Plant Assets Intangibles Chapter 9 Longlived Assets Plant
Plant Assets & Intangibles Chapter 9
Long-lived Assets Plant Assets Natural Resources Intangible Assets Depreciation Depletion Amortization Copyright (c) 2009 Prentice Hall. All rights reserved. 2
Characteristics of Plant Assets Held for use in business Full cost includes several expenditures Last several years Can be sold or traded in Copyright (c) 2009 Prentice Hall. All rights reserved. 3
Learning Objective 1 Measure the cost of a plant asset
The Cost Principle Cost of an asset = Sum of all costs incurred to bring the asset to its intended purpose, less any discounts Copyright (c) 2009 Prentice Hall. All rights reserved. 5
Types of Plant Assets Land improvements Machinery & equipment Buildings Furniture & fixtures Copyright (c) 2009 Prentice Hall. All rights reserved. 6
Land NOT depreciated Costs included in Land ◦ ◦ ◦ Purchase price Brokerage fees Survey and legal fees Property taxes in arrears Title transfer Costs of clearing and removing unwanted buildings Copyright (c) 2009 Prentice Hall. All rights reserved. 7
Land Improvements Subject to depreciation Examples: ◦ ◦ ◦ Fencing Paving Sprinkler systems Lighting Signs Copyright (c) 2009 Prentice Hall. All rights reserved. 8
Buildings Cost includes: ◦ ◦ Purchase price Architectural fees Contractor charges Materials, labor, and overhead If self-constructed, interest on loans may be included If existing structure is purchased, repairs and renovations are included Copyright (c) 2009 Prentice Hall. All rights reserved. 9
Machinery and Equipment Cost includes: ◦ ◦ ◦ Purchase price (less any discounts) Transportation charges Insurance while in transit Sales tax Installation costs Cost of testing before asset is used Copyright (c) 2009 Prentice Hall. All rights reserved. 10
Furniture and Fixtures Purchase price (less any discounts) Shipping charges Costs to assemble Copyright (c) 2009 Prentice Hall. All rights reserved. 11
Lump Sum Purchase Company purchases a group of plant assets for a single price ◦ Also called basket purchase Assign cost to individual assets based on relative sales values Copyright (c) 2009 Prentice Hall. All rights reserved. 12
Short Exercise 9 -2 Fair value Percent Allocated cost Land $75, 000 50% $70, 000 Building $60, 000 40% $56, 000 Equipment $15, 000 10% $14, 000 $150, 000 100% $140, 000 Total Multiply percent by total cost of $140, 000 Divide fair value of each asset by the total fair value of $150, 000 Copyright (c) 2009 Prentice Hall. All rights reserved. 13
Plant Asset Spending Capital expenditures Debited to an asset account Increase asset’s capacity of efficiency OR Extend useful life Expenses Debited to an expense account Maintain asset in working order Copyright (c) 2009 Prentice Hall. All rights reserved. 14
Capitalize or Expense? Impact of Accounting Errors If a capital expenditure is incorrectly recorded as an expense: Overstates expenses Understates net income Understates Capital Understates assets (equipment) Copyright (c) 2009 Prentice Hall. All rights reserved. 15
Review Question 1. Which of the following would be included in the cost of land? A. B. C. D. Brokers’ commissions Property taxes in arrears Costs of clearing and removing unwanted buildings All of the above Copyright © 2009 Prentice Hall. All rights reserved. 16
1. Which of the following would be included in the cost of land? A. B. C. Brokers’ commissions Property taxes in arrears Costs of clearing and removing unwanted buildings All of the above D. Copyright © 2009 Prentice Hall. All rights reserved. 17
2. Which of the following would NOT be included in the cost of equipment? A. B. C. Sales tax Installation costs Repairs after the equipment is placed in service Insurance while in transit D. Copyright © 2009 Prentice Hall. All rights reserved. 18
2. Which of the following would NOT be included in the cost of equipment? A. B. C. Sales tax Installation costs Repairs after the equipment is placed in service Insurance while in transit D. Copyright © 2009 Prentice Hall. All rights reserved. 19
3. Expenditures for parking lots, driveways and fences are debited to: A. B. C. D. Land improvements. Leasehold improvements. Equipment. Copyright © 2009 Prentice Hall. All rights reserved. 20
3. Expenditures for parking lots, driveways and fences are debited to: A. B. C. D. Land improvements. Leasehold improvements. Equipment. Copyright © 2009 Prentice Hall. All rights reserved. 21
Learning Objective 2 Account for depreciation
