Study
Study Objectives
Objectives
Reporting and Analyzing
Long-Lived Assets
Chapter
9-1
Chapter
9-2
Reporting
-Lived Assets
Long
Reporting and
and Analyzing
Analyzing LongLong-Lived
Assets
Section One
Determining the cost of
plant assets
Accounting for plant
assets
Analyzing plant assets
used in operations of business,
Accounting for
intangibles assets
Types of intangibles
assets
Financial statement
presentation of longlonglived assets
Chapter
9-4
4.
Describe the procedure for revising periodic depreciation.
5.
Explain how to account for the disposal of plant assets.
6.
Describe methods for evaluating the use of plant assets.
7.
Identify the basic issues related to reporting intangible assets.
8.
Indicate how long-lived assets are reported in the financial
statements.
9.
Compute periodic depreciation using the declining-balance method
and the units-of-activity method.
Determining
Determining the
the Cost
Cost of
of Plant
Plant Assets
Assets
not intended for sale to customers,
Revenue expenditure - expensed immediately.
expected to provide service for a number of years.
Capital expenditures - included in a plant asset account.
Referred to as property, plant, and equipment; plant and
equipment; and fixed assets.
Chapter
9-5
Determining
Determining the
the Cost
Cost of
of Plant
Plant Assets
Assets
Compute periodic depreciation using the straight-line method, and
contrast its expense pattern with those of other methods.
Cost consists of all expenditures necessary to acquire an
asset and make it ready for its intended use.
physical substance,
Intangible
Assets
Explain the concept of depreciation.
3.
Cost Principle - record plant assets at cost.
Plant assets are resources that have
Plant Assets
Describe how the cost principle applies to plant assets.
2.
Chapter
9-3
Financial Accounting, Fifth Edition
Plant
Plant Assets
Assets
1.
Chapter
9-6
Statement
Statement Presentation
Presentation of
of Long-Lived
Long-Lived Assets
Assets
Cost is measured by the cash paid in a cash transaction
Illustration 9-22
SO 1 Describe how the cost principle applies to plant assets.
Determining
Determining the
the Cost
Cost of
of Plant
Plant Assets
Assets
Land
or by the cash equivalent price paid.
All necessary costs incurred in making land ready for its
intended use increase (debit) the Land account.
The cash equivalent price is equal to
Costs typically include:
the fair market value of the asset given up or
1) the cash purchase price,
the fair market value of the asset received,
2) closing costs such as title and attorney’s fees,
whichever is more clearly determinable.
3) real estate brokers’ commissions, and
4) accrued property taxes and other liens on the land
assumed by the purchaser.
Chapter
9-7
SO 1 Describe how the cost principle applies to plant assets.
Chapter
9-8
SO 8 Indicate how longlong-lived assets are reported in the financial statements.
Chapter
9-9
SO 1 Describe how the cost principle applies to plant assets.
Determining
Determining the
the Cost
Cost of
of Plant
Plant Assets
Assets
Determining
Determining the
the Cost
Cost of
of Plant
Plant Assets
Assets
Illustration: Assume that Hayes Manufacturing Company
acquires real estate at a cash cost of $100,000. The
property contains an old warehouse that is razed at a net
cost of $6,000 ($7,500 in costs less $1,500 proceeds from
salvaged materials). Additional expenditures are the
attorney’s fee, $1,000, and the real estate broker’s
commission, $8,000.
Required: Determine amount to be reported as the cost of
the land.
Required: Determine amount to be reported as the cost of
the land.
Chapter
9-10
SO 1 Describe how the cost principle applies to plant assets.
Determining
Determining the
the Cost
Cost of
of Plant
Plant Assets
Assets
Attorney's fees ($1,000)
Limited useful lives.
Real estate broker’s commission ($8,000)
Expense (depreciate) the cost of land improvements
over their useful lives.
Cost of Land
Chapter
9-11
SO 1 Describe how the cost principle applies to plant assets.
