© the mcgraw-hill companies, inc., 2008 mcgraw-hill/irwin 9-1 plant and intangible assets chapter 9

© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin

9-1

PLANT ANDINTANGIBLE ASSETS

Chapter

9


9-2

Long-lived assets acquired for use in business operations.

Long-lived assets acquired for use in business operations.

Similar to long-term 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.

Plant AssetsPlant Assets


9-3

Major Categories of Plant AssetsMajor Categories of Plant Assets

L an d , b u ild in g s ,eq u ip m en t,

fu rn itu re , fixtu res .

L on g -te rmasse ts h avin g

p h ys ica l su b s tan ce .

Tangible PlantAssets

P aten ts , cop yrig h ts ,trad em arks ,

fran ch ises , g ood w ill.

N on cu rren t asse tsw ith n o p h ys ica l

su b s tan ce .

IntangibleAssets

O il reserves ,t im b er, o th er

m in era ls .

S ites acq u ired fo rextrac tin g va lu ab le

resou rces .

NaturalResources


9-4

Acquisition.Acquisition.Allocation of the acquisition cost Allocation of the acquisition cost

to expense over the asset’s to expense over the asset’s useful life (depreciation).useful life (depreciation).

Sale or disposal.Sale or disposal.

Acquisition.Acquisition.Allocation of the acquisition cost Allocation of the acquisition cost

to expense over the asset’s to expense over the asset’s useful life (depreciation).useful life (depreciation).

Sale or disposal.Sale or disposal.

Accountable EventsAccountable Events


9-5

Asset price

Asset price

. . . for getting the asset to the

desired location.

. . . for getting the asset to the

desired location.

. . . for getting the asset ready

for use.

. . . for getting the asset ready

for use.

CostCost

Acquisition of Plant AssetsAcquisition of Plant Assets

=Reasonable and

necessary costs . . .

Reasonable and necessary costs . . .

+


9-6

On May 4, Heat Co., a stove maker, buys a new On May 4, Heat Co., a stove maker, buys a new machine from Supply Co. The new machine machine from Supply Co. The new machine

has a price of $52,000. Sales tax is 8%.has a price of $52,000. Sales tax is 8%.Heat Co. pays $500 shipping cost to get the Heat Co. pays $500 shipping cost to get the

machine to its plant. After the machine machine to its plant. After the machine arrives, set-up costs of $1,300 are incurred, arrives, set-up costs of $1,300 are incurred,

along with $4,000 in testing costs.along with $4,000 in testing costs.

Compute the cost of Heat Co.’s new machine.Compute the cost of Heat Co.’s new machine.

On May 4, Heat Co., a stove maker, buys a new On May 4, Heat Co., a stove maker, buys a new machine from Supply Co. The new machine machine from Supply Co. The new machine

has a price of $52,000. Sales tax is 8%.has a price of $52,000. Sales tax is 8%.Heat Co. pays $500 shipping cost to get the Heat Co. pays $500 shipping cost to get the

machine to its plant. After the machine machine to its plant. After the machine arrives, set-up costs of $1,300 are incurred, arrives, set-up costs of $1,300 are incurred,

along with $4,000 in testing costs.along with $4,000 in testing costs.

Compute the cost of Heat Co.’s new machine.Compute the cost of Heat Co.’s new machine.

Determining CostDetermining Cost


9-7

Determining CostDetermining Cost


9-8

Improvements to land such as driveways,

fences, and landscaping are recorded separately.

Improvements to land such as driveways,

fences, and landscaping are recorded separately.

Cost includes real estate commissions, escrow

fees, legal fees, clearing and grading the property.

Cost includes real estate commissions, escrow

fees, legal fees, clearing and grading the property.

Land Improvements

Land Improvements

LandLand

Special ConsiderationsSpecial Considerations


9-9

Repairs made prior to the building being put in use are considered part of the

building’s cost.

Repairs made prior to the building being put in use are considered part of the

building’s cost.

BuildingsBuildings


EquipmentEquipment

Related interest, insurance, and property

taxes are treated as expenses of the current

period.

Related interest, insurance, and property

taxes are treated as expenses of the current

period.


9-10

I think I’ll buy the whole thing;

building, land, and contents.


