Chapter 8
Reporting and Interpreting Property,
Plant, and Equipment; Natural
Resources; and Intangibles
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2001
Business Background
Costly excess
capacity reduces
profits.
Insufficient
capacity results
in lost sales.
How much
is enough?
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2001
Classification of Long-Lived Assets
Actively Used in Operations
Expected to Benefit Future Periods
Tangible
Intangible
Physical
Substance
No Physical
Substance
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2001
Classification of Long-Lived Assets
Actively Used in Operations
Examples
!
Land
!
Assets subject to depreciation
"Buildings and equipment
"Furniture and fixtures
!
Natural resource
assets
Intangible
subject to depletion
Expected to Benefit Future Periods
Tangible
Physical
Substance
Irwin/McGraw-Hill
"
Physical
Mineral No
deposits
and timber
Substance
© The McGraw-Hill Companies, Inc., 2001
Classification of Long-Lived Assets
Actively Used in Operations
Examples
!
Value represented by rights
Expected
to Benefit Future Periods
that produce
benefits
Patents
Copyrights
Trademarks
Intangible
Tangible
Franchises
Goodwill
No Physical
Physical
!
Subject
to amortization
Substance
Irwin/McGraw-Hill
Substance
© The McGraw-Hill Companies, Inc., 2001
Measuring and Recording
Acquisition Cost
Acquisition
Acquisition cost
cost includes
includes the
the purchase
purchase
price
price and
and all
all expenditures
expenditures needed
needed to
to
prepare
prepare the
the asset
asset for
for its
its intended
intended use.
use.
Acquisition
Acquisition cost
cost does
does not
not include
include
financing
financing charges
charges and
and cash
cash discounts.
discounts.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2001
Acquisition Cost
Buildings
#
#Purchase
Purchase price
price
#
#Architectural
Architectural fees
fees
#
#Cost
Cost of
of permits
permits
#
#Excavation
Excavation costs
costs
#
#Construction
Construction costs
costs
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2001
Acquisition Cost
Equipment
#
#Purchase
Purchase price
price
#
#Installation
Installation costs
costs
#
#Modification
Modification to
to building
building
necessary
necessary to
to install
install
equipment
equipment
#
#Transportation
Transportation costs
costs
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2001
Acquisition Cost
Land
#
#Purchase
Purchase price
price
#
#Real
Real estate
estate commissions
commissions
#
#Title
Title insurance
insurance premiums
premiums
#
#Delinquent
Delinquent taxes
taxes
#
#Surveying
Surveying fees
fees
#
#Title
Title search
search and
and transfer
transfer fees
fees
Land is not depreciable.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2001
Acquisition for Cash
On June 1, Delta Air Lines purchased
aircraft for $60,000,000 cash.
GENERAL JOURNAL
Date
June
Description
Debit
Page 8
Credit
1
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2001
Acquisition for Cash
On June 1, Delta Air Lines purchased
aircraft for $60,000,000 cash.
GENERAL JOURNAL
Date
June
Description
1 Flight equipment
Cash
Irwin/McGraw-Hill
Debit
Page 8
Credit
60,000,000
60,000,000
© The McGraw-Hill Companies, Inc., 2001
Acquisition for Debt
On June 14, Delta Air Lines purchased
aircraft for $1,000,000 cash and a
$59,000,000 note payable.
GENERAL JOURNAL
Date
Description
Debit
Page 9
Credit
June 14
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2001
Acquisition for Debt
On June 14, Delta Air Lines purchased
aircraft for $1,000,000 cash and a
$59,000,000 note payable.
GENERAL JOURNAL
Date
Description
June 14 Flight equipment
Cash
Note payable
Irwin/McGraw-Hill
Debit
Page 9
Credit
60,000,000
1,000,000
59,000,000
© The McGraw-Hill Companies, Inc., 2001
Acquisition for
Noncash Consideration
Record at the current market value of the
consideration given, or the current market
value of the asset acquired, whichever is
more clearly evident.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2001
Acquisition for
Noncash Consideration
On July 7, Delta purchased a $60,000,000
aircraft for $26,000,000 cash plus 400,000
shares of $3 par value common stock.