Determining
Determining the
the Cost
Cost of
of Plant
Plant Assets
Assets
Purchase costs:
Costs typically include:
Purchase price, closing costs (attorney’s fees, title
insurance, etc.) and real estate broker’s commission.
cash purchase price
Remodeling and replacing or repairing the roof, floors,
electrical wiring, and plumbing.
freight charges
Chapter
9-12
SO 1 Describe how the cost principle applies to plant assets.
Determining
Determining the
the Cost
Cost of
of Plant
Plant Assets
Assets
Illustration: Lenard Company purchases a delivery truck at
a cash price of $22,000. Related expenditures are sales
taxes $1,320, painting and lettering $500, motor vehicle
license $80, and a three-year accident insurance policy
$1,600. Compute the cost of the delivery truck.
Truck
sales taxes
insurance during transit paid by the purchaser
Construction costs:
expenditures required in assembling, installing, and
testing the unit
Contract price plus payments for architects’ fees, building
permits, and excavation costs.
Illustration: Lenard Company purchases a delivery truck at
a cash price of $22,000. Related expenditures are sales
taxes $1,320, painting and lettering $500, motor vehicle
license $80, and a three-year accident insurance policy
$1,600. Prepare the journal entry to record these costs.
Examples are driveways, parking lots, fences,
landscaping, and underground sprinklers.
Net removal cost of warehouse ($6,000)
Include all costs incurred in acquiring the equipment and
preparing it for use.
Determining
Determining the
the Cost
Cost of
of Plant
Plant Assets
Assets
Includes all expenditures necessary to make the
improvements ready for their intended use.
Cash price of property ($100,000)
Includes all costs related directly to purchase or
construction.
SO 1 Describe how the cost principle applies to plant assets.
Land Improvements
Land
Equipment
Buildings
Chapter
9-13
Determining
Determining the
the Cost
Cost of
of Plant
Plant Assets
Assets
Chapter
9-14
SO 1 Describe how the cost principle applies to plant assets.
Accounting
Accounting for
for Plant
Plant Assets
Assets
Cost of Delivery Truck
Chapter
9-15
SO 1 Describe how the cost principle applies to plant assets.
Accounting
Accounting for
for Plant
Plant Assets
Assets
Factors in Computing Depreciation
Depreciation
Illustration 9-6
The process of allocating to expense the cost of a plant
asset over its useful (service) life in a rational and
systematic manner.
Cost
Useful Life
Salvage Value
Process of cost allocation, not asset valuation.
Applies to land improvements, buildings, and equipment,
not land.
Depreciable, because the revenue-producing ability of
asset will decline over the asset’s useful life.
Chapter
9-16
SO 1 Describe how the cost principle applies to plant assets.
Chapter
9-17
SO 2 Explain the concept of depreciation.
Chapter
9-18
SO 2 Explain the concept of depreciation.
Accounting
Accounting for
for Plant
Plant Assets
Assets
Accounting
Accounting for
for Plant
Plant Assets
Assets
Accounting
Accounting for
for Plant
Plant Assets
Assets
Depreciation Methods
UC Company - Income Statement
Illustration: Assume that in January of 2005, UC Company
purchased equipment for $75,000. The equipment would be
useful to UC for three years.
Cash Basis Accounting
2005
2006
2007
Total
Question:
Revenues
$ 100,000
Depreciation Expenses (75,000)
$ 100,000
$
100,000
$ 300,000
(75,000)
What impact would this equipment have on UC’s future
Income Statements, if:
Net income (loss)
$ 100,000
$
100,000
$ 225,000
$
25,000
Management selects the method it believes best measures
an asset’s contribution to revenue over its useful life.
Examples include:
(1) Straight-line method.
(2) Declining-balance method.
Accrual Basis Accounting
a. UC used the cash basis of accounting
2005
Revenues
$ 100,000
Depreciation Expenses
(25,000)
b. UC used the accrual basis of accounting?
Net income (loss)
Chapter
9-19
$
75,000
2006
2007
$ 100,000 $ 300,000
(25,000)
(75,000)
$
$
75,000
75,000
(3) Units-of-Activity method.
