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Plant Assets & Intangibles Plant Assets & Intangibles

Plant Assets & Intangibles - PowerPoint Presentation

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Plant Assets & Intangibles - PPT Presentation

Chapter 9 1 Learning Objectives 2 Measure the cost of a plant asset Account for depreciation Record the disposal of an asset by sale or trade Account for natural resources Account for intangible assets ID: 545988

depreciation 000 cost asset 000 depreciation asset cost assets year expense life plant purchase land straight line method book

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Slide1

Plant Assets & Intangibles

Chapter 9

1Slide2

Learning Objectives

2

Measure the cost of a plant asset

Account for depreciation

Record the disposal of an asset by sale or trade

Account for natural resources

Account for intangible assets

Describe ethical issues related to plant assetsSlide3

Real or tangible assets

Buildings, desk, equipment

Depreciation

Natural resources

Oil, diamonds, forest

Depletion

Intangible assets

Software, patents, goodwillAmortizationCharacteristics of Plant AssetsPlant assets are relatively expensiveLast multiple yearsAllocate costs based on benefits over the years3Slide4

The cost of plant assets is the

advance purchase

of

services

.

As time passes, the services are

used

, and the portion of the asset cost used is transferred to expense.Characteristics of Plant Assets:Cost FlowThen we get rid of it, maybe for more or less than its book value.Slide5

Measure the cost of a plant asset

5

1Slide6

Cost of an asset =

Sum of

actual

costs incurred to purchase the asset and ready it for its

intended

purpose

Rule for measuring

an asset’s costThe Cost Principle6Slide7

Oh behave!

7

Land

Building

Not Depreciated

Depreciated

Record purchases to accounts based on asset behavior.

These two assets behave significantly differently, so put them in different accounts.Slide8

Land Particulars

NOT depreciatedCosts included in land:

Purchase priceBrokerage feesSurvey and legal fees

Property taxes in arrearsTitle transferCosts of clearing and removing unwanted elementsBuildings and land improvements are not Land

8

Cost of an asset =

Sum of

actual costs incurred to purchase the asset and ready it for its intended purposeSlide9

Measuring Cost of Land

9

CapitalizedSlide10

Land Improvements

Subject to depreciationExamples:Fencing

PavingSprinkler systemsLighting

Signs10Slide11

Buildings

Building

ConstructedArchitectural feesBuilding permits

Contractor chargesPayments for material, labor, and overheadCapitalized interest cost, if self-constructed

Building

Purchased

Purchase priceCosts to renovate the building for useSimilar to construction costs11Slide12

Machinery, Equipment, fixtures, etc

Cost includes:

Net Purchase priceTransportation chargesInsurance while in transit

Sales tax and other taxesPurchase commissionInstallation/assembly The cost of testing before it is usedNOTRelated suppliesFirst viable production run

12Slide13

Lump Sum Purchase (Basket)

Purchase a group of plant assets for a single price

Also called basket purchaseAssign cost to individual assets based on relative sales values

LandLand ImprovementsBuildingEquipment13Slide14

14

Lump Sum Purchase

Obtain a market value appraisal of the pieces

Compute the ratio of each asset’s market value to the totalThe journal entry to record the purchase: Slide15

Capital

Expenditure

Revenue

Expenditure

Any

material

expenditure

that will benefit multipleaccounting periods.

To capitalize an expenditure

means to record it to an

asset account for now.

Smaller

dollar amounts

or

consumed in

one period

.

To expense an expenditure

means to charge it to an

expense account, NOW.

Capitalize or Expense

Capitalize

Expense

Which is it? Purchased a new delivery truck

Which is it? Purchased 10,000 $100 scanners

Which is it? Purchased a new

life-time

stapler

Which is it? Purchased a Stair Master for homeSlide16

Acquiring Plant Assets:

Determining Cost

Tig welder purchase

Welder price: $6,400

Freight in: $100

Sales tax: $500

Related supplies:

$75

Total Cost: $7,000 Slide17

Acquiring Plant Assets:Journal EntrySlide18

Capitalize or Expense? Impact of Accounting Errors

If capital expenditure incorrectly recorded as expense:

18Slide19

S9-1: Measuring plant asset cost

This chapter lists the costs included for the acquisition of land. First is the purchase price, which is obviously included in the cost of the land. The reasons for including the other costs are not so obvious. For example, removing a building looks more like an expense.

State why the costs listed in the chapter are included as part of the cost of the land.

