Post on 17-Jan-2016
Chapter 9-1
REPORTING AND ANALYZING LONG-LIVED ASSETS
9
Chapter 9-2
Plant assets are resources that have
have physical substance (a definite size and shape),
intangible assets (no physical substance) start on slide 29
are used in the operations of a business,
are not intended for sale to customers (not inventory),
are expected to provide service to the company for a
number of years, except land which is expected to last
indefinitely (it does not decline in service over time).
Plant Assets – Property, Plant & EquipmentPlant Assets – Property, Plant & EquipmentPlant Assets – Property, Plant & EquipmentPlant Assets – Property, Plant & Equipment
Sometimes referred to as PP&E; Property; Property, Plant, and Equipment; Plant and Equipment; or Fixed Assets.
Chapter 9-3
The Cost Principle - requires that companies record plant
assets at cost (what you paid for it)…. Plus, all the costs
necessary to make it ready for its intended use.
Determining the Determining the CostCost of Plant Assets of Plant AssetsDetermining the Determining the CostCost of Plant Assets of Plant Assets
Revenue expenditures – when the useful life is 1 year or less,
costs are expensed immediately and go on the Income
Statement (e.g., changing the trucks oil, window wipers, etc.)
Capital expenditures – when the useful life is longer than 1
year, costs are added directly into the asset account and
expensed (depreciated) over time. The costs are recorded on
the Balance Sheet (e.g., the total cost to buy a truck).
Chapter 9-4
Debit the land account for all the necessary costs incurred in making land ready for its intended use.
Land (does not get depreciated because it rarely declines in service over its useful life, see slide 13).
Determining the Determining the CostCost of Land of LandDetermining the Determining the CostCost of Land of Land
Costs typically include the cash purchase price, plus
- closing costs such as title and attorney’s fees,
- real estate brokers’ commissions, and
- unpaid (accrued) property taxes, if any, and other
liens assumed by the purchaser.
- costs to remove unwanted buildings/fixtures net of
any proceeds from salvaging, plus any clearing,
draining, filling or grading the land for use.
Chapter 9-5
Assume Papa Ron’s buys land (property, real estate) at a
cash cost of $100,000. The property contains an old house
that’s removed at a cost of $7,500 less $1,500 cash from
selling some salvaged materials for a net cost of $6,000!
Additional costs (expenditures) are a $1,000 attorney’s fee to
clear the title and a $8,000 real estate broker’s commission.
What amount should Papa Ron’s report as the cost of the
land? See the next slide…
Determining the Cost of Determining the Cost of LandLandDetermining the Cost of Determining the Cost of LandLand
Chapter 9-6
What amount should be reported on Papa Ron’s balance sheet as the cost of the land.
Determining the Cost of Determining the Cost of LandLandDetermining the Cost of Determining the Cost of LandLand
Cash price of property
Net removal cost of house (7,500 – 1,500)
Attorney's fees 1,000
6,000
$100,000
$115,000Cost of the Land!
Real estate broker’s commission 8,000
The Net cost of removal is $6,000. $7,500 in removal costs less the $1,500 cash (proceeds) from selling the salvaged materials.
Chapter 9-7
These include all the costs (expenditures) necessary to make
the improvements ready for their intended use. They’re
depreciated over time just like buildings, vehicles, or machinery.
If the useful life is 1 year or less (annual flowers), expense the
cost immediately (revenue expenditures).
If the useful life is longer than 1 year, we depreciate the cost
over its useful life, for example paving parking lots, landscaping,
fences, street lights (capital expenditures).
Land Improvements are depreciated. (Remember the land itself is not depreciated)
Determining the Cost of LandDetermining the Cost of Land ImprovementsImprovementsDetermining the Cost of LandDetermining the Cost of Land ImprovementsImprovements
Chapter 9-8
Equipment includes the all costs related to its purchase
and preparing it for its intended use. Equipment gets
depreciated over its useful life. Costs typically include:
Cash purchase price.
Sales taxes.
Freight charges if FOB Shipping
Insurance during transit if paid by the purchaser
Additional costs if required or necessary to assemble, install, and test the unit
Determining the Cost of Determining the Cost of EquipmentEquipmentDetermining the Cost of Determining the Cost of EquipmentEquipment
Chapter 9-9
Papa Ron’s purchases a truck at a cash price of $22,000. Related
capital expenditures necessary to prepare the truck for its intended
use are sales taxes $1,320, and permanent painting & lettering $500.
