Chapter 10 Plant Assets Natural Resources and Intangible
Chapter 10 Plant Assets, Natural Resources, and Intangible Assets Chapter 10 -1 Accounting Principles, Ninth Edition
Read Ch 10 & DO: ONLINE QUESTIONS on website l Chapter 10 -2 QUIZZIZ: Accounting CH 1 -9 Review
Study Objectives 1. Explain the concept of depreciation. 2. Compute periodic depreciation using different methods. 3. Distinguish between revenue and capital expenditures, and explain the entries for each. 4. Compute periodic depletion of natural resources. 5. Explain the basic issues related to accounting for intangible assets. 6. Indicate how plant assets, natural resources, and intangible assets are reported. Chapter 10 -3
Intangible Assets- OPEN CH 10 OUTLINE Intangible assets are rights, privileges, and competitive advantages that ________. (limited life or an indefinite life) Common types of intangibles: Patents Franchises or licenses (inventions) Copyrights (control copies) Copyright © Apple Inc Chapter 10 -4 Registered Trademarks (brands-logos)
Plant Assets Plant assets include land, land improvements, buildings, and equipment (machinery, furniture, tools). Major characteristics include: “Used in operations” and not for resale. Long-term in nature and usually depreciated. Possess physical substance. Referred to as property, plant, and equipment; plant and equipment; and fixed assets. Chapter 10 -5
Determining the Cost of Plant Assets #3 -6 in Outline Land Includes all costs to acquire land ready it for use. Costs typically include: (1) the purchase price; (2) closing costs, such as title and attorney’s fees; (3) real estate brokers’ commissions; (4) costs of grading, filling, draining, and clearing; (5) assumption of any liens, mortgages, or encumbrances on the property. Chapter 10 -6 SO 1 Describe how the cost principle applies to plant assets.
Determining the Cost of Plant Assets Land Improvements Includes all expenditures necessary to make the improvements ready for their intended use. Examples are driveways, parking lots, fences, landscaping, and underground sprinklers. Limited useful lives. Expense (depreciate) the cost of land improvements over their useful lives. Chapter 10 -7 SO 1 Describe how the cost principle applies to plant assets.
Determining the Cost of Plant Assets Buildings Includes all costs related directly to purchase or construction. Purchase costs: Purchase price, closing costs (attorney’s fees, title insurance, etc. ) and real estate broker’s commission. Remodeling and replacing or repairing the roof, floors, electrical wiring, and plumbing. Construction costs: Contract price plus payments for architects’ fees, building permits, and excavation costs. Chapter 10 -8 SO 1 Describe how the cost principle applies to plant assets.
Determining the Cost of Plant Assets Equipment Include all costs incurred in acquiring the equipment and preparing it for use. Costs typically include: purchase price, sales taxes, freight and handling charges, insurance on the equipment while in transit, assembling and installation costs, and costs of conducting trial runs. Chapter 10 -9 SO 1 Describe how the cost principle applies to plant assets.
Determining the Cost of Plant Assets E 10 -3 Determine amount to be reported as the cost of the land. USE OUTLINE- #3 Land Company paid $80, 000 in cash. $80, 000 Old warehouse razed at a cost of $8, 600 Salvaged materials were sold for $1, 700. 8, 600 - 1, 700 Expenditures before construction began: $1, 100 attorney’s fee for work on land purchase. $5, 000 real estate broker’s fee. $7, 800 architect’s fee. 5, 000 Building Chapter 10 -10 0 0 $14, 000 for driveways and parking lot. Land Improvements 1, 100 Total $93, 000 SO 1 Describe how the cost principle applies to plant assets.
Practice The following expenditures were incurred by Obermeyer Company in purchasing land: cash price $70, 000, accrued taxes $3, 000, attorneys' fees $2, 500, real estate broker's commission $2, 000, and clearing and grading $3, 500. What is the cost of the land? (#3 on outline) l Neeley Company incurs the following expenditures in purchasing a truck: cash price $30, 000, accident insurance $2, 000 (not in transit), sales taxes $1, 500, motor vehicle license $100, and painting and lettering $400. What is the cost of the truck? (#6 in outline) Chapter l 10 -11
Review l l Chapter 10 -12 On March 1, A Company acquired real estate on which it planned to construct a small office building. The company paid $90, 000 in cash. An old warehouse on the property was taken down at a cost of $18, 000; the salvaged materials were sold for $3, 700. Additional expenditures before construction began included $1, 100 attorney's fee for work concerning the land purchase, $5, 000 real estate broker's fee, $7, 800 architect's fee, and $14, 000 to put in driveways and a parking lot. Determine acquisition costs of land.
Depreciation #7 -13 in outline Depreciation is the process of allocating the cost of All Fixed Tangible Assets to expense in a systematic and rational manner to those periods expected to benefit from the use of the asset. Process of cost allocation, not asset valuation. Applies to land improvements, buildings, and equipment, not land. LAND IS LEAST likely to lose its value over time Depreciable, because the revenue-producing ability of asset will decline over the asset’s useful life. NOTE: In computing depreciation, the number of years of useful life of the assets is AN ESTIMATE. Chapter 10 -13 SO 2 Explain the concept of depreciation.
