principles of accounting/ financial and managerial accounting chapter 09

© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin

Slide 9-1

PLANT AND INTANGIBLE ASSETS

Chapter

9


Slide 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


Slide 9-3

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

Major Categories of Plant AssetsMajor Categories of Plant Assets


Slide 9-4

Acquisition.Allocation of the

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

Sale or disposal.

Acquisition.Allocation of the

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

Sale or disposal.

Accountable EventsAccountable Events


Slide 9-5

Asset price

Asset price

Reasonable and necessary costs . . .

Reasonable and necessary costs . . .

. . . 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

+


Slide 9-6

On May 4, Heat Co., an Ohio maker of stoves, buys a new machine from a Texas company.

The new machine has a price of $52,000. Sales tax was computed at 8%.

Heat Co. pays $500 shipping cost to get the machine to Ohio. After the machine arrives,

set-up costs of $1,300 are incurred, along with $4,000 in testing costs.

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

On May 4, Heat Co., an Ohio maker of stoves, buys a new machine from a Texas company.

The new machine has a price of $52,000. Sales tax was computed at 8%.

Heat Co. pays $500 shipping cost to get the machine to Ohio. After the machine arrives,

set-up costs of $1,300 are incurred, along with $4,000 in testing costs.

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

Determining CostDetermining Cost


Slide 9-7

Prepare the journal entry.

Determining CostDetermining Cost


Slide 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


Slide 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.


Slide 9-10

I think I’ll buy the whole thing; barn, land, and animals.


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


Slide 9-11

CapitalExpenditure

CapitalExpenditure

RevenueExpenditure

RevenueExpenditure

Any material expenditurethat will benefit several

accounting periods.

Any material expenditurethat will benefit several

accounting periods.

To capitalize an expendituremeans to charge it to an

asset account.

To capitalize an expendituremeans to charge it to an

asset account.

Expenditure forordinary repairs

and maintenance.

Expenditure forordinary repairs

and maintenance.

To expense an expendituremeans to charge it to an

expense account.

To expense an expendituremeans to charge it to an

expense account.

Capital Expenditures and Revenue Expenditures

Capital Expenditures and Revenue Expenditures


Slide 9-12

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

The allocation of the cost of a plant asset to expense in the 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


Slide 9-13

Book Value Cost – Accumulated Depreciation

Accumulated Depreciation 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 Depreciation

Accumulated Depreciation Contra-asset Represents the portion of an

asset’s cost that has alreadybeen allocated to expense.

Causes of Depreciation Physical deterioration Obsolescence

DepreciationDepreciation


Slide 9-14

Cost - Residual Value

Years of Useful Life

Depreciation

Expense per Year=

Straight-Line DepreciationStraight-Line Depreciation


Slide 9-15

On January 1, 2003, Bass Co. buys a new boat. Bass Co. pays $24,000 for the boat. The boat has an

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

Compute depreciation for 2003 using the straight-line method.



Compute depreciation for 2003 using the straight-line method.



Slide 9-16

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

life of the boat is:

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

life of the boat is:

Salvage ValueSalvage Value



Slide 9-17

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

prorated.

When an asset is acquired during the year, depreciation 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. ½

Depreciation for Fractional PeriodsDepreciation for Fractional Periods


Slide 9-18

Half-Year ConventionHalf-Year Convention

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

2001, for equipment purchased in 2003. The equipment cost $75,000, has a useful life of 10

years and an estimated salvage 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


Slide 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


Slide 9-20



Compute depreciation for 2003 using the double-declining balance method.



Compute depreciation for 2003 using the double-declining balance method.



Slide 9-21

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

Compute depreciation for the rest of the boat’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.


Slide 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


Slide 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


Slide 9-24


On January 1, 2003, equipment was purchased that cost $30,000, has a useful

life of 10 years and no salvage value. During 2005, the useful life was revised to 8

years total (5 years remaining).

Calculate depreciation expense for the year ended December 31, 2005, using the

straight-line method.

On January 1, 2003, equipment was purchased that cost $30,000, has a useful

life of 10 years and no salvage value. During 2005, the useful life was revised to 8

years total (5 years remaining).