GENERAL JOURNAL
Date
July
Description
Debit
Page 10
Credit
7
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2001
Acquisition for
Noncash Consideration
On July 7, Delta purchased a $60,000,000
aircraft for $26,000,000 cash plus 400,000
shares of $3 par value common stock.
GENERAL JOURNAL
Date
July
Description
7 Flight equipment
Cash
Common stock
Additional paid-in capital
Irwin/McGraw-Hill
Debit
Page 10
Credit
60,000,000
26,000,000
1,200,000
32,800,000
© The McGraw-Hill Companies, Inc., 2001
Acquisition by Construction
Asset
Asset cost
cost includes:
includes:
All materials and
labor traceable to
the construction.
Irwin/McGraw-Hill
A reasonable
amount of
overhead.
Interest on debt
incurred during
the construction.
© The McGraw-Hill Companies, Inc., 2001
Acquisition as a Basket Purchase
The total cost of a combined purchase of
land and building is separated on the basis
of their relative market values.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2001
Acquisition as a Basket Purchase
On
On January
January 1,
1, Delta
Delta purchased
purchased land
land and
and
building
building for
for $300,000
$300,000 cash.
cash. The
The
appraised
appraised values
values are
are building,
building, $189,000,
$189,000,
and
and land,
land, $126,000.
$126,000. How
How much
much of
of the
the
$300,000
$300,000 purchase
purchase price
price will
will be
be charged
charged
to
to the
the building
building and
and land
land accounts?
accounts?
Continue
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2001
Acquisition as a Basket Purchase
Asset
Appraised
Value
% of
Value
Purchase
Price
Assigned
Cost
b*
c
b × c
Land
Building
Total
a
$ 126,000
189,000
$ 315,000
40%
60%
100%
* $126,000 ÷ $315,000 = 40%
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2001
Acquisition as a Basket Purchase
Asset
Appraised
Value
% of
Value
b*
Land
Building
Total
a
$ 126,000
189,000
$ 315,000
Purchase
Price
Assigned
Cost
c
b × c
40% × $ 300,000 = $ 120,000
60% ×
300,000 =
180,000
100%
$ 300,000
* $126,000 ÷ $315,000 = 40%
Prepare the journal entry to record the
purchase of land and building.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2001
Acquisition as a Basket Purchase
GENERAL JOURNAL
Date
Jan.
Description
1 Land
Credit
120,000
Building
Cash
Irwin/McGraw-Hill
Debit
Page 11
180,000
300,000
© The McGraw-Hill Companies, Inc., 2001
Repairs, Maintenance,
and Additions
Type of
Ex pe nditure
Ca pita l or
Re ve nue
Ordina ry
re pa irs a nd
m a inte na nce
Re ve nue 1. Ma inta ins norm a l ope ra ting condition
2. Doe s not incre a se productivity
3. Doe s not e x te nd life be yond origina l
e stim a te
Ide ntifying Cha ra cte ristics
Ex tra ordina ry
re pa irs
Ca pita l
1. Ma jor ove rha uls or pa rtia l
re pla ce m e nts
2. Ex te nds life be yond origina l e stim a te
Additions
Ca pita l
1. Incre a se s productivity
2. Ma y e x te nd use ful life
3. Im prove m e nts or e x pa nsions
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2001
Capital and Revenue Expenditures
Financial Statement Effect
Treatment
Statement
Expense
Current Current
Income Taxes
Capital
Expenditure
Balance sheet
account debited
Deferred
Higher
Higher
Revenue Income statement Currently
Expenditure account debited recognized Low er
Low er
Many companies have policies expensing all
expenditures below a certain amount
according to the materiality constraint.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2001
Depreciation
Depreciation
Depreciation is
is aa cost
cost allocation
allocation process
process
that
that systematically
systematically and
and rationally
rationally matches
matches
acquisition
acquisition costs
costs of
of operational
operational assets
assets
with
with periods
periods benefited
benefited by
by their
their use.
use.
