Previous Lecture Plant Assets Longlived assets acquired for

Previous Lecture • Plant Assets -Long-lived assets acquired for use in business operations. • Major Categories of Plant Assets – Tangible Plant Assets – Intangible Assets – Natural Resources • Accountable Events • Acquisition of Plant Assets 1

Previous Lecture • Determining Cost • Special Considerations – Land: Cost includes real estate commissions, escrow fees, legal fees, clearing and grading the property. – Land Improvement: Improvements to land such as driveways, fences, and landscaping are recorded separately. – Building : Repairs made prior to the building being put in use are considered part of the building’s cost. 2

Previous Lecture – Equipment: Related interest, insurance, and property taxes are treated as expenses of the current period. • Allocation of a Lump-Sum Purchase • Capital Expenditures & Revenue Expenditures • Depreciation – Straight-Line Depreciation • Depreciation for Fractional Periods • Declining-Balance Method 3

Previous Lecture • • Financial Statement Disclosures Revising Depreciation Rates Impairment of Assets Disposal of Plant and Equipment 4

Chapter USED ASSETS MANAGEMENT 9 5

Trading in Used Assets for New Ones Accounting depends on whether assets are similar or dissimilar. Airplane for Airplane Truck for Airplane Only situations where cash is paid will be demonstrated. 6

Trading in Used Assets for New Ones 7

Trading in Used Assets for New Ones – Similar Assets On May 30, 2003, Essex Company exchanged a used airplane and $35, 000 cash for a new airplane. The old airplane originally cost $40, 000, had up-to-date accumulated depreciation of $30, 000, and a fair value of $4, 000. SIMILAR 8

Trading in Used Assets for New Ones – Similar Assets The exchange resulted in a: a. b. c. d. gain of $6, 000. loss of $4, 000. gain of $4, 000. Prepare a journal entry to record the exchange. 9

Trading in Used Assets for New Ones – Similar Assets Prepare the journal entry to record the trade. 10

Trading in Used Assets for New Ones – Similar Assets On June 30, 2004, Rancho Landscape exchanged a used truck and $11, 500 cash for a new truck. The old airplane originally cost $10, 000, had up-to-date accumulated depreciation of $8, 000, and a trade in allowance of $3, 500 and has a book value of $2, 000 11

Trading in Used Assets for New Ones – Similar Assets The exchange resulted in a: a. b. c. d. gain of $1, 500. loss of $2, 000. gain of $3, 000. Prepare a journal entry to record the exchange. 12

Trading in Used Assets for New Ones – Similar Assets Prepare the journal entry to record the trade. 13

Intangible Assets Often provide exclusive rights or privileges. Noncurrent assets without physical substance. Characteristics Useful life is often difficult to determine. Usually acquired for operational use. 14

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 15

Intangible Assets • Amortize over shorter of economic life or legal life, subject to a maximum of 40 years. • Use straight-line method. • Research and development costs are normally expensed as incurred. 16

Intangible Assets – Goodwill Occurs when one company buys another company. Only purchased goodwill is an intangible asset. The amount by which the purchase price exceeds the fair market value of net assets acquired. 17

Goodwill • Positive attributes of goodwill are: – Favorable reputation – Positive market share – Positive advertising image – Reputation of high quality and loyal employees – Superior Management – Manufacturing and other operating efficiency 18

Intangible Assets – Goodwill Eddy Company paid $1, 000 to purchase all of James Company’s assets and assumed liabilities of $200, 000. The acquired assets were appraised at a fair value of $900, 000. 19

Intangible Assets – Goodwill What amount of goodwill should be recorded on Eddy Company books? a. b. c. d. $100, 000. $200, 000. $300, 000. $400, 000. 20

Intangible Assets – Patents Exclusive right granted by federal government to sell or manufacture an invention. Cost is purchase price plus legal cost to defend. Amortize cost over the shorter of useful life or 17 years. 21

Patents Assume that the patent is purchased from the inventor at a cost of $100, 000 after 5 years of legal life have expired, therefore the remaining legal life is 12 years. But if estimated useful life is only four years, amortization should be based on this shorter period. The entry to record this amortization is 22

Patent Prepare the journal entry to record the trade. 23

Intangible Assets – Trademarks and Trade Names A symbol, design, or logo associated with a business. Internally developed trademarks have no recorded asset cost. Purchased trademarks are recorded at cost, and amortized over shorter of legal or economic life, or 40 years. 24

Intangible Assets – Franchises Legally protected right to sell products or provide services purchased by franchisee from franchisor. Purchase price is intangible asset which is amortized over the shorter of the protected right or 40 years. 25

Intangible Assets – Copyrights Exclusive right granted by the federal government to protect artistic or intellectual properties. Legal life is life of creator plus 50 years. Amortize cost over a period not to exceed 40 years. 26

Natural Resources Total cost, including exploration and development, is charged to depletion expense over periods benefited. Extracted from the natural environment and reported at cost less accumulated depletion. Examples: oil, coal, gold 27

Depletion of Natural Resources Depletion is calculated using the units-of-production method. Unit depletion rate is calculated as follows: Cost – Salvage Value Total Units of Capacity 28

Depletion of Natural Resources Total depletion cost for a period is: Unit Depletion Rate Total depletion cost × Inventory for sale Number of Units Extracted in Period Cost of goods sold Unsold Inventory 29

Depletion of Natural Resources Specialized plant assets may be required to extract the natural resource. These assets are recorded in a separate account and depreciated. 30

Natural resources Assume that rainbow minerals pay $45 million to acquire red valley mine that has 10 million tons of coal. The residual is estimated to be $5 million. The depletion over life is of 40 million and rate $4 per million. Assume that 2 million tons are mined during first year so prepare journal entry 31

Natural resources Prepare the journal entry to record the trade. 32

Natural resources Rainbow Mineral’s Balance sheet 33

The Units-of-Output Method Cost per Unit of Output Depreciation Expense = Cost - Residual Value Estimated Units of Output = Cost per Unit Number of × of Output Units Produced 34

Unit of Output method Consider S & G delivery truck which cost $17, 000 and has an estimated salvage value of $ 2, 000. Assume that S & G plans to retire this truck after it has been delivered 100, 000 mile. Calculate the deprecation rate 35

Unit of Output Cost per Unit of Output Cost - Residual Value Estimated Units of Output 17, 000 - 2, 000 100, 000 miles $0. 15 Depreciation per mile 36

MACRS: The “Tax Method” MACRS = Modified Accelerated Cost Recovery System Based on Declining. Balance Methods The only accelerated method allowed by the IRS when computing depreciation for tax return purposes. Asset Cost × MACRS rate Rates are available from tables provided by the IRS. 37

Which Depreciation Methods Do Most Businesses Use?

End of Chapter 9 39