CHAPTER TWENTY ACCOUNTING FOR LONG TERM ASSETS LONGTERM

CHAPTER TWENTY ACCOUNTING FOR LONG TERM ASSETS

LONG-TERM ASSETS 4 Property, Plant, and Equipment éTangible and used in the operations of the business éAlso called Plant Assets or Fixed Assets éExamples - land, buildings, furniture and equipment 4 Wasting Assets éNatural resources consumed in the operation of the business 4 Intangible Assets éLong-term assets that have no physical substance éExamples - patents, copyrights and trademarks

LONG-TERM ASSETS 4 Long-term assets (except land) gradually wear out or are used up as time passes éPortion that has been used up or worn out is recognized as an expense • Plant Asset - “Depreciation” • Natural Resources - “Depletion” • Intangible Assets - “Amortization” éProcess of cost allocation • not a process of valuation • not intended to make the assets reflect their market values on the balance sheet

LAND 8 Cost includes: • all amounts spent to purchase the land prepare it for its intended use, including costs for: – legal and real estate fees – cost of removing old buildings – grading the land – special tax assessments

LAND IMPROVEMENTS 8 Costs related to land that are not permanent in nature 8 Cost includes: • planting trees and shrubs • installing fences • paving parking areas 8 Depreciated over their expected useful lives

BUILDINGS 8 Cost includes: Interest on loans DURING CONSTRUCTION debited to the asset account, but interest AFTER asset is put into service is debited to an expense account. • purchase price bif purchase price includes land…. the cost of land building must be determined and accounted for separately • legal fees and related taxes • if building is constructed…. includes material, labor, architectural and engineering fees binsurance premiums and interest on loans during construction

EQUIPMENT 8 Costs include: • purchase price • transportation charges • insurance while in transit • installation costs • any other costs that are incurred up to the point of placing the asset in service

DEPRECIATION DATE PR DEBIT CREDIT 100 00 1 Dec. 31 Depr. Expense- Delivery Eq. 2 3 4 5 6 7 8 9 10 11 DESCRIPTION Reported on the Income Statement

DEPRECIATION DATE PR DEBIT CREDIT 100 00 1 Dec. 31 Depr. Expense- Delivery Eq. 2 Accum Depr-Delivery Eq 100 00 3 4 5 6 7 8 9 10 11 DESCRIPTION Deducted from the asset account “Delivery Equipment” on the Balance Sheet

DEPRECIATION 2 major types: Physical depreciation - the loss of usefulness because of deterioration Functional depreciation - the loss of usefulness because of inadequacy or obsolescence

DEPRECIATION COST - the sum of all amounts spent to acquire an asset and prepare it for its intended use What did we pay for the new asset? New asset had a cost of $10, 000

DEPRECIATION USEFUL LIFE - the amount of service expected to be obtained from an asset. How long will the asset be used? Be careful!! We only want to know how long our company will use the asset…. not how long the asset could last.

DEPRECIATION USEFUL LIFE - the amount of service expected to be obtained from an asset. How long will the asset be used? We plan on using it for 4 years.

DEPRECIATION SALVAGE VALUE - the estimated scrap, or market value for the asset on its expected disposal date. What can we get for it when we’re through with it? We feel we can sell it for $1, 000 after using it for 4 years.

FOUR COMMON DEPRECIATION METHODS

STRAIGHT-LINE METHOD Depreciation is recognized evenly over the years of the asset’s life. Formula: (Cost - Salvage Value) ($10, 000 - $1, 000) Cost minus Salvage Value is also called “Depreciable Cost. ”

STRAIGHT-LINE METHOD Depreciation is recognized evenly over the years of the asset’s life. Formula: (Cost - Salvage Value) Est. Useful Life $2, 250 per year ($10, 000 - $1, 000) 4 years

