Plant and Intangible Assets Chapter 9 Power Point

Plant and Intangible Assets Chapter 9 Power. Point Authors: Susan Coomer Galbreath, Ph. D. , CPA Charles W. Caldwell, D. B. A. , CMA Jon A. Booker, Ph. D. , CPA, CIA Cynthia J. Rooney, Ph. D. , CPA Mc. Graw-Hill/Irwin Copyright © 2012 The Mc. Graw-Hill Companies, Inc.

Plant Assets as a “Stream of Future Services” Plant assets represent a bundle of future services, and can be thought of as longterm prepaid expenses. The cost of plant assets is the advance purchase of services. As years pass, and the services are used, the cost is transferred to depreciation expense. 9 -2

Major Categories of Plant Assets 9 -3

Accountable Events in the Lives of Plant Assets 1. Acquisition. 2. Allocation of the acquisition cost to expense over the asset’s useful life (depreciation). 3. Sale or disposal. 9 -4

Acquisition of Plant Assets Cost = Asset price + Reasonable and necessary costs. . . for getting the asset to the desired location. . for getting the asset ready for use. 9 -5

Special Considerations Land Improvements Cost includes real estate commissions, escrow fees, legal fees, clearing and grading the property. Improvements to land such as driveways, fences, and landscaping are recorded separately. 9 -6

Special Considerations Buildings Costs incurred for remodeling prior to the building being put in use are considered part of the building’s cost. Equipment Related interest, insurance, and property taxes are treated as expenses of the current period. 9 -7

Special Considerations Allocation of a Lump-Sum Purchase The total cost must be allocated to separate accounts for each asset. The allocation is based on the relative Fair Market Value of each asset purchased. 9 -8

Capital Expenditures and Revenue Expenditures Capital Expenditure Revenue Expenditure Any material expenditure that will benefit several accounting periods. Expenditure for ordinary repairs and maintenance. To capitalize an expenditure means to charge it to an asset account. To expense an expenditure means to charge it to an expense account. 9 -9

Depreciation The allocation of the cost of a plant asset to expense in the periods in which services are received from the asset. Balance Sheet Purchase cost as assets purchased Assets: Plant and equipment Income Statement as the services are received Revenues: Expenses: Depreciation 9 -10

Depreciation Book Value Cost – Accumulated Depreciation § Contra-asset § Represents the portion of an asset’s cost that has already been allocated to expense. Causes of Depreciation § Physical deterioration § Obsolescence 9 -11

Straight-Line Depreciation = Expense per Year Cost - Residual Value Years of Useful Life 9 -12

Declining-Balance Method Depreciation in the early years of an asset’s estimated useful life is higher than in later years. The double-declining balance depreciation rate is 200% of the straight-line depreciation rate of (1÷Useful Life). 9 -13

Impairment of Plant Assets If the cost of an asset cannot be recovered through future use or sale, the asset should be written down to its net realizable value. 9 -14

Disposal of Plant and Equipment Update depreciation to the date of disposal. Journalize disposal by: Recording cash received (debit). Removing accumulated depreciation (debit). Recording a gain (credit) or loss (debit). Removing the asset cost (credit). 9 -15

Intangible Assets Noncurrent assets without physical substance. Often provide exclusive rights or privileges. Characteristics Useful life is often difficult to determine. Usually acquired for operational use. 9 -16

Intangible Assets Record at current cash equivalent cost, including purchase price, legal fees, and filing fees. Patents Copyrights Leasehold Improvements Goodwill Trademarks and Trade Names 9 -17

End of Chapter 9 9 -18