 31 Balance c/d 165,000

205,000 205,000

20.4

Jan 1 Balance b/d 165,000

(2) Depreciation

Dr Depreciation Cr

20.3 R 20.3 R

Jul 1 Accumulated depreciation 4,000

Dec 31 Profit or loss 22,000

22,000 22,000

(3) Accumulated Depreciation

Dr Accumulated depreciation Cr

20.3 R 20.3 R

Jul 1 Machinery realisation 20,000

Dec 31 Balance c/d 21,000

41,000 41,000

20.4

Jan 1 Balance b/d 21,000

(4) Machinery Realisation

Dr Machinery realisation Cr

20.3 R 20.3 R

Jul 1 Machinery (at cost) 40,000

Jul 1 Accumulated depreciation 20,000

ZYP Company 15,000

Loss on disposal of machinery 5,000

40,000 40,000

Summary

• Other non-current assets include intangible assets, long-term investments, and deferred tax assets.
• Accounting for these assets requires accurate ledger accounts for cost, depreciation, and realisation.
• Depreciation spreads the cost of tangible assets over their useful life, commonly using the straight-line method.
• Ledger accounts should be properly balanced and closed off at the end of the financial year.

Check your understanding

1. What are the main types of other non-current assets?
2. How is annual amortisation calculated for intangible assets?
3. Explain how to record the sale of a long-term investment.
4. What is the formula for calculating annual depreciation using the straight-line method?