STRAIGHT-LINE METHOD YEAR DEPR. EXPENSE ACCUM. DEPREC. BOOK VALUE = COST - ACCUM. DEPR BOOK VALUE

STRAIGHT-LINE METHOD YEAR DEPR. EXPENSE ACCUM. DEPREC. BOOK VALUE = COST at time of purchase BOOK VALUE $10, 000

STRAIGHT-LINE METHOD YEAR DEPR. EXPENSE ACCUM. DEPREC. 1 2 $2, 250 Same depreciation each year BOOK VALUE $10, 000 $ 7, 750

STRAIGHT-LINE METHOD YEAR DEPR. EXPENSE ACCUM. DEPREC. 1 2 $2, 250 $4, 500 BOOK VALUE $10, 000 $ 7, 750 First year’s + Second year’s depreciation $2, 250 + $2, 250

STRAIGHT-LINE METHOD YEAR DEPR. EXPENSE ACCUM. DEPREC. 1 2 $2, 250 $4, 500 Cost - Accum. Depreciation $10, 000 - $4, 500 BOOK VALUE $10, 000 $ 7, 750 $ 5, 500

STRAIGHT-LINE METHOD YEAR DEPR. EXPENSE ACCUM. DEPREC. 1 2 3 $2, 250 $4, 500 $6, 750 1 st + 2 nd + 3 rd year’s depreciation $2, 250 + $2, 250 BOOK VALUE $10, 000 $ 7, 750 $ 5, 500

STRAIGHT-LINE METHOD YEAR DEPR. EXPENSE ACCUM. DEPREC. 1 2 3 $2, 250 4 $2, 250 $4, 500 $6, 750 $9, 000 The entire depreciable cost has been expensed by the end of the 4 th year. BOOK VALUE $10, 000 $ 7, 750 $ 5, 500 $ 3, 250

STRAIGHT-LINE METHOD YEAR DEPR. EXPENSE ACCUM. DEPREC. 1 2 3 $2, 250 4 $2, 250 $4, 500 $6, 750 $9, 000 BOOK VALUE $10, 000 $ 7, 750 $ 5, 500 $ 3, 250 $ 1, 000 Book Value is now equal to the Salvage Value.

DECLINING-BALANCE METHOD Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years. Formula: Depreciation Rate

DEPRECIATION RATE Commonly the depreciation rate is twice the Straight-Line rate. STRAIGHT-LINE RATE FORMULA: 100% Useful Life Straight-Line rate is 25% 100% 4 years

DECLINING-BALANCE METHOD Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years. Formula: Depreciation Rate 50% Twice the Straight line rate 2 x 25%

DECLINING-BALANCE METHOD Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years. Formula: Depreciation Rate x Book Value at Beg. of Year x 50% $10, 000 In year 1…. Book Value = Cost

DECLINING-BALANCE METHOD Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years. Formula: Depreciation Rate x Book Value at Beg. of Year x 50% $10, 000 1 st year’s depreciation = $5, 000

DECLINING-BALANCE METHOD Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years. Formula: Depreciation Rate x Book Value at Beg. of Year x Let’s compute the second year’s depreciation.

DECLINING-BALANCE METHOD Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years. Formula: Depreciation Rate x Book Value at Beg. of Year x 50% Rate stays the same

DECLINING-BALANCE METHOD Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years. Formula: Depreciation Rate x Book Value at Beg. of Year x 50% $5, 000 Cost $10, 000 - Accum. Depr. - $5, 000

DECLINING-BALANCE METHOD Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years. Formula: Depreciation Rate x Book Value at Beg. of Year x 50% $5, 000 Let’s look at the 3 rdyear’s depreciation. = 2 nd $2, 500

DECLINING-BALANCE METHOD Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years. Formula: Depreciation Rate x Book Value at Beg. of Year x 50% $2, 500 Cost - Accum. Depr. $10, 000 - ($5, 000 + $2, 500)

DECLINING-BALANCE METHOD Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years. Formula: Depreciation Rate x Book Value at Beg. of Year x 50% $2, 500 Let’s look at the and final year. 3 rd 4 th year’s depreciation = $1, 250

DECLINING-BALANCE METHOD Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years. Formula: Depreciation Rate x Book Value at Beg. of Year x 50% $1, 250 Book Value is down to $1, 250. Goal is to reduce it to the Salvage Value by end of 4 th year. That means only $250 of depreciation to go!