Total
$ 100,000
(25,000)
Illustration 9-7
Use of depreciation
methods in major U.S.
companies
$ 225,000
Chapter
9-20
SO 3
Chapter
9-21
Compute periodic depreciation using the straightstraight-line method,
and contrast its expense pattern with those of other methods.
Excel
Accounting
Accounting for
for Plant
Plant Assets
Assets
Accounting
Accounting for
for Plant
Plant Assets
Assets
Illustration: Bill’s Pizzas purchased a small delivery truck
on January 1, 2010.
Accounting
Accounting for
for Plant
Plant Assets
Assets
Illustration: (Straight-Line Method)
Straight-Line
Expense is same amount for each year.
Depreciable cost is cost of the asset less its salvage
value.
Illustration 9-8
Required: Compute depreciation using the following.
(a) Straight-Line.
(b) Units-of-Activity.
Chapter
9-22
SO 3
Compute periodic depreciation using the straightstraight-line method,
and contrast its expense pattern with those of other methods.
Partial
Year
Accounting
Accounting for
for Plant
Plant Assets
Assets
Year
Depreciable
Cost
Annual
Expense
2010
$ 12,000
x
20% =
$ 2,400
2011
12,000
x
20% =
2012
12,000
x
20% =
Partial
Year
x
9/12
=
$
$ 1,800
2,400
2,400
4,200
2,400
2,400
6,600
2013
12,000
x
20% =
2,400
2,400
9,000
2014
12,000
x
20% =
2,400
2,400
11,400
2015
12,000
x
20% =
2,400
600
12,000
3/12
=
Compute periodic depreciation using the straightstraight-line method,
and contrast its expense pattern with those of other methods.
2010
$ 12,000
$ 2,400
$ 2,400
$ 10,600
2011
12,000
20
2,400
4,800
8,200
2012
12,000
20
2,400
7,200
5,800
2013
12,000
20
2,400
9,600
3,400
2014
12,000
20
2,400
12,000
1,000
Rate
=
20%
Accum.
Deprec.
Book
Value
Depreciation expense
2,400
Accumulated depreciation
SO 3
Chapter
9-24
x
Annual
Expense
2,400
Compute periodic depreciation using the straightstraight-line method,
and contrast its expense pattern with those of other methods.
Accounting
Accounting for
for Plant
Plant Assets
Assets
Illustration: (Declining-Balance Method)
Declining
Balance
x Rate =
Illustration 9-10
Decreasing annual depreciation expense over the
asset’s useful life.
Year
Beginning
Book value
2010
13,000
40%
$ 5,200
$ 5,200
$ 7,800
Double declining-balance rate is double the straightline rate.
2012
7,800
40
3,120
8,320
4,680
2013
4,680
40
1,872
10,192
2,808
2014
2,808
40
1,123
11,315
1,685
2015
1,685
40
12,000
1,000
Accelerated method.
Accum.
Deprec.
1,800
x
SO 3
Declining-Balance
Assuming the delivery truck was purchased on April 1, 2010.
Current
Year
Expense
Chapter
9-23
Accounting
Accounting for
for Plant
Plant Assets
Assets
Illustration: (Straight-Line Method)
Rate
Year
2010
Journal
Entry
(c) Declining Balance.
Illustration 9-9
Depreciable
Cost
Rate applied to book value.
Annual
Expense
685*
Accum.
Deprec.
Book
Value
$ 12,000
Journal entry:
2010
Depreciation expense
Accumultated depreciation
Chapter
9-25
SO 3
2010
Journal
Entry
1,800
1,800
Compute periodic depreciation using the straightstraight-line method,
and contrast its expense pattern with those of other methods.
Chapter
9-26
SO 3
Compute periodic depreciation using the straightstraight-line method,
and contrast its expense pattern with those of other methods.
Chapter
9-27
Depreciation expense
5,200
Accumulated depreciation
* Computation of $674 ($1,685 x 40%) is adjusted to $685.
