Lectures 11, 12 and 13 Accounting, REI faculty, 1 st year, 2016-2017

III. Accounting treatment for non-current assets

An important item in almost all companies represents their non-current assets; therefore, special
attention must be shown to their accounting. Important issues concerning accounting for noncurrent assets are their cost, useful life, depreciation method, and carrying amount.
A. PROPERTY, PLANT AND EQUIPMENT (PPE) are tangible assets that:
(a) are held for use in the production or supply of goods or services, for rental to others, or for
administrative purposes; and
(b) are expected to be used during more than one period.
Items of PPE should be recognised as assets when it is probable that:
(a) the future economic benefits associated with the assets will flow to the enterprise; and
(b) the cost of the assets can be measured reliably.
Use in the production or sale of other assets is the characteristic that distinguishes an item of PPE
from inventory or investment. A factory machine held for sale by a dealer is classified as
merchandise; the same asset would be classified as PPE by an entity using it to make products.
Land purchased and held for future expansion but presently unused is investment property. Only
when the asset is put to use by the owner in the production, rental to others, or administrative
purposes, should it be classified as PPE.
The following are examples of separate classes of PPE: land, buildings, machinery, office
equipment etc.
A productive or service life longer than one accounting period distinguishes an item of PPE from
an item of inventories. An item of inventory is consumed in a single accounting period. If
consumed, its cost is charged to the period of consumption. The productive life of a plant asset is
longer than one period; thus it contributes to the entity for several periods. Therefore, as a result
of the matching principle, its cost must be allocated to (spread over) these periods in a systematic
and rational manner.
This recognition principle is applied to all PPE costs at the time they are incurred. These costs
include costs incurred initially to acquire or construct an item of PPE, and some costs incurred
subsequently to add to, replace part of, or service it.
A1. Initial measurement: PPE should be initially recorded at cost.
The cost of an item of PPE comprises:
(a) its purchase price, including import duties and non-refundable purchase taxes, after
deducting trade discounts and rebates;
(b) any costs directly attributable to bringing the asset to the location and condition necessary for
it to be capable of operating in the manner intended by management (costs of site preparation,
initial delivery and handling costs, installation and assembly costs).

Prof. univ. dr. Ctlin ALBU, Department of Accounting, Bucharest University of Economic Studies