DECLINING-BALANCE METHOD Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years. Formula: Depreciation Rate x Book Value at Beg. of Year x 50% $1, 250 $625 is too much!!! Book value would fall below the salvage value. 4 th year’s depreciation is limited to $250.

DOUBLE-DECLINING BALANCE METHOD YEAR DEPR. EXPENSE ACCUM. DEPREC. 1 2 3 $5, 000 $2, 500 $1, 250 4 $ 250 $5, 000 $7, 500 $8, 750 $9, 000 Just like the Straight-Line method… Total depreciation is $9, 000. BOOK VALUE $10, 000 $ 5, 000 $ 2, 500 $ 1, 250 $ 1, 000

DOUBLE-DECLINING BALANCE METHOD YEAR 1 2 3 4 DEPR. EXPENSE ACCUM. DEPREC. What if the asset had been bought on April 1 of year 1? BOOK VALUE $10, 000

DOUBLE-DECLINING BALANCE METHOD YEAR 1 2 3 4 DEPR. EXPENSE $3, 750 ACCUM. DEPREC. $3, 750 Year 1 $10, 000 x 50% = $5, 000 x 9/12 = $3, 750 BOOK VALUE $10, 000 $ 6, 250

DOUBLE-DECLINING BALANCE METHOD YEAR 1 2 3 4 DEPR. EXPENSE $3, 750 $3, 125 ACCUM. DEPREC. $3, 750 $6, 875 Year 2 $6, 250 x 50% = $3, 125 BOOK VALUE $10, 000 $ 6, 250 $ 3, 125

DOUBLE-DECLINING BALANCE METHOD YEAR 1 2 3 4 DEPR. EXPENSE $3, 750 $3, 125 $1, 563 ACCUM. DEPREC. $3, 750 $6, 875 $8, 348 Year 3 $3, 125 x 50% = $1, 563 BOOK VALUE $10, 000 $ 6, 250 $ 3, 125 $ 1, 562

DOUBLE-DECLINING BALANCE METHOD YEAR 1 2 3 4 DEPR. EXPENSE $3, 750 $3, 125 $1, 563 ACCUM. DEPREC. $3, 750 $6, 875 $8, 348 BOOK VALUE $10, 000 $ 6, 250 $ 3, 125 $ 1, 562 Only $562 of depreciation to go before book value reaches the salvage value.

DOUBLE-DECLINING BALANCE METHOD YEAR 1 2 3 4 DEPR. EXPENSE $3, 750 $3, 125 $1, 563 $ 562 ACCUM. DEPREC. $3, 750 $6, 875 $8, 348 $9, 000 BOOK VALUE $10, 000 $ 6, 250 $ 3, 125 $ 1, 562 $ 1, 000 Year 4 $1, 562 x 50% = $781 Too much!!! Limited to only $562

SUM-OF-THE-YEARS’ DIGITS METHOD Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years. An accelerated depreciation method, but not as accelerated as Declining-Balance method. Formula: (Cost - Salvage Value) x ($10, 000 - 1, 000) x Remaining useful life 4 Year 1 = 4 years remaining

SUM-OF-THE-YEARS’ DIGITS METHOD Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years. An accelerated depreciation method, but not as accelerated as Declining-Balance method. Formula: Remaining useful life (Cost - Salvage Value) x Sum-of-the-Years’ Digits ($10, 000 - 1, 000) x 4 + 3 + 2 + 1 = 10 4 10

SUM-OF-THE-YEARS’ DIGITS METHOD Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years. An accelerated depreciation method, but not as accelerated as Declining-Balance method. Formula: Remaining useful life (Cost - Salvage Value) x Sum-of-the-Years’ Digits ($10, 000 - 1, 000) x 4 10 Year 1 depreciation is $3, 600.