Balance Sheet
Acquisition
Cost
(Unused)
Irwin/McGraw-Hill
Income Statement
Cost
Allocation
Expense
(Used)
© The McGraw-Hill Companies, Inc., 2001
Depreciation
Depreciation
Expense
Depreciation for
the current year
Accumulated
Depreciation
Total of depreciation
to date on an asset
Irwin/McGraw-Hill
Income
Statement
Balance
Sheet
© The McGraw-Hill Companies, Inc., 2001
Depreciation on Delta’s
1998 Balance Sheet
Property and Equipment:
Flight equipment
Less: Accumulated depreciation
$ 11,180
3,895
Flight equipment under capital lease
Less: Accumulated depreciation
Ground property and equipment
Less: Accumulated depreciation
$
$
7,285
515
216
299
3,285
1,854
1,431
Advance payments for equipment
Total property and equipment
$
306
9,321
Book Values
Book value =/ Market value
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2001
Depreciation Concepts
The
The calculation
calculation of
of depreciation
depreciation requires
requires
three
three amounts
amounts for
for each
each asset:
asset:
$
$ Acquisition
Acquisition cost.
cost.
%
% Estimated
Estimated useful
useful life.
life.
&
& Estimated
Estimated residual
residual value.
value.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2001
Alternative Depreciation Methods
$
$ Straight-line
Straight-line
%
% Units-of-production
Units-of-production
&
& Accelerated
Accelerated Method:
Method:
Declining
Declining balance
balance
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2001
Straight-Line Method
Depreciation
Expense per Year
=
Cost - Residual Value
Life in Years
At the beginning of the year, Delta
purchased equipment for $62,500 cash.
The equipment has an estimated useful
life of 3 years and an estimated
residual value of $2,500.
SL
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2001
Straight-Line Method
Depreciation
Expense per Year
=
Cost - Residual Value
Life in Years
Depreciation
Expense per Year
=
$62,500 - $2,500
3 years
Depreciation
Expense per Year
=
Irwin/McGraw-Hill
$20,000
SL
© The McGraw-Hill Companies, Inc., 2001
Straight-Line Method
Depreciation Accumulated
Expense
Depreciation
Year
(debit)
(credit)
1
2
3
$ 20,000
20,000
20,000
$ 60,000
$
$
20,000
20,000
20,000
60,000
Accumulated
Depreciation
Balance
$
20,000
40,000
60,000
Undepreciated
Balance
(book value)
$
62,500
42,500
22,500
2,500
Residual Value
SL
Irwin/McGraw-Hill
More than 95 percent of companies use the
straight-line method for some or all of their
assets method in financial reports.
© The McGraw-Hill Companies, Inc., 2001
Units-of-Production Method
Step 1:
Depreciation
Rate
=
Cost - Residual Value
Life in Units of Production
=
Number of
Depreciation
× Units Produced
Rate
for the Year
Step 2:
Depreciation
Expense
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2001
Units-of-Production Method
At
At the
the beginning
beginning of
of the
the year,
year, Delta
Delta purchased
purchased
ground
ground equipment
equipment for
for $62,500
$62,500 cash.
cash. The
The
equipment
equipment has
has aa 100,000
100,000 mile
mile useful
useful life
life and
and
an
an estimated
estimated residual
residual value
value of
of $2,500.
$2,500.
IfIf the
the equipment
equipment is
is used
used 30,000
30,000 miles
miles in
in the
the
first
first year,
year, what
what is
is the
the amount
amount of
of depreciation
depreciation
expense?
expense?
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2001
Units-of-Production Method
Step 1:
Depreciation =
Rate
$62,500 - $2,500
100,000 miles
= $.60 per mile
Step 2:
Depreciation
= $.60 per mile × 30,000 miles = $18,000
Expense
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2001
Units-of-Production Method
Year
Miles
1
2
3
30,000
50,000
20,000
100,000
Irwin/McGraw-Hill
Depreciation
Expense
Accumulated
Depreciation
Balance
$
$
18,000
18,000
Undepreciated
Balance
(book value)
$
62,500
44,500
© The McGraw-Hill Companies, Inc., 2001
Units-of-Production Method
Year
Miles
1
2
3
30,000
50,000
20,000
100,000
Depreciation
Expense
Accumulated
Depreciation
Balance
$
$
$
18,000
30,000
12,000
60,000
18,000
48,000
60,000
Undepreciated
Balance
(book value)
$
62,500
44,500
14,500
2,500
Residual Value
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2001
Accelerated Depreciation
Accelerated depreciation matches higher
depreciation expense with higher revenues
in the early years of an asset’s useful life
when the asset is more efficient.