Page 1 of 6

Lectures 11, 12 and 13 Accounting, REI faculty, 1 st year, 2016-2017

Example 1 Initial measurement International Co. purchases a machine on December 30, the unit
price of which is 75.000 RON. The enterprise obtains a trade discount of 5.000 RON for this
machine. Since the machine is imported, there are additional import duties of 7.000 RON directly
attributable to this machine. Handling and installing costs of 4.000 RON have been incurred for the
machine. Calculate the cost of the machine at initial measurement.
A2. Depreciation of PPE When a PPE asset is purchased, actually a quantity of usefulness that will
contribute to production throughout the service life of the asset is acquired. However, since the life of
any plant asset other than land is limited, this quantity of usefulness will be consumed by the end of
the assets useful life. Consequently, items of PPE other than land depreciate through use over time:
Depreciation is the expiration of a PPE assets quantity of usefulness;
The depreciable amount is the items cost minus any residual value;
The residual value is the estimated amount that an entity would currently obtain from the
disposal of an asset, after deducting the estimated costs of disposal;
The recording of depreciation is a process of allocating and charging the cost of this
usefulness to the accounting periods that benefit from the assets use (i.e. useful life or
service life);
Useful life is either (a) the period of time over which an asset is expected to be used by the
entity, or (b) the number of production or similar units expected to be obtained from the asset
by the entity;
The carrying amount is the assets cost minus any accumulated depreciation computed.
REMARK 1 Depreciation is not recorded with a credit to the assets account, but in a contra-asset
account called Accumulated depreciation (a minus assets account).
REMARK 2 Depreciation begins the month following the putting in use of the asset.
The depreciation method is the pattern by which the cost is allocated to each of the periods involved in
the useful life. Some popular methods are: the straight-line, the units of production, accelerated methods.
The straight-line method: the same amount of the assets cost is allocated to every accounting
period. The depreciable amount of the asset is divided by the estimated number of accounting
periods in the assets useful life. This method is used when there is an even pattern of
consumption throughout the entire useful life of the asset.
Example 2a Straight-line method of depreciation Alpha Company purchases and puts in use a machine
on December 30, 2016, for which it will pay later. The cost of the machine is 120.000 RON. A useful life
of 5 years is estimated.
Required: Calculate the annual depreciation for the indicated useful life, journalize the acquisition and
the depreciation for the first year, and calculate the carrying amount of the machine at the end of the first
2 years of use. How will these transactions affect the financial statements of the two years of use?
REMARK Fractional period depreciation: Assets are normally put in use at different dates than the
beginning of accounting periods, and therefore depreciation for exercises corresponding to calendar years
must be calculated for partial periods. With the straight-line method the amount is simply a fraction of the
annual amount. For example, an asset put in use in March would be depreciated for only nine months
during the first calendar year (April to December). Therefore, depreciation for the year of putting in use
would be 9/12 of the annual amount. A complement of 3-month depreciation will be recorded during the
last calendar year of use.
Example 2b: Redo example 2a if the asset were purchased and put in use on February 27 2016.
Prof. univ. dr. Ctlin ALBU, Department of Accounting, Bucharest University of Economic Studies

Page 2 of 6

Lectures 11, 12 and 13 Accounting, REI faculty, 1 st year, 2016-2017

The units-of-output method: this method involves calculations that are quite similar to the
straight-line method, but it allocates the depreciable amount over the useful life expressed as
units of output (e.g., machine hours, or number of kilometres run) rather than years of use. It
is logical to use this approach in those situations where the life is best measured by
identifiable units of machine "consumption" (there is an uneven consumption over the years)
(the engine of a corporate jet may have an estimated 50.000-hour life, or a printing machine
may produce an expected 4.000.000 copies, distributed unevenly over many years).

Example 3 Units-of-output method Lets assume that Alpha Company in Example 2a above would
have had its manager establish firm contracts with customers, according to which the machine would
be used to produce 1.000 units of finished goods in the first year of use, 500 units in the second year,
2.500 the 3rd year, 2.000 the 4th year and 4.000 units the 5th year. Required: Redo computations and
comment on the adequacy of this method.

The accelerated method: in Romania, it corresponds to a 50% write off in the first year of use,
followed by a straight-line depreciation over the remaining useful life. While this method is
permitted by fiscal authorities, there is little reason to use it in accounting purposes.

Example 2c Residual value non-zero: when there is any residual value estimated at the end of
the useful life, this value is considered when calculating depreciation. Required: redo examples
2a and 2b when there is a residual value of 10.000 RON estimated at the end of the useful life.
REMARK Different depreciation methods will result in different financial statements.
Consequently, much consideration must be given when choosing the depreciation method. The
choice of one method over another must reflect the consumption pattern of benefits through use.

A3. Disposing of PPE It is not mandatory for items of PPE to stay within the enterprise until the end
of their economic life. The most common way to dispose of PPE items is to sell them to third parties.
They can be sold either at the end of their useful life for the enterprise, or before. They can also be
simply put out of use indefinitely.
Example 4 PPE sale The Voly Company put in use at the end of December 2016 equipment purchased
for 50,000 RON. The companys management estimated that the benefits comprised in the asset would be
consumed uniformly over 5 years.
a) The company sells the equipment at the end of its useful life for 500 RON;
b) The company sells the equipment at the end of the 3rd year for 21.000 RON.
Required: Journalize the transactions and determine the profit obtained by selling the equipment in each
of the two cases.