SUM-OF-THE-YEARS’DIGITS METHOD Year Depreciable Rate Annual Deprec. Cost Accum. Deprec. Book Value $10, 000 1 2 3 4 $9, 000 Cost - Salvage Value

SUM-OF-THE-YEARS’DIGITS METHOD Year Depreciable Rate Annual Deprec. Cost 1 2 3 4 $9, 000 4/10 $9, 000 $3, 600 Accum. Deprec. $3, 600 Depreciable Cost does not change. Book Value $10, 000 $ 6, 400

SUM-OF-THE-YEARS’DIGITS METHOD Year Depreciable Rate Annual Deprec. Cost 1 2 3 4 $9, 000 4/10 $9, 000 3/10 $3, 600 Accum. Deprec. $3, 600 It is the rate that decreases over time. Book Value $10, 000 $ 6, 400

SUM-OF-THE-YEARS’DIGITS METHOD Year Depreciable Rate Annual Deprec. Cost 1 2 3 4 $9, 000 4/10 3/10 2/10 1/10 $3, 600 $2, 700 $1, 800 $ 900 No adjustment is needed in the 4 th year. Accum. Deprec. $3, 600 $6, 300 $8, 100 $9, 000 Book Value $10, 000 $ 6, 400 $ 3, 700 $ 1, 900 $ 1, 000

SUM-OF-THE-YEARS’DIGITS METHOD Year Depreciable Rate Annual Deprec. Cost Accum. Deprec. Book Value $10, 000 1 2 3 4 5 $9, 000 $9, 000 What if this asset had been bought April 1 st?

SUM-OF-THE-YEARS’DIGITS METHOD Year Depreciable Rate Annual Deprec. Cost 1 2 3 4 5 $9, 000 4/10 $2, 700 $9, 000 x 4/10 x 9/12 $9, 000 Accum. Deprec. $2, 700 Book Value $10, 000 $ 7, 300

SUM-OF-THE-YEARS’DIGITS METHOD Year Depreciable Rate Annual Deprec. Cost 1 2 3 4 5 Accum. Deprec. $9, 000 4/10 $2, 700 4/10 $9, 000 3/10 $2, 925 $5, 625 $9, 000 x 4/10 x 3/12 = $900 $9, 000 x 3/10 x 9/12 = $2, 025 $9, 000 $900 + $2, 025 = $2, 925 Book Value $10, 000 $ 7, 300 $ 4, 375

SUM-OF-THE-YEARS’DIGITS METHOD Year Depreciable Rate Annual Deprec. Cost Accum. Deprec. Book Value $10, 000 $ 7, 300 $ 4, 375 $ 2, 350 1 $9, 000 4/10 $2, 700 4/10 $9, 000 3/10 $2, 925 2 $5, 625 3/10 3 $9, 000 2/10 $2, 025 $7, 650 4 $9, 000 5 The remaining $9, 000 years are computed in the same manner: 3 months at one rate & 9 months at another

SUM-OF-THE-YEARS’DIGITS METHOD Year Depreciable Rate Annual Deprec. Cost 1 2 3 4 5 $9, 000 $9, 000 4/10 3/10 2/10 1/10 $2, 700 $2, 925 $2, 025 $1, 125 $ 225 Accum. Deprec. $2, 700 $5, 625 $7, 650 $8, 775 $9, 000 Year 5 is only 3 months. Book Value $10, 000 $ 7, 300 $ 4, 375 $ 2, 350 $ 1, 225 $ 1, 000

UNITS-OF-PRODUCTION METHOD Depreciation is based on the extent to which the asset was used during the year. Formula: Step #1 Compute Depreciation per unit: (Cost - Salvage Value) Estimated Useful Life in Units ($10, 000 - 1, 000) 90, 000 The asset (a vehicle) is expected to be driven 90, 000 miles in its useful life.