Depreciation Allocation of a plant asset’s cost to expense over its useful life Matches expense against revenue generated using the asset $40, 000 cost 10 -year life Copyright (c) 2009 Prentice Hall. All rights reserved. 23
Causes of Depreciation Wear and tear from use Physical factors Obsolescence ◦ Computers and other technology Copyright (c) 2009 Prentice Hall. All rights reserved. 24
Depreciation is NOT: Copyright (c) 2009 Prentice Hall. All rights reserved. 25
Factors in Computing Depreciation Cost Estimated useful life ◦ Expressed in years, units, miles, or output Estimated residual value ◦ Also called salvage value ◦ Expected cash value at end of useful life Cost Useful Life Residual Value Copyright (c) 2009 Prentice Hall. All rights reserved. 26
Depreciation Methods Straightline Units-of production Decliningbalance Copyright (c) 2009 Prentice Hall. All rights reserved. 27
Straight-Line Method (Cost – residual value) 1 Life # 12 Depreciation expense Copyright (c) 2009 Prentice Hall. All rights reserved. 28
Book Value Increases over time Accumulated depreciation Cost Book value Decreases over time Copyright (c) 2009 Prentice Hall. All rights reserved. 29
Units-of-Production Method Depreciation per unit = (Cost – Residual value) x 1 Life in units Depreciation expense = Depreciation per unit x activity during the period Copyright (c) 2009 Prentice Hall. All rights reserved. 30
Double-Declining-Balance Method Accelerated method ◦ Writes off more depreciation near the start of an asset’s life Residual value is not in formula ◦ Ignored until last year Copyright (c) 2009 Prentice Hall. All rights reserved. 31
Double-Declining-Balance Method (Cost – Accumulated depreciation) Book value 2 Life # 12 Twice the straightline rate Depreciation expense Decreases over the asset’s life Copyright (c) 2009 Prentice Hall. All rights reserved. 32
Comparing Depreciation Methods Cost = $50, 000 Residual value = $5, 000 Life = 5 years or 100, 000 units Copyright (c) 2009 Prentice Hall. All rights reserved. 33
Which Method is Best for Matching? Straight-line • For assets that generate revenue over time Units-ofproduction • For assets that depreciate due to wear and tear Doubledecliningbalance • For assets that produce more revenue in their early years Copyright (c) 2009 Prentice Hall. All rights reserved. 34
Short Exercise 9 -3 Straight-line – 1 st year (65, 000 – 5, 000) 1 4 12 12 $15, 000 depreciation, 1 st year Copyright (c) 2009 Prentice Hall. All rights reserved. 35
Short Exercise 9 -3 (continued) Units-of-Production 1 (65, 000 – 5, 000) x 6, 000 miles = $10 per mile 1. 3 million miles x $10 per mile = $13, 000 depreciation expense, 1 st year Copyright (c) 2009 Prentice Hall. All rights reserved. 36
Short Exercise 9 -3 (continued) Double-declining-balance – 1 st year ($65, 000 - 0) 2 4 12 12 $32, 500, 000 depreciation expense, 1 st year Copyright (c) 2009 Prentice Hall. All rights reserved. 37
Short Exercise 9 -3 (continued) Cost $65, 000 Less: Accumulated depreciation Book value, using straight-line 15, 000 $50, 000 Copyright (c) 2009 Prentice Hall. All rights reserved. 38
Changes in Useful Life or Residual Value Considered a change in estimate Businesses must report on the reason and effect of the change Remaining asset book value is depreciated over the remaining life Copyright (c) 2009 Prentice Hall. All rights reserved. 39
Fully Depreciated Assets Asset has reached the end of its estimated life If still useful, a company will continue to use it Report book value on balance sheet Record no more depreciation Asset never reported below residual value Copyright (c) 2009 Prentice Hall. All rights reserved. 40
Review Question 4. Which of the following costs for a vehicle is most likely to be recorded as a capital expenditure? A. B. C. D. Oil change Engine overhaul Replacement of a flat tire Repainting Copyright © 2009 Prentice Hall. All rights reserved. 41
4. Which of the following costs for a vehicle is most likely to be recorded as a capital expenditure? A. B. C. D. Oil change Engine overhaul Replacement of a flat tire Repainting Copyright © 2009 Prentice Hall. All rights reserved. 42
5. Depreciation: A. is a process of valuation that records the decline in market value of plant assets aside cash to replace plant asset as they wear out. is a process of allocating a plant asset’s cost to expense over its life. is all of the above. B. C. D. Copyright © 2009 Prentice Hall. All rights reserved. 43