The allocation is based on the relative Fair Market

Value of each asset

purchased.

The allocation is based on the relative Fair Market

Value of each asset

purchased.

The total cost must be

allocated to separate

accounts for each asset.

The total cost must be

allocated to separate

accounts for each asset.

Allocation of a Lump-Sum PurchaseAllocation of a Lump-Sum Purchase


9-11

CapitalCapitalExpenditureExpenditure

CapitalCapitalExpenditureExpenditure

RevenueRevenueExpenditureExpenditureRevenueRevenue

ExpenditureExpenditure

Any material expenditureAny material expenditurethat will benefit severalthat will benefit several

accounting periods.accounting periods.

Any material expenditureAny material expenditurethat will benefit severalthat will benefit several

accounting periods.accounting periods.

To To capitalizecapitalize an expenditure an expendituremeans to charge it to anmeans to charge it to an

asset accountasset account..

To To capitalizecapitalize an expenditure an expendituremeans to charge it to anmeans to charge it to an

asset accountasset account..

Expenditure forExpenditure forordinary repairsordinary repairs

and maintenanceand maintenance..

Expenditure forExpenditure forordinary repairsordinary repairs

and maintenanceand maintenance..

ToTo expense expense an expenditure an expendituremeans to charge it to anmeans to charge it to an

expense accountexpense account..

ToTo expense expense an expenditure an expendituremeans to charge it to anmeans to charge it to an

expense accountexpense account..

Capital Expenditures and Revenue Expenditures

Capital Expenditures and Revenue Expenditures


9-12

The allocation of the cost of a plant asset to expense in the The allocation of the cost of a plant asset to expense in the periods in which services are received from the asset.periods in which services are received from the asset.

Cost of plant

assets

Balance SheetBalance Sheet

Assets: Plant and equipment

Assets: Plant and equipment

Income StatementIncome Statement

Revenues:Expenses: Depreciation

Revenues:Expenses: Depreciation

as the services are received

DepreciationDepreciation


9-13

Book Value

• Cost – Accumulated DepreciationDepreciation

• Contra-asset• Represents the portion of an asset’s

cost that has alreadybeen allocated to expense.

Causes of Depreciation

• Physical deterioration• Obsolescence

Book Value

• Cost – Accumulated DepreciationDepreciation

• Contra-asset• Represents the portion of an asset’s

cost that has alreadybeen allocated to expense.

Causes of Depreciation

• Physical deterioration• Obsolescence

DepreciationDepreciation


9-14

Cost - Residual Value

Years of Useful Life

Depreciation

Expense per Year=

Straight-Line DepreciationStraight-Line Depreciation


9-15

On January 1, 2007, Bass Co. buys new equipment. On January 1, 2007, Bass Co. buys new equipment. Bass pays a total of $24,000 for the equipment. The Bass pays a total of $24,000 for the equipment. The equipment has an estimated residual value of $3,000 equipment has an estimated residual value of $3,000

and an estimated useful life of 5 years.and an estimated useful life of 5 years.Compute depreciation for 2007 using the straight-line Compute depreciation for 2007 using the straight-line

method.method.

On January 1, 2007, Bass Co. buys new equipment. On January 1, 2007, Bass Co. buys new equipment. Bass pays a total of $24,000 for the equipment. The Bass pays a total of $24,000 for the equipment. The equipment has an estimated residual value of $3,000 equipment has an estimated residual value of $3,000

and an estimated useful life of 5 years.and an estimated useful life of 5 years.Compute depreciation for 2007 using the straight-line Compute depreciation for 2007 using the straight-line

method.method.



9-16

Bass Co. will record $4,200 depreciation each year for five Bass Co. will record $4,200 depreciation each year for five years. Total depreciation over the estimated useful life of years. Total depreciation over the estimated useful life of

the equipment is:the equipment is:

Bass Co. will record $4,200 depreciation each year for five Bass Co. will record $4,200 depreciation each year for five years. Total depreciation over the estimated useful life of years. Total depreciation over the estimated useful life of

the equipment is:the equipment is:

Salvage ValueSalvage Value



9-17

When an asset is acquired during the year, depreciation When an asset is acquired during the year, depreciation in the year of acquisition must be prorated.in the year of acquisition must be prorated.

