CH10 Plant Assets Natural Resources and Intangible Assets
CH-10: Plant Assets, Natural Resources, and Intangible Assets 1
CH-10: Plant Assets, Natural Resources, and Intangible Assets Plant Assets • Determining the cost • Depreciation • Expenditures during useful life • Disposals Natural • Depletion Resources Intangible Assets Statement Presentatio n • Accounting for intangibles (Amortization) • Research and development costs 2
Plant Assets Plant assets are resources that have u physical substance (a definite size and shape), u are used in the operations of a business, u are not intended for sale to customers, u are expected to provide service to the company for a number of years, except for land. u Types: Land, Land Improvements, Buildings, Equipments Referred to as property, plant, and equipment; plant and equipment; and fixed assets. 3
Plant Assets Determining the Cost Principle requires that companies record plant assets at costs Cost consists of all expenditures necessary to acquire an asset and make it ready for its intended use. Land Costs typically include: 1) cash purchase price, 2) closing costs such as title and attorney’s fees, 3) real estate brokers’ commissions, and 4) accrued property taxes and other liens on the land assumed by the purchaser. 4
Plant Assets Determining the Cost Example: Hayes Manufacturing Company acquires real estate at a cash cost of $100, 000. The property contains an old warehouse that is razed at a net cost of $6, 000 ($7, 500 in costs less $1, 500 proceeds from salvaged materials). Additional expenditures are the attorney’s fee, $1, 000, and the real estate broker’s commission, $8, 000. Determine the amount to be reported as the cost of the land. Cash price of property ($100, 000) $100, 000 Net removal cost of warehouse ($6, 000) 6, 000 Attorney's fees ($1, 000) 1, 000 Real estate broker’s commission ($8, 000) 8, 000 Cost of Land $115, 000 5
Plant Assets Determining the Cost Land Improvements Includes all expenditures necessary to make the improvements ready for their intended use. u Examples: driveways, parking lots, fences, landscaping, and lighting. u Limited useful lives. u Expense (depreciate) the cost of land improvements over their useful lives. 6
Plant Assets Determining the Cost Buildings Includes all costs related directly to purchase or construction. Purchase costs: u Purchase price, closing costs (attorney’s fees, title insurance, etc. ) and real estate broker’s commission. u Remodeling and replacing or repairing the roof, floors, electrical wiring, and plumbing. Construction costs: u Contract price plus payments for architects’ fees, building permits, and excavation costs. 7
Plant Assets Determining the Cost Equipment Include all costs incurred in acquiring the equipment and preparing it for use. Costs typically include: u Cash purchase price. u Sales taxes. u Freight charges. u Insurance during transit paid by the purchaser. u Expenditures required in assembling, installing, and testing the unit. 8
Plant Assets Determining the Cost Example: Lenard Company purchases a delivery truck at a cash price of $22, 000. Related expenditures are sales taxes $1, 320, painting and lettering $500, motor vehicle license $80, and a three-year accident insurance policy $1, 600. Compute the cost of the delivery truck. Truck Cash price $22, 000 Sales taxes 1, 320 Painting and lettering Cost of Delivery Truck 500 $23, 820 9
Plant Assets Determining the Cost Prepare the journal entry to record these costs. Equipment License expense Prepaid insurance Cash 23, 820 80 1, 600 25, 500 10
Plant Assets Depreciation Process of allocating to expense the cost of a plant asset over its useful (service) life in a rational and systematic manner. u Process of cost allocation, not asset valuation. u Applies to land improvements, buildings, and equipment, not land. u Depreciable, because the revenue-producing ability of asset will decline over the asset’s useful life. 11
