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Transcript of © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Plant Assets, Natural Resources, and...
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
Plant Assets, Natural Resources, and Intangibles
Chapter
1010
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
Called Property, Plant, & EquipmentCalled Property, Plant, & Equipment
Plant AssetsPlant 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 AssetsPlant Assets
Plant Assets as a Percent of Total Assets
5%
51%
59%
78%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
eBay Wal-Mart Anheuser-Busch
McDonald's
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
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 AssetsPlant 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 DeterminationCost Determination
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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
LandLand
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Land ImprovementsLand 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.
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Cost of purchase or construction
Cost of purchase or construction
Brokeragefees
Brokeragefees
TaxesTaxes
Title feesTitle fees
Attorney feesAttorney fees
BuildingsBuildings
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Purchaseprice
Purchaseprice
Installing,assembling, and
testing
Installing,assembling, and
testing
Insurance whilein transit
Insurance whilein transit
TaxesTaxes
Transportationcharges
Transportationcharges
Machinery and EquipmentMachinery and Equipment
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On January 1, Matrix, Inc. purchased land and building for $200,000 cash. The appraised values
are building, $162,500, and land, $87,500.
How much of the $200,000 purchase price will be charged to the building and land accounts?
On January 1, Matrix, Inc. purchased land and building for $200,000 cash. The appraised values
are building, $162,500, and land, $87,500.
How much of the $200,000 purchase price will be charged to the building and land accounts?
Lump-Sum Asset PurchaseLump-Sum Asset Purchase
The total cost of a combined purchase of land and building is separated on the basis of their relative market values.
The total cost of a combined purchase of land and building is separated on the basis of their relative market values.
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Appraised % of Purchase ApportionedAsset Value Value Price Cost
a b* c b × c
Land 87,500$ 35% × 200,000$ = 70,000$ Building 162,500 65% × 200,000 = 130,000 Total 250,000$ 100% 200,000$
* $87,500 ÷ $250,000 = 35%
$162,500 ÷ $250,000 = 65%
Appraised % of Purchase ApportionedAsset Value Value Price Cost
a b* c b × c
Land 87,500$ 35% × 200,000$ = 70,000$ Building 162,500 65% × 200,000 = 130,000 Total 250,000$ 100% 200,000$
* $87,500 ÷ $250,000 = 35%
$162,500 ÷ $250,000 = 65%
Lump-Sum Asset PurchaseLump-Sum Asset Purchase
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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
DepreciationDepreciation
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The calculation of depreciation requires three amounts for each asset:
Cost.
Salvage Value.
Useful Life.
Factors in Computing DepreciationFactors in Computing Depreciation
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Straight-line
Units-of-production
Declining balance
Depreciation MethodsDepreciation Methods
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On January 1, 2004, 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 MethodStraight-Line Method
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Straight-Line MethodStraight-Line Method
Cost - Salvage Value
Useful life in periods
Depreciation
Expense for Period=
$9,000 Depreciation
Expense per Year=
$50,000 - $5,000
5 years=
Dec. 31 Depreciation Expense 9,000 Accumulated Depreciation - Equipment 9,000
To record annual depreciation
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Depreciation AccumulatedExpense Depreciation Accumulated Book
Year (debit) (credit) Depreciation Value50,000$
2004 9,000$ 9,000$ 9,000$ 41,000 2005 9,000 9,000 18,000 32,000 2006 9,000 9,000 27,000 23,000 2007 9,000 9,000 36,000 14,000 2008 9,000 9,000 45,000 5,000
45,000$ 45,000$
Salvage ValueSalvage Value
Straight-Line MethodStraight-Line Method
DepreciationRate
= (100% ÷ 5 years) = 20% per year
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Dep
reci
atio
n
Exp
ense Depreciation Expense reported on the
Income Statement.
$0$1,000
$3,000
$5,000
$7,000
$9,000
2004 2005 2006 2007 2008
For the year ended December 31
Book Valuereported on theBalance Sheet.