Related revenue expenditures (limited use), include a truck vehicle
license $80, and a 3 year prepaid auto insurance policy $1,500. The
cost of the truck does not include these last two (see next slide):
Determining the Cost of EquipmentDetermining the Cost of Equipment
Cash price (necessary)
Sales taxes (necessary)
Painting and lettering (necessary) 5001,320
$22,000
$23,820Cost of the Truck
Remember - The Sales Taxes and Painting & Lettering are capital expenditures. The others are revenue expenditures.
Chapter 9-10
The entry to record Papa Ron’s truck purchase and all the other
related costs include: the truck cost of $23,820 (from prior slide)
and the additional revenue expenses: the $80 motor vehicle
license, and the $1,500 3-year insurance policy.
Determining the Determining the CostCost of Equipment of EquipmentDetermining the Determining the CostCost of Equipment of Equipment
Equipment – Truck (see prior slide) 23,820
License expense (limited use) 80
Prepaid insurance (limited use) 1,500
Cash 25,400
The $23,820 cost of the Equipment was calculated on the prior slide. Note the license & insurance are not considered part of the truck’s cost
Chapter 9-11
Buildings include all the costs related to its purchase or its construction, preparing it for its intended use. Buildings usually get depreciated over long periods of time (years).
Purchase costs - if you’re buying it:
Purchase price, closing costs, attorney’s fees, title
insurance, and real estate broker’s commission.
Remodeling, replacing or repairing the roof, floors,
electrical wiring, and plumbing.
Construction costs - if you’re building it:
Contract price plus payments for architects’ fees,
permits, and excavation costs.
(Buildings are not on the exam).
Determining the Cost of Determining the Cost of BuildingsBuildingsDetermining the Cost of Determining the Cost of BuildingsBuildings
Chapter 9-12
All leases are classified as either operating leases (you do not own the asset) or capital leases (you will own the asset)!
A lease is a contractual agreement in which the owner of an asset (lessor) allows another party (lessee) to use the asset for a period of time at an agreed price.
Operating leases – you do not own the asset which is
eventually returned and the cost is simply expensed on the
income statement. Some advantages of operating leases
are: reduced risk of obsolescence, little or no down payment,
assets and liabilities are not reported.
Capital leases – lessees will eventually own the asset and
record the asset and the related liability on the balance
sheet. Basically, the seller (the lessor) is financing the
purchase by the buyer (the lessee).
Operating vs. Capital LeasesOperating vs. Capital Leases
Chapter 9-13
Impairments are a permanent decline in the fair value of an
owned asset. In order not to overstate the asset’s value on the
balance sheet, the company adjusts the asset down to its new
fair value in the year the decline occurs by recording a loss.
Using land as an example when a very rare event occurs:
Loss on Impairment $$$
Land (or Equipment or Buildings) $$$
Impairments
Accounting for Impairment of Plant AssetsAccounting for Impairment of Plant Assets
Chapter 9-14
Why? A building with a useful life of 30 years would
distort the I/S if it was all expensed at once. The
accounting principle is that each year of the useful life
should share the expense.
Depreciation is the process of allocating the cost (called cost
allocation) of a plant asset to an expense account over its useful
service life in a rational and systematic manner (instead of
expensing it all in one year). This applies to buildings, equipment,
and land improvements (remember we do not depreciate land).
Accounting for Depreciation of Plant AssetsAccounting for Depreciation of Plant Assets
Chapter 9-15
Factors in Computing Depreciation
Cost Useful Life Salvage Value
Accounting for Accounting for DepreciationDepreciation of Plant Assets of Plant AssetsAccounting for Accounting for DepreciationDepreciation of Plant Assets of Plant Assets
Chapter 9-16
Management selects the method it believes best measures
an asset’s contribution to revenue over its useful life.
Depreciation Methods
Examples include the:
(1) Straight-line method.
(2) Units-of-activity method
(3) Declining-balance method.
SO 3SO 3
Accounting for Plant AssetsAccounting for Plant AssetsAccounting for Plant AssetsAccounting for Plant Assets
Chapter 9-17
Papa Ron’s Pizza purchased a delivery truck on Jan. 1,
2014.