Depreciation Factors in Computing Depreciation Cost Chapter 10 -14 Useful Life Illustration 10 -6 Salvage Value SO 2 Explain the concept of depreciation.
Depreciation Methods- These methods & formulas are in the outline Objective is to select the method that best measures an asset’s contribution to revenue over its useful life. Examples include: (1) Straight-line method. (2) Units-of-Activity method. (3) Declining-balance method. Illustration 10 -8 Use of depreciation methods in 600 large U. S. companies Chapter 10 -15 SO 3 Compute periodic depreciation using different methods.
Depreciation Exercise (Depreciation Computations—Three Methods) Parish Corporation purchased a new machine for its assembly process on January. The cost of this machine was $117, 900. The company estimated that the machine would have a salvage value of $12, 900 at the end of its service life. (This means that $105 k is depreciated) Its life is estimated at 5 years and its working hours are estimated at 1, 000 hours. (Annual hours used are: 200, 150, 250, 300, 100) Year-end is December 31. Instructions: Compute the depreciation expense under the following methods. (a) Straight-Line. (b) Units-of-Activity. (c) Declining Balance. Chapter 10 -16 SO 3 Compute periodic depreciation using different methods.
Depreciation Straight-Line Expense is same amount for each year. Depreciable cost: Straight-line method predominates in practice. Depreciable Cost ÷ Useful Life (in years) = Depreciation Expense Chapter 10 -17 SO 3 Compute periodic depreciation using different methods.
Depreciation Exercise (Straight-Line Method): Depreciable Cost ÷ Useful Life (in years) = Depreciation Expense. Cost $117, 900. salvage value $12, 900. Useful years = 5. 1 Calculate Depreciable Cost (Total cost of the asset MINUS salvage value. ) 2 Calculate the Straight-Line Method using formula above Chapter 10 -18 Journal Entry Depreciation expense 21, 000 Accumulated depreciation
A company purchased factory equipment on January 1 for $48, 000. It is estimated that the equipment will have a $6, 000 salvage value at the end of its 10 -year useful life. Using the straight-line method of depreciation, the amount to be recorded as depreciation expense at December 31 is a. $4, 800. b. $4, 200. c. $3, 150. d. $3, 600. Chapter 10 -19
Depreciation Units-of-Activity Expense varies based on units/hours of activity. Depreciable cost is ________. Companies estimate total units of activity to calculate depreciation cost per unit. FORMULA: (1) Depreciable Cost ÷ Total Units/Hours of Activity = Depreciation Cost per Unit (2) Depreciation Cost per Unit X Units/Hours of Activity During the Year = Depreciation Expense Chapter 10 -20
Depreciation Exercise (Units-of-Activity Method): Cost $117, 900. salvage value $12, 900. Annual/YEARLY hours used are: 200, 150, 250, 300, 100 respectively (total HOURS = 1000) (1) Find Depreciable Cost (Total cost of the asset MINUS salvage value) (2) Depreciable Cost ÷ Total Units/Hours of Activity = Depreciation Cost per Unit. (3) Depreciation Cost per Unit X Units of Activity During the Year = Depreciation Expense. Chapter 10 -21 ($105, 000 / 1, 000 hours = $105 per hour)
A factory machine was purchased for $60, 000 on January 1. It was estimated that it would have a $12, 000 salvage value at the end of its 5 -year useful life. It was also estimated that the machine would be run 40, 000 hours in the 5 years. If the actual number of machine hours ran in YEAR 1 was 4, 000 hours and the company uses the units-of-activity method of depreciation, the amount of depreciation expense for YEAR 1 would be: a. b. c. d. Chapter 10 -22 $6, 000. $9, 600. $12, 000. $4, 800.
Depreciation Declining-Balance Decreasing annual depreciation expense over the asset’s useful life. Declining-balance rate is double the straightline rate. To get straight line rate: Take 100% & DIVIDE by # of years Rate applied to book value (cost less accumulated depreciation. FORMULA: Chapter 10 -23
Depreciation Exercise (Declining-Balance Method): Cost was $117, 900. useful years = 5. Book Value at Beginning of Year X Declining Balance Rate = Depreciation Expense. Declining-balance rate is double the straight-line rate. Take 100% & DIVIDE by # of years X 2. To get the 2 nd year book value- take previous book value minus previous ANNUAL EXPENSE Journal Entry Chapter 10 -24 Depreciation expense 47, 160 Accumulated depreciation 47, 160
l l Conlin Company acquires a delivery truck at a cost of $42, 000. The truck is expected to have a salvage value of $6, 000 at the end of its 4 -year useful life. Assume the declining-balance depreciation rate is double the straight-line rate of 25%. (100% / 4 years) Compute annual depreciation for the first and second years under the declining -balance method. FIRST get straight line rate: Take 100% & DIVIDE by # of years SECOND MULTIPLY straight line rate BY 2 TO GET declining balance rate THIRD: Book Value at Beginning of Year X Declining Balance Rate = Depreciation Expense FOR YEAR #1 FOURTH: To get the 2 nd year book value- take previous book value minus previous Depreciation Expense. THEN X BY Declining Balance Rate = Depreciation Expense FOR YEAR #2 The declining balance rate is 50%, or (25% X 2) (BASED ON 100% / 4 years) Chapter 10 -25
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