Depreciation
Expense
Early Years
High
Later Years
Irwin/McGraw-Hill
Low
Repair
Expense
Low
High
© The McGraw-Hill Companies, Inc., 2001
Double-Declining-Balance Method
Declining balance rate of 2 is
double-declining-balance (DDB) rate.
Annual
Depreciation =
expense
Net
Book
Value
×
(
2
Useful Life in Years
)
Cost – Accumulated Depreciation
Annual
Annualcomputation
computationignores
ignoresresidual
residualvalue.
value.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2001
Double-Declining-Balance Method
At the beginning of the year, Delta
purchased equipment for $62,500 cash.
The equipment has an estimated useful
life of 3 years and an estimated residual
value of $2,500.
Calculate the depreciation expense
for the first two years.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2001
Double-Declining-Balance Method
Annual
Depreciation =
expense
Irwin/McGraw-Hill
Net
Book
Value
×
(
2
Useful Life in Years
)
© The McGraw-Hill Companies, Inc., 2001
Double-Declining-Balance Method
Annual
Depreciation =
expense
Net
Book
Value
×
(
2
Useful Life in Years
)
Year 1 Depreciation:
$62,500 ×
(
2
3 years
) = $41,667
Year 2 Depreciation:
($62,500 – $41,667) ×
Irwin/McGraw-Hill
(
2
3 years
) = $13,889
© The McGraw-Hill Companies, Inc., 2001
Double-Declining-Balance Method
Year
1
2
3
Depreciation
Expense
(debit)
Accumulated
Depreciation
Balance
$
$
$
41,667
13,889
4,629
60,185
41,667
55,556
60,185
Undepreciated
Balance
(book value)
$
62,500
20,833
6,944
2,315
Below residual value
($62,500 – $55,556) ×
Irwin/McGraw-Hill
(
2
3 years
) = $4,629
© The McGraw-Hill Companies, Inc., 2001
Double-Declining-Balance Method
Year
1
2
3
Depreciation
Expense
(debit)
Accumulated
Depreciation
Balance
$
$
$
41,667
13,889
4,444
60,000
41,667
55,556
60,000
Undepreciated
Balance
(book value)
$
62,500
20,833
6,944
2,500
Depreciation expense is limited to the amount that
reduces book value to the estimated residual value.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2001
Depreciation and
Federal Income Tax
For
For tax
tax purposes,
purposes, most
most corporations
corporations
use
use the
the Modified
Modified Accelerated
Accelerated Cost
Cost
Recovery
Recovery System
System (MACRS).
(MACRS).
MACRS
MACRS depreciation
depreciation provides
provides for
for
rapid
rapid write-off
write-off of
of an
an asset’s
asset’s cost
cost in
in
order
order to
to stimulate
stimulate new
new investment.
investment.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2001
Depreciation Methods
in Other Countries
Many countries, including Australia,
Brazil, England, and Mexico, use other
methods such as depreciation based
on the current fair value of assets.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2001
Changes in Depreciation
Estimates
Estimated
residual value
Estimated
useful life
So depreciation
is an estimate.
Over
Over the
the life
life of
of an
an asset,
asset, new
new information
information
may
may come
come to
to light
light that
that indicates
indicates the
the
original
original estimates
estimates were
were inaccurate.
inaccurate.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2001
Changes in Depreciation
Estimates
If our estimates
change, depreciation
is:
Book value at
date of change
–
Residual value at
date of change
Remaining useful life at date of change
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2001
Changes in Depreciation Estimates
After owning aircraft costing $60,000,000
for five years, Delta revised estimates
of residual value and useful life:
Acquisition
Acquisition cost
costof
ofaircraft
aircraft
Original
Original estimated
estimated useful
useful life
life
Original
Original estimated
estimated residual
residual value
value
Original
Original annual
annual depreciation
depreciation
($60,000,000
($60,000,000--$3,000,000)
$3,000,000)÷÷20
20
$$60,000,000
60,000,000
20
20years
years
$$ 3,000,000
3,000,000
Revised
Revised estimated
estimated useful
useful life
life
Revised
Revised estimated
estimated residual
residual value
value
25
25years
years
750,000
750,000
$$ 2,850,000
2,850,000
$$
What is the new annual depreciation?
