11-1 & I NTANGIBLE A SSETS N ATURAL R ESOURCES, P LANT A SSET D ISPOSALS, Patent CHAPTER 11.

11-1

& INTANGIBLE ASSETS

NATURAL RESOURCES,

PLANT ASSET DISPOSALS,

Patent

CHAPTER 11CHAPTER 11.

11-2

Disposal of Plant AssetsDisposal of Plant Assets

Plant assets (except land) eventually become inadequate or obsolete and

must be sold, retired (junked) or exchanged for new assets.

11-3

Disposal of Plant Assets Disposal of Plant Assets General Procedure*General Procedure*

Record the asset depreciation up to date of sale

Record the disposal by Writing off asset cost (creditcredit)

Writing off Accumulated Depreciation (debitdebit)

Record any cash, received (debitdebit)

Record gain (creditcredit) or loss (debitdebit)

Record the asset depreciation up to date of sale

Record the disposal by Writing off asset cost (creditcredit)

Writing off Accumulated Depreciation (debitdebit)

Record any cash, received (debitdebit)

Record gain (creditcredit) or loss (debitdebit)

** No matter which way disposed

11-4

Steps in Sale of Plant AssetsSteps in Sale of Plant Assets Update depreciation to the date of sale

Determine the current book value (BV) of the asset being sold

Remember: Book value equalsacquisition cost less

accumulated depreciation

Remember: Book value equalsacquisition cost less

accumulated depreciation

11-5

Determine if there is a gain or loss by comparing cash received for the asset with the asset’s book value

If Cash > BV, record a gain (credit)

If Cash < BV, record a loss (debit)

If Cash = BV, no gain or loss

Steps in Sale of Plant AssetsSteps in Sale of Plant Assets

11-6

Steps in Sale of Plant AssetsSteps in Sale of Plant AssetsPrepare journal entry to record the sale

Debit Cash received

Debit Accumulated Depreciation

Credit Asset for original cost

Record gain (credit) or loss (debit)(i.e., a PLUG)(i.e., a PLUG)

11-7

Sale of Plant AssetsSale of Plant AssetsExampleExample

BV = cost - accumulated depreciationBV = $100,000 - $46,000 BV = $54,000

On September 30, 1999, Evans Company sold a machine that

originally cost $100,000 for $60,000 cash. Accumulated depreciation

taken on the machine was $46,000.

11-8

Gain = excess of cash received over book value of asset sold

Gain = $60,000 - $54,000 = $6,000

On September 30, 1999, Evans Company sold a machine that

originally cost $100,000 for $60,000 cash. Accumulated depreciation

taken on the machine was $46,000.


11-9

Prepare the journal entry to record Evans’ sale of the machine on

September 30, 1999 assuming that depreciation has already been

recorded to that date.


11-10

GENERAL JOURNAL

Page: 1

Date Description PR Debit Credit

9/30 Cash 60,000Accumulated Depreciation 46,000 Gain on Sale 6,000 Machine 100,000To record sale of machine

Sale of Plant AssetsSale of Plant AssetsExample Example

11-11

GENERAL JOURNAL

Page: 1


9/30 Cash 60,000Accumulated Depreciation 46,000 Gain on Sale 6,000 Machine 100,000To record sale of machine

Sale of Plant AssetsSale of Plant AssetsExample Example

Plug!

11-12

Plant Asset RetirementPlant Asset Retirement(i.e., Junked)(i.e., Junked)

No sale, so no cash received.No sale, so no cash received.

Use same procedure as for a sale

Update depreciation to date of sale

Determine current book value

Determine loss, if any

Prepare journal entry

Use same procedure as for a sale

Update depreciation to date of sale

Determine current book value

Determine loss, if any

Prepare journal entry

11-13

Now assume the Evans Company retiredretired the machine on September 30, 1998. All information is the same except the asset is retired with no cash received.

Plant Asset RetirementPlant Asset RetirementExampleExample

11-14

Now assume the Evans Company retiredretired the machine on September 30, 1998. All information is the same except the asset is retired with no cash received.

Loss = Cash Received - Book ValueLoss = 0 - $54,000 Loss = $54,000


11-15

GENERAL JOURNAL

Page: 1


9/30 Accumulated Depreciation 46,000Loss on Retirement 54,000 Machine 100,000

To record machine retirement


11-16

Accounting depends on whetherassets are similar or dissimilar.

Accounting depends on whetherassets are similar or dissimilar.