Compute depreciation using the following methods:
(a) Straight-Line (b) Units-of-Activity (c) Declining Balance
Accounting for Accounting for DepreciationDepreciation of Plant Assets of Plant AssetsAccounting for Accounting for DepreciationDepreciation of Plant Assets of Plant Assets
Remember: The salvage value is simply an estimate
of what you’ll get for selling the asset or trading it in
after you’re done using it.
R
RWhose your
daddy?
Papa Ron!
Chapter 9-18
The Straight-Line Method
Expense is same amount for each year.
Depreciable cost = Cost less salvage value.
Accounting for Plant AssetsAccounting for Plant AssetsAccounting for Plant AssetsAccounting for Plant Assets
If the total useful life = 100%, then each year equals 20%
(100% / 5 years) or 1/5 which equals $2,400 per year.
Chapter 9-19
Depreciable Annual Accum. Book
Year Cost x Rate = Expense Deprec. Value
The Straight-Line Method
2014 $ 12,000 20% or 1/5 $ 2,400 $ 2,400 $ 10,600
2015 12,000 20 2,400 4,800 8,200
2016 12,000 20 2,400 7,200 5,800
2017 12,000 20 2,400 9,600 3,400
2018 12,000 20 2,400 12,000 1,000
2014 Journal Entry
Depreciation expense 2,400
Accumulated depreciation2,400
Accounting for Plant AssetsAccounting for Plant AssetsAccounting for Plant AssetsAccounting for Plant Assets
The book value is the original $13,000 cost less the Accumulated Depreciation at any given point in time.
Chapter 9-20
Accounting for Plant AssetsAccounting for Plant AssetsAccounting for Plant AssetsAccounting for Plant Assets
CurrentDepreciable Annual Partial Year Accum.
Year Cost Rate Expense Year Expense Deprec.
2014 12,000$ x 20% = 2,400$ x 9/12 = 1,800$ 1,800$
2015 12,000 x 20% = 2,400 2,400 4,200
2016 12,000 x 20% = 2,400 2,400 6,600
2017 12,000 x 20% = 2,400 2,400 9,000
2018 12,000 x 20% = 2,400 2,400 11,400
2019 12,000 x 20% = 2,400 x 3/12 = 600 12,000
12,000$
Journal entry:
2014 Depreciation expense 1,800
Accumulated depreciation 1,800
If the truck was purchased on April 1, 2014, only 9 months are depreciated in the 1st year with 3 months left for the last year!
The Straight-Line Method for a Partial Year!
Chapter 9-21
Units of Activity Method (not on exam)
Acct. for Plant Assets – Units of ActivityAcct. for Plant Assets – Units of ActivityAcct. for Plant Assets – Units of ActivityAcct. for Plant Assets – Units of Activity
Depreciation expense may depend on usage. Remember the
depreciable cost is only $12,000 – not $13,000 ($1,000 salvage).
A truck driven 15,000 miles in year 1 would have $1,800 of depreciation
expense (15,000/100,000 = 15% and 15% of $12,000 = $1,800).
If driven 30,000 miles in year 2 the expense would be $3,600 (30,000/100,000
= 30% and 30% of $12,000 is $3,600. Repeated until accumulation
depreciation reaches $12,000 and only the $1,000 of salvage value remains.
Chapter 9-22
Declining Balance Method (not on the exam)
Acct. for Plant Assets – Declining BalanceAcct. for Plant Assets – Declining BalanceAcct. for Plant Assets – Declining BalanceAcct. for Plant Assets – Declining Balance
This is an accelerated method. It expenses a greater
amount in the early years and smaller amounts in
succeeding years over the asset’s useful life. Why?
Because in many cases, the revenue-producing ability of
the asset usually declines over its useful life.
A double declining-balance rate (DDB) is double the
straight-line rate. So a useful life of 5 years would have a
20% straight line rate per year while the DDB rate would
be a 40% rate per year. Each year, the DBB rate is
applied to the remaining book value.
Chapter 9-23
Comparison of Depreciation
Methods
Accounting for Plant AssetsAccounting for Plant AssetsAccounting for Plant AssetsAccounting for Plant Assets
Each method is acceptable because each recognizes the
decline in service potential of the asset
in a rational and systematic manner.
Chapter 9-24
Companies can dispose of plant assets in three ways:
Sale, Retirement, or Exchange (Trading it in)
First: Record depreciation up to the date of disposal.