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2001
Changes in Depreciation Estimates
Acquisition cost
Accumulated depreciation (years 1-5)
($2,850,000 per year × 5 years)
Remaining book value
Less: New residual value
New depreciable amount
Divide by remaining life
Revised annual depreciation
Irwin/McGraw-Hill
$ 60,000,000
14,250,000
45,750,000
750,000
45,000,000
÷ 20
$ 2,250,000
© The McGraw-Hill Companies, Inc., 2001
Disposal of Property, Plant,
and Equipment
! Voluntary
disposals:
Sale
Trade-in
Retirement
! Involuntary
disposals:
Fire
Accident
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2001
Disposal of Property, Plant,
and Equipment
$ Update depreciation
to the date of disposal.
% Journalize disposal by:
Recording cash
received (debit)
or paid (credit).
Recording a
gain (credit)
or loss (debit).
Writing off accumulated
depreciation (debit).
Writing off the
asset cost (credit).
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2001
Disposal of Property, Plant,
and Equipment
If Cash > BV, record a gain (credit).
If Cash < BV, record a loss (debit).
If Cash = BV, no gain or loss.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2001
Disposal of Property, Plant,
and Equipment
Delta
Delta Airlines
Airlines sold
sold flight
flight equipment
equipment
for
for $4,000,000
$4,000,000 cash
cash at
at the
the end
end of
of its
its
17th
17th year
year of
of use.
use. The
The flight
flight equipment
equipment
originally
originally cost
cost $20,000,000,
$20,000,000, and
and was
was
depreciated
depreciated using
using the
the straight-line
straight-line
method
method with
with zero
zero salvage
salvage value
value
and
and aa useful
useful life
life of
of 20
20 years.
years.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2001
Disposal of Property, Plant,
and Equipment
The
The amount
amount of
of depreciation
depreciation
recorded
recorded at
at the
the end
end of
of the
the 17th
17th year
year
to
to bring
bring depreciation
depreciation up
up to
to date
date is:
is:
a.
a.
b.
b.
c.
c.
d.
d.
Irwin/McGraw-Hill
$0.
$0.
$1,000,000.
$1,000,000.
$2,000,000.
$2,000,000.
$4,000,000.
$4,000,000.
© The McGraw-Hill Companies, Inc., 2001
Disposal of Property, Plant,
and Equipment
The
The amount
amount of
of depreciation
depreciation
recorded
recorded at
at the
the end
end of
of the
the 17th
17th year
year
to
to bring
bring depreciation
depreciation up
up to
to date
date is:
is:
a.
a.
b.
b.
c.
c.
d.
d.
Irwin/McGraw-Hill
$0.
$0.
$1,000,000.
$1,000,000.
$2,000,000.
$2,000,000.
$4,000,000.
$4,000,000.
Annual Depreciation:
($20,000,000 - $0) ÷ 20 Years.
= $1,000,000
© The McGraw-Hill Companies, Inc., 2001
Disposal of Property, Plant,
and Equipment
After
After updating
updating the
the depreciation,
depreciation,
the
the equipment’s
equipment’s book
book value
value at
at the
the
end
end of
of the
the 17th
17th year
year is:
is:
a.
a.
b.
b.
c.
c.
d.
d.
Irwin/McGraw-Hill
$3,000,000.
$3,000,000.
$16,000,000.
$16,000,000.
$17,000,000.
$17,000,000.
$4,000,000.
$4,000,000.
© The McGraw-Hill Companies, Inc., 2001
Disposal of Property, Plant,
and Equipment
Accumulated Depreciation =
(17yrs. ×the
$1,000,000)
= $17,000,000
After
depreciation,
After updating
updating
the
depreciation,
the
book
value
the
BV = Cost
- Accumulated
the equipment’s
equipment’s
book
value at
atDepreciation
the
end
17th
is:
end of
of the
17th year
year
is:
BV
=the
$20,000,000
- $17,000,000
= $3,000,000
a.
a.
b.
b.
c.
c.
d.
d.
Irwin/McGraw-Hill
$3,000,000.
$3,000,000.
$16,000,000.
