Accounting for Property Plant Equipment and Intangible Assets

Learning Objective 1 Calculating the cost of an asset. © 2004 Prentice Hall Business

Types of Long-Term Assets Tangible assets: – land – buildings – equipment Intangible assets: – patents – copyrights – franchises – goodwill Natural resources: timber, oil, coal © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 16 - 3

Learning Unit 16 -1 (Cost of Property, Plant, and Equipment) Purchase price less discounts Freight Insurance in transit Sales and other taxes Purchase commission Installation costs Expenditures to test the asset Special foundation © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 16 - 4

Learning Unit 16 -1 (Cost of Property, Plant, and Equipment) The cost of land includes related costs of surveying, commissions, title searches, and clearing. In other words, any cost necessary to prepare it for its designated purpose. Land has an unlimited useful life, so it is not depreciated. © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 16 - 5

Learning Unit 16 -1 (Cost of Property, Plant, and Equipment) A business signs a $100, 000 note payable to purchase land for a new building site. It pays $1, 000 in back property tax, $6, 000 in transfer taxes, $4, 000 for removal of an old building, a $1, 000 survey fee, and $150, 000 to pave the parking lot. What is the cost of the land? © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 16 - 6

Learning Unit 16 -1 (Cost of Property, Plant, and Equipment) Purchase price of land Add related costs: Back property taxes Transfer taxes Removal of buildings Survey fees Total cost of land $100, 000 $ 1, 000 6, 000 4, 000 12, 000 $112, 000 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 16 - 7

Learning Unit 16 -1 (Cost of Property, Plant, and Equipment) The cost of driveways, shrubbery, paving of parking lots, sprinkler systems, light poles, etc. , have a limited useful life. These assets would be depreciated over that useful life. © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 16 - 8

Learning Objective 2 Calculating depreciation using one of four methods: straight line, declining balance, units of production, and sum of the years’ digits. © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 16 - 9

Learning Unit 16 -2 (Depreciation Methods) Straight line (SL) Units of production (UOP) Double declining balance (DDB) Sum of the years’ digits (SYM) MACRS © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 16 - 10

Learning Unit 16 -2 (Depreciation Methods) Data Items Amount Cost of truck Less: Estimated residual value Depreciable cost Estimated useful life Units of production $20, 000 – 2, 000 $18, 000 5 years 90, 000 miles © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 16 - 11

Learning Unit 16 -2 (Depreciation Methods: SL) (Cost – Residual value) ÷ Years of useful life ($20, 000 – $2, 000) ÷ 5 = $3, 600 Year 1 depreciation: Year 2 depreciation: Year 3 depreciation: Year 4 depreciation: Year 5 depreciation: Total depreciation: $ 3, 600 3, 600 $18, 000 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 16 - 12

Learning Unit 16 -2 (Depreciation Methods: SL) Year 1 Depreciation 20 xx $3, 600 Melvin Company Accumulated Depreciation $3, 600 20 xx © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 16 - 13

Learning Unit 16 -2 (Depreciation Methods: UOP) ($20, 000 – $2, 000) ÷ 90, 000 = $. 20/mile Year 1: Year 2: Year 3: Year 4: Year 5: 30, 000 miles × $. 20 = $6, 000 21, 000 miles × $. 20 = 4, 200 15, 000 miles × $. 20 = 3, 000 5, 000 miles × $. 20 = 1, 000 19, 000 miles × $. 20 = 3, 800 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 16 - 14

Learning Unit 16 -2 (Depreciation Methods: DDB) Straight-line rate per year: 100% ÷ 5 = 20% Double declining balance: 2 times the straight-line rate = 40% Book value of truck at the end of the first year: $20, 000 × 40% = $8, 000 $20, 000 – $8, 000 = $12, 000 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 16 - 15

Learning Unit 16 -2 (Depreciation Methods: SYM) The sum-of-the -years’-digits method formula follows: N is the numerator = Number of years of life remaining D is the Denominator = Sum of the year’s digits divided by two = [N(N + 1) ÷ 2] © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 16 - 16

Learning Unit 16 -2 (Depreciation Methods: SYM) What is the book value of the truck at the end of the first year? $18, 000 × 5 ÷ 15 = $6, 000 $20, 000 – $6, 000 = $14, 000 What is the book value of the truck at the end of the second year? $18, 000 × 4 ÷ 15 = $4, 800 $20, 000 – $10, 800 = $9, 200 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 16 - 17

Learning Objective 3 Calculating depreciation for tax purposes using the Modified Accelerated Cost Recovery System. © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 16 - 18

Learning Unit 16 -2 (Depreciation Methods: MACRS) MACRS stands for Modified Accelerated Cost Recovery System. Class asset life is determined. Depreciation rates are found in the relevant table provided by the IRS. Listed property items are those which are subject to personal use such as computers and automobiles. © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 16 - 19

Learning Objective 4 Explaining the difference between capital expenditures and revenue expenditures. © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 16 - 20

Learning Unit 16 -3 (Capital and Revenue Expenditures) Categories of capital expenditures: Additions or enlargements: (charged to asset account) Extraordinary repairs: (charged to accumulated depreciation) Betterments: (charged to asset account) © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 16 - 21

Learning Unit 16 -3 (Capital and Revenue Expenditures) What are revenue expenditures? – another name for expenses – payments made for ordinary maintenance These payments occur often. All payments are debited to expense accounts. © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 16 - 22

Learning Objective 5 Journalizing entries for discarding, selling, or exchanging plant assets. © 2004

Learning Unit 16 -3 (Capital and Revenue Expenditures) Discarding plant assets Selling plant assets Exchanging for similar plant assets © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 16 - 24

Learning Unit 16 -3 (Capital and Revenue Expenditures) Boulder Company is disposing of a $7, 000 truck with no residual value. The truck has been fully depreciated. Accumulated Depreciation Truck 7, 000 Assume that the accumulated depreciation on the truck is $6, 000. © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 16 - 25

Learning Unit 16 -3 (Capital and Revenue Expenditures) Truck cost: Accumulated depreciation: Book value Accumulated Depreciation Loss on disposal Truck To dispose of truck $7, 000 $6, 000 $1, 000 6, 000 1, 000 7, 000 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 16 - 26

Learning Unit 16 -3 (Capital and Revenue Expenditures) Dissimilar assets exchange: Gain/loss is recognized in the same manner as if the asset were sold. Similar assets exchange: No gain is recognized. Gain is absorbed into the new asset. The IRS allows neither a gain or loss to be recognized on similar exchanges. © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 16 - 27

Learning Objective 6 Explaining amortization and how it applies to intangible assets. © 2004

Learning Unit 16 -4 (Natural Resources and Intangibles) Depletion method is similar to units-of-production depreciation method. (Cost – Residual value) ÷ Estimated units of natural resource = Depletion per unit © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 16 - 29