Calculate depreciation expense for the year ended December 31, 2005, using the

straight-line method.


Slide 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, 12/31/2005 ($3,000 per year × 3 years) 9,000 Remaining book value 21,000$ Divide by remaining life ÷ 5Revised annual depreciation 4,200$

Asset cost 30,000$ Accumulated depreciation, 12/31/2005 ($3,000 per year × 3 years) 9,000 Remaining book value 21,000$ Divide by remaining life ÷ 5Revised annual depreciation 4,200$


Slide 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 AssetsImpairment of Assets


Slide 9-27

Update depreciation to the date of disposal.

Update depreciation to the date of disposal.

Recording cashreceived (debit)or paid (credit).


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:


Slide 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.








or loss (debit).


or loss (debit).



Slide 9-29

On September 30, 2003, Evans Map Company sells a machine that originally cost $100,000 for

$60,000 cash. The machine was placed in service on January 1, 1998. 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, 2003, Evans Map Company sells a machine that originally cost $100,000 for

$60,000 cash. The machine was placed in service on January 1, 1998. 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.



Slide 9-30

The amount of depreciation recorded on September 30, 2003,

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, 2003,

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



Slide 9-31

After updating the depreciation, the machine’s book value on September 30, 2003, 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, 2003, 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$



Slide 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$



Slide 9-33

Accounting depends on whetherassets are similar or dissimilar.

Accounting depends on whetherassets are similar or dissimilar.

Airplanefor

Airplane

Airplanefor

Airplane

Truckfor

Airplane

Truckfor

Airplane

Only situations where cash is paid will be demonstrated.

Only situations where cash is paid will be demonstrated.

Trading in Used Assetsfor New Ones



Slide 9-34

Recognize Gains?

Recognize Losses?

Similar Assets and Cash Paid

Yes No

Yes Yes

Dissimilar Assets




Slide 9-35

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.

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

Trading in Used Assetsfor New Ones – Similar Assets



Slide 9-36

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.




Slide 9-37



Prepare the journal entry to record the trade.

Prepare the journal entry to record the trade.


Slide 9-38

Noncurrent assetswithout physical

substance.

Noncurrent assetswithout physical

substance.

Useful life isoften difficultto determine.

Useful life isoften difficultto determine.

Usually acquired for operational

use.

Usually acquired for operational

use.

Often provideexclusive rights

or privileges.

Often provideexclusive rights

or privileges.

Intangible AssetsIntangible Assets

CharacteristicsCharacteristics


Slide 9-39

Patents Copyrights Leaseholds Leasehold

Improvements Goodwill Trademarks and

Trade Names

Record at current cash

equivalent cost, including

purchase price, legal fees, and

filing fees.



Slide 9-40

Amortize over shorter of economiclife or legal life, subject to a maximumof 40 years.

Use straight-line method.

Research and development costs arenormally expensed as incurred.

Amortize over shorter of economiclife or legal life, subject to a maximumof 40 years.

Use straight-line method.

Research and development costs arenormally expensed as incurred.



Slide 9-41

The amount by which thepurchase price exceeds the fair

market value of net assets acquired.

The amount by which thepurchase price exceeds the fair

market value of net assets acquired.

Occurs when onecompany buys

another company.

Occurs when onecompany buys

another company.

Only purchased goodwill is an

intangible asset.

Only purchased goodwill is an

intangible asset.

Intangible Assets – GoodwillIntangible Assets – Goodwill

GoodwillGoodwill


Slide 9-42

Eddy Company paid $1,000,000 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.

Eddy Company paid $1,000,000 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.

Intangible Assets – GoodwillIntangible Assets – Goodwill


Slide 9-43

What amount of goodwill should be recorded on Eddy Company books?

a. $100,000.

b. $200,000.

c. $300,000.

d. $400,000.

What amount of goodwill should be recorded on Eddy Company books?

a. $100,000.

b. $200,000.

c. $300,000.

d. $400,000.