$41,000
$32,000
$23,000
$14,000
$5,000
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
$45,000
2004 2005 2006 2007 2008
As of December 31
Bo
ok
Val
ue
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Step 2:Depreciation Expense =
DepreciationPer Unit
×Number of
Units Producedin the Period
Units-of-Production MethodUnits-of-Production Method
DepreciationPer Unit
= Cost - Salvage Value Total Units of Production
Step 1:
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
On December 31, 2001, 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 2002, what is the amount of depreciation expense?
On December 31, 2001, 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 2002, what is the amount of depreciation expense?
Units-of-Production MethodUnits-of-Production Method
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
Step 2:Depreciation Expense = $.45 per unit × 22,000 units = $9,900
Step 1:Depreciation
Per Unit= $50,000 - $5,000
100,000 units = $.45 per unit
Units-of-Production MethodUnits-of-Production Method
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Depreciation Accumulated BookYear Units Expense Depreciation Value
50,000$ 2004 22,000 9,900$ 9,900$ 40,100 2005 28,000 12,600 22,500 27,500 2006 - - 22,500 27,500 2007 32,000 14,400 36,900 13,100 2008 18,000 8,100 45,000 5,000
100,000 45,000$
No depreciation expense if the equipment is idle.
Units-of-Production MethodUnits-of-Production Method
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Depreciation RepairExpense Expense
Early Years High Low
Later Years Low High
Early years’ total expense approximates later years’ total expense.
Declining Balance MethodDeclining Balance Method
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Double-Declining-Balance MethodDouble-Declining-Balance Method
Step 2:Double-declining-
balance rate= 2 × Straight-line rate = 2 × 20% = 40%
Step 1:Straight-line
rate= 100 % ÷ Useful life = 100% ÷ 5 = 20%
Step 3:Depreciation
expense =Double-declining-
balance rate ×Beginning period
book value
40% × $50,000 = $20,000 for 2004
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
2004 Depreciation: 40% × $50,000 = $20,000
Double-Declining-Balance MethodDouble-Declining-Balance Method
2005 Depreciation: 40% × ($50,000 - $20,000) = $12,000
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Depreciation Accumulated BookYear Expense Depreciation Value
50,000$ 2004 20,000$ 20,000$ 30,000 2005 12,000 32,000 18,000 2006 7,200 39,200 10,800 2007 4,320 43,520 6,480 2008 2,592 46,112 3,888
46,112$ Below salvage value
Double-Declining-Balance MethodDouble-Declining-Balance Method
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Depreciation Accumulated BookYear Expense Depreciation Value
50,000$ 2004 20,000$ 20,000$ 30,000 2005 12,000 32,000 18,000 2006 7,200 39,200 10,800 2007 4,320 43,520 6,480 2008 1,480 45,000 5,000
45,000$
We usually must force depreciation expense in thelast year so that book value equals salvage value.We usually must force depreciation expense in thelast year so that book value equals salvage value.
Double-Declining-Balance MethodDouble-Declining-Balance Method
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin Life in Years
An
nu
al D
DB
Dep
reci
atio
n
$0
$5,000
$10,000
$15,000
$20,000
1 2 3 4 5
Comparing Depreciation MethodsComparing Depreciation Methods
An
nu
al P
rod
uct
ion
Dep
reci
atio
n
Life in Years
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
$16,000
1 2 3 4 5Life in Years
An
nu
al S
LD
epre
ciat
ion
$0
$2,000
$4,000
$6,000
$8,000
$10,000
1 2 3 4 5
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
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 ReportingDepreciation for Tax Reporting
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
When a plant asset is acquired during the year, depreciation is calculated for the fraction of the
year the asset is owned.
When a plant asset is acquired during the year, depreciation is calculated for the fraction of the
year the asset is owned.
June 30
Partial-Year DepreciationPartial-Year Depreciation
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Calculate the straight-line depreciation on December 31, 2004, for equipment purchased
on June 30, 2004. The equipment cost $75,000, has a useful life of 10 years and an
estimated salvage value of $5,000.
Calculate the straight-line depreciation on December 31, 2004, for equipment purchased
on June 30, 2004. 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 all 2004
Depreciation = $7,000 × 6/12 = $3,500
Depreciation = ($75,000 - $5,000) ÷ 10
= $7,000 for all 2004
Depreciation = $7,000 × 6/12 = $3,500
Partial Year DepreciationPartial Year Depreciation
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So depreciationis an estimate.