19

The other cost (for example, back property taxes, transfer taxes, removing a building, and survey fees) are included as part of the cost of the land because they are necessary to get the land ready for its intended use.Slide20

S9-1: Measuring plant asset cost

(Continued)

2. After the land is ready for use, will these costs be capitalized or expensed?

20After the land is ready for use, subsequent land-related cost such as property taxes, ground maintenance and ordinary land related would be expensed.Slide21

S9-2: Lump-sum asset purchase

Rural Tech Support pays $130,000 for a group purchase of land, building, and equipment. At the time of your acquisition, the land has a market value of $70,000, the building $56,000, and the equipment $14,000.

Journalize the lump-sum purchase of the three assets for a total cost of $130,000. You sign a note payable for this amount.

21

Market Value

% of

Market Value

Cost of Each AssetLand $70,00050%$65,000Building56,00040%52,000Equipment14,00010%13,000Total140,000$130,000Slide22

S9-2: Lump-sum asset purchase

Journalize the lump-sum purchase of the three assets for a total cost of $130,000. You sign a note payable for this amount.

22

Journal Entry

DATE

ACCOUNTS AND EXPLANATIONS

DEBIT

CREDITLand$ 65,000

Building

52,000

Equipment

13,000

Notes Payable

$130,000Slide23

Account for depreciation

23

2Slide24

Depreciation

Allocation of cost to expense over its useful lifeMatches expense against revenue generated

24

Oven $5,000

Cash $5,000

Buy it

Use it for 4 yearsEarn pizza sales revenueExpense oven usage

$1,000

$1,000

$1,000

$1,000 more or less

Sell the old oven

$1,000

Can you smell the matching principle at work here?Slide25

Depreciation

25

Process of valuation

Cash set aside to replace asset

Depreciation is

NOT: Slide26

Allocating the portion of the

cost of a plant asset used

to expense in the periods in which services are received from the asset.

Defining DepreciationThe main purposeSlide27

Allocating the portion of the

cost of a plant asset used

to expense in the periods in which services are received from the asset.

Defining DepreciationThe main purposeSlide28

Allocating the portion of the

cost of a plant asset used

to expense in the periods in which services are received from the asset.

Defining DepreciationThe main purposeSlide29

Accumulated Depreciation

Contra-asset

Represents the portion of an asset’s cost that has already

been allocated to expense.

Book Value

Cost - Accumulated Depreciation = book value

Causes of Depreciation (incidental)

Physical deteriorationObsolescenceThe by-products of Depreciation ExpenseSlide30

Data for Recording Depreciation

Data Item

Amount

Cost of capitalized asset

Asset debit amount

Estimated residual value

Salvage value

Depreciable costCost–estimated residual valueEstimated useful life–YearsLength of the service–how long the company can use the assetEstimated useful life–Units30Slide31

Depreciation Methods

31

Straight-line

Units-of production

Declining- balance

Equal amounts per period

Different amounts; based upon usage

Decreasing amount over time as it agesSlide32

(Cost - Residual Value) x 1/life x #/12

Depreciation

Expense per Year

=

Depreciation Method:

Straight-Line

An equal amount is expensed each year

The expense portrays an item equally useful in beginning & end of lifeSlide33

January

1, 2011,

Pizzaz Pizzas bought two new pizza ovens.

Paid $12,000 for the pair including transportation and installation.

Estimate useful life of

5

years.

Expect to sell the pair for $4,000 used after the 5 yearsPrepare a complete Depreciation table using The Straight Line methodDemo: Straight-Line Depreciation(Cost - Residual Value) x 1/life x #/12 DepreciationExpense per Year=($12,000 – 4,000) x 1/5 x 12/12=$1,600=Slide34

Residual

Value

Demo: Straight-Line Depreciation

(Cost - Residual Value) x 1/life x #/12

Depreciation

Expense per Year

=

($12,000 – 4,000) x 1/5 x 12/12=$1,600=Journal Entry: Income Statement impact.What is the balance sheet account entry?Total depreciation to date: Contra asset account balances

The “Net” asset value on the balance sheetSlide35

Full-Year convention

: Record a full year’s depreciation the first year.

Eg

May 1st purchase: 100% of full year’s amount Overstates the first year depreciation, Materially so?

Actual Date

: Record the depreciation from the actual date of purchase.

Eg

May 1st purchase: 8/12 (or 244/365) x full year’s amountThe most precise option, requiring different calculations for each item purchased on different dates.½ -Year convention: Record 1/2 year’s depreciation the first year. Eg May 1st purchase: 50% of full year’s amount. Extend past the final year to catch up on the other ½ year.Easy, balances error between over and understatingWhen to start depreciatingSlide36

Your turn: E9-17, Straight Line Only

36Slide37

Straight-Line Method

An equal amount of depreciation to each year.

