Financial Accounting
Eleventh Edition
Global Edition
Chapter 7
PPE and
Intangibles
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Long-Lived Assets and Related
Expense Accounts
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Learning Objectives (1 of 2)
7.1 Understand the different types of long-term assets
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7.2 Determine the ______ of PPE on initial recognition
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7.3 Understand when to capitalize or expense
subsequent costs
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7.4 Measure and record depreciation
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7.5 Understand the recognition and subsequent
measurement of intangible assets
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Learning Objectives (2 of 2)
7.6 Evaluate a company’s performance based on its
assets
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Learning Objective 7.1
Understand the different types of long-term assets
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Understand the different types of
long-term assets
Property, Plant and Equipment (PPE):
sum of all the costs
The cost of any asset is the _____
incurred to bring the asset to its intended use.
• Costs include:
‒
Purchase price
‒
Taxes
‒
Commissions
‒
Other costs to make the asset ready for use
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Learning Objective 7.2
Determine the cost of PPE on initial recognition
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Determine the cost of PPE on initial
recognition (1 of 11)
Land
• Costs include:
–
Purchase price
–
Brokerage commission
–
Survey fees
–
Legal fees
–
Back property taxes
–
Expenditures for grading and clearing land
–
Removing any unwanted buildings
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Determine the cost of PPE on initial
recognition (2 of 11)
Land Improvements and Leasehold Improvements
• Cost of land improvements:
–
Driveways signs
Fee
–
___________
–
Sprinkler systems
–
Other similar items
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Determine the cost of PPE on initial
recognition (3 of 11)
Land Improvements and Leasehold Improvements
• Leasehold improvements:
–
Improvements made to leased property
–
Depreciated or amortized over the lease term
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Determine the cost of PPE on initial
recognition (4 of 11)
Airbus signs a €300,000 note payable to purchase a parcel
of land for a new logistic site. Airbus also pays €10,000 for
real estate commission, €13,000 of stamp duty, a €1,000
land survey fee, and €16,000 to pave the parking lot—all in
cash. What should Airbus recognize as the cost of this
land?
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Determine the cost of PPE on initial
recognition (5 of 11)
Airbus signs a €300,000 note payable to purchase a
parcel of land for a new logistic site. Airbus also pays
€10,000 for real estate commission, €13,000 of stamp
duty, a €1,000 land survey fee, and €16,000 to pave the
parking lot—all in cash.
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Determine the cost of PPE on initial
recognition (6 of 11)
Building, Machinery, and Equipment
o
• Cost of constructing a building includes:
–
Architectural fees
–
Building permits
–
Contractors’ charges
–
Payment for material, labor, and overhead
–
Interest on money borrowed to finance
construction
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Determine the cost of PPE on initial
recognition (7 of 11)
Building, Machinery, and Equipment
o
• Cost of purchasing a building includes:
–
Purchase price
–
Brokerage commission
–
Sales and other taxes
–
Expenditures to repair and renovate building for its
intended purpose
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Determine the cost of PPE on initial
recognition (8 of 11)
Building, Machinery, and Equipment
–
–
–
–
–
–
–
–
• Cost of equipment:
Purchase price (less any discounts)
Transportation from the seller
Insurance while in transit
Sales and other taxes
Purchase commission
Instnllatim
_________________
costs
Expenditures to tst
_______ the asset before it’s placed in
service
Cost of any special platforms
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Determine the cost of PPE on initial
recognition (9 of 11)
• Lump-Sum (or Basket) Purchases of Assets
–
Purchase __________
assets for a single lumpSeverd
sum amount
–
Total cost divided among the assets based on
ma.ru
relative ____________
values
–
Technique is called the relative-sales-value
method
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Determine the cost of PPE on initial
recognition (10 of 11)
Airbus purchases o
land and ao
building in Luxemburg.
The building sits on two acres of land, and the
combined purchase price of land and building is €2.7
million. An appraisal indicates that the land’s fair value
is €1 million and the building’s fair value is €2 million.
o
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Determine the cost of PPE on initial
recognition (11 of 11)
Airbus purchases land and a building in Luxemburg.
