chapter 8 accounting for long-term assets. called property, plant, & equipment plant assets...
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Called Property, Plant, & EquipmentCalled Property, Plant, & Equipment
Plant Assets
Expected to Benefit Future PeriodsExpected to Benefit Future Periods
Actively Used in OperationsActively Used in Operations
Tangible in NatureTangible in Nature
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Plant Assets
Plant Assets as a Percent of Total Assets
9%
54% 55%
74%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
eBay Wal-Mart Anheuser-Busch
McDonald's
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Noncurrent assetswithout physicalsubstance.
Noncurrent assetswithout physicalsubstance.
Useful life isoften difficultto determine.
Useful life isoften difficultto determine.
Usually acquired for operational use.
Usually acquired for operational use.
IntangibleAssets
IntangibleAssets
Often provideexclusive rightsor privileges.
Often provideexclusive rightsor privileges.
Intangible AssetsP6
Decline in asset value over its useful life
Use2. Allocate cost to periods benefited.3. Account for subsequent expenditures.
Use2. Allocate cost to periods benefited.3. Account for subsequent expenditures.
Disposal 4. Record disposal. Disposal 4. Record disposal.
Plant Assets
Acquisition1. Compute cost. Acquisition1. Compute cost.
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AcquisitionCost
AcquisitionCost
Acquisition cost excludes financing charges and
cash discounts.
Acquisition cost excludes financing charges and
cash discounts.
All expenditures
needed to prepare the asset for its intended use
All expenditures
needed to prepare the asset for its intended use
Purchaseprice
Purchaseprice
Cost DeterminationP1
Land is not depreciable.Land is not depreciable.
Purchaseprice
Purchaseprice
Real estatecommissionsReal estate
commissions
Title insurance premiumsTitle insurance premiums
Delinquenttaxes
Delinquenttaxes
Surveyingfees
Surveyingfees
Title search and transfer feesTitle search and transfer fees
LandP1
Land Improvements
Parking lots, driveways, fences, walks, shrubs, and lighting systems.
Parking lots, driveways, fences, walks, shrubs, and lighting systems.
Depreciate over useful life of
improvements.
P1
Cost of purchase or construction
Cost of purchase or construction
Brokeragefees
Brokeragefees
TaxesTaxes
Title feesTitle fees
Attorney feesAttorney fees
BuildingsP1
Purchaseprice
Purchaseprice
Installing,assembling, and
testing
Installing,assembling, and
testing
Insurance whilein transit
Insurance whilein transit
TaxesTaxes
Transportationcharges
Transportationcharges
Machinery and EquipmentP1
Depreciation is the process of allocating the cost of a plant asset to expense in the accounting periods benefiting from its use.
Depreciation is the process of allocating the cost of a plant asset to expense in the accounting periods benefiting from its use.
Cost
AllocationAcquisition
CostAcquisition
Cost
(Unused)
Balance Sheet
(Used)
Income Statement
ExpenseExpense
DepreciationC2
The calculation of depreciation requires three amounts for each asset:
1. Book Value.
2. Salvage Value.
3. Useful Life.
Factors in Computing Depreciation
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On January 1, 2007, equipment was purchased for $50,000 cash. The equipment has an estimated useful life of 5 years and an estimated residual value of $5,000.
Cost - Salvage Value
Useful life in periods
Depreciation
Expense for Period=
Straight-Line MethodP2
Straight-Line Method
Cost - Salvage Value
Useful life in periods
Depreciation
Expense for Period=
$9,000 Depreciation
Expense per Year=
$50,000 - $5,000
5 years=
Dr. Cr.Depreciation Expense 9,000
Accumulated Depreciation - Equipment 9,000 To record annual depreciation
P2
Depreciation AccumulatedExpense Depreciation Accumulated Book
Year (debit) (credit) Depreciation Value50,000$
2007 9,000$ 9,000$ 9,000$ 41,000 2008 9,000 9,000 18,000 32,000 2009 9,000 9,000 27,000 23,000 2010 9,000 9,000 36,000 14,000 2011 9,000 9,000 45,000 5,000
45,000$ 45,000$
Salvage ValueSalvage Value
Straight-Line Method
DepreciationRate
= (100% ÷ 5 years) = 20% per year
P2
Dep
reci
atio
n
Exp
ense Depreciation Expense
reported on theIncome Statement.
$0$1,000
$3,000
$5,000
$7,000
$9,000
2007 2008 2009 2010 2011
For the year ended December 31
Book Valuereported on theBalance Sheet.
$41,000
$32,000
$23,000
$14,000
$5,000
$-
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
$45,000
2007 2008 2009 2010 2011
For the year ended December 31
Bo
ok
Val
ue
P2
Units-of-Production Method
Step 2:Depreciation Expense =
DepreciationPer Unit
×Number of
Units Producedin the Period
DepreciationPer Unit
= Cost - Salvage Value Total Units of Production
Step 1:
P2
On December 31, 2007, equipment was purchased for $50,000 cash. The equipment is expected to produce 100,000 units during its useful life and has an estimated salvage value of $5,000.
If 22,000 units were produced in 2008, whatis the amount of depreciation expense?
On December 31, 2007, equipment was purchased for $50,000 cash. The equipment is expected to produce 100,000 units during its useful life and has an estimated salvage value of $5,000.
If 22,000 units were produced in 2008, whatis the amount of depreciation expense?
Units-of-Production MethodP2
Step 2:Depreciation Expense = $.45 per unit × 22,000 units = $9,900
Step 1:Depreciation
Per Unit= $50,000 - $5,000
100,000 units = $.45 per unit
Units-of-Production MethodP2
Depreciation Accumulated BookYear Units Expense Depreciation Value
50,000$ 2008 22,000 9,900$ 9,900$ 40,100 2009 28,000 12,600 22,500 27,500 2010 - - 22,500 27,500 2011 32,000 14,400 36,900 13,100 2012 18,000 8,100 45,000 5,000
100,000 45,000$
No depreciation expense if the equipment is idle.
Units-of-Production MethodP2
Most corporations use the Modified Accelerated Cost Recovery System (MACRS) for tax purposes.
MACRS depreciation provides for rapid write-off of an asset’s cost in order to stimulate new investment.
Most corporations use the Modified Accelerated Cost Recovery System (MACRS) for tax purposes.
MACRS depreciation provides for rapid write-off of an asset’s cost in order to stimulate new investment.
Depreciation for Tax ReportingP2
Reporting Depreciation
Property, plant, and equipment: Land and buildings 150,000$ Machinery and equipment 200,000 Office furniture and equipment 175,000 Land improvements 50,000 Total 575,000$ Less Accumulated depreciation (122,000) Net property, plant, and equipment 453,000$
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Additional Expenditures
If the amounts involved are not material, most companies expense the item.
If the amounts involved are not material, most companies expense the item.
Financial Statement EffectCurrent Current
Treatment Statement Expense Income Taxes
Capital Balance sheetExpenditure account debited Deferred Higher Higher
Revenue Income statement CurrentlyExpenditure account debited recognized Lower Lower
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