Objective portrayal of consistent usageSimple to implementBy far the most commonly used method

37Slide38

Depreciation Methods

38

Straight-line

Units-of production

Equal amounts per period

Different amounts; based upon usageSlide39

Units-of-Production Method

Assigned depreciation rate to each

unit of lifeUnit can be miles, units produced, hours, etc.

Ideal for assets that are replaced because of wear, and that are not used at a consistent rateAnnual depreciation depends on asset usage39

(Cost - Residual Value) x 1/ life in units

Depreciation

expense

per unit of output=Slide40

40

Demo: Units-of-Production Method

February 23, 2011,

Pizzaz

Pizza Bought a used truck to make deliveries.

The truck cost $7,000 and should last for 20,000 more miles.

They expect to drive the truck 2,000 miles the first year.

They will double their miles driven each year until the truck dies. After that they should be able to sell the truck as-is for $1,000. Prepare a complete Depreciation table using The Units of Production method(Cost - Residual Value) x 1/ life in units Depreciationexpense per unit of output=($7,000 - $1,000) x 1/ 20,000 miles==

30 cents / mileSlide41

Demo: Pizzaz Pizzas delivery truck

Cost $7,000, residual $1,00020,000 miles of life.

Use 2,000 1st year, double annually

41Slide42

Your turn: E9-17, units of production

42Slide43

Email me for the application

43Slide44

44Slide45

Depreciation Methods

45

Straight-line

Units-of production

Declining- balance

Equal amounts per period

Different amounts; based upon usage

Decreasing amount over time as it agesSlide46

Double declining balance vs. SLWhat’s the same, what’s different?

The TOTAL amount expensed across the entire useful life is identical. What changes?Slide47

To reflect actual asset life behavior:

If the asset is more productive in the early years of its life.

To minimize Income taxes NOW:

To show increasing profitability year to yearStraight Line 2 years

Deprec. Exp. $4000

Acc. Dep. $4000

Deprec. Exp. $4000

Acc. Dep. $4000Accelerated Depreciation:Why use it?Accelerated 2 yearsDeprec. Exp. $6000 Acc. Dep. $6000Deprec. Exp. $2000 Acc. Dep. $2000Year 1Year 2Slide48

Double-Declining-Balance

Method

Accelerated method

More depreciation expense early in asset’s life

Less depreciation expense as it ages

Calculated as:

Note: The book value is the declining part

The 2 is the double partOtherwise, it looks just like straight line48(Cost – Accumulated Depreciation) x 2/life x #/12DepreciationExpense=(Book Value) x 2/life x #/12=Slide49

Double-Declining-Balance Method

49

2 times straight line rate

Book value declines

Book value becomes period’s depreciable cost

Depreciation expense declines

Final year’s expense leaves book value equal to residual value, no

lower & no higherSlide50

Double-Declining-Balance Method

50

Optional switch to straight line:

Do it when straight line would provide a higher expense than DDB

This avoids undesirable increase of expense in final year

(8856-1000) x ½ = 3,928 36,072 4,928 (8856-1000) x ½ = 3,928 40,000 Slide51

Your turn: E9-17 2x declining balance

51Slide52

Which Method is Best for _________?

52

Straight-line

Units-of- production

Double-declining-balance

Assets that generate revenue over time

Assets that depreciate due to wear and tear from use

Assets that produce more revenue in their early yearsMatchingSaving on taxesSlide53

Accounting for Partial-Year Depreciation

Only for methods using monthsStraight-line

Double-declining balance

53

Period of time used changes the formula for timeSlide54

Issues in Accounting for Plant Assets

Changes in useful life or residual valueConsidered a change in estimate

Must report on the reason and effect of the changeAsset book value is depreciated over the remaining life

54Slide55

Issues in Accounting for Plant Assets

Changes in Useful LifeThe asset’s remaining depreciable book value is spread over the asset’s remaining life

Change in residual value

55Slide56

Fully Depreciated Assets

Asset has reached the end of its estimated lifeIf still useful, a company will continue to use it

Report book value on balance sheetRecord no more depreciationAsset never reported below residual value

56Slide57

S9-3: Computing first-year depreciation and book value

At the beginning of the year, Alaska Freight Airlines purchased a used airplane for $43,000,000. Alaska Freight Airlines expects the plane to remain useful for five years (4,000,000 miles) and to have a residual value of $7,000,000. The company expects the plane to be flown 1,400,000 miles the first year.