Predicted salvage value
Predicteduseful life
Over the life of an asset, new information may come to light that indicates theoriginal estimates were inaccurate.
Over the life of an asset, new information may come to light that indicates theoriginal estimates were inaccurate.
Change in Estimates for DepreciationChange in Estimates for Depreciation
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On January 1, 2004, equipment was purchased that cost $30,000, has a useful life of 10 years and no salvage value. During 2007, the useful life was
revised to 8 years total (5 years remaining).
Calculate depreciation expense for the yearended December 31, 2004, using the
straight-line method.
On January 1, 2004, equipment was purchased that cost $30,000, has a useful life of 10 years and no salvage value. During 2007, the useful life was
revised to 8 years total (5 years remaining).
Calculate depreciation expense for the yearended December 31, 2004, using the
straight-line method.
Change in Estimates for DepreciationChange in Estimates for Depreciation
Book value at date of change
Salvage value at date of change
Remaining useful life at date of change
–
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
Change in Estimates for DepreciationChange in Estimates for Depreciation
Asset cost 30,000$ Accumulated depreciation, 12/31/2006 ($3,000 per year × 3 years) 9,000 Remaining book value 21,000$ Divide by remaining life ÷ 5Revised annual depreciation 4,200$
Dec. 31 Depreciation Expense 4,200 Accumulated Depreciation - Equipment 4,200
To record depreciation for 2007
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Reporting DepreciationReporting 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$
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
Additional ExpendituresAdditional 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
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
Revenue and Capital ExpendituresRevenue and Capital Expenditures
Type of Capital orExpenditure Revenue Identifying Characteristics
Ordinary Revenue 1. Maintains normal operating condition.Repairs 2. Does not increase productivity.
3. Does not extend life beyond original estimate.
Capital 1. Major overhauls or partial replacements.2. Extends life beyond original estimate.
Betterments and
Extraordinary Repairs
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
Recording cashreceived (debit)or paid (credit).
Recording cashreceived (debit)or paid (credit).
Removing accumulateddepreciation (debit).
Removing accumulateddepreciation (debit).
Update depreciation to the date of disposal.
Journalize disposal by: Journalize disposal by:
Removing the asset cost (credit).
Removing the asset cost (credit).
Recording again (credit)
or loss (debit).
Recording again (credit)
or loss (debit).
Disposals of Plant AssetsDisposals of Plant Assets
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
Update depreciation to the date of disposal.
Journalize disposal by:
If Cash > BV, record a gain (credit).
If Cash < BV, record a loss (debit).
If Cash = BV, no gain or loss.
Discarding Plant AssetsDiscarding Plant Assets
Recording cashreceived (debit)or paid (credit).
Recording cashreceived (debit)or paid (credit).
Removing accumulateddepreciation (debit).
Removing accumulateddepreciation (debit).
Removing the asset cost (credit).
Removing the asset cost (credit).
Recording again (credit)
or loss (debit).
Recording again (credit)
or loss (debit).
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
On September 30, 2004, Evans Company sells a machine that originally cost
$100,000 for $60,000 cash. The machine was placed in service on January 1, 2000. It was depreciated using the straight-line method with an estimated salvage value of $20,000 and a useful life of 10 years.
Selling Plant AssetsSelling Plant Assets
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Selling Plant AssetsUpdate Depreciation to Date of DisposalUpdate Depreciation to Date of Disposal
Annual Depreciation:($100,000 - $20,000) ÷ 10 Yrs. = $8,000
Depreciation to September 30, 2004:9/12 × $8,000 = $6,000
Annual Depreciation:($100,000 - $20,000) ÷ 10 Yrs. = $8,000
Depreciation to September 30, 2004:9/12 × $8,000 = $6,000
Sep. 30 Depreciation expense 6,000 Accumulated Depreciation - Machine 6,000
To update depreciation to date of disposal
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
Selling Plant AssetsDetermine Book Value of AssetDetermine Book Value of Asset
Cost 100,000$ Accumulated Depreciation: ( yrs. × $8,000) + $6,000 = 38,000
Book Value 62,000$
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
Selling Plant AssetsDetermine Gain or Loss on DisposalDetermine Gain or Loss on Disposal
Cost 100,000$ Accumulated depreciation 38,000
Book Value 62,000 Cash Received 60,000
Loss on disposal (2,000)$
If Cash > BV, record a gain (credit).
