Post on 31-Dec-2015
• Plant Assets -Long-lived assets acquired for use in business operations.
• Major Categories of Plant Assets– Tangible Plant Assets– Intangible Assets– Natural Resources
• Accountable Events• Acquisition of Plant Assets
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• Determining Cost• Special Considerations
– Land: Cost includes real estate commissions, escrow fees, legal fees, clearing and grading the property.
– Land Improvement: Improvements to land such as driveways, fences, and landscaping are recorded separately.
– Building : Repairs made prior to the building being put in use are considered part of the building’s cost.
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– Equipment: Related interest, insurance, and property taxes are treated as expenses of the current period.
• Allocation of a Lump-Sum Purchase• Capital Expenditures & Revenue Expenditures• Depreciation
– Straight-Line Depreciation• Depreciation for Fractional Periods
• Declining-Balance Method3
• Financial Statement Disclosures• Revising Depreciation Rates• Impairment of Assets• Disposal of Plant and Equipment
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USED ASSETS MANAGEMENTChapter
9
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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
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Recognize Gains?
Recognize Losses?
Similar Assets and Cash Paid
Yes No
Yes Yes
Dissimilar Assets
Trading in Used Assets for New Ones
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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
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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.
Trading in Used Assetsfor New Ones – Similar Assets
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Trading in Used Assetsfor New Ones – Similar Assets
Prepare the journal entry to record the trade.
Prepare the journal entry to record the trade.
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On June 30, 2004, Rancho Landscape exchanged a used truck and $11,500 cash
for a new truck. The old airplane originally cost $10,000, had up-to-date
accumulated depreciation of $8,000, and a trade in allowance of $3,500 and has a
book value of $2,000
On June 30, 2004, Rancho Landscape exchanged a used truck and $11,500 cash
for a new truck. The old airplane originally cost $10,000, had up-to-date
accumulated depreciation of $8,000, and a trade in allowance of $3,500 and has a
book value of $2,000
Trading in Used Assetsfor New Ones – Similar Assets
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The exchange resulted in a:
a. gain of $1,500.
b. loss of $1,500.
c. loss of $2,000.
d. gain of $3,000.
The exchange resulted in a:
a. gain of $1,500.
b. loss of $1,500.
c. loss of $2,000.
d. gain of $3,000.
Cost 15,000$ Accum. Depr. 8,000
Book Value 2,000$ Fair Value 3,500
Gain 1,500$
Prepare a journal entry to record the exchange.
Trading in Used Assetsfor New Ones – Similar Assets
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Trading in Used Assetsfor New Ones – Similar Assets
Prepare the journal entry to record the trade.
Prepare the journal entry to record the trade.
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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 Assets
CharacteristicsCharacteristics
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Intangible Assets
Record at current cash
equivalent cost, including
purchase price, legal fees, and
filing fees.
• Patents• Copyrights• Leaseholds• Leasehold
Improvements• Goodwill• Trademarks and
Trade Names
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Intangible Assets
• 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.
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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.
GoodwillGoodwill
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• Positive attributes of goodwill are:– Favorable reputation– Positive market share– Positive advertising image– Reputation of high quality and loyal
employees– Superior Management– Manufacturing and other operating
efficiency 18
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.
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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.
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Intangible Assets – Patents
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.
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Assume that the patent is purchased from the inventor at a cost of $100,000 after 5 years of legal life have expired, therefore the remaining legal life is 12 years. But if estimated useful life is only four years, amortization should be based on this
shorter period. The entry to record this amortization is
Assume that the patent is purchased from the inventor at a cost of $100,000 after 5 years of legal life have expired, therefore the remaining legal life is 12 years. But if estimated useful life is only four years, amortization should be based on this
shorter period. The entry to record this amortization is
Patents
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Patent
Prepare the journal entry to record the trade.
Prepare the journal entry to record the trade.
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Intangible Assets –Trademarks and Trade Names
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.
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Intangible Assets – Franchises
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.25
Intangible Assets – Copyrights
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.
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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 Resources
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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 Resources
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Depletion of Natural Resources
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
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Depletion of Natural Resources
Specialized plant assets may be required to extract the natural resource.
These assets are recorded in a separate account and depreciated.
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Assume that rainbow minerals pay $45 million to acquire red valley mine that has
10 million tons of coal. The residual is estimated to be $5 million. The depletion over life is of 40 million and rate $4 per million. Assume that 2 million tons are
mined during first year so prepare journal entry
Assume that rainbow minerals pay $45 million to acquire red valley mine that has
10 million tons of coal. The residual is estimated to be $5 million. The depletion over life is of 40 million and rate $4 per million. Assume that 2 million tons are
mined during first year so prepare journal entry
Natural resources
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Natural resources
Prepare the journal entry to record the trade.
Prepare the journal entry to record the trade.
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Natural resources
Rainbow Mineral’s Balance sheet Rainbow Mineral’s Balance sheet
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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 Method
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Consider S & G delivery truck which cost $17,000 and has an estimated salvage
value of $ 2,000 . Assume that S & G plans to retire this truck after it has been
delivered 100,000 mile. Calculate the deprecation rate
Consider S & G delivery truck which cost $17,000 and has an estimated salvage
value of $ 2,000 . Assume that S & G plans to retire this truck after it has been
delivered 100,000 mile. Calculate the deprecation rate
Unit of Output method
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Unit of Output
Cost per Unit
of Output
Cost - Residual Value
Estimated Units of Output
Cost per Unit
of Output
17,000 - 2,000
100,000 miles
$0.15 Depreciation per mile
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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”
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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?
End of Chapter 9
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