Intangible Assets – GoodwillIntangible Assets – GoodwillIntangible Assets – Goodwill


Slide 9-44

Exclusive right grantedby federal government to sell or

manufacture an invention.

Exclusive right grantedby federal government to sell or

manufacture an invention.

Cost is purchaseprice plus legalcost to defend.

Cost is purchaseprice plus legalcost to defend.

Amortize costover the shorter of

useful life or 17 years.

Amortize costover the shorter of

useful life or 17 years.

Intangible Assets – PatentsIntangible Assets – Patents


Slide 9-45

A symbol, design, or logo associated with a business.

A symbol, design, or logo associated with a business.

Purchasedtrademarks

are recordedat cost, and

amortized overshorter of legal

or economic life,or 40 years.

Internallydevelopedtrademarks

have norecorded

asset cost.

Intangible Assets –Trademarks and Trade Names

Intangible Assets –Trademarks and Trade Names


Slide 9-46

Legally protected right to sell products or provide services purchased by

franchisee from franchisor.

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.

Purchase price is intangible asset which is amortized over the shorter of

the protected right or 40 years.

Intangible Assets – FranchisesIntangible Assets – Franchises


Slide 9-47

Exclusive right granted by the federal government to protect

artistic or intellectual properties.

Exclusive right granted by the federal government to protect

artistic or intellectual properties.

Amortize costover a period not

to exceed 40 years.

Amortize costover a period not

to exceed 40 years.

Legal life islife of creatorplus 50 years.

Legal life islife of creatorplus 50 years.

Intangible Assets – CopyrightsIntangible Assets – Copyrights


Slide 9-48

Total cost,including

exploration anddevelopment,is charged to

depletion expenseover periods

benefited.

Total cost,including

exploration anddevelopment,is charged to

depletion expenseover periods

benefited.

Examples: oil, coal, goldExamples: oil, coal, gold

Extracted fromthe natural

environmentand reportedat cost less

accumulateddepletion.

Extracted fromthe natural

environmentand reportedat cost less

accumulateddepletion.

Natural ResourcesNatural Resources


Slide 9-49

Depletion is calculated using theunits-of-production method.

Unit depletion rate is calculated as follows:

Total Units of Capacity

Cost – Salvage Value

Depletion of Natural ResourcesDepletion of Natural Resources


Slide 9-50

Total depletion cost for a period is:

Unit Depletion

Rate

Number of Units

Extracted in Period×

Totaldepletion

cost

Totaldepletion

cost

Inventoryfor sale

Inventoryfor sale

UnsoldInventory

UnsoldInventory

Cost ofgoods sold

Cost ofgoods sold



Slide 9-51

Specialized plant assets may be required to extract the natural resource.

These assets are recorded in a separate account and depreciated.



Slide 9-52

Cost per Unit

of Output=

Cost - Residual Value

Estimated Units of Output

DepreciationExpense =

Cost per Unit

of Output×

Number of

Units Produced

The Units-of-Output MethodThe Units-of-Output Method


Slide 9-53

MACRS = Modified Accelerated Cost Recovery SystemMACRS = Modified Accelerated Cost Recovery System

Based on Declining-Balance

Methods

Based on Declining-Balance

Methods

Asset Cost × MACRS rateRates are available from tables

provided by the IRS.

Asset Cost × MACRS rateRates are available from tables

provided by the IRS.

The only accelerated method allowed by the IRS when

computing depreciation for tax return purposes.

The only accelerated method allowed by the IRS when

computing depreciation for tax return purposes.

MACRS: The “Tax Method”MACRS: The “Tax Method”


Slide 9-54

A survey of 600 Publicly Owned Corporations

563

44

11

70

53

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

563

44

11

70

53

9

Straight-line

Declining-balance

Sum-of-the-years'-digits

Accelerated methods (not specified)

Units-of-output

Other

Which Depreciation MethodsDo Most Businesses Use?

Which Depreciation MethodsDo Most Businesses Use?


Slide 9-55

End of Chapter 9End of Chapter 9

principles of accounting/ financial and managerial accounting chapter 09

Education

revising depreciation

intangible

balance method

line method

similar assets

line depreciation

hill companies

federal government