UNITS-OF-PRODUCTION METHOD Depreciation is based on the extent to which the asset was used during the year. Formula: Step #1 Compute Depreciation per unit: (Cost - Salvage Value) Estimated Useful Life in Units ($10, 000 - 1, 000) 90, 000 Depreciation per mile = $. 10

UNITS-OF-PRODUCTION METHOD Depreciation is based on the extent to which the asset was used during the year. Formula: Step #2 Multiply depreciation per unit by number of units produced or consumed this year. $. 10/mile x 24, 000 miles Year 1 Depreciation is $2, 400.

UNITS-OF-PRODUCTION METHOD Depreciation is based on the extent to which the asset was used during the year. Formula: Step #2 Multiply depreciation per unit by number of units produced or consumed this year. $. 10/mile x All years are computed in the same manner. 24, 000 miles

DEPRECIATION METHODS FOR FEDERAL INCOME TAX 4 Method used depends on when asset was purchased: ébefore 1981 • Straight-Line, Declining-Balance, Sum-of-the-Years’ -Digits, or Units of Production é 1981 -1986 • Accelerated Cost Recovery System (ACRS) éafter 1986 • Modified Accelerated Cost Recovery (MACRS)

REPAIRS & MAINTENANCE 4 If the repairs do not extend the life of the asset or improve its usefulness éRecorded as expenses éExamples replacement of minor parts, lubrication, cleaning

ADDITIONS & IMPROVEMENTS Accounted for in two ways: 4 If it increases the usefulness of the asset and will provide benefits in future periods éDebited to the asset account • increasing the book value éDepreciated over the remaining life of the asset 4 If it extends the useful life of the asset, but does not increase its usefulness or efficiency éDebited to Accumulated Depreciation • increasing the book value

ADDITIONS & IMPROVEMENTS Example: A business purchased two computers on January 1, 20 -1. Both computers were purchased for $6, 500, are estimated to be used for 3 years and have salvage values of $500. The business uses the Straight-Line method in computing depreciation. If at the beginning of 20 -2, the company replaced a disk drive on computer A at a cost of $400. The replacement extends the life of the computer but doesn’t increase its usefulness….

ADDITIONS & IMPROVEMENTS Computer A Accumulated Depr. Computer A $2, 000 12/31/-1 $6, 500 1/1/-2 $400 $1, 600 Replacement is debited to Accum. Depreciation.

ADDITIONS & IMPROVEMENTS Computer A Accumulated Depr. Computer A $2, 000 12/31/-1 $6, 500 1/1/-2 $400 $1, 600 Book Value is now $4, 900 ($6, 500 - $1, 600).

ADDITIONS & IMPROVEMENTS Computer A Accumulated Depr. Computer A $2, 000 12/31/-1 $6, 500 1/1/-2 $400 $1, 600 Depreciation for the remaining 2 years: (Book Value - Salvage Value)/Remaining Life ($4, 900 - $500)/2 years = $2, 200 per year

ADDITIONS & IMPROVEMENTS Example: A business purchased two computers on January 1, 20 -1. Both computers were purchased for $6, 500, are estimated to be used for 3 years and have salvage values of $500. The business uses the Straight-Line method in computing depreciation. The company also added a new tape drive backup unit to computer B at a cost of $400. Adding new components increases the usefulness of the computer…. .

ADDITIONS & IMPROVEMENTS Computer B Accumulated Depr. Computer B $2, 000 $6, 500 1/1/-2 $ 400 Debited directly to the asset account

ADDITIONS & IMPROVEMENTS Computer B $6, 500 1/1/-2 $ 400 $6, 900 Accumulated Depr. Computer B $2, 000 Book Value is now $4, 900 ($6, 900 - $2, 000).

ADDITIONS & IMPROVEMENTS Computer B $6, 500 1/1/-2 $ 400 $6, 900 Accumulated Depr. Computer B $2, 000 Depreciation for the remaining 2 years: (Book Value - Salvage Value)/Remaining Life ($4, 900 - $500)/2 years = $2, 200 per year

PLANT ASSET DISPOSALS • A plant asset can be disposed of in several ways: ¬Discarded or retired Sold ®Exchanged or traded in for another asset

DISCARDING/RETIRING PLANT ASSETS Example: A printer with a cost of $800 and accumulated depreciation of $800 is discarded. There is no gain or loss since the book value is $0. . .