Plant Assets Depreciation Factors in Computing Depreciation Cost Useful Life Salvage Value 12
Plant Assets Depreciation Methods Management selects the method it believes best measures an asset’s contribution to revenue over its useful life. Some common types of measures include: (1) Straight-line method. (2) Declining-balance method. (3) Units-of-activity method. 13
Plant Assets Depreciation Scenario: Barb’s Florists purchased a small delivery truck on January 1, 2012. Required: Compute depreciation using the following. (a) Straight-Line. (b) Units-of-Activity. (c) Declining Balance. 14
Plant Assets Depreciation Straight-Line u Expense is same amount for each year. u Depreciable cost = Cost less salvage value. u Book Value= Cost less Acc. Depreciation. Book value is an asset's original cost, less any accumulated depreciation that has been subsequently incurred. For example, if you bought a machine for $50, 000 and its associated depreciation were $10, 000 per year, then at the end of the second year, the machine would have a book value of $30, 000. Book value is not necessarily the same as an asset's market value, since market value is based on supply and demand perceived value, while book value is simply an accounting calculation. Book value can also refer to the amount that investors would theoretically receive if an entity liquidated. 15
Plant Assets Depreciation Example: (Straight-Line Method) (rate: 100%/5 yrs= 20%) (13000 -2400)= 20% $ 2, 400 $ 12, 000 2013 12, 000 20 2, 400 2014 12, 000 20 2, 400 (2400+2400) = 4, 800 (4800+2400) = 7, 200 2015 12, 000 20 2, 400 9, 600 3, 400 2016 12, 000 20 2, 400 12, 000 1, 000 2012 Depreciation expense Journal Accumulated depreciation Entry $ 2, 400 $ 10, 600 2012 (13000 -4800)= 8, 200 5, 800 2, 400 16
Plant Assets Depreciation Example: (Straight-Line Method) – Partial Year Assume the delivery truck was purchased on April 1, 2012. 17
Plant Assets Depreciation Units-of-Activity u Companies estimate total units of activity to calculate depreciation cost per unit. u Expense varies based on units of activity. u Depreciable cost is cost less salvage value. u Assume, Barb’s Florists drives its delivery truck 15000 miles in the first year. 18
Plant Assets Depreciation Example: (Units-of-Activity Method) **13000 -1800= $ 11, 200 13000 -5400= 2012 15, 000 $ 0. 12 $ 1, 800 2013 30, 000 0. 12 3, 600 5, 400 2014 20, 000 0. 12 2, 400 7, 800 5, 200 2015 25, 000 0. 12 3, 000 10, 800 2, 200 2016 10, 000 0. 12 1, 200 12, 000 1, 000 7, 600 **Book Value= Cost less Acc. Depreciation 2012 Journal Entry Depreciation expense Accumulated depreciation 1, 800 19
Plant Assets Depreciation Declining-Balance u Accelerated method. u Decreasing annual depreciation expense over the asset’s useful life. u Common rate: Twice the straight-line rate with Double. Declining-Balance. u Rate applied to book value. 20
Plant Assets Depreciation Example: (Declining-Balance Method) 2012 13, 000 2013 **7, 800 2014 4, 680 2015 2, 808 1, 685 2016 (13000 -5200) =$ $ 5, 200 3, 120 8, 320 40 1, 872 10, 192 (13000 -10192) 40 1, 123 11, 315 1, 685 12, 000 1, 000 40% 40 40 685* 7, 800 (13000 -8320) =4, 680 =2, 808 **Ending book value of previous year. 2012 Journal Entry Depreciation expense Accumulated depreciation 5, 200 * Computation of $674 ($1, 685 x 40%) is adjusted to $685. bcoz ending year book value must be equal to 1000 (salvage value) 21
Plant Assets Depreciation Example: (Declining-Balance Method) – Partial Year 22
Plant Assets Depreciation Comparison of Methods Each method is acceptable because each recognizes the decline in service potential of the asset in a rational and systematic manner. 23
Plant Assets Depreciation Revising Periodic Depreciation u Change in estimate starts in the period when the decision is made and continued in future periods. u The latest book value is used for the new calculations u Previous year’s calculations not changed u Previous year’s calculations are not considered as error. 24