When an asset is acquired during the year, depreciation When an asset is acquired during the year, depreciation in the year of acquisition must be prorated.in the year of acquisition must be prorated.

Half-Year ConventionIn the year of

acquisition, record six months of depreciation.

Half-Year ConventionIn the year of

acquisition, record six months of depreciation. ½½

Depreciation for Fractional PeriodsDepreciation for Fractional Periods


9-18

Half-Year ConventionHalf-Year Convention

Using the half-year convention, calculate the Using the half-year convention, calculate the straight-line depreciation on December 31, 2007, straight-line depreciation on December 31, 2007,

for equipment purchased in 2007. The for equipment purchased in 2007. The equipment cost $75,000, has a useful life of 10 equipment cost $75,000, has a useful life of 10

years and an estimated residual value of $5,000.years and an estimated residual value of $5,000.

Using the half-year convention, calculate the Using the half-year convention, calculate the straight-line depreciation on December 31, 2007, straight-line depreciation on December 31, 2007,

for equipment purchased in 2007. The for equipment purchased in 2007. The equipment cost $75,000, has a useful life of 10 equipment cost $75,000, has a useful life of 10

years and an estimated residual value of $5,000.years and an estimated residual value of $5,000.

Depreciation = ($75,000 - $5,000) ÷ 10

= $7,000 for a full year

Depreciation = $7,000 × 1/2 = $3,500

Depreciation = ($75,000 - $5,000) ÷ 10

= $7,000 for a full year

Depreciation = $7,000 × 1/2 = $3,500


9-19

Depreciation in the early years of an asset’s estimated useful life is higher than in later years.

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).

The double-declining balance depreciation rate is 200% of the straight-line

depreciation rate of (1÷Useful Life).

Declining-Balance MethodDeclining-Balance Method


9-20

On January 1, 2007, Bass Co. buys a new delivery truck. On January 1, 2007, Bass Co. buys a new delivery truck. Bass Co. pays $24,000 for the truck. The truck has an Bass Co. pays $24,000 for the truck. The truck has an

estimated residual value of $3,000 and an estimated useful estimated residual value of $3,000 and an estimated useful life of 5 years.life of 5 years.

Compute depreciation for 2007 using the double-Compute depreciation for 2007 using the double-declining balance method.declining balance method.

On January 1, 2007, Bass Co. buys a new delivery truck. On January 1, 2007, Bass Co. buys a new delivery truck. Bass Co. pays $24,000 for the truck. The truck has an Bass Co. pays $24,000 for the truck. The truck has an

estimated residual value of $3,000 and an estimated useful estimated residual value of $3,000 and an estimated useful life of 5 years.life of 5 years.

Compute depreciation for 2007 using the double-Compute depreciation for 2007 using the double-declining balance method.declining balance method.



9-21

Compute depreciation for the rest of the Compute depreciation for the rest of the truck’s estimated useful life. truck’s estimated useful life.

Compute depreciation for the rest of the Compute depreciation for the rest of the truck’s estimated useful life. truck’s estimated useful life.


Total depreciation over the estimated useful life of an asset is the same using either the straight-line method or

the declining-balance method.

Total depreciation over the estimated useful life of an asset is the same using either the straight-line method or

the declining-balance method.


9-22

Estimates of Useful Life and Residual Value• May differ from company to

company.• The reasonableness of

management’s estimates is evaluated by external auditors.

Principle of Consistency• Companies should avoid

switching depreciation methods from period to period.

Estimates of Useful Life and Residual Value• May differ from company to

company.• The reasonableness of

management’s estimates is evaluated by external auditors.

Principle of Consistency• Companies should avoid

switching depreciation methods from period to period.

Financial Statement DisclosuresFinancial Statement Disclosures


9-23

So depreciationis an estimate.

So depreciationis an estimate.

Predicted salvage value

Predicted salvage value

Predicteduseful life

Predicteduseful life

Over the life of an asset, new information may come to light that indicates the

original estimates need to be revised.

Over the life of an asset, new information may come to light that indicates the

original estimates need to be revised.