1. Compute Alaska Freight Airlines’

first-year depreciation on the plane using the following methods:a. Straight-lineb. Units-of-productionc. Double-declining-balance

57Slide58

S9-3: Computing first-year depreciation and book

values

(Continued)

Compute Alaska Freight Airlines’ first-year depreciation on the plane using the following method:a. Straight-line58

$43,000,000 – 7,000,000 / 5 years = $7,200,000 Slide59

S9-3: Computing first-year depreciation and book value

(Continued)

Compute Alaska Freight Airlines’ first-year depreciation on the plane using the

following method:b. Units-of-production59

$43,000,000 – 7,000,000

4,000,000 miles

$9 per mile X 1,400,000 miles = $12,600,000

=$9 per mileSlide60

S9-3: Computing first-year depreciation and book value

(Continued)

Compute Alaska Freight Airlines’

first-year depreciation on the plane using the following method:c. Double-declining-balance60

1

st

year ($43,000,000 - $0) X 2/5 X 12/12 = $17,200,000

2nd year ($43,000,000 - $17,200,000) X 2/5 X 12/12 = $10,320,000 Slide61

Record the disposal of an asset by sale or trade

61

3Slide62

Disposing of a Plant Asset

Asset wears out or becomes obsolete.Company can:

Sell the asset for cashScrap the asset for no cashTrade the asset for another asset

Non-like property exchangeLike-kind exchange62

Result in a gain or loss

No gain or lossSlide63

Accounting for Disposal of

Plant AssetUpdate depreciation

Remove old asset from booksZero out asset by crediting for original costZero out accumulated depreciation of asset by debiting for all depreciation taken

Record the value of any cash paid or receivedIf a note was signed, credit Notes payableDetermine difference between total debits and total credits

63Slide64

April 1:

Arriano Fabrication Sold land & building for $100,000 cash and $800,000 Note Receivable Costs:

Land

$50,000 Building $550,000

Accumulated depreciation, building

$250,000Demo: Sale of Plant and EquipmentDebits and credits Don’t match! $1,150,000 $600,000Debits and credits match! $1,150,000 $1,150,000Slide65

Accounting for Disposal of Plant Asset: Final Step

Asset traded for a like-kind asset

Difference will be recorded as a debit to the new asset accountAsset sold or exchanged for a dissimilar assetGain or loss will be recorded

65

If debits > credits

If debits < credits

If debits = credits

GAINLOSSNO GAIN OR LOSSSlide66

S9-8: Sale of asset at gain or loss

GPN

purchased equipment on January 1, 2012, for $36,000. Depreciation taken to date amounts to $16,000 after two years use. GPN

sold the equipment for $26,000 on December 31, 2013.Journalize the sale of the equipment.

66

Journal Entry

DATE

ACCOUNTS AND EXPLANATIONSDEBITCREDITDec 31Cash26,000

Accumulated depreciation

16,000

Equipment

36,000

Gain on sale of asset

6,000Slide67

S9-9: Like-kind exchange

Brown’s Salvage Company purchased a computer for $2,600, debiting Computer equipment. During 2012 and 2013, Brown’s Salvage Company recorded total depreciation of $2,000 on the computer. On January 1, 2014, Brown’s Salvage Company traded in the computer for a new one, paying $2,500 cash. The fair value of the new computer is $3,100.

Journalize the sale of the equipment, assuming straight-line depreciation was used.

67

Journal Entry

DATE

ACCOUNTS AND EXPLANATIONS

DEBITCREDITJan 1Computer equipment (new)3,100

Accumulated depreciation (old)

2,000

Computer equipment (old)

2,600

Cash

2,500Slide68

Account for natural resources

68

4Slide69

Natural Resources

Plant assets coming from the earthIn or on the ground

Examples: Iron ore, oil, natural gas, diamonds, coal, and timberExpensed through depletionDepletion expense–the portion of the cost used up

Computed by the units-of-production method 69Slide70

Depletion Expense

Formula

Estimated total units equals amount to reasonably removeCost–Residual value equals value to be depleted

As resources sold, costs are moved to Depletion expense70Slide71

Accumulated Depletion

Accumulated depletion–a contra account similar to Accumulated depreciation.Reported on the balance sheet similar to other depreciable assets

71Slide72

S9-10: Accounting for depletion of natural resources

TexAm Petroleum holds huge reserves of oil and gas assets. Assume that at the end of 2012, TexAm Petroleum’s cost of oil and gas reserves totaled $72,000,000,000, representing 8,000,000,000 barrels of oil and gas.

Which depreciation method does TexAm Petroleum use to compute depletion?