Plant Asset ExchangesPlant Asset Exchanges

Airplanefor

Airplane

Truckfor

Airplane

11-17

Key to Recording These ExchangesKey to Recording These Exchanges

Compute gain or loss by comparing book value of asset given

up with the fair value of asset given up.

Fair value is frequently determined by the trade-in allowance received for old asset.

Plant Asset ExchangesPlant Asset Exchanges

11-18

Only situations where cash is paid will be demonstrated

Only situations where cash is paid will be demonstrated

Plant Asset ExchangesPlant Asset ExchangesGeneral ProcedureGeneral Procedure

Only recognizeif assets are

dissimilarIf gain

If lossAlways recognize losses

regardless of whether assets are similar or dissimilar

11-19

Update depreciation

Compute gain or loss by comparing book value of asset given up with the fair value fair value of asset given up

Prepare journal entry to record the transaction

Plant Asset ExchangesPlant Asset ExchangesGeneral ProcedureGeneral Procedure

11-20

Plant Asset ExchangesPlant Asset ExchangesDisDissimilar Assetssimilar Assets

First let’s look at exchanges of dissimilar assets.

Gains and losses are always recognized when the exchange

involves dissimilar assets.

DISSIMILAR

11-21

On April 30, 1998, Essex Company exchanged a used airplane and $25,000 for a new lift truck worth $31,000. The airplane originally cost $50,000, had

up-to-date accumulated depreciation of $40,000, and a fair value of $6,000.

Dissimilar AssetsDissimilar AssetsExample #1Example #1

DISSIMILAR

11-22

The exchange resulted in a:

a. Loss of $10,000.

b. Loss of $6,000.

c. Loss of $4,000.

d. Loss of $2,000.


a. Loss of $10,000.

b. Loss of $6,000.

c. Loss of $4,000.

d. Loss of $2,000.

Dissimilar AssetsDissimilar AssetsQuestionQuestion

11-23


a. Loss of $10,000.

b. Loss of $6,000.

c. Loss of $4,000.

d. Loss of $2,000.


a. Loss of $10,000.

b. Loss of $6,000.

c. Loss of $4,000.

d. Loss of $2,000.

Cost 50,000$Accum. Depr. 40,000

Book Value 10,000$Fair Value 6,000

Loss 4,000$


Prepare the journal entry to record the exchange.

11-24

GENERAL JOURNAL

Page: 1


4/30 Lift Truck 31,000Accumulated Depreciation 40,000Loss on Exchange 4,000 Airplane 50,000 Cash 25,000To record exchange of airplane

for lift truck


Plug

Note that the debit to the new asset, lift truck, for $31,000 was a plug figure in the entry.

11-25

Dissimilar AssetsDissimilar Assets

Let’s look at anexchange of

dissimilar assets thatresults in a gain.

11-26

On June 1, 1998, Rogers Company exchanged equipment and $30,000 for land worth $130,000. The equipment

originally cost $200,000, had up-to-date accumulated depreciation of $120,000,

and a fair value of $100,000.


DISSIMILAR

11-27

The exchange resulted in a gain of:

a. $10,000.

b. $20,000.

c. $30,000.

d. $40,000.


a. $10,000.

b. $20,000.

c. $30,000.

d. $40,000.


11-28


a. $10,000.

b. $20,000.

c. $30,000.

d. $40,000.


a. $10,000.

b. $20,000.

c. $30,000.

d. $40,000.

Cost 200,000$ Accum. Depr. 120,000

Book Value 80,000 Fair Value 100,000

Gain 20,000$


Prepare a journal entry to record the exchange.

11-29

GENERAL JOURNAL

Page: 1


6/1 Land 130,000Accumulated Depreciation 120,000 Gain on Exchange 20,000 Equipment 200,000 Cash 30,000

To record exchange of equipment

for land.


Plug

11-30

Now let’s look at exchanges of similar assets.

Remember that when the exchange involves similar assets, losses are

always recognized, but gains are never recognized.

SIMILAR

Plant Asset ExchangesPlant Asset ExchangesSimilar AssetsSimilar Assets

11-31

On May 30, 1998, Huge Company exchanged a used airplane and $35,000 cash for a new airplane worth $39,000. The old airplane originally cost $40,000,

had up-to-date accumulated depreciation of $30,000, and a fair value of $4,000.

Similar AssetsSimilar AssetsExample #1Example #1

SIMILAR

11-32


a. Loss of $10,000.

b. Loss of $6,000.

c. Loss of $4,000.

d. Loss of $2,000.


a. Loss of $10,000.

b. Loss of $6,000.

c. Loss of $4,000.

d. Loss of $2,000.