B. INTANGIBLE ASSETS Not all fixed assets are tangible. Some of them may be
non-monetary assets without physical substance; such an intangible asset is for example computer
software. It meets the definition of fixed assets (in that it is not a current asset for the company that
uses it), yet it does not have any physical substance; therefore, it is said to be intangible. The same
rules established for PPE apply for intangibles. For example, if computer software is purchased, it is
capitalized (at cost); if it is internally developed (whether for use or sale), it is charged to expense
until technological feasibility, probable future benefits, intent and ability to use or sell the software,
resources to complete the software, and ability to measure cost, are demonstrated; after that, it is
capitalized. Amortization rules apply: over the estimated useful life, and based on pattern of benefits
consumption (straight-line is the default). Usually the residual value of such assets is 0.
Prof. univ. dr. Ctlin ALBU, Department of Accounting, Bucharest University of Economic Studies

Page 3 of 6

Lectures 11, 12 and 13 Accounting, REI faculty, 1 st year, 2016-2017

C. FINANCIAL ASSETS AS NON-CURRENT ASSETS are assets that are equity
instruments of another entity, or a contractual right to receive cash or another financial asset
from another entity (called financial receivables), held for more than 12 months. For example,
such financial assets may be debt and equity instruments, or loans receivable.
C1. Equity instruments generally include common and preferred shares (issued by other
entities). Many of them are actively traded on the market; if in addition to that, they are held for
trading within the next 12 months, they are classified as current assets. If not, they are noncurrent assets (or long-term investments).
Example 5 Long-term investments Investor Company buys on December 5, 2016, 10.000
common shares of Dot Company for 5 RON each. The Company intends to keep these shares for
a period exceeding 12 months after the balance sheet date.
Required 1: What kind of an investment is that? Journalize the transaction.
Required 2: Now lets assume that as of December 31, 2017, the Dot shares worth 49.000 RON.
Is there any adjustment to be made? What if the shares were worth 51.000 RON?
Required 3: Now lets assume that on December 31, 2017, the shares worth 49.000 RON. The
shares are not sold and on December 31, 2018, they worth 51.000 RON. What would the
necessary entries be?
Example 6 Disposal of long-term investments Lets assume that Vault Company purchases on
25 June 2016 5.000 shares of the John Enterprise, for 40 RON each. The intent of Vault
Companys management is to keep the shares for a period exceeding 12 months after the balance
sheet date. Yet, due to some unexpected circumstances, March 21 2017, Vault Company sells the
John Enterprise shares, for 50 RON each.
Required 1: Journalize both transactions. Determine profit from this sale.
Required 2: But what if Vault Company would have sold the John Enterprise shares for 35 RON
each?
REMARK: accounting treatment for investments is different if they are current assets.

Example 7 Short term investments: Refer to the Investor Company above (Example 5).
Required: journalize the transactions if the shares were intended to be sold within 12 months
after the balance sheet date.

Example 8 Disposal of short term investments Refer to the Vault Company above (Example
6). Required: journalize the transactions if the shares were intended to be sold within 12 months
after the balance sheet date.
C2. Long term receivables: these are financial receivables (unlike trade receivables), being cash
amounts offered by the company to third parties in exchange of interest, which are awarded on
the long run (more than 12 months). To the extent the loans are granted on less than 1 year, they
are classified as short term receivables.

Example 9 The Singleton Co. loans 10.000 RON to the Doubleton Co. on 1 January 2016, for 5
years, at an interest rate of 10 percent of any unpaid balance. The loan is to be repaid in equal
shares at the end of each year, the same for the interest. Required: Journalize the transactions for
the first 2 years.
Prof. univ. dr. Ctlin ALBU, Department of Accounting, Bucharest University of Economic Studies