Revising Depreciation RatesRevising Depreciation Rates


9-24


On January 1, 2004, equipment was purchased that cost $30,000, has a useful

life of 10 years and no salvage value. During 2007, the useful life was revised to

8 years total (5 years remaining).

Calculate depreciation expense for the year ended December 31, 2007, using the

straight-line method.

On January 1, 2004, equipment was purchased that cost $30,000, has a useful

life of 10 years and no salvage value. During 2007, the useful life was revised to

8 years total (5 years remaining).

Calculate depreciation expense for the year ended December 31, 2007, using the

straight-line method.


9-25

When our estimates change, depreciation is:

When our estimates change, depreciation is:

Book value at date of change

Salvage value at date of change

Remaining useful life at date of change

–


Asset cost 30,000$ Accumulated depreciation, 12/31/2006 ($3,000 per year × 3 years) 9,000 Remaining book value 21,000$ Divide by remaining life ÷ 5Revised annual depreciation 4,200$

Asset cost 30,000$ Accumulated depreciation, 12/31/2006 ($3,000 per year × 3 years) 9,000 Remaining book value 21,000$ Divide by remaining life ÷ 5Revised annual depreciation 4,200$


9-26

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.

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.

Impairment of Plant AssetsImpairment of Plant Assets


9-27

Update depreciation to the date of disposal.

Update depreciation to the date of disposal.

Recording cashreceived (debit).Recording cashreceived (debit).

Removing accumulateddepreciation (debit).


Removing the asset cost (credit).


Recording again (credit)

or loss (debit).


or loss (debit).

Disposal of Plant and EquipmentDisposal of Plant and Equipment

Journalize disposal by: Journalize disposal by:


9-28

If Cash > BV, record a gain (credit).

If Cash < BV, record a loss (debit).

If Cash = BV, no gain or loss.

If Cash > BV, record a gain (credit).

If Cash < BV, record a loss (debit).

If Cash = BV, no gain or loss.

Recording cashreceived (debit).Recording cashreceived (debit).






or loss (debit).


or loss (debit).



9-29

On September 30, 2007, Evans Company sells a machine that originally cost $100,000 for

$60,000 cash. The machine was placed in service on January 1, 2002. It has been

depreciated using the straight-line method with an estimated salvage value of $20,000 and an

estimated useful life of 10 years.

Let’s answer the following questions.

On September 30, 2007, Evans Company sells a machine that originally cost $100,000 for

$60,000 cash. The machine was placed in service on January 1, 2002. It has been

depreciated using the straight-line method with an estimated salvage value of $20,000 and an

estimated useful life of 10 years.

Let’s answer the following questions.



9-30

The amount of depreciation recorded on September 30, 2007,

to bring depreciation up to date is:

a. $8,000.

b. $6,000.

c. $4,000.

d. $2,000.

The amount of depreciation recorded on September 30, 2007,

to bring depreciation up to date is:

a. $8,000.

b. $6,000.

c. $4,000.

d. $2,000.

Annual Depreciation:($100,000 - $20,000) ÷ 10 Yrs. = $8,000

Depreciation to Sept. 30:9/12 × $8,000 = $6,000



9-31

After updating the depreciation, the machine’s book value on September 30, 2007, is:

a. $54,000.

b. $46,000.

c. $40,000.

d. $60,000.

After updating the depreciation, the machine’s book value on September 30, 2007, is:

a. $54,000.

b. $46,000.

c. $40,000.

d. $60,000.

Cost 100,000$ Accumulated Depreciation: (5 yrs. × $8,000) + $6,000 = 46,000

Book Value 54,000$

Cost 100,000$ Accumulated Depreciation: (5 yrs. × $8,000) + $6,000 = 46,000

Book Value 54,000$



9-32

The machine’s sale resulted in:

a. a gain of $6,000.

b. a gain of $4,000.

c. a loss of $6,000.

d. a loss of $4,000.

The machine’s sale resulted in:

a. a gain of $6,000.

b. a gain of $4,000.

c. a loss of $6,000.

d. a loss of $4,000. Cost 100,000$ Accum. Depr. 46,000 Book value 54,000$ Cash received 60,000 Gain 6,000$



9-33


Prepare the journal entry to record the sale.