$16,000,000.
$17,000,000.
$17,000,000.
$4,000,000.
$4,000,000.
© The McGraw-Hill Companies, Inc., 2001
Disposal of Property, Plant,
and Equipment
The
The equipment’s
equipment’s sale
sale resulted
resulted in:
in:
a.
a.
b.
b.
c.
c.
d.
d.
Irwin/McGraw-Hill
aa gain
gain of
of $1,000,000.
$1,000,000.
aa gain
gain of
of $3,000,000.
$3,000,000.
aa gain
gain of
of $4,000,000.
$4,000,000.
aa loss
loss of
of $1,000,000.
$1,000,000.
© The McGraw-Hill Companies, Inc., 2001
Disposal of Property, Plant,
and Equipment
The
The equipment’s
equipment’s sale
sale resulted
resulted in:
in:
a.
a.
b.
b.
c.
c.
d.
d.
aa gain
gain of
of $1,000,000.
$1,000,000.
aa gain
gain of
of $3,000,000.
$3,000,000.
aa gain
gain of
of $4,000,000.
$4,000,000.
aa loss
loss of
of $1,000,000.
$1,000,000.
Gain = Cash Received - Book Value
Gain = $4,000,000 - $3,000,000 = $1,000,000
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2001
Disposal of Property, Plant,
and Equipment
Prepare the journal entry to record Delta’s sale
of the equipment at the end of the 17th year.
GENERAL JOURNAL
Date
Irwin/McGraw-Hill
Description
Debit
Page 8
Credit
© The McGraw-Hill Companies, Inc., 2001
Disposal of Property, Plant,
and Equipment
Prepare the journal entry to record Delta’s sale
of the equipment at the end of the 17th year.
GENERAL JOURNAL
Date
Description
Cash
Credit
4,000,000
Accumulated Depreciation
Gain on Sale
Flight Equipment
Irwin/McGraw-Hill
Debit
Page 8
17,000,000
1,000,000
20,000,000
© The McGraw-Hill Companies, Inc., 2001
Natural Resources
Extracted from
the natural
environment.
A noncurrent
asset presented
at cost less
accumulated
depletion.
Examples: oil, coal, gold
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2001
Natural Resources
Total cost of
asset is the cost
of acquisition,
exploration,
and development.
Total cost is
allocated over
periods benefited
by means of
depletion.
Depletion is like depreciation.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2001
Depletion of Natural Resources
Depletion is calculated using the
units-of-production method.
Unit depletion rate is calculated as follows:
Acquisition and
Development Cost
–
Residual
Value
Estimated Recoverable Units
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2001
Depletion of Natural Resources
Total depletion cost for a period is:
UNIT DEPLETION
RATE
Total
depletion
cost
Irwin/McGraw-Hill
×
NUMBER OF UNITS
EXTRACTED IN PERIOD
Cost of
goods sold
Inventory
for sale
Unsold
Inventory
© The McGraw-Hill Companies, Inc., 2001
Natural Resources
Specialized plant assets may be required
to extract the natural resource.
These assets are recorded in a separate
account and depreciated.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2001
Intangible Assets
Often
Oftenprovide
provide
exclusive
exclusiverights
rights
or
orprivileges.
privileges.
Noncurrent
Noncurrentassets
assets
without
withoutphysical
physical
substance.
substance.
Intangible
Assets
Useful
Usefullife
lifeis
is
often
oftendifficult
difficult
to
todetermine.
determine.
Irwin/McGraw-Hill
Usually
Usuallyacquired
acquired
for
foroperational
operational
use.
use.
© The McGraw-Hill Companies, Inc., 2001
Intangible Assets
Record at
current cash
equivalent
cost, including
purchase
price, legal
fees, and filing
fees.
!
!
!
!
!
!
Irwin/McGraw-Hill
Goodwill
Trademarks
Patents
Copyrights
Franchises
Leaseholds
© The McGraw-Hill Companies, Inc., 2001
Intangible Assets
!
! Amortize
Amortize over
over shorter
shorter of
of economic
economic life
life or
or
legal
legal life,
life, subject
subject to
to rules
rules specified
specified by
by
GAAP.
GAAP.
!
! Use
Use straight-line
straight-line method.
method.