Page 4 of 6

Lectures 11, 12 and 13 Accounting, REI faculty, 1 st year, 2016-2017

IV. Accounting treatment for equity

Corporations are separate legal entities, having separate and distinct existence from their owners
(i.e., stockholders). They are artificial beings, existing only in contemplation of law. In an initial
meeting, the shareholders' initial investment is collected (this start-up money will be placed into
the corporate accounts) in exchange for the capital of the corporation (the "capital" is the
financial instrument evidencing a person's ownership interest and ownership in the corporation).
Shares can be issued at par (or nominal) value or at a premium.
Example 1 Shares issued at par value Assume that on September 15 2016, Expando
Corporation is founded. This company issued the same day 50.000 ordinary shares (at 1 RON
par value per share) in exchange of 10.000 RON in cash, 15.000 RON in machinery and 25.000
RON in buildings. Shares are issued at par value. Required: Journalize all transactions.
Example 2 Shares issued at a premium ATT has a share capital of 1.000 shares, issued at the
par value of 10 lei/share. In June 2016 the company issues another 100 shares at 15 lei/share. On
June 12 2016 all the shares were subscribed but contribution has not yet been paid. Journalize the
second share issuance.
REMARK: payment may be only partial. We then have to reflect it in financial accounts.

Example 3 Redo example 1 if the shareholders only paid the cash portion upon subscription, and
paid the machinery contribution on June 18.

Special care must be shown to accounting for profit/loss of the period. This process involves
expenses and revenues accounts. They must be closed against the Profit (loss) of the period
(121) account, so as at the end of the period they would not bear any ending balance. Once profit
has been determined, the entitys General Assembly can establish the profit appropriation (i.e.,
reserves, dividends etc.). Some companies distribute regular and increasing dividends. Others
may want to continuously grow via reinvestment of all earnings; their investors are content
relying on the notion that their investment value will gradually increase due to this earnings
reinvestment activity. Whatever the case, a company has no obligation to pay a dividend, and
there is no "liability" for dividends until such time as they are actually declared (usually the
following year, upon the approval of financial statements). A "declaration" is a formal action by
the Board of Directors to indicate that a dividend will be paid at some stipulated future date. Any
undistributed profit is kept within the business for future periods.
Example 4 Profit determination; reserves; dividends distribution The following information
was extracted from the Example Companys income statement as at December 31 2016: 601
30.000 lei; 607 25.000 lei; 641 40.000 lei; 681 15.000 lei; 701 60.000; 707 35.000; 711
20.000; 758 20.000. The entity calculates and records the legal reserve in the amount of
5.000 lei right away. Required: determine the years profit or loss and prepare appropriate
journal entries, including income tax declaration and payment.
On April 5 2017 the General Assembly decides to distribute dividends from the 2016 profit, in
the amount of 4.000 lei. Required: Journalize the transaction.
Prof. univ. dr. Ctlin ALBU, Department of Accounting, Bucharest University of Economic Studies

Page 5 of 6

Lectures 11, 12 and 13 Accounting, REI faculty, 1 st year, 2016-2017

V. Accounting treatment for financial liabilities

Money for financing companies can also come from outside of the enterprise (not only from the
inside such as equity). Such is the case of loans for example.
Example 1 Bank loans: Lets assume the case of This Co., needing 100.000 RON to expand
production facilities. Its management decides to borrow the money. Consequently, January 1,
2016, the company receives a bank loan for the amount, with an annual interest of 10% of any
unpaid balance, on 5 years. The loan is to be repaid in equal shares, at the end of each accounting
period. The interest is to be paid at the end of each accounting period. Required: Journalize the
transactions for the first 2 years.
Example 2 Fractional period interest: Lets now assume that the loan is received on June 30,
2003. The loan is to be repaid evenly, on the anniversary date. Interest is calculated and paid at
the same anniversary date. Required: What would be the necessary entries for the first 2 years?
How would this loan affect financial statements of the first 2 calendar years?

Prof. univ. dr. Ctlin ALBU, Department of Accounting, Bucharest University of Economic Studies

Page 6 of 6