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
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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
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Your turn: E9-17, units of production
42Slide43
Email me for the application
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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.
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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.
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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
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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.
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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.
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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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