5. Depreciation: A. is a process of valuation that records the decline in market value of plant assets aside cash to replace plant asset as they wear out. is a process of allocating a plant asset’s cost to expense over its life. is all of the above. B. C. D. Copyright © 2009 Prentice Hall. All rights reserved. 44
6. Which plant asset is NOT depreciated? A. B. C. D. Land improvements Furniture and fixtures All plant assets are depreciated. Copyright © 2009 Prentice Hall. All rights reserved. 45
7. A. B. C. D. A company purchases a machine for $50, 000. It is assigned a $5, 000 residual value and a 10 -year life. Compute annual depreciation expense using the straightline method. $5, 500 $5, 000 $4, 500 $50, 000 Copyright © 2009 Prentice Hall. All rights reserved. 46
7. A. B. C. D. A company purchases a machine for $50, 000. It is assigned a $5, 000 residual value and a 10 -year life. Compute annual depreciation expense using the straightline method. $5, 500 $5, 000 $4, 500 $50, 000 Copyright © 2009 Prentice Hall. All rights reserved. 47
Learning Objective 3 Record the disposal of an asset by sale or trade
Disposing of a Plant Asset wears out or becomes obsolete. Company can: ◦ Sell the asset for cash ◦ Scrap the asset for no cash ◦ Trade the asset for another asset Result in a gain or loss Non-like property exchange Like-kind exchange No gain or loss Copyright (c) 2009 Prentice Hall. All rights reserved. 49
Accounting for Disposal of Plant Asset Bring depreciation up to date Remove old asset from books ◦ Zero out asset by crediting for original cost ◦ Zero out accumulated depreciation of asset by debiting for all depreciation taken Record the value of any cash paid or received ◦ If money is borrowed, credit Notes payable Determine difference between total debits and total credits Copyright (c) 2009 Prentice Hall. All rights reserved. 50
Accounting for Disposal of Plant Asset – Final Step If asset was traded for a like-kind asset ◦ Difference will be recorded as a debit to the new asset account If the asset was sold or exchanged for a dissimilar asset ◦ Gain or loss will be recorded If debits > credits GAIN If debits < credits LOSS If debits = credits NO GAIN OR LOSS Copyright (c) 2009 Prentice Hall. All rights reserved. 51
Exercise 9 -20 GENERAL JOURNAL DATE 8 31 REF DESCRIPTION Depreciation expense DEBIT CREDIT 2, 560 Accumulated depreciation Year Depreciation expense 2, 560 Accumulated depreciation Book value $16, 000 2011 $6, 400 9, 600 2012 2, 560 8, 960 7, 040 Copyright (c) 2009 Prentice Hall. All rights reserved. 52
Exercise 9 -20 (continued) GENERAL JOURNAL DATE 8 31 REF DESCRIPTION DEBIT Cash 7, 600 Accumulated depreciation 8, 960 Fixtures 16, 000 Gain on sale of plant assets Year CREDIT Depreciation expense 560 Accumulated depreciation Book value $16, 000 2011 $6, 400 9, 600 2012 2, 560 8, 960 7, 040 Copyright (c) 2009 Prentice Hall. All rights reserved. 53
Learning Objective 4 Account for natural resources
Natural Resources Plant assets extracted from the natural environment ◦ Iron ore, oil, coal Expensed through depletion using the units-ofproduction method Accumulated depletion is a contra-asset account to the natural resource Copyright (c) 2009 Prentice Hall. All rights reserved. 55
Depletion per unit = (Cost – Residual value) x 1 Estimated total units of natural resource Depletion expense = Depletion per unit x number of units removed Copyright (c) 2009 Prentice Hall. All rights reserved. 56
Learning Objective 5 Account for intangible assets
Intangible Assets Non-current assets with no physical form Provide exclusive rights or privileges Expensed through amortization using the straightline method ◦ Credit to the asset directly ◦ If intangible has indefinite life, it is not amortized Copyright (c) 2009 Prentice Hall. All rights reserved. 58
Types of Intangibles Patent • Exclusive 20 -year right to produce & sell an invention Copyright • Exclusive right to sell a book, musical work, film, art, software, or intellectual property Trademarks and brand names • Represent distinctive products or services Issued by the federal government Copyright (c) 2009 Prentice Hall. All rights reserved. 59
Types of Intangibles Franchises & licenses Goodwill • Allows purchaser to sell goods or services under specific conditions • Excess of the cost to purchase another company over the market value of its net assets Copyright (c) 2009 Prentice Hall. All rights reserved. 60
Goodwill Only recorded when a company purchases another business Not amortized ◦ Current value measured each year If value increases, no entry If value decreases, a loss is recorded Copyright (c) 2009 Prentice Hall. All rights reserved. 61
