Weygandt Accounting Principles 10e PowerPoint Ch10

8/9/2019 Weygandt Accounting Principles 10e PowerPoint Ch10

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CHAPTER10Plant Assets, NaturalResources, and

Intangible Assets


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PreviewofCHAPTER10


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Plant assetsare resources that have physical substance(a definite size and shape),

are used in the operationsof a business,

are not intended for saleto customers,

are expected to proide sericeto the company for a

number of years, except for land.

Referred to as property, plant, and e!uip"ent# plant ande!uip"ent# and fi$ed assets%

&'()I*N1 Plant Assets


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Plant assetsare critical to a companys successIllustration 10-1

Plant Assets


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(ost Principle- requires that companies record plantassets at cost.

(ost consists of all e$penditures necessary to

ac!uire an asset and "ae it ready for its intended use%

SO 1 Describe how the cost principle applies to plant assets.SO 1 Describe how the cost principle applies to plant assets.

.eter"ining the (ost of Plant Assets


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All necessary costsincurred in making land ready for its

intended useincrease debitthe Land account.

osts typically include!") cash purchase price,

#) closing costs such as title and attorneys fees,

$) real estate brokers commissions, and

%) accrued property taxes and other liens on the land

assumed by the purchaser.



Land


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Illustration &ayes 'anufacturing ompany acquires realestate at a cash cost of ",. *he property contains an old

+arehouse that is razed at a net cost of , (-, in costs

less ", proceeds from salvaged materials). /dditional

expenditures are the attorneys fee, ",, and the real estatebrokers commission, 0,.

Re!uired 1etermine the amount to be reported as the cost of

the land.




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5and5and

Re!uired 1etermine amount to be reported as the cost of theland.


ash price of property (",)

2et removal cost of +arehouse (,)

/ttorney3s fees (",) ",

,

",

"",ost of Land

4eal estate brokers commission (0,) 0,



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Includes all e$pendituresnecessary to make the

improvements ready for their intended use.

Land Improvements

'$a"ples drive+ays, parking lots, fences, landscaping,and lighting.

Limited useful lives.

5xpense (depreciate) the cost of land improvements overtheir useful lives.




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Includes all costsrelated directly to purchase or construction.

Buildings

Purchase costs

6urchase price, closing costs (attorneys fees, title insurance,etc.) and real estate brokers commission.

4emodeling and replacing or repairing the roof, floors,

electrical +iring, and plumbing.

(onstruction costs

ontract price plus payments for architects fees, building

permits, and excavation costs.




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Include all costsincurred in acquiring the equipment and

preparing it for use.

osts typically include!

Equipment

ash purchase price.

7ales taxes.

8reight charges.

9nsurance during transit paid by the purchaser.

5xpenditures required in assembling, installing, and testing

the unit.




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Illustration Lenard ompany purchases a delivery truck at acash price of ##,. 4elated expenditures are sales taxes

",$#, painting and lettering , motor vehicle license 0,

and a three:year accident insurance policy ",. (o"pute

the costof the delivery truck.


)ruc)ruc

ash price

7ales taxes

6ainting and lettering

",$#

##,

#$,0#ost of 1elivery *ruck



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Illustration Lenard ompany purchases a delivery truck at acash price of ##,. 4elated expenditures are sales taxes

",$#, painting and lettering , motor vehicle license 0,

and a three:year accident insurance policy ",. Prepare the

6ournal entryto record these costs.


5quipment #$,0#

License expense 0

6repaid insurance ",

ash #,



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6rocess of cost allocation, not asset aluation.

/pplies to land improvements, buildings, and equipment,

not land.

1epreciable, because the reenue-producing ability of

asset 7ill declineover the assets useful life.

6rocess of allocating to e$pensethe cost of a plant asset

over its useful (service) life in a rational and systematic

manner.

SO 2 Eplain the concept o! depreciation.SO 2 Eplain the concept o! depreciation.

.epreciation

Depreciation


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"actors in #omputing Depreciation

ost

SO 2 Eplain the concept o! depreciation.SO 2 Eplain the concept o! depreciation.

;seful Life 7alvage


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'anagement selects the method it believes best measures an

assets contribution to revenue over its useful life.

Depreciation $ethods

5xamples include!

(") 7traight:line method.

(#) 1eclining:balance method.

($) ;nits:of:activity method.

SO %SO %

Illustration 10-;se of depreciationmethods in ma=or ;.7.companies

.epreciation


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Illustration >arbs 8lorists purchased a small delivery truck on?anuary ", #"#.

Re!uired ompute depreciation using the follo+ing.(a) 7traight:Line. (b) ;nits:of:/ctivity. (c) 1eclining >alance.

SO % #ompute periodic depreciation using di!!erent methods.SO % #ompute periodic depreciation using di!!erent methods.

.epreciation

Illustration 10-/


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&traight-5ine 5xpense is sa"e a"ountfor each year.