Prepare the journal entry to record the sale.


9-34

On May 30, 2007, Essex Company On May 30, 2007, Essex Company exchanges a used airplane and $35,000 exchanges a used airplane and $35,000 cash for a new airplane. The old airplane cash for a new airplane. The old airplane

originally cost $40,000, had up-to-date originally cost $40,000, had up-to-date accumulated depreciation of $30,000, and accumulated depreciation of $30,000, and

a fair value of $4,000. a fair value of $4,000.

On May 30, 2007, Essex Company On May 30, 2007, Essex Company exchanges a used airplane and $35,000 exchanges a used airplane and $35,000 cash for a new airplane. The old airplane cash for a new airplane. The old airplane

originally cost $40,000, had up-to-date originally cost $40,000, had up-to-date accumulated depreciation of $30,000, and accumulated depreciation of $30,000, and

a fair value of $4,000. a fair value of $4,000.

Trading in Used Assets for New Ones



9-35

The exchange resulted in a:

a. gain of $6,000.

b. loss of $6,000.

c. loss of $4,000.

d. gain of $4,000.

The exchange resulted in a:

a. gain of $6,000.

b. loss of $6,000.

c. loss of $4,000.

d. gain of $4,000.

Cost 40,000$ Accum. Depr. 30,000

Book Value 10,000$ Fair Value 4,000

Loss 6,000$

Prepare a journal entry to record the exchange.




9-36



Prepare the journal entry to record the trade.

Prepare the journal entry to record the trade.


9-37

Plant Transactions and theStatement of Cash Flows

Plant Transactions and theStatement of Cash Flows

Cash payments for plant assets represent a cash Cash payments for plant assets represent a cash outflow for investing activities on the statement of outflow for investing activities on the statement of cash flows. A disposal of a plant asset for cash cash flows. A disposal of a plant asset for cash

results in a cash inflow to the company.results in a cash inflow to the company.

Cash payments for plant assets represent a cash Cash payments for plant assets represent a cash outflow for investing activities on the statement of outflow for investing activities on the statement of cash flows. A disposal of a plant asset for cash cash flows. A disposal of a plant asset for cash

results in a cash inflow to the company.results in a cash inflow to the company.

Depreciation is a Depreciation is a non-cash charge to non-cash charge to income and has no income and has no

effect on cash flows.effect on cash flows.


9-38

Other Depreciation MethodsOther Depreciation Methods

Units-of-Output Method

Cost – Residual ValueCost – Residual ValueEstimated Units of OutputEstimated Units of Output

Depreciation costDepreciation costper unit of outputper unit of output==

MACRSModified Accelerated Cost Recovery System

The depreciation system used on federalThe depreciation system used on federalincome tax returns. It is an accelerated method.income tax returns. It is an accelerated method.


9-39

Other Depreciation MethodsOther Depreciation Methods

Sum-of-the-Years’ Digits Method

In general, depreciation calculated under this In general, depreciation calculated under this accelerated method falls between the double-accelerated method falls between the double-declining amount and 150-percent-declining declining amount and 150-percent-declining method. It is not used by many companies method. It is not used by many companies because the computations are complex.because the computations are complex.

In general, depreciation calculated under this In general, depreciation calculated under this accelerated method falls between the double-accelerated method falls between the double-declining amount and 150-percent-declining declining amount and 150-percent-declining method. It is not used by many companies method. It is not used by many companies because the computations are complex.because the computations are complex.


9-40

A survey of 600 Publicly Owned Corporations

579

22

5

44

32

9

Straight-line

Declining-balance

Sum-of-the-years'-digits

Accelerated methods (not specified)

Units-of-output

Other

A survey of 600 Publicly Owned Corporations

579

22

5

44

32

9

Straight-line

Declining-balance

Sum-of-the-years'-digits

Accelerated methods (not specified)

Units-of-output

Other

Depreciation Methods in Use:A Survey

Depreciation Methods in Use:A Survey

© the mcgraw-hill companies, inc., 2008 mcgraw-hill/irwin 9-1 plant and intangible assets chapter 9

Documents

cost slide

mcgrawhill companies

cost of heat

cost of plant assets

acquisition cost

shipping cost

buildings cost

total cost