Second: remove the asset by (1) debiting Accumulated Depreciation, and (2) crediting the asset account.
Third: Debit any cash received (or credit any cash paid out) See next slide to calculate possible Gains or Losses!
Plant Asset Disposals
Accounting for Plant Assets - DisposalsAccounting for Plant Assets - Disposals
Chapter 9-25
1st calculate the Book Value! This equals the asset’s
cost less its updated accumulated depreciation at the
time of the sale.
2nd compare the book value with the proceeds (if any).
This is the cash received from the sale.
If the proceeds (the cash) exceed the book value,
a gain on disposal occurs.
If the proceeds (the cash) are less than the book
value, a loss on disposal occurs.
Plant Asset Disposals – Plant Asset Disposals – Gains Gains andand Losses LossesPlant Asset Disposals – Plant Asset Disposals – Gains Gains andand Losses Losses
Chapter 9-26
On July 1, 2014, Papa Ron’s sells office furniture for $16,000
cash. The furniture originally cost $60,000. As of January 1,
2014, it had accumulated depreciation of $41,000. Depreciation
for the first six months of 2014 is $8,000. The 1st thing to do is
prepare the journal entry to record depreciation expense and
update the accumulated depreciation to the date of the sale.
Depreciation expense 8,000
Accumulated depreciation 8,000
July 1
Plant Asset Disposals – Updating DepreciationPlant Asset Disposals – Updating Depreciation
Total accumulated depreciation after the above J/E is now $49,000 (41,000 + 8,000)
Chapter 9-27
Papa Ron’s records the disposal/sale as follows.
Cash 16,000
Accumulated depreciation 49,000
Equipment60,000Gain on disposal
5,000
July 1
Plant Asset Disposals - Plant Asset Disposals - GainGainPlant Asset Disposals - Plant Asset Disposals - GainGain
If proceeds were only $9,000, a “Loss on Disposal” would be debited for $2,000, see next slide
Chapter 9-28
If proceeds were only $9,000? A “Loss on Disposal” would then be debited for $2,000!
Cash 9,000
Accumulated depreciation 49,000
Equipment60,000
July 1
Plant Asset Disposals - Plant Asset Disposals - LossLossPlant Asset Disposals - Plant Asset Disposals - LossLoss
Loss on disposal 2,000
Loss on disposal $ 2,000
Proceeds from sale 9,000
Chapter 9-29
Intangible assets are rights, privileges, and competitive
advantages that result from ownership of long-lived
assets that do not possess physical substance!
Intangible AssetsIntangible AssetsIntangible AssetsIntangible Assets
Patents
Copyrights
Franchises or licenses
Trademarks
Trade names
Goodwill
They can have limited life or an indefinite life
(lasts forever). Common types of intangibles:
Whooo… you
gonna call?
Papa Ron of
course!
Chapter 9-30
Research expenses that
may or may not lead to
patents,
copyrights,
new processes, and
new products.
All R & D costs are expensed when incurred!
WHY? We don’t know if the patent or copyright will ever be granted
Research and Development (R&D) Costs
Intangible Assets – Research & DevelopmentIntangible Assets – Research & Development
Chapter 9-31
Amortization of Intangibles (it’s like depreciation)
Limited-Life Intangibles:
Debit Amortization Expense and credit the
Intangible Asset account (e.g., credit “Patents”).
Accounting for Intangible AssetsAccounting for Intangible AssetsAccounting for Intangible AssetsAccounting for Intangible Assets
Indefinite-Life Intangibles:
If the asset is expected to provide benefits forever,
(like land) then no amortization is taken; it stays on
the books forever or until a impairment (a
permanent decline in value) adjustment is made.
Chapter 9-32
Exclusive right to manufacture, sell, or otherwise control an
invention for a period of 20 years from the date of the grant
(light bulbs, computers, cookware, drugs)
The costs of purchasing a patent are amortized over 20
years or its useful life, whichever is shorter.
Any legal fees incurred to successfully obtain and defend a
patent are added (capitalized) to the patent account.
Note: All R&D costs in developing the patent are expensed!