5,200
Partial Year
Depreciation
Depreciation using
using Other
Other Methods
Methods
Purchased on
4/1/10
Illustration: (Declining-Balance Method)
Declining
Balance
Rate
Annual
Expense
Partial
Year
9/12
Current
Year
Expense
2010
$ 13,000 x
40%
= $ 5,200 x
3,900
$ 3,900
2011
9,100 x
40%
=
3,640
3,640
7,540
2012
5,460 x
40%
=
2,184
2,184
9,724
2013
3,276 x
40%
=
1,310
1,310
11,034
2014
1,966 x
40%
=
786
2015
1,179 x
40%
=
472
786
11,821
179
12,000
Illustration 9-11
Companies estimate total units of activity to calculate
depreciation cost per unit.
Accum.
Deprec.
Year
Plug
Illustration: (Units-of-Activity Method)
Units-of-Activity
Beginning
Book Value
= $
Accounting
Accounting for
for Plant
Plant Assets
Assets
Accounting
Accounting for
for Plant
Plant Assets
Assets
Illustration 9A-3
Expense varies based on
units of activity.
Depreciable cost is cost
less salvage value.
$ 12,000
Journal entry:
2010
Depreciation expense
3,900
Accumultated depreciation
SO 9
Chapter
9-28
Accounting
Accounting for
for Plant
Plant Assets
Assets
Chapter
9-29
SO 3
Compute periodic depreciation using the straightstraight-line method,
and contrast its expense pattern with those of other methods.
Accounting
Accounting for
for Plant
Plant Assets
Assets
Illustration 9-12
SO 3
Plant
Plant Asset
Asset Disposals
Disposals
Illustration: On July 1, 2010, Wright Company sells office
furniture for $16,000 cash. The office furniture originally
cost $60,000. As of January 1, 2010, it had accumulated
depreciation of $41,000. Depreciation for the first six
months of 2010 is $8,000. Prepare the journal entry to
record depreciation expense up to the date of sale.
July 1
Chapter
9-34
=
Book
Expense
Deprec.
Value
15,000
$ 0.12
$ 1,800
$ 1,800
$ 11,200
0.12
3,600
5,400
7,600
2012
20,000
0.12
2,400
7,800
5,200
2013
25,000
0.12
3,000
10,800
2,200
2014
10,000
0.12
1,200
12,000
1,000
Depreciation expense
Accumulated depreciation
SO 3
Chapter
9-30
1,800
1,800
Compute periodic depreciation using the straightstraight-line method,
and contrast its expense pattern with those of other methods.
Sale of Plant Assets
Compare the book value of the asset with the proceeds
received from the sale.
If proceeds exceed the book value, a gain on disposal
occurs.
If proceeds are less than the book value, a loss on
disposal occurs.
Record depreciation up to the date of disposal.
Eliminate asset by (1) debiting Accumulated Depreciation, and
(2) crediting the asset account.
Chapter
9-32
SO 5 Explain how to account for the disposal of a plant asset.
Plant
Plant Asset
Asset Disposals
Disposals
Chapter
9-33
SO 5 Explain how to account for the disposal of a plant asset.
Plant
Plant Asset
Asset Disposals
Disposals
Illustration: Assume that instead of selling the office
furniture for $16,000, Wright sells it for $9,000.
Illustration 9-16
Computation of gain
on disposal
Illustration 9-17
Computation of loss
on disposal
Illustration: Wright records the sale as follows.
July 1
SO 5 Explain how to account for the disposal of a plant asset.
Hour
30,000
Illustration 9-15
Compute periodic depreciation using the straightstraight-line method,
and contrast its expense pattern with those of other methods.
x
Accum.
2011
Illustration 9-13
Chapter
9-31
Used
Annual
2010
Companies dispose of plant assets in three ways —
Retirement, Sale, or Exchange (appendix).
Each method is
acceptable because
each recognizes the
decline in service
potential of the asset
in a rational and
systematic manner.
Rate per
Plant
Plant Asset
Asset Disposals
Disposals
Plant Asset Disposals
Comparison of
Depreciation
Methods
Year
2010
Journal
Entry
3,900
Compute periodic depreciation using the decliningdecliningbalance method and the unitsunits-ofof-activity method.
Hours
Chapter
9-35
July 1
SO 5 Explain how to account for the disposal of a plant asset.
