Post on 17-Dec-2015
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Accounting for Property,
Plant Equipment, and Intangible Assets
Chapter 17
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Assets that benefit more than oneaccounting period must be capitalized.
Property, Plant, and Equipment
To capitalize is to debit anasset for the original cost.
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Calculating the cost of an asset.
Learning Objective 1
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Types of Long-Term Assets
Tangible assets:
– land
– buildings
– equipment
Tangible assets:
– land
– buildings
– equipment
Intangible assets:
– patents
– copyrights
– franchises
– goodwill
Intangible assets:
– patents
– copyrights
– franchises
– goodwill
Natural resources: timber, oil, coalNatural resources: timber, oil, coal
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Learning Unit 17-1
What is included in the cost of an asset? Purchase price of the asset plus all costs
necessary to place the asset into service. It does not include the cost of negligence. Cash discounts are deducted from the price. Debit the asset account and credit Cash
and/or Liabilities to record the asset.
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Learning Unit 17-1
Debiting an asset account instead of expensing the cost is called capitalization.
The cost of the asset will be allocated to periods of use to be matched with revenue of those periods.
This process is called depreciation.
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Learning Unit 17-1
The cost of driveways, shrubbery, paving of parking lots, sprinkler systems, light poles, etc., have a limited useful life.
These assets would be depreciated over that useful life.
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Learning Unit 17-1
The cost of land includes related costs of surveying, commissions, title searches, and clearing. In other words, any cost necessary to prepare it for its designated purpose.
Land has an unlimited useful life, so it is not depreciated.
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Calculating depreciationusing one of four methods:
straight-line,declining-balance,
units-of-production,and sum-of-the-years’-
digits.
Learning Objective 2
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Learning Unit 17-2
What are the different depreciation methods? 1 Straight-line 2 Double declining-balance 3 Units-of-production 4 Sum-of-the-years’ digits MACRS – Modified Accelerated Cost
Recovery System
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Learning Unit 17-2
Melvin Company purchased a delivery truck on January 1, 200x for $20,000.
The company expects the van to have a residual value of $2,000 at the end of its useful life.
The truck has an estimated service life of 90,000 miles or 5 years.
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Learning Unit 17-2
The straight-line method assigns an equal amount of depreciation expense to each year.
(Cost – Residual value) ÷ Useful life in yearsDepreciation:($20,000 – $2,000) ÷ 5 = $18,000 ÷ 5 = $3,600
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Learning Unit 17-2
Year 1 AccumulatedDepreciation Depreciation
200x $3,600 $3,600 200x
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Learning Unit 17-2
(Cost – Residual value) ÷ Years of useful life ($20,000 – 2,000) ÷ 5 = $18,000 ÷ 5 = $3,600
Year 1 depreciation: $ 3,600 Year 2 depreciation: $ 3,600 Year 3 depreciation: $ 3,600 Year 4 depreciation: $ 3,600 Year 5 depreciation: $ 3,600 Total depreciation: $18,000
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Learning Unit 17-2
The double declining-balance method is an accelerated depreciation method.
It writes off a relatively larger amount of the asset’s cost nearer the start of its useful life than the straight-line method does.
100% ÷ 5 = 20% The double declining balance is two times
the straight-line rate, or 40%
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Learning Unit 17-2
The book value is the unexpired portion of the cost of an asset.
What is the book value of the truck at the end of the first year?
$20,000 40% = $8,000 $20,000 – $8,000 = $12,000
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Learning Unit 17-2
The units-of-production method assigns a fixed amount of depreciation to each unit of output or service produced by the plant asset.
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Learning Unit 17-2
Depreciation per unit: (Cost – Residual value) ÷ Useful life in units ($20,000 – $2,000) ÷ 90,000 miles $18,000 ÷ 90,000 miles = $.20/mile
How much is the depreciation expense if the van was driven 30,000 miles the first year?