DISCARDING/RETIRING PLANT ASSETS DATE 1 2 3 4 DESCRIPTION Accum. Depr. - Office Equipment PR DEBIT CREDIT 800 00 Discarded printer 5 6 7 8 9 10 11 Since the company no longer has the printer, its cost and related depreciation are removed from the books. 800 00

DISCARDING/RETIRING PLANT ASSETS DATE DESCRIPTION 1 2 3 4 5 6 7 8 9 10 11 What if the accumulated depreciation had been $720 instead? PR DEBIT CREDIT

DISCARDING/RETIRING PLANT ASSETS DATE 1 2 3 4 DESCRIPTION Accum. Depr. - Office Eq. Loss on discarded Office Equipment Discarded printer 5 6 7 8 9 10 11 Loss of $80 PR DEBIT CREDIT 720 00 800 00

SELLING PLANT ASSETS Example: A printer with a cost of $800 and accumulated depreciation of $720 is sold for $80. We’re giving up an asset with a value of $80 to get $80 cash.

SELLING PLANT ASSETS DATE 1 2 3 4 DESCRIPTION Cash Accum. Depr. - Office Equipment Sold printer 5 6 7 8 9 10 11 No Gain or Loss PR DEBIT CREDIT 80 00 720 00 800 00

SELLING PLANT ASSET DATE 1 2 3 4 5 DESCRIPTION Cash Accum. Depr. - Office Equipment Gain on Sale of Printer PR DEBIT CREDIT 120 00 720 00 Sold printer 6 7 8 9 10 11 If we sold the printer for $120…. . Gain of $40 ($120 cash - $80 book value) 800 00 40 00

SELLING PLANT ASSET DATE 1 2 3 4 5 DESCRIPTION Cash Accum. Depr. - Office Eq. Loss on Sale of Printer Office Equipment PR DEBIT CREDIT 50 00 720 00 Sold printer 6 7 8 9 10 11 If we sold the printer for $50…. . Loss of $30 ($80 book value - $50 cash) 30 00 800 00

EXCHANGE/TRADE-IN OF PLANT ASSETS Example: An old delivery truck is traded-in for a new delivery truck with a fair market value of $30, 000. Old Delivery Accum. Depr. Truck Old Truck $6, 900 Cost $8, 000 Book Value of $1, 100 ($8, 000 - $6, 900)

EXCHANGE/TRADE-IN OF PLANT ASSETS Example: An old delivery truck is traded-in for a new delivery truck with a fair market value of $30, 000. Old Delivery Accum. Depr. Truck Old Truck $6, 900 Cost $8, 000 If a $1, 000 trade-in is granted on the old truck…. . $100 LOSS

EXCHANGE/TRADE-IN OF PLANT ASSETS DATE 1 2 3 4 5 6 7 8 9 10 11 DESCRIPTION Delivery Equipment (New) PR DEBIT CREDIT 30, 000 00 The new delivery truck is entered on the books at its market value.

EXCHAGE/TRADE-IN OF PLANT ASSETS DATE 1 2 3 4 5 6 7 8 9 10 11 DESCRIPTION Delivery Equipment (New) Accum. Depr. - Delivery Eq. PR DEBIT CREDIT 30, 000 00 6, 900 00 Accumulated Depreciation on the old truck is removed from the books.