Research and Development (R&D) Costs Important to several industries, such as pharmaceutical companies Not an intangible ◦ Expensed as incurred Copyright (c) 2009 Prentice Hall. All rights reserved. 62
Learning Objective 6 Describe ethical issues related to plant assets
Capitalize or Expense? Capitalize Results in higher asset value and larger net income ◦ Looks better to investors If cost provides a future benefit, then capitalize Expense Results in lower net income ◦ Less taxes If cost does not provide a future benefit, then expense Copyright (c) 2009 Prentice Hall. All rights reserved. 64
8. A. B. C. D. A company purchased a truck for $42, 000. Management estimated a residual value of $2, 000 and that the truck would be driven 200, 000 miles. Compute depreciation expense using the units-ofproduction method, assuming the truck is driven 25, 000 miles in the first year. $25, 000 $5, 250 $5, 000 $1, 600 Copyright © 2009 Prentice Hall. All rights reserved. 65
8. A. B. C. D. A company purchased a truck for $42, 000. Management estimated a residual value of $2, 000 and that the truck would be driven 200, 000 miles. Compute depreciation expense using the units-ofproduction method, assuming the truck is driven 25, 000 miles in the first year. $25, 000 $5, 250 $5, 000 $1, 600 Copyright © 2009 Prentice Hall. All rights reserved. 66
9. Which depreciation method produces a constant expense amount over the asset’s life? A. B. C. Straight-line Units-of-production Double-declining-balance Copyright © 2009 Prentice Hall. All rights reserved. 67
9. Which depreciation method produces a constant expense amount over the asset’s life? A. B. C. Straight-line Units-of-production Double-declining-balance Copyright © 2009 Prentice Hall. All rights reserved. 68
10. Which depreciation method is most similar to that used for tax purposes? A. B. C. Straight-line Units-of-production Double-declining-balance Copyright © 2009 Prentice Hall. All rights reserved. 69
10. Which depreciation method is most similar to that used for tax purposes? A. B. C. Straight-line Units-of-production Double-declining-balance Copyright © 2009 Prentice Hall. All rights reserved. 70
11. A company sells machinery for $25, 000 cash. The machinery’s original cost is $100, 000, and its accumulated depreciation balance is $80, 000. The entry to record the sale would include a: A. loss of $75. 000. B. gain of $20, 000. C. gain of $5, 000. D. loss of $5, 000. Copyright © 2009 Prentice Hall. All rights reserved. 71
11. A company sells machinery for $25, 000 cash. The machinery’s original cost is $100, 000, and its accumulated depreciation balance is $80, 000. The entry to record the sale would include a: A. loss of $75. 000. B. gain of $20, 000. C. gain of $5, 000. D. loss of $5, 000. Copyright © 2009 Prentice Hall. All rights reserved. 72
12. The charge of allocating the cost of natural resources that are used up during a period is called: A. B. C. D. depreciation. depletion. amortization. extraction. Copyright © 2009 Prentice Hall. All rights reserved. 73
12. The charge of allocating the cost of natural resources that are used up during a period is called: A. B. C. D. depreciation. depletion. amortization. extraction. Copyright © 2009 Prentice Hall. All rights reserved. 74
13. If an intangible asset has an indefinite life, : A. B. C. D. it is not amortized. it is tested annually for decline in value. a loss is recorded when its value decreases. all of the above are true. Copyright © 2009 Prentice Hall. All rights reserved. 75
13. If an intangible asset has an indefinite life, : A. B. C. D. it is not amortized. it is tested annually for decline in value. a loss is recorded when its value decreases. all of the above are true. Copyright © 2009 Prentice Hall. All rights reserved. 76
14. Research and development costs are recorded as a(n): A. B. C. D. intangible asset. expense. intangible asset if project is successful; expense if unsuccessful. intangible asset or expense based upon management’s expectations. Copyright © 2009 Prentice Hall. All rights reserved. 77
14. Research and development costs are recorded as a(n): A. B. C. D. intangible asset. expense. intangible asset if project is successful; expense if unsuccessful. intangible asset or expense based upon management’s expectations. Copyright © 2009 Prentice Hall. All rights reserved. 78
End of Chapter 9
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