Depreciation Arcadia HS purchased equipment for $510, 000 which was estimated to have a useful life of 10 years with a salvage value of $10, 000 at the end of that time. Depreciation has been recorded for 7 years on a straight-line basis. In 2008 (year 8), it is determined that the total estimated life should be 15 years with a salvage value of $5, 000 at the end of that time. Questions: ◦ What is the journal entry to correct the prior years’ depreciation? ◦ Calculate the depreciation expense for 2008. No Entry Required 25
Depreciation Equipment cost Salvage value Depreciable cost Useful life (original) Annual depreciation After 7 years $510, 000 First, establish BV at - 10, 000 date of change in estimate. $500, 000 / 10 years $ 50, 000 x 7 years = $350, 000 Balance Sheet (Dec. 31, 2007) Fixed Assets: Equipment cost Accumulated depreciation Book value (BV) $510, 000 - 350, 000 $160, 000 26
Depreciation Book value Salvage value (new) Depreciable cost Useful life remaining(15 -7 yrs) Annual depreciation After 7 years $160, 000 - 5, 000 $155, 000 / 8 yrs $ 19, 375 Depreciation Expense calculation for 2008. Journal entry for 2008 Depreciation expense Accumulated depreciation 19, 375 27
Plant Assets Life Expenditures during Useful Ordinary Repairs - expenditures to maintain the operating efficiency and productive life of the unit. u Debit - Repair (or Maintenance) Expense. u Referred to as revenue expenditures. Additions and Improvements - costs incurred to increase the operating efficiency, productive capacity, or useful life of a plant asset. u Debit - the plant asset affected. u Referred to as capital expenditures. 28
Plant Assets Disposal Companies dispose of plant assets in three ways—Retirement, Sale, or Exchange (appendix). Record depreciation up to the date of disposal. Eliminate asset by (1) debiting Accumulated Depreciation, and (2) crediting the asset account. 29
Plant Assets Disposal Retirement of Plant Assets u No cash is received. u Decrease (debit) Accumulated Depreciation for the full amount of depreciation taken over the life of the asset. u Decrease (credit) the asset account for the original cost of the asset. 30
Plant Assets Disposal Example: Sunset Company discards delivery equipment that cost $18, 000 and has accumulated depreciation of $14, 000. The journal entry is? Accumulated depreciation Loss on disposal Equipment 14, 000 18, 000 Companies report a loss on disposal in the “Other expenses and losses” section of the income statement. Question: What happens if a fully depreciated plant asset is still useful to the company? 31
Plant Assets Disposal Sale of Plant Assets Compare the book value of the asset with the proceeds received from the sale. u If proceeds exceed the book value, a gain on disposal occurs. u If proceeds are less than the book value, a loss on disposal occurs. 32
Plant Assets Disposal Example: On July 1, 2012, Wright Company sells office furniture for $16, 000 cash. The office furniture originally cost $60, 000. As of January 1, 2012, it had accumulated depreciation of $41, 000. Depreciation for the first six months of 2012 is $8, 000. Prepare the journal entry to record depreciation expense up to the date of sale. July 1 Depreciation expense Accumulated depreciation 8, 000 33
Plant Assets Disposal Gain on Sale Wright records the sale as follows. July 1 Cash Accumulated depreciation Equipment Gain on disposal 16, 000 49, 000 60, 000 5, 000 34
Plant Assets Disposal Loss on Sale Example: Assume that instead of selling the office furniture for $16, 000, Wright sells it for $9, 000. July 1 Cash Accumulated depreciation Loss on disposal Equipment 9, 000 49, 000 2, 000 60, 000 35
Plant Assets Disposal Exchange of Plant Assets u Ordinarily, companies record a gain or loss on the exchange of plant assets. u Most exchanges have commercial substance. u Commercial substance - if the future cash flows change as a result of the exchange.