!
! Research
Research and
and development
development costs
costs are
are
normally
normally expensed
expensed as
as incurred.
incurred.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2001
Intangible Assets
Goodwill
Goodwill
Occurs when one
company buys
another company.
Only purchased
goodwill is an
intangible asset.
The amount by which the
purchase price exceeds the fair
market value of net assets acquired.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2001
Intangible Assets
Goodwill
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.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2001
Intangible Assets
Goodwill
What
What amount
amount of
of goodwill
goodwill should
should be
be
recorded
recorded on
on Eddy
Eddy Company
Company books?
books?
a.
a.
b.
b.
c.
c.
d.
d.
Irwin/McGraw-Hill
$100,000
$100,000
$200,000
$200,000
$300,000
$300,000
$400,000
$400,000
© The McGraw-Hill Companies, Inc., 2001
Intangible Assets
Goodwill
What
What amount
amount of
of goodwill
goodwill should
should be
be
recorded
recorded on
on Eddy
Eddy Company
Company books?
books?
a.
a.
b.
b.
c.
c.
d.
d.
Irwin/McGraw-Hill
$100,000
$100,000
$200,000
$200,000
$300,000
$300,000
$400,000
$400,000
FMV of Asse ts
De bt Assum e d
$
FMV of Ne t Asse ts
Purcha se Price
Goodw ill
$
900,000
200,000
700,000
1,000,000
$ 300,000
© The McGraw-Hill Companies, Inc., 2001
Intangible Assets
Trademarks
AA symbol,
symbol, design,
design, or
or logo
logo
associated
associated with
with aa business.
business.
Internally
developed
trademarks
have no
recorded
asset cost.
Irwin/McGraw-Hill
Purchased
trademarks
are recorded
at cost.
© The McGraw-Hill Companies, Inc., 2001
Intangible Assets
Patents
Exclusive
Exclusive right
right granted
granted
by
by federal
federal government
government to
to sell
sell
or
or manufacture
manufacture an
an invention.
invention.
Cost
Cost is
is purchase
purchase
price
price plus
plus legal
legal
cost
cost to
to defend.
defend.
Irwin/McGraw-Hill
Amortize
Amortize cost
cost
over
over the
the shorter
shorter of
of
useful
useful life
life or
or 17
17 years.
years.
© The McGraw-Hill Companies, Inc., 2001
Intangible Assets
Copyrights
Exclusive
Exclusive right
right granted
granted by
by the
the
federal
federal government
government to
to protect
protect
artistic
artistic or
or intellectual
intellectual properties.
properties.
Legal
Legal life
life is
is
life
life of
of creator
creator
plus
plus 50
50 years.
years.
Irwin/McGraw-Hill
Amortize
Amortize cost
cost
over
over the
the period
period
benefited.
benefited.
© The McGraw-Hill Companies, Inc., 2001
Intangible Assets
Franchises
Legally
Legally protected
protected right
right to
to sell
sell products
products or
or
provide
provide services
services purchased
purchased by
by franchisee
franchisee
from
from franchisor.
franchisor.
Purchase
Purchase price
price is
is an
an intangible
intangible
asset
asset which
which is
is amortized.
amortized.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2001
Intangible Assets
Leaseholds
!
!A
A lease
lease is
is aa contract
contract to
to
use
use property
property granted
granted
by
by lessor
lessor to
to lessee
lessee and
and
rights
rights granted
granted under
under the
the
lease
lease are
are called
called aa leasehold.
leasehold.
!
!A
A leasehold
leasehold is
is recorded
recorded only
only
ifif advance
advance payment
payment is
is involved.
involved.
Otherwise
Otherwise periodic
periodic payments
payments
are
are rent
rent expense.
expense.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2001
Intangible Assets
Leasehold Improvements
Long-lived alterations made by
lessee to leased property.
Leasehold improvements are recorded at
cost and amortized over their useful life.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2001
Asset Impairment
Impairment is the loss of a significant portion
of the utility of an asset through . . .
! Casualty.
! Obsolescence.
! Lack
of demand for the asset’s services.
A loss should be recognized when an
asset suffers a permanent impairment.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2001
This computer is
about to become
fully depreciated!
End of
Chapter 8
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2001