Chapter
9-36
SO 5 Explain how to account for the disposal of a plant asset.
Plant
Plant Asset
Asset Disposals
Disposals
Illustration: Assume that Hobart Enterprises retires
its computer printers, which cost $32,000. The accumulated
depreciation on these printers is $32,000. The journal entry
to record this retirement is?
Plant
Plant Asset
Asset Disposals
Disposals
Accounting
Accounting for
for Plant
Plant Assets
Assets
Depreciation and Income Taxes
Retirement of Plant Assets
¾ No cash is received.
¾ Decrease (debit) Accumulated Depreciation for
the full amount of depreciation taken over the life
of the asset.
¾ Decrease (credit) the asset account for the
original cost of the asset.
IRS does not require taxpayer to use the same
depreciation method on the tax return that is used in
preparing financial statements.
IRS requires the straight-line method or a special
accelerated-depreciation method called the Modified
Accelerated Cost Recovery System (MACRS). MACRS is
NOT acceptable under GAAP.
Question: What happens if a fully depreciated plant asset is still
useful to the company?
Chapter
9-37
SO 5 Explain how to account for the disposal of a plant asset.
Accounting
Accounting for
for Plant
Plant Assets
Assets
Revising Periodic Depreciation
Chapter
9-38
SO 5 Explain how to account for the disposal of a plant asset.
Accounting
Accounting for
for Plant
Plant Assets
Assets
A permanent decline in the market value of an
asset.
Debit - Repair (or Maintenance) Expense.
Not considered error.
Compute periodic depreciation using the straightstraight-line method,
and contrast its expense pattern with those of other methods.
Impairments
Ordinary Repairs - expenditures to maintain the
operating efficiency and productive life of the unit.
Not handled retrospectively.
SO 3
Accounting
Accounting for
for Plant
Plant Assets
Assets
Expenditure During Useful Life
Accounted for in the period of change and future
periods (Change in Estimate).
Chapter
9-39
So as not to overstate the asset on the books, the
company writes the asset down to its new market
value during the year in which the decline in value
occurs.
Additions and Improvements - costs incurred to
increase the operating efficiency, productive capacity,
or useful life of a plant asset.
Debit - the plant asset affected.
Referred to as capital expenditures.
Chapter
9-40
SO 4 Describe the procedure for revising periodic depreciation.
Determining
Determining the
the Cost
Cost of
of Plant
Plant Assets
Assets
To Buy or Lease?
A lease is a contractual agreement in which the owner of
an asset (the lessor) allows another party (the lessee) to
use the asset for a period of time at an agreed price.
Some advantages of leasing
Chapter
9-41
SO 4 Describe the procedure for revising periodic depreciation.
Section Two
Intangible
Intangible Assets
Assets
Intangible assets are rights, privileges, and competitive
advantages that result from ownership of long-lived
assets that do not possess physical substance.
Chapter
9-42
SO 4 Describe the procedure for revising periodic depreciation.
Accounting
Accounting for
for Intangible
Intangible Assets
Assets
Amortization of Intangibles
Limited-Life Intangibles:
Amortize to expense.
Limited life or an indefinite life.
Credit asset account or accumulated amortization.
Common types of intangibles:
1. Reduced risk of obsolescence.
Patents
Trademarks
2. Little or no down payment.
Copyrights
Trade names
3. Shared tax advantages.
Franchises or licenses
Goodwill
Indefinite-Life Intangibles:
No foreseeable limit on time the asset is expected to
provide cash flows.
No amortization.
4. Assets and liabilities not reported.
Capital lease - lessees show the asset and liability on the balance sheet.
Chapter
9-43
SO 1 Describe how the cost principle applies to plant assets.
Chapter
9-44
SO 7 Identify the basic issues related to reporting intangible assets.
Chapter
9-45
SO 7 Identify the basic issues related to reporting intangible assets.
Excel
Types
Types of
of Intangible
Intangible Assets
Assets
Patents
Exclusive right to manufacture, sell, or otherwise
control an invention for a period of 20 years from the
date of the grant.