72

Units-of-production is the depreciation method used to compute depreciation.Slide73

S9-10: Accounting for depletion of natural resources

(Continued)

2. Suppose TexAm Petroleum removed 400,000,000 barrels of oil during 2013. Journalize depletion expense for 2013.

73

Journal Entry

DATE

ACCOUNTS AND EXPLANATIONS

DEBITCREDITDec 31Depletion expense3,600,000,000

Accumulated depreciation

3,600,000,000Slide74

Account for intangible assets

74

5Slide75

Intangible Assets

Non-current assets with no physical formProvide exclusive rights or privileges

Expensed through amortization using the straight-line methodCredit to the asset directlyIf intangible has indefinite life, it is not amortized

75Slide76

Exclusive 20-year right to produce & sell an invention

Amortized over its useful life

Exclusive right to sell a book, musical work, film, art, software, or intellectual property (70 years beyond the authors life)

Amortized over its useful life

Represent distinctive products or services

Nike - swoosh, Chevrolet – “Like a Rock”

Amortized over its useful life

Types of Intangibles76PatentCopyright

Trademarks - brand names

Issued by the federal governmentSlide77

Types of Intangibles

77

Franchises & licenses

Privilege to sell goods or services under specific conditions

Examples: McDonalds, Holiday Inn,

Dallas Cowboys

Amortized over its useful life

GoodwillExcess of cost to purchase another company over market value of its net assetsRecorded only by an acquiring companyGoodwill is notamortized, it is expensed through impairmentSlide78

Research

and Development (R&D) Costs

Important to several industriesPharmaceutical companiesExamples: Procter

& Gamble, General Electric, Intel, and BoeingUSGAAP Not an intangibleExpensed as incurredIFRSCapitalize DevelopmentAmortized over product

life

78Slide79

The amount by which the

purchase price

exceeds

the fairmarket value of net assets acquired.

Occurs when one

company buys

another company.

Only purchased goodwill is an intangible asset.Intangible Assets – GoodwillGoodwillSlide80

Not amortized.

Subject to assessment

for impairment

value and may be

written down.

Intangible Assets – Goodwill

Goodwill

Want a snack? Let’s buy:Not amortized.Subject to assessment for impairmentvalue and may bewritten down.Not amortized.

Subject to assessment

for impairmentvalue and may be

written down.

Not amortized.

Subject to assessment for impairment

value and may be

written down.Slide81

S9-11: Accounting for goodwill

When one media company buys another, goodwill is often the most costly asset. TMC Advertising paid $170,000 to acquire Seacoast Report, a weekly advertising paper. At the time of the acquisition, Seacoast Report’s balance sheet reported total assets of $130,000 and liabilities of $70,000. The fair market value of Seacoast Report’s assets was $100,000.

How much goodwill did TMC Advertising purchase when acquiring

Seacoast Report? Journalize the purchase.81

$170,000 – ($100,000 – $70,000) = $140,000

Journal Entry

DATE

ACCOUNTS AND EXPLANATIONSDEBITCREDITAssets100,000

Goodwill

140,000

Liabilities

70,000

Cash

170,000Slide82

Describe ethical issues related to plant assets

82

6Slide83

Ethical Dilemma: Capitalize or Expense?

Capitalize

Results in higher asset value and larger net incomeLooks better to investors

If cost provides a future benefit, then capitalizeExpenseResults in lower net incomeLess taxesIf cost does not provide a future benefit, then expense

83Slide84

Chapter 9 Summary

84

All costs spent to ready an asset to perform its intended function are capitalized (debited to the asset account). All repairs that neither extend the asset’s life nor improve its efficiency are expensed.Depreciation recovers the cost invested in an asset over the asset’s useful life. In this section we illustrated three methods: straight-line, UOP, and double-declining-balance. Although the three methods allocate the cost differently, when the asset’s life is over, the net book value is always equal to the asset’s residual value.

Asset impairments also can reduce the value recorded on the books for the asset. Impairments recognize decline in an asset’s value for issues other than normal depreciation.Slide85

Chapter 9 Summary

Asset trades or disposals are as common as asset acquisitions. The key to recording the trade/disposal is to first make sure the depreciation is current on the asset. Then, record the value of items given up or received in the trade/disposal based on whether the trade is like-kind (no gain/loss) or not (potential gain/loss).

Depletion is the word we use instead of depreciation to attach to recovering the cost of natural resources. UOP is the most common method used in depletion accounting.

85Slide86

Chapter 9 Summary

Intangible assets are assets whose value is not represented by their physical form but from their original creativity. The cost invested in intangibles is recovered using amortization, usually using the straight-line method since the intangible’s life is the best measure of its decline in value.

Ethical issues regarding the recording of assets should revolve around the definition of an asset. That is, does this item provide future economic benefit? If so, it’s an asset.

86Slide87

87Slide88

Copyright

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.

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