Similar AssetsSimilar AssetsQuestionQuestion

11-33


a. Loss of $10,000.

b. Loss of $6,000.

c. Loss of $4,000.

d. Loss of $2,000.


a. Loss of $10,000.

b. Loss of $6,000.

c. Loss of $4,000.

d. Loss of $2,000.

Cost 40,000$Accum. Depr. 30,000

Book Value 10,000$Fair Value 4,000

Loss 6,000$



11-34


GENERAL JOURNAL

Page: 1


5/30 New Airplane 39,000Accumulated Depreciation 30,000Loss on Exchange 6,000 Old Airplane 40,000 Cash 35,000

To record exchange of airplanesThe “Rule”: The new airplane is recorded

at the fair value of the old airplane plus the cash paid, just like an exchange of

dissimilar assets.

11-35

GENERAL JOURNAL

Page: 1


5/30 New Airplane 39,000Accumulated Depreciation 30,000Loss on Exchange 6,000 Old Airplane 40,000 Cash 35,000

To record exchange of airplanes


Plug

The “Rule”: The new airplane is recorded at the fair value of the old airplane plus the

cash paid, just like an exchange of dissimilar assets.

Rice says: “Forget the rule and plug it!”

11-36

Let’s change the example so that a gain is indicated. The assets are still similar.Let’s change the example so that a gain is indicated. The assets are still similar.

Similar AssetsSimilar AssetsExampleExample

SIMILAR

11-37

On July 31, 1998, SimCo exchanged a used airplane and $100,000 cash for a

new airplane . The old airplane originally cost $4,000,000, had up-to-date

accumulated depreciation of $3,000,000, and a fair value of $1,400,000.


SIMILAR

11-38

The exchange indicates a gain of:

a. $ 400,000.

b. $1,400,000.

c. $1,000,000.

d. $2,600,000.


a. $ 400,000.

b. $1,400,000.

c. $1,000,000.

d. $2,600,000.


11-39


a. $ 400,000.

b. $1,400,000.

c. $1,000,000.

d. $2,600,000.


a. $ 400,000.

b. $1,400,000.

c. $1,000,000.

d. $2,600,000.

Cost 4,000,000$ Accum. Depr. 3,000,000

Book Value 1,000,000 Fair Value 1,400,000

Indicated Gain 400,000$



11-40

GENERAL JOURNAL

Page: 1


7/31 New Airplane 1,100,000Accumulated Depreciation 3,000,000 Old Airplane 4,000,000 Cash 100,000



The “Rule”Book value of old asset + cash paid$1,000,000 + $100,000 = $1,100,000

11-41

GENERAL JOURNAL

Page: 1


7/31 New Airplane 1,100,000Accumulated Depreciation 3,000,000 Old Airplane 4,000,000 Cash 100,000



Remember, gains are not recognized when similar assets are exchanged.

PLUG IT!

11-42

Dissimilar Assets Similar Assets

Recognize Gains?

Yes No

Recognize Losses

Yes Yes

Plant Asset ExchangesPlant Asset ExchangesSummarySummary

11-43

Let’s change the subject!Let’s change the subject!

11-44

Natural ResourcesNatural Resources

Examples: oil, coal, gold

Extracted fromthe natural

environment

A noncurrentasset presented

at cost lessaccumulated

depletion

11-45

Natural ResourcesNatural Resources

Depletion is like depreciation

Total cost of asset is the cost

of acquisition, exploration,

and development

Total cost isallocated over

periods benefitedby means of

depletion

11-46

Let’s change the subject again!Let’s change the subject again!

11-47

Intangible AssetsIntangible Assets

Non-current assetswithout physical

substance

Non-current assetswithout physical

substance

Useful life isoften difficultto determine

Useful life isoften difficultto determine

Often provideexclusive rightsor privileges to

use the asset

Often provideexclusive rightsor privileges to

use the asset

IntangibleAssets

11-48

Patents Copyrights Franchises Trademarks Leaseholds Leasehold

improvements Goodwill

Intangible AssetsIntangible AssetsExamplesExamples

11-49

Intangible AssetsIntangible AssetsAccounting ProceduresAccounting Procedures

Cost is allocated over the period the asset is expected to produce revenue using a process called “amortization”

Amortize cost over economic life legal life or 40 years...whichever is shorter

Why?Because FASB said so!