1epreciable cost @ ost less salvage value.

Illustration 10-

.epreciation



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Illustration &traight-5ine 8ethod

2012 9 12,000 20: 9 2,400 9 2,400 9 10,00

2013 12,000 20 2,400 4,00 ,200

2014 12,000 20 2,400 /,200 +,00

201+ 12,000 20 2,400 ,00 3,400

201 12,000 20 2,400 12,000 1,000

2012;ournal'ntry

.epreciation e$pense 2,400

Accu"ulated depreciation 2,400

Illustration 10-10

.epreciation



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Assu"e the deliery truc 7as purchased on April 1, 2012%

SO %SO %

.epreciation Partial


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ompanies estimate total units of activity to calculate

depreciation cost per unit.

=nits-of-Actiity

Illustration 10-11

5xpense varies basedon units of activity.

1epreciable cost is

cost less salvage

value.

.epreciation



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Illustration =nits-of-Actiity 8ethod

2012 1+,000 9 0%12 9 1,00 9 1,00 9 11,200

2013 30,000 0%12 3,00 +,400 /,00

2014 20,000 0%12 2,400 /,00 +,200

201+ 2+,000 0%12 3,000 10,00 2,200

201 10,000 0%12 1,200 12,000 1,000

.epreciation e$pense 1,00

Accu"ulated depreciation 1,00

2012;ournal'ntry

Illustration 10-12

.epreciation



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.eclining->alance /ccelerated method.

1ecreasing annual depreciation expense over the assets

useful life. *+ice the straight:line rate +ith 1ouble:1eclining:>alance.

4ate applied to book value.

.epreciation


Illustration 10-13


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Illustration .eclining->alance 8ethod

2012 13,000 40: 9 +,200 9 +,200 9 /,00

2013 /,00 40 3,120 ,320 4,0

2014 4,0 40 1,/2 10,12 2,0

201+ 2,0 40 1,123 11,31+ 1,+

201 1,+ 40 +? 12,000 1,000

? (o"putation of 9/4 91,+ $ 40: is ad6usted to 9+%

.epreciation e$pense +,200

Accu"ulated depreciation +,200

2012;ournal'ntry

Illustration 10-14

SO %SO %

.epreciation


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10-2/ SO % #ompute periodic depreciation using di!!erent methods.SO % #ompute periodic depreciation using di!!erent methods.

Illustration .eclining->alance 8ethod

.epreciation Partial


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(o"parison of

8ethods

Illustration 10-1+

Illustration 10-1

'ach "ethod is

acceptable because

each recogni@es the

decline in sericepotential of the asset

in a rational and

syste"atic "anner%

SO %SO %

.epreciation


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947 does not require taxpayer to use the same depreciation

method on the tax return that is used in preparing financial

statements.

947 requires the straight-linemethod or a special

accelerated:depreciation method called the 8odified

Accelerated (ost Recoery &yste"('/47).

'/47 is N*) acceptableunder A//6.

Depreciation and Income &aes

.epreciation



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/ccounted for in the period of change and future

periods (hange in 5stimate).

2ot handled retrospectively.

2ot considered error.

SO ' Describe the procedure !or revising periodic depreciation.SO ' Describe the procedure !or revising periodic depreciation.

(evising )eriodic Depreciation

.epreciation


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Illustration /rcadia &7, purchased equipment for ",+hich +as estimated to have a useful life of " years +ith a

salvage value of ", at the end of that time. 1epreciation

has been recorded for - years on a straight:line basis. 9n #"#

(year 0), it is determined that the total estimated life should be" years +ith a salvage value of , at the end of that time.

No 'ntryNo 'ntryRe!uiredRe!uired

SO ' Describe the procedure !or revising periodic depreciation.SO ' Describe the procedure !or revising periodic depreciation.

uestions

Bhat is the =ournal entry to correct the

prior years depreciationC

alculate the depreciation expense for

#"#.

.epreciation


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5quipment5quipment ",",

6lant /ssets!6lant /ssets!

/ccumulated depreciation/ccumulated depreciation $,$,

2et book value (2>alance 7heet>alance 7heet (1ec. $", #"")(1ec. $", #"")

/fter - years/fter - years

5quipment cost ",7alvage value : ",

1epreciable base ,

;seful life (original) " years

/nnual depreciation , x - years @ $,

8irst, establish 2>oth international standards and DAAP follo7 the cost

principle 7hen accounting for property, plant, and e!uip"ent atdate of ac!uisition%