The building sits on two acres of land, and the
combined purchase price of land and building is €2.7
million. An appraisal indicates that the land’s fair value
is €1 million and the building’s fair value is €2 million.
o
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Learning Objective 7.3
Understand when to capitalize or expense subsequent
costs
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Understand when to capitalize or
expense subsequent costs
T
• Capital expenditure → ________
the asset’s
extad its useful life
capacity or _________
ddd to an asset
• Capitalized means the cost is ______
account rather than being __________ immediately
eopessed
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Exhibit 7-4 Capital Expenditure or
Immediate Expense for Costs
Associated with a Delivery Truck
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Learning Objective 7.4
Measure and record depreciation
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Measure and Record Depreciation
(1 of 2)
Book Value
Plant assets are recorded on the balance sheet at their
book value.
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Book Value = Cost − __________________________
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Measure and Record Depreciation
(2 of 2)
• Depreciation
–
Process of allocating a plant asset’s cost to
____________ over its life
expenn
–
Necessary as plant assets wear out, grow
_____________, and lose value over time
–
Allocates cost against revenue it helps earn each
period
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–
Depreciation expense is reported on the
lncome sheet
______________________
–
Land is not depreciated
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Exhibit 7-5 Allocating Cost of Assets Over
Useful Life
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Measure and Record Depreciation
(3 of 2)
• Cost
‒ Purchase price and all costs to get plant asset
ready for use, known amount
• Estimated Useful Life
‒
Length of service expected from using the asset,
estimated amount
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• Estimated Residual Value
end
‒
Expected cash value of an asset at the _______
of its useful life, estimated amount
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Depreciation Methods (1 of 6)
• Three main depreciation methods:
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–
Constant allocation (_______________________)
unīts of production)
–
By actual usages (______
–
Accelerated allocation (double-declining balance)
DDB
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Exhibit 7-6 Data for Depreciation
Computations (1 of 4)
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Depreciation Methods (2 of 6)
• Straight-Line Method
–
Equal amount of depreciation assigned each
period
–
Depreciable cost divided by ________________
to
usefullh
determine annual depreciation expense
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Exhibit 7-6 Data for Depreciation
Computations (2 of 4)
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Depreciation Methods (3 of 6)
Straight-Line Method
Cantraaant)
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Exhibit 7-7 Straight-Line Depreciation
Schedule
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Depreciation Methods (4 of 6)
• Units-of-Production Method
–
Fixed amount of depreciation is assigned to each
unit of output produced by the asset
–
Depreciable cost is divided by useful life–in units of
production–to determine fixed amount per unit
–
Per-unit amount then multiplied by number of units
produced each period to compute depreciation
expense
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Exhibit 7-6 Data for Depreciation
Computations (3 of 4)
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Exhibit 7-8 Units-of-Production (UOP)
Depreciation Schedule
Assume that Airbus expects to drive the truck 20,000
miles during the first year, 30,000 during the second,
25,000 during the third, 15,000 during the fourth, and
10,000 during the fifth. Exhibit 7-8 shows the UOP
depreciation schedule.
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Depreciation Methods (5 of 6)
• Double-Declining-Balance Method
–
Writes off a ________ amount of cost near the
start of asset’s useful life
–
Most frequently used accelerated depreciation
method
–
Multiplies asset’s declining book value at the
beginning of the year by a constant percentage,
two times the straight-line depreciation rate
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Exhibit 7-6 Data for Depreciation
Computations (4 of 4)
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Exhibit 7-9 Double-Declining-Balance
(DDB) Depreciation Schedule
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Depreciation Methods (6 of 6)
• DDB method differs from others in two ways:
–
Residual value is ignored initially
–
Final year depreciation is a “_________”
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Comparing Depreciation Methods (1 of 2)
• Straight-line
‒
Best for plant assets that generate revenue
____________ over time
eg
• Units-of-production
‒ Best for assets that wear out because of use
• Double-declining-balance
‒ Best for assets that generate ______
MON revenue
earlier in their useful life
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Comparing Depreciation Methods (2 of 2)
ˇ
ˇ
ˇ
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Exhibit 7-10 Depreciation Patterns
Through Time
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Exhibit 7-11 Depreciation Methods
Used by 170 Companies
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Other Issues in Accounting for Plant
Assets
• Plant assets are complex because
–
They have long lives
incometaxes
–
Depreciation affects _____________
–
Companies may have ________ or losses when
gains
they sell plant assets
–
Possible international accounting changes in the
future
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Depreciation for Tax Purposes
• Most companies use straight-line depreciation for
financial reporting, but the double-declining-balance
method for _____ purposes.