EXCHANGE/TRADE-IN OF PLANT ASSETS DATE 1 2 3 4 DESCRIPTION Delivery Equipment (New) Accum. Depr. - Delivery Eq. Loss on Exchange of Equip. PR DEBIT CREDIT 30, 000 00 6, 900 00 100 00 5 6 7 8 9 10 11 Loss is recognized…. Will be shown on the Income Statement

EXCHANGE/TRADE-IN OF PLANT ASSETS DATE 1 2 3 4 DESCRIPTION PR DEBIT CREDIT Delivery Equipment (New) Accum. Depr. - Delivery Eq. Loss on Exchange of Equip. Delivery Eq. (Old) 5 6 7 8 9 10 11 The cost of the old delivery truck is removed from the books. 30, 000 00 6, 900 00 100 00 8, 000 00

EXCHANGE/TRADE-IN OF PLANT ASSETS DATE 1 2 3 4 5 DESCRIPTION Delivery Equipment (New) Accum. Depr. - Delivery Eq. Loss on Exchange of Equip. Delivery Eq. (Old) Cash PR DEBIT CREDIT 30, 000 00 6, 900 00 100 00 8, 000 00 29, 000 00 6 7 8 9 10 11 Cash is credited for the amount paid, $29, 000 ($30, 000 price - $1, 000 trade-in).

EXCHANGE/TRADE-IN OF PLANT ASSETS DATE DESCRIPTION 5 Delivery Equipment (New) Accum. Depr. - Delivery Eq. Loss on Exchange of Equip. Delivery Eq. (Old) Cash 6 Purchased a new truck 1 2 3 4 PR DEBIT CREDIT 7 8 9 10 11 What if the trade-in had been $1, 500 instead? 30, 000 00 6, 900 00 100 00 8, 000 00 29, 000 00

EXCHANGE/TRADE-IN OF PLANT ASSETS $1, 500 trade-in - $1, 100 book value $400 GAIN Conservatism is practiced in accounting: “. . when in doubt we should choose the reporting technique that is least likely to overstate assets or net income”… Gain cannot be recognized!

EXCHANGE/TRADE-IN OF PLANT ASSETS DATE DESCRIPTION 1 2 3 4 Delivery Equipment (New) Accum. Depr. - Delivery Eq. (Old) Cash 5 Purchased a new truck PR DEBIT CREDIT 29, 600 00 6, 900 00 6 7 8 9 10 11 New truck is recorded at $29, 600 ($30, 000 market value - $400 gain). 8, 000 00 28, 500 00

NATURAL RESOURCES Example: A coal mine is acquired at a cost of $1, 000. No salvage value. Approximately 1, 000 tons of coal are expected to be mined. Natural resources are “depleted” over time using Units-of-Production method.

NATURAL RESOURCES Example: A coal mine is acquired at a cost of $1, 000. No salvage value. Approximately 1, 000 tons of coal are expected to be mined. (Cost - Salvage Value)/Tons $1, 000, 000 tons Depletion is $1. 00/ton

NATURAL RESOURCES Example: During the current year 180, 000 tons of coal were mined and sold. 180, 000 tons x $1. 00 per ton $180, 000 Depletion

NATURAL RESOURCES DATE 1 2 3 4 5 6 7 8 9 10 11 DESCRIPTION PR DEBIT CREDIT Depletion Expense-Mine Accum. Depletion -Mine Very similar to depreciation adjusting entries 180, 000

INTANGIBLE ASSETS 4 Patents égive inventor exclusive right to produce, use and sell an invention for a period of twenty years • If a company purchases a patent the amount paid = cost of patent • If it develops its own patent only the fees paid to government and patent attorneys = cost • Cost is then “AMORTIZED” over patent’s useful life – using Straight-line method

INTANGIBLE ASSETS 4 Copyrights égive exclusive right to the reproduction and sale of a literary, artistic or musical composition for the life of the holder plus fifty years • If a company purchases a copyright the amount paid = cost of patent • If a develops its own patent recorded as an ordinary expense • Cost is then “AMORTIZED” over patent’s useful life – using Straight-line method

INTANGIBLE ASSETS 4 Trademarks éor trade name to identify a firm’s merchandise if widespread are protected by registering them with the United States Patent Office. • If a company purchases a trademark the amount paid = cost of patent • If a develops its own trademark only the cost to register it are recorded as an asset • Cost is then “AMORTIZED” over patent’s useful life – using Straight-line method