=nder both IFR& and DAAP, interest costs incurred during

construction are capitali@ed% Recently, IFR& conerged to DAAP

re!uire"ents in this area% IFR&, lie DAAP, capitali@es all direct costs in self-constructed

assets such as ra7 "aterials and labor% IFR& does not address

the capitali@ation of fi$ed oerhead%


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Hey Points IFR& also ie7s depreciation as an allocation of cost oer an

assets useful life% IFR& per"its the sa"e depreciation "ethods

e%g%, straight-line, accelerated, and units-of-actiity as DAAP%

Jo7eer, a "a6or difference is that IFR& re!uires co"ponent

depreciation% (o"ponent depreciation specifies that any

significant parts of a depreciable asset that hae different

esti"ated useful lies should be separately depreciated%

(o"ponent depreciation is allo7ed under DAAP but is seldo"

used% IFR& uses the ter" residual alue, rather than salage alue%


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Hey Points IFR& allo7s co"panies to realue plant assets to fair alue at

the reporting date% (o"panies that choose to use the

realuation fra"e7or "ust follo7 realuation procedures% If

realuation is used, it "ust be applied to all assets in a class of

assets% Assets that are e$periencing rapid price changes "ust

be realued on an annual basis, other7ise less fre!uent

realuation is acceptable%

=nder both DAAP and IFR&, changes in the depreciation

"ethod used and changes in useful life are handled in currentand future periods% Prior periods are not affected% DAAP

recently confor"ed to international standards in the accounting

for changes in depreciation "ethods%


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Hey Points )he accounting for subse!uent e$penditures, such as ordinary

repairs and additions, are essentially the sa"e under IFR& and

DAAP%

)he accounting for plant asset disposals is essentially the sa"eunder IFR& and DAAP%

Initial costs to ac!uire natural resources are essentially the

sa"e under IFR& and DAAP%

)he definition of intangible assets is essentially the sa"e underIFR& and DAAP%


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Hey Points Intangibles generally arise 7hen a co"pany buys another

co"pany% In this case, specific criteria are needed to separate

good7ill fro" other intangibles% >oth DAAP and IFR& follo7 the

sa"e approach to "ae this separation, that is, co"panies

recogni@e an intangible asset separately fro" good7ill if the

intangible represents contractual or legal rights or is capable of

being separated or diided and sold, transferred, licensed,

rented, or e$changed% In addition, under both DAAP and IFR&,

co"panies recogni@e ac!uired in-process research anddeelop"ent IPRE. as a separate intangible asset if it "eets

the definition of an intangible asset and its fair alue can be

"easured reliably%


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Hey Points IFR& re!uires an i"pair"ent test at each reporting date for

plant assets and intangibles and records an i"pair"ent if the

assets carrying a"ount e$ceeds its recoerable a"ount% )he

recoerable a"ount is the higher of the assets fair alue less

costs to sell or its alue-in-use% Galue-in-use is the future cash

flo7s to be deried fro" the particular asset, discounted to

present alue% =nder DAAP, i"pair"ent loss is "easured as the

e$cess of the carrying a"ount oer the assets fair alue%


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Hey Points IFR& allo7s reersal of i"pair"ent losses 7hen there has been

a change in econo"ic conditions or in the e$pected use of the

asset% =nder DAAP, i"pair"ent losses cannot be reersed for

assets to be held and used# the i"pair"ent loss results in a

ne7 cost basis for the asset% IFR& and DAAP are si"ilar in the

accounting for i"pair"ents of assets held for disposal%

)he accounting for e$changes of non"onetary assets has

recently conerged bet7een IFR& and DAAP% DAAP no7

re!uires that gains on e$changes of non"onetary assets berecogni@ed if the e$change has co""ercial substance% )his is

the sa"e fra"e7or used in IFR&%


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5ooing to the FutureIt is too early to say 7hether a conerged conceptual fra"e7or

7ill reco""end fair alue "easure"ent and realuation

accounting for plant assets and intangibles% )he IA&> and FA&>

hae identified a pro6ect that 7ould consider e$panded recognitionof internally generated intangible assets% IFR& per"its "ore

recognition of intangibles co"pared to DAAP% )hus, it 7ill be

challenging to deelop conerged standards for intangible assets,

gien the long-standing prohibition on capitali@ing internally

generated intangible assets and research and deelop"ent costs

in DAAP%


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Khich of the follo7ing state"ents is correctL

a >oth IFR& and DAAP per"it realuation of property, plant,

and e!uip"ent and intangible assets e$cept for

good7ill%

b IFR& per"its realuation of property, plant, and

e!uip"ent and intangible assets e$cept for good7ill%

c >oth IFR& and DAAP per"it realuation of property, plant,and e!uip"ent but not intangible assets%

d DAAP per"its realuation of property, plant, and

e!uip"ent but not intangible assets%

IFR& &elf-)est uestions


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Research and deelop"ent costs are

a e$pensed under DAAP%

b e$pensed under IFR&%

c e$pensed under both DAAP and IFR&%

d None of the aboe%



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=nder IFR&, alue-in-use is defined as

a net reali@able alue%

b fair alue%

c future cash flo7s discounted to present alue%

d total future undiscounted cash flo7s%


( i ht( i ht


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Weygandt Accounting Principles 10e PowerPoint Ch10

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