Intangible Assets - Intangible Assets - PatentsPatentsIntangible Assets - Intangible Assets - PatentsPatents
Chapter 9-33
NBC Labs purchased a patent at a cost of $60,000 on June 30,
It estimates the useful life of the patent to be 8 years (which is
shorter than 20 years). The entry to record the straight-line
amortization for the 6 month period ended December 31:
Amortization expense (1/2 year) 3,750
Patent 3,750
Cost $60,000Useful life divide by 8
Annual expense $ 7,5006 months x 6/12
Amortization $ 3,750
Dec. 31
Amortization Expense - PatentsAmortization Expense - Patents
A full year’s expense would be the $7,500
Chapter 9-34
Gives the owner the exclusive right to reproduce & sell an
artistic or published work: musical compositions &
recordings, movies, software, paintings, performances, etc.
Granted for the creator's life, plus an additional 70 years.
Capitalize the total costs of acquiring and defending it and
amortize to expense over its useful life (like Patents).
Intangible Assets - Intangible Assets - CopyrightsCopyrightsIntangible Assets - Intangible Assets - CopyrightsCopyrights
Don’t
Chapter 9-35
A word, phrase, jingle, or symbol that identifies a
particular enterprise or product.
► Wheaties, Coca-Cola, Disney, Monopoly, Sunkist,
Kleenex, Pepsi, McDonalds, etc.
Legal protection for an indefinite number of 20 year
renewal periods – no amortization!
Capitalize the acquisition costs.
Intangible Assets – Trademarks & Trade NamesIntangible Assets – Trademarks & Trade Names
Chapter 9-36
Contractual arrangement between a franchisor and a
franchisee - Toyota, Subway and Marriott have
franchises.
Franchises (or licenses) with a limited life should be
amortized to expense over the life of the franchise.
Franchises with an indefinite life should be carried at cost
and not amortized.
Intangible Assets – Franchises and LicensesIntangible Assets – Franchises and Licenses
Chapter 9-37
Goodwill is recorded as the excess of the purchase price over
the fair market value of the net assets acquired (assets less
liabilities). For example, if you pay $100,000 for the net assets
(Assets less Liabilities) of a business that are $85,000, then
$15,000 is for Goodwill!
Why would anyone pay more than the fair value for the net
assets of a business? The reasons include exceptional
management, desirable location, good customer relations, skilled
employees, high-quality products, remove competition, etc.
Intangible Assets - Intangible Assets - GoodwillGoodwillIntangible Assets - Intangible Assets - GoodwillGoodwill
Chapter 9-38
Papa Ron’s Pizza purchased an oven for $130,000 June 1, 2014. The expected salvage value is $10,000, the expected useful life is 10 years. Required: Use the straight line method to record J/E for first 2 years.
Calculate: The depreciable cost is $120,000. Divide that by 10 years and you get depreciation of $12,000 per year. Year 1 is a partial year; Papa Ron will have the oven for only 7 months (June to December). So year 1 is $12,000 x 7/12 or $7000. Year 2 is a full year or $12,000.
Year 1: Dep. Exp. 7000 Year 2: Dep. Exp. 12,000
Accu. Dep. 7000 Accum. Dep. 12,000
Accumulated Depreciation at the end of Year 2 is $19,000. The book value would be $130,000 less $19,000 or $111,000.
If asset is sold after year 2 and the proceeds were $115,000 the gain would be $4,000. If proceeds were $91,000 the loss would be $20,000!
Equipment Depreciation & Sale – See BE 9-8Equipment Depreciation & Sale – See BE 9-8Equipment Depreciation & Sale – See BE 9-8Equipment Depreciation & Sale – See BE 9-8
Chapter 9-39
Match the term most directly associated with each
statement.
Copyright Amortization
Intangible assets Franchise
Research and development costs
1. The allocation to expense of the cost of an intangible
asset over the asset’s useful life.
2. Rights, privileges, and competitive advantages that
result from the ownership of long-lived assets that do
not possess physical substance.
3. An exclusive right granted by the federal government
to reproduce and sell an artistic or published work.
Amortization
Intangible assets
Copyrights
LO 7 Identify the basic issues related to reporting intangible assets.
Chapter 9-40
Match the term most directly associated with each
statement.
Copyright Amortization
Intangible assets Franchise
Research and development costs
4. A right to sell certain products or services or to use
certain trademarks or trade names within a
designated geographic area.
5. Costs incurred by a company that often lead to
patents or new products. These costs must be
expensed as incurred.
Franchise
Research and development
costs
LO 7 Identify the basic issues related to reporting intangible assets.