Capitalize costs of purchasing a patent and amortize
over its 20-year life or its useful life, whichever is
shorter.
Types
Types of
of Intangible
Intangible Assets
Assets
Illustration: Assume that National Labs purchases a patent
at a cost of $60,000 on June 30. National estimates the
useful life of the patent to be eight years. Prepare the
journal entry to record the amortization for the six-month
period ended December 31.
Types
Types of
of Intangible
Intangible Assets
Assets
Research and Development Costs
Expenditures that may lead to
patents,
copyrights,
new processes, and
All R & D costs
are expensed
when incurred.
new products.
Expense any R&D costs in developing a patent.
Legal fees incurred successfully defending a patent
are capitalized to Patent account.
Chapter
9-46
SO 7 Identify the basic issues related to reporting intangible assets.
Types
Types of
of Intangible
Intangible Assets
Assets
Copyrights
Journal Entry
Chapter
9-47
SO 7 Identify the basic issues related to reporting intangible assets.
Types
Types of
of Intangible
Intangible Assets
Assets
Trademarks and Trade Names
Chapter
9-48
Types
Types of
of Intangible
Intangible Assets
Assets
Franchises and Licenses
Word, phrase, jingle, or symbol that identifies a
particular enterprise or product.
Give the owner the exclusive right to reproduce and
sell an artistic or published work.
Contractual arrangement between a franchisor and a
franchisee.
¾ Wheaties, Monopoly, Sunkist, Kleenex, Coca-Cola,
Copyright is granted for the life of the creator plus
70 years.
¾ Toyota, Shell, Subway, and Marriott are
Big Mac, and Jeep.
Capitalize costs of acquiring and defending it.
Amortized to expense over useful life.
franchises.
Trademark or trade name has legal protection for
indefinite number of 20 year renewal periods.
Franchise (or license) with a limited life should be
amortized to expense over the life of the franchise.
Capitalize acquisition costs.
Franchise with an indefinite life should be carried at
cost and not amortized.
No amortization.
Chapter
9-49
SO 7 Identify the basic issues related to reporting intangible assets.
Types
Types of
of Intangible
Intangible Assets
Assets
Goodwill
Includes exceptional management, desirable location,
good customer relations, skilled employees, high-quality
products, etc.
Chapter
9-50
Illustration: Identify the term most directly associated
with each statement.
Internally created goodwill should not be capitalized.
Illustration: Identify the term most directly associated
with each statement.
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.
3. An exclusive right granted by the
federal government to reproduce and
sell an artistic or published work.
Chapter
9-53
SO 7 Identify the basic issues related to reporting intangible assets.
SO 7 Identify the basic issues related to reporting intangible assets.
Types
Types of
of Intangible
Intangible Assets
Assets
2. Rights, privileges, and competitive
advantages that result from the
ownership of long-lived assets that do
not possess physical substance.
purchase price over the FMV of the identifiable net
assets acquired.
SO 7 Identify the basic issues related to reporting intangible assets.
Chapter
9-51
1. The allocation to expense of the cost
of an intangible asset over the asset’s
useful life.
Goodwill is recorded as the excess of ...
Chapter
9-52
SO 7 Identify the basic issues related to reporting intangible assets.
Types
Types of
of Intangible
Intangible Assets
Assets
Only recorded when an entire business is purchased.
SO 7 Identify the basic issues related to reporting intangible assets.
Chapter
9-54
SO 7 Identify the basic issues related to reporting intangible assets.
Statement
Statement Presentation
Presentation of
of Long-Lived
Long-Lived Assets
Assets
Statement
Statement Presentation
Presentation of
of Long-Lived
Long-Lived Assets
Assets
Copyright
Copyright
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use of these programs or from the use of the information
contained herein.”
Illustration 9-22
A difference between accrual-accounting net income and net cash provided
by operating activities is caused by depreciation and amortization expense.
Chapter
9-55
SO 8 Indicate how longlong-lived assets are reported in the financial statements.
Chapter
9-56
SO 8 Indicate how longlong-lived assets are reported in the financial statements.
Chapter
9-57