Use straight-line method

Record cost at current cash equivalent, including

purchase price, legal fees, and

filing fees.

11-50

Intangible AssetsIntangible AssetsPatentsPatents

Exclusive right grantedby federal government to

sell or manufacture invention

Exclusive right grantedby federal government to

sell or manufacture invention

Cost is purchaseprice plus any legal

cost to defend

Cost is purchaseprice plus any legal

cost to defendLegal life is 17 yearsLegal life is 17 years

Research and Development costs to develop a patent are expensed as cost is incurred.

Research and Development costs to develop a patent are expensed as cost is incurred.

11-51

Intangible AssetsIntangible AssetsCopyrightsCopyrights

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

Legal life islife of creatorplus 50 years

Legal life islife of creatorplus 50 years

11-52

Right to sell products or provide services purchased by franchisee

from franchisor

Right to sell products or provide services purchased by franchisee

from franchisor

Purchase price is intangible asset which is amortized over shorter of legal life, economic life, or 40 years

Purchase price is intangible asset which is amortized over shorter of legal life, economic life, or 40 years

Intangible AssetsIntangible AssetsFranchisesFranchises

11-53

A symbol, design, or logo associated with a business

A symbol, design, or logo associated with a business

Ifpurchased,trademarks

are recordedat cost, and

amortized overshorter of legal oreconomic life, or

40 years

Ifinternally

developed,trademarks

have norecorded

asset cost

Intangible AssetsIntangible AssetsTrademarksTrademarks

11-54

Intangible AssetsIntangible AssetsLeasesLeases

A contract to rent property. Right to use is granted by lessor to lessee.

Two types of leases

Capital leases

Operating leases

11-55

A means of financing acquisition of property

Lessor transfers ownership to lessee at end of lease

However, lessee records leased property from the beginning as if it were purchased, ignoring the legal reality.

Intangible AssetsIntangible AssetsCapital LeasesCapital Leases

11-56

If a lease does not qualify as capital lease, it is an operating lease.

Common rental agreements are normally operating leases.

Rent expense is normally recorded as incurred.

However, if there is a prepayment at the start of the lease, it is accounted for as long-term prepaid rent in an intangible asset account called “leasehold”.

Intangible AssetsIntangible AssetsOperating LeasesOperating Leases

11-57

Intangible AssetsIntangible AssetsLeasehold ImprovementsLeasehold Improvements

Long-lived alterations made by lessee to leased property

Leasehold improvements are amortized over the shorter of the life of the

improvement or the life of the lease.

11-58

Occurs when one company buys the assets and assumes the liabilities of another companyOccurs when one company buys the assets

and assumes the liabilities of another company

Only purchased goodwill is recorded as an assetOnly purchased goodwill is recorded as an asset

Goodwill is the amount by which cost exceeds the fair market value of net assets acquired

•Goodwill = Cost - (FMV of net assets acquired)•Net assets = assets - liabilities•Synergism

Goodwill is the amount by which cost exceeds the fair market value of net assets acquired

•Goodwill = Cost - (FMV of net assets acquired)•Net assets = assets - liabilities•Synergism

Intangible AssetsIntangible AssetsGoodwillGoodwill

11-59

Intangible AssetsIntangible AssetsGoodwill ExampleGoodwill Example

Eddy Company paid $1,000,000 to purchase all of James Company’s

assets and assumed James Company liabilities of $200,000. James

Company’s assets were appraised at a fair value of $900,000.

11-60

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

a. $100,000

b. $200,000

c. $300,000

d. $400,000


a. $100,000

b. $200,000

c. $300,000

d. $400,000

GoodwillGoodwillQuestionQuestion

11-61


a. $100,000

b. $200,000

c. $300,000

d. $400,000


a. $100,000

b. $200,000

c. $300,000

d. $400,000

FMV of Assets 900,000$ Debt Assumed 200,000

FMV of Net Assets 700,000$ Purchase Price 1,000,000

Goodwill 300,000$

GoodwillGoodwillQuestionQuestion

11-62

THE ENDTHIS CHAPTER HAS

BEEN A MOUNTAIN-TOP EXPERIENCE, BUT I’M GLAD IT’S FINISHED!

11-1 & I NTANGIBLE A SSETS N ATURAL R ESOURCES, P LANT A SSET D ISPOSALS, Patent CHAPTER 11.

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Transcript of 11-1 & I NTANGIBLE A SSETS N ATURAL R ESOURCES, P LANT A SSET D ISPOSALS, Patent CHAPTER 11.