If Cash < BV, record a loss (debit).
If Cash = BV, no gain or loss.
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
Selling Plant AssetsRecord the Disposal in the JournalRecord the Disposal in the Journal
Sep. 30 Cash 60,000 Accumulated Depreciation - Machine 38,000 Loss on Disposal of Asset 2,000
Machine 100,000 To record disposal of equipment
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
Accounting for exchanges of similar assets depends on
whether the book value of the asset(s) given up is less or
more than the market value of the asset(s) received.
Accounting for exchanges of similar assets depends on
whether the book value of the asset(s) given up is less or
more than the market value of the asset(s) received.
Exchanging Plant AssetsExchanging Plant Assets
SIMILAR
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
Exchanging Plant AssetsExchanging Plant Assets
Accounting for exchanges of similar assets depends on whether the book value of the asset(s) given up is less or more than the market value of
the asset(s) received.
Accounting for exchanges of similar assets depends on whether the book value of the asset(s) given up is less or more than the market value of
the asset(s) received.
A loss is recognized when the book value given up is less than
the market value received.
A loss is recognized when the book value given up is less than
the market value received.
A gain is not recognized when the
book value given up is more than the market
value received.
A gain is not recognized when the
book value given up is more than the market
value received.
SIMILAR
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
On May 30, 2004, Matrix, Inc. exchanged a used bus and $35,000 cash for a new European-style
bus. The old bus originally cost $40,000, had up-to-date accumulated depreciation of $30,000. The
new bus had a market value of $39,000.
On May 30, 2004, Matrix, Inc. exchanged a used bus and $35,000 cash for a new European-style
bus. The old bus originally cost $40,000, had up-to-date accumulated depreciation of $30,000. The
new bus had a market value of $39,000.
Exchanging Plant AssetsExchanging Plant Assets
SIMILAR
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
Market value of asset received 39,000$ Cost of old bus 40,000$ Accumulated depreciation 30,000
Book value of old bus 10,000 Cash 35,000 45,000
Loss on exchange 6,000$
Exchanging Plant AssetsExchanging Plant Assets
May 30 Bus (new) 39,000 Accumulated Depreciation - Bus 30,000 Loss on Exchange 6,000
Bus (old) 40,000 Cash 35,000
Remember -- Losses are always recorded immediately.
Remember -- Losses are always recorded immediately.
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
On May 30, 2004, Matrix, Inc. exchanged a used bus and $35,000 cash for a new
European-style bus. The old bus originally cost $40,000, had up-to-date accumulated
depreciation of $30,000. The new bus had a market value of $49,000.
On May 30, 2004, Matrix, Inc. exchanged a used bus and $35,000 cash for a new
European-style bus. The old bus originally cost $40,000, had up-to-date accumulated
depreciation of $30,000. The new bus had a market value of $49,000.
SIMILAR
Exchanging Plant AssetsExchanging Plant Assets
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
Market value of asset received 49,000$ Cost of old bus 40,000$ Accumulated depreciation 30,000
Book value of old bus 10,000 Cash 35,000 45,000
Gain on exchange 4,000$
Exchanging Plant AssetsExchanging Plant Assets
May 30 Bus (new) 45,000 Accumulated Depreciation - Bus 30,000
Bus (old) 40,000 Cash 35,000
Market value of new bus – gain not recognized$49,000 - $4,000 = $45,000
Market value of new bus – gain not recognized$49,000 - $4,000 = $45,000
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
Exchanging Plant AssetsExchanging Plant Assets
Comparison of Treatment of Gains and Losses
The $4,000 gain in not recognizedThe $4,000 gain in not recognized
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Let’s change the subject!Let’s Talk About Natural Resources!Let’s Talk About Natural Resources!
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
Total cost,including
exploration anddevelopment,is charged to
depletion expenseover periods
benefited.
Extracted fromthe natural
environmentand reportedat cost less
accumulateddepletion.