30,000 miles × $.20 ÷ mile = $6,000
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Learning Unit 17-2
Depreciation @ $.20/mile:
Year 1: 30,000 miles = $ 6,000 Year 2: 21,000 miles = $ 4,200 Year 3: 15,000 miles = $ 3,000 Year 4: 5,000 miles = $ 1,000 Year 5: 19,000 miles = $ 3,800 Total: 90,000 miles =$18,000
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Learning Unit 17-2
The sum-of-the -years’ digits method formula follows:
N is the Numerator = number of years of life remaining
D is the Denominator = sum of the year’s digits divided by two = [N(N + 1) ÷ 2]
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Learning Unit 17-2
What is the book value of the truck at the end of the first year?
$18,000 × 5 ÷ 15 = $6,000 $20,000 – $6,000 = $14,000
What is the book value of the truck at the end of the second year?
$18,000 4 ÷ 15 = $4,800 $20,000 – $10,800 = $9,200
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Calculating depreciationfor tax purposes using
theModified Accelerated
Cost Recovery System.
Learning Objective 3
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Learning Unit 17-2
MACRS stands for Modified Accelerated Cost Recovery System.
Class asset life is determined. Depreciation rates are found in the relevant
table provided by the IRS. Listed property items are those which are
subject to personal use such as computers and automobiles.
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Explaining the difference between
capital expenditures and revenue expenditures.
Learning Objective 4
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Learning Unit 17-3
What are capital expenditures?– original cost of assets– additions or enlargements– extraordinary repair or betterment All capital expenditures, except for land,
are debited to asset accounts and depreciated.
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Categories of Capital ExpendituresCategories of Capital Expenditures
Additions or Enlargements:(charged to asset account)Additions or Enlargements:(charged to asset account)
Extraordinary Repairs:(charged to accumulated depreciation)
Extraordinary Repairs:(charged to accumulated depreciation)
Betterments:(charged to asset account)
Betterments:(charged to asset account)
Learning Unit 17-3
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Learning Unit 17-3
What are revenue expenditures?– another name for expenses– payments made for ordinary maintenance These payments occur often. All payments are debited to expense
accounts.
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Learning Objective 5
Journalizing entries for discarding,
selling, or exchanging plant assets.
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Learning Unit 17-3
How does a company dispose of its plant assets?
– discarding– selling– exchanging for similar plant assets
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Learning Unit 17-3
Boulder Company is disposing of a $7,000 truck with no residual value.
The truck has been fully depreciated.What is the entry?Accumulated Depreciation 7,000
Truck 7,000
Assume that the accumulated depreciation on the truck is $6,000.
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Loss on Disposal 1,000Accumulated Depreciation 6,000
Truck 7,000
Loss on Disposal 1,000Accumulated Depreciation 6,000
Truck 7,000
What is the entry?What is the entry?
Learning Unit 17-3
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Dissimilar assets exchange:Gain/loss is recognized inthe same manner as ifthe asset were sold.
Dissimilar assets exchange:Gain/loss is recognized inthe same manner as ifthe asset were sold.
Similar assets exchange: No gain is recognized.Gain is absorbed intothe new asset.
Similar assets exchange: No gain is recognized.Gain is absorbed intothe new asset.
The IRS allows neithera gain nor a loss to be
recognized onsimilar exchanges.
The IRS allows neithera gain nor a loss to be
recognized onsimilar exchanges.
Learning Unit 17-3
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Learning Objective 6
Explaining amortization andhow it applies to intangible
assets.
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Learning Unit 17-4
The cost of original intangible asset rights is allocated over the life of the asset in terms of estimated units of total production over the life of the asset.
Depletion method is similar to units of production depreciation method.
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Learning Unit 17-4
Amortization is the allocation of the cost of original asset rights over the shorter of 40 years, legal life, or useful life of the asset.
Patents – life of patent or 17 years Copyrights – useful life or 50 years Franchises – life of franchise or 40 years Goodwill – usually 40 years
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End of Chapter 17