• Accelerated depreciation provides fastest tax
deductions → Tax deductions __________ income
taxes → Reduced income taxes helps conserve cash
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Exhibit 7-12 The Cash Flow Advantage of
Accelerated Depreciation for Tax Purposes
DDB
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Depreciation for Partial Years
Suppose Airbus purchases a warehouse building on
April 1 for €500,000. The building’s estimated life is 20
years, and its estimated residual value is €80,000.
Airbus’s fiscal year-end is December 31.
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31
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Changes in Estimates of Useful Lives
or Residual Values (1 of 2)
• After an asset is in use, managers may change its
useful life based on experience or new information.
–
Called a change in accounting ____________
dimate
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Changes in Estimates of Useful Lives
or Residual Values (2 of 2)
Assume a Lenovo’s equipment cost $50,000 and originally had a
useful life of 10 years (no residual value). Lenovo used the asset
for 4 years, resulting in accumulated depreciation of $20,000 and
a remaining book value of $30,000. Management now believes
the asset will remain useful for an additional 8 years.
-
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Impairment of PPE (1 of 2)
• Impairment 划
–
Both tangible and intangible long-term assets must
be tested __________
tul
–
Occurs when expected future cash flows _______
below the asset’s net book value
–
If impaired, must adjust the carrying value
downward to fair value
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Impairment of PPE (2 of 2)
Assume the fair value less cost to sell was $300
million and the value-in-use was $100 million when
the carrying amount of a factory was $700 million.
The recoverable amount was $300 million. Toshiba
recognized an impairment loss of $400 million with
the following journal entry (in millions):
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Measurement Subsequent to Initial
Recognition
• Under IAS 16, an entity elects one out of two
measurement models for each class of property,
which is defined as a grouping of assets of similar
nature and use in an entity’s operations.
–
Cost model
–
Revaluation model
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Using Fully Depreciated Assets
• A fully depreciated asset:
–
Is an asset that has reached the end of its
estimated useful life
–
Can continue to use asset, but will not record
anymore depreciation
–
Remove the asset’s cost and accumulated
depreciation when the asset is __________
dsposed
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Learning Objective 7.5
Account for PPE disposals
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Account for PPE disposals (1 of 8)
• Before accounting for disposal, the business should
bring the _____________ up to date to:
– ② Update the asset’s final book value
–
Record the expense up to the date of disposal
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Actdep
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Account for PPE disposals (2 of 8)
Disposing of a Fully Depreciated Asset for No
Proceeds. Suppose the final year’s depreciation
expense has just been recorded for a machine that cost
$60,000 and has a residual value of zero.
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Account for PPE disposals (3 of 8)
☒
Disposing of a Not Fully Depreciated Asset for No
Proceeds. Suppose FedEx disposes of equipment that
cost $60,000. This asset only has $50,000 of
accumulated depreciation and a book value of $10,000.
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Account for PPE disposals (4 of 8)
Selling a PPE. Suppose Zar Zar Trading sells equipment
on September 30, 20X8 for $7,300 cash. The equipment
cost $10,000 when purchased on January 1, 20X5 and
has been depreciated straight-line. It had an estimated
life of 10 years with no residual value. The depreciation
entry on September 30, 20X8 is:
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Account for PPE disposals (5 of 8)
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Copyright © 2018 Pearson Education, Inc. All Rights Reserved.
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Account for PPE disposals (6 of 8)
trdsposd
Selling a PPE. Suppose Zar Zar Trading sells
equipment on September 30, 20X8 for $7,300 cash.
The equipment cost $10,000 when purchased on
January 1, 20X5 and has been depreciated straight-line.