Natural ResourcesNatural Resources
Examples: oil, coal, goldExamples: oil, coal, gold
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
Step 2:DepletionExpense =
DepletionPer Unit
×Units Extracted
and Sold in Period
Cost Determination and DepletionCost Determination and Depletion
DepletionPer Unit
= Cost - Salvage Value Total Units of Capacity
Step 1:
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
Apex Mining acquired a tract of land containing ore deposits. Total costs of
acquisition and development were $1,000,000 and Apex estimates the land contained 40,000 tons of ore. During the
first year of operations Apex extracted and sold 13,000 tons of ore.
Apex Mining acquired a tract of land containing ore deposits. Total costs of
acquisition and development were $1,000,000 and Apex estimates the land contained 40,000 tons of ore. During the
first year of operations Apex extracted and sold 13,000 tons of ore.
Depletion of Natural ResourcesDepletion of Natural Resources
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
Step 2: Depletion Expense = $25 per ton × 13,000 units = $325,000
Step 1:DepletionPer Unit
= $1,000,000 - $0 40,000 tons
= $25 per ton
Units-of-Production MethodUnits-of-Production Method
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
Plant Assets Used in Extracting Natural ResourcesPlant Assets Used in Extracting Natural Resources
Specialized plant assets may be required to extract the natural resource.
These assets are recorded in a separate account and depreciated.
Specialized plant assets may be required to extract the natural resource.
These assets are recorded in a separate account and depreciated.
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
Let’s change the subject!Now Let’s Look at Intangible Assets!Now Let’s Look at Intangible Assets!
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
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.
IntangibleAssets
IntangibleAssets
Often provideexclusive rights
or privileges.
Often provideexclusive rights
or privileges.
Intangible AssetsIntangible Assets
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
o Patentso Copyrightso Leaseholdso Leasehold Improvementso Franchises & Licenseso Goodwillo Trademarks & Trade Names
Record at current cash
equivalent cost, including
purchase price, legal fees, and
filing fees.
Cost Determination and AmortizationCost Determination and Amortization
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
Types of IntangiblesTypes of Intangibles
PatentsThe exclusive right granted to its owner to
manufacture and sell a patented item or use a process for 17 years. Patents are generally
amortized, using the straight-line method, over its useful life not to exceed 17 years.
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
Types of IntangiblesTypes of Intangibles
PatentsMatrix, Inc. purchased a patent for $10,000. The
patent is expected to have a useful life of 10 years.
Dec. 31 Amortization Expense - Patents 1,000 Accumulated Amortization - Patents 1,000
To amortize patent costs
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
Type’ of IntangiblesType’ of Intangibles
CopyrightsThe exclusive right to publish and sell a musical,
literary, or artistic work during the life of the creator plus 70 years.
LeaseholdsThe rights the lessor grants to the lessee under
the terms of a lease. Most leases have a determinable life.
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
Types of IntangiblesTypes of Intangibles
Leasehold ImprovementsA lessee may pay for alternations or
improvements to the leased property such as partitions, painting, and storefronts. These costs are usually amortized over the term of the lease.
Franchises and LicensesThe right granted by a company or the
government to deliver a product or service under specified conditions.
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Types of IntangiblesTypes of Intangibles
Trademarks and Trade NamesA symbol, name, phrase, or jingle identified with a
company, product, or service.
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Occurs when onecompany buys
another company.
Occurs when onecompany buys
another company.
Goodwill is not amortized. It is testedeach year to determine if there has been
any impairment in carrying value.
Goodwill is not amortized. It is testedeach year to determine if there has been
any impairment in carrying value.
GoodwillGoodwill
Only purchased goodwill is an
intangible asset.
Only purchased goodwill is an
intangible asset.
GoodwillGoodwill
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Provides information about a company’s efficiency in using its assets.
Provides information about a company’s efficiency in using its assets.
Total AssetTurnover =
Net SalesAverage Total Assets
Total Asset TurnoverTotal Asset Turnover
2002 2001 2000 1999Coors 1.25 1.44 1.52 1.49 Anheuser-Busch 0.97 0.95 0.97 0.94
Total Asset Turnover
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End of Chapter 10End of Chapter 10