Plant Assets Disposal Loss on Exchange Example: Roland Co. exchanged old trucks (cost $64, 000 less $22, 000 accumulated depreciation) plus cash of $17, 000 for a new semi-truck. The old trucks had a fair market value of $26, 000. Cost of old trucks Less: Accumulated depreciation Book value Fair market value of old trucks Loss on disposal $64, 000 22, 000 42, 000 26, 000 $16, 000 Fair market value of old trucks Cash paid Cost of new truck $26, 000 17, 000 $43, 000
Plant Assets Disposal Continued: Prepare the entry to record the exchange of assets by Roland Co. Equipment (new) 43, 000 Accumulated depreciation 22, 000 Loss on disposal 16, 000 Equipment (old) 64, 000 Cash 17, 000
Plant Assets Disposal Gain on Exchange Example: Mark Express Delivery trades its old delivery equipment (cost $40, 000 less $28, 000 accumulated depreciation) for new delivery equipment. The old equipment had a fair market value of $19, 000. Mark also paid $3, 000. Cost of old equipment Less: Accumulated depreciation Book value Fair market value of old equipment Gain on disposal $40, 000 28, 000 12, 000 19, 000 $ 7, 000 Fair market value of old equipment Cash paid Cost of new equipment $19, 000 3, 000 $22, 000
Plant Assets Disposal Continued: Prepare the entry to record the exchange of assets by Mark Express. Equipment (new) 22, 000 Accumulated depreciation 28, 000 Equipment (used) 40, 000 Gain on disposal 7, 000 Cash 3, 000
Natural Resources Natural resources consist of standing timber and underground deposits of oil, gas, and minerals. Distinguishing characteristics: u Physically extracted in operations. u Replaceable only by an act of nature. Cost - price needed to acquire the resource and prepare it for its intended use. Extracted resources that have not been sold are reported in the current assets section. 41
Natural Resources Depletion - allocation of the cost to expense in a rational and systematic manner over the resource’s useful life. u Depletion is to natural resources as depreciation is to plant assets. u Companies generally use units-of-activity method. u Depletion generally is a function of the units extracted. Journal entry: Depletion expense Accumulated depletion XXXXX 42
Intangible Assets Intangible assets are rights, privileges, and competitive advantages that result from ownership of long-lived assets that do not possess physical substance. Common types of intangibles: u Patents u Trademarks and Trade Names u Copyrights u Franchises or licenses u Goodwill 43
Intangible Assets Limited life or Indefinite life Limited-Life Intangibles: u Amortize to expense. u Credit asset account. (Not Contra-Asset) Indefinite-Life Intangibles: u No foreseeable limit on time the asset is expected to provide cash flows. u No amortization. 44
Intangible Assets u Patents: Exclusive right to manufacture, sell, or otherwise control an invention for a period of 20 years from the date of the grant. u u Amortized over useful life Copyright: Give the creator/owner the exclusive right to reproduce and sell an artistic or published work for more than 70 years. u u Amortized over useful life Trademarks and Trade Names: Word, phrase, jingle, or symbol that identifies a particular enterprise or product that has legal protection for indefinite number of 20 year renewal periods. u Not Amortized 45
Intangible Assets u u Franchise or License: Contractual arrangement between a franchisor and a franchisee whereby the franchisor allows the franchisee to use their name, logo, or trademark. u Amortized if limited-life. u Not Amortized if indefinite-life Goodwill: Includes exceptional management, desirable location, good customer relations, skilled employees, highquality products, etc. u Internally created goodwill should not be capitalized. u Only recorded when an entire business is purchased. u Not Amortized 46
Intangible Assets Amortization Example: National Labs purchases a patent at a cost of $60, 000 on June 30. National estimates the useful life of the patent to be eight years. Prepare the journal entry to record the amortization for the six-month period ended December 31. Cost Useful life Annual expense 6 months Amortization Dec. 31 Amortization expense Patent $60, 000 / 8 $ 7, 500 x 6/12 $ 3, 750 47
Statement Presentation 48
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