It had an estimated life of 10 years with no residual
value. The entry to record the sale is:
○
③
②
o
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Account for PPE disposals (7 of 8)
• Exchanging PPE
–
Trade in old assets for new ones
–
Nonmonetary exchanges
–
Based on ______
扣 values of assets involved
–
Differences between fair values of old and new
assets results in a ______ or ______
loss
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Account for PPE disposals (8 of 8)
Exchanging PPE. Assume Zar Zar’s old delivery car
cost $9,000 with accumulated depreciation of $8,000.
Zar Zar trades the old automobile for a new one with a
fair market value of $15,000 and pays $10,000 of cash.
②
③
①
④
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T-Accounts for Analyzing PPE
Transactions (1 of 2)
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T-Accounts for Analyzing PPE
Transactions (2 of 2)
Suppose you started the year with buildings that cost
$100,000. During the year, you bought another building
for $150,000 and ended the year with buildings that cost
$180,000. What was the cost of the building you sold?
PDR
nhd
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Accounting for Natural Resources
(1 of 4)
ˊ
ˊ
• Natural Resources
–
Long-term assets such as iron ore, petroleum (oil),
and timber
–
________________
– tracks the flow of a natural
Dephhon
resource from its raw state through inventory to
cost of goods sold
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Accounting for Natural Resources
(2 of 4)
For example, an oil lease may cost Royal Dutch Shell
$100,000 and contain an estimated 10,000 barrels of
oil. If 3,000 barrels are extracted (assuming the
company paid cash, $10 a barrel), the following entry is
made:
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Learning Objective 7.5
Understand the recognition and subsequent
measurement of intangible assets
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Understand the recognition and subsequent
measurement of intangible assets (4 of 4)
• Intangible Assets
o physical form
–
Long-term assets with _____
–
Carry special rights
–
Patents, ___________, trademarks, franchises,
leaseholds, and _____________
–
Two categories
●
Finite lives → ___________________
recorded
Aonahn
●
Indefinite lives → Checked ____________ for
impairment
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annuay
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Accounting for Specific
Intangibles (1 of 8)
• Patents
–
Granted by a government
–
Give the holder excusive right to produce and sell
invention
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Accounting for Specific
Intangibles (2 of 8)
Patents: Suppose Yamaha pays $170,000 to acquire a
patent on ☐
January 1, and the business believes the
useful life is 5 years.
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Accounting for Specific
Intangibles (3 of 8)
• Copyrights
–
Granted by a government
–
Give the holder excusive right to reproduce and
sell a book, musical composition, film, or other
work of art
–
Extend 70 years beyond the author’s life
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Accounting for Specific
Intangibles (4 of 8)
• Trademarks and Trade names
–
Distinctive identifications of products or services
–
Useful life may be set by contract
–
Amortize cost over useful life
●
May have indefinite life and not be amortized
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Accounting for Specific
Intangibles (5 of 8)
• Franchises and Licenses
–
Granted by a private business or government
–
Right to sell a product or service in accordance
with specified conditions
–
Includes restaurant chains and sports
organizations
–
Often have indefinite lives
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Accounting for Specific
Intangibles (6 of 8)
$ 3M
• Goodwill
$0
–
The __________
of the cost of purchasing another
au
company over the sum of the market values of the
acquired company’s net assets
–
Only recorded when it is purchased, never when
created
–
Perform impairment test (instead of amortization)
MCO.MN
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Accounting for Specific
Intangibles (7 of 8)
Goodwill. FedEx acquires Europa Company for $10
million. Europa has assets with a market value of $9
million and $2 million in liabilities, therefore, net assets
equals $7 million. FedEx paid $3 million for goodwill as
follows:
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Accounting for Specific
Intangibles (8 of 8)
Goodwill. Airbus acquires Europa Company for $10
million. Europa has assets with a market value of $9
million and $2 million in liabilities; therefore, net assets
equals $7 million. The journal entry to record this
transaction is:
②
①
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⑦
Learning Objective 7.7
Evaluate a company’s performance based on its assets
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Evaluate a company’s performance
based on its assets (1 of 2)
ˊ
Return on Assets (ROA)
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fnctuatim
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Evaluate a company’s performance
based on its assets (2 of 2)
Airbus’ performance in comparison to Boeing and
General Dynamics is as follows:
an
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