Chapter 10
Plant Assets, Natural Resources and Intangible Assets
Property, Plant & Equipment
Assets acquired for use and not for resale; will benefit for > one
period; and have physical substance (all are depreciated, except
for
)
Record PPE at historical cost, just like all other assets; that is
the cash or cash equivalent price of obtaining the asset and
getting it ready for intended use.
LAND
LAND IMPROVEMENTS
What about land held for speculation?
What about if you are a real estate developer?
BUILDINGS
EQUIPMENT
Depreciation -
Book value -
Three Factors in Computing Depreciation:
1.
Cost
2.
Estimated Useful Life
a) physical wear and tear
3.
b)
obsolescence
c)
inadequacy
Salvage Value(residual value) -
Depreciable cost -
Three methods of depreciation
1)
Straight line method
2)
Units of activity
3)
Double Declining Balance
Straight line
Cost - Salvage Value
Life in Years
=
Annual Depreciation
Expense
Units of Activity
Cost - Salvage Value
=
Total Units of Activity
Deprecation Expense Per
Unit of Activity
Depreciation Expense for period =
# of units used X depr. exp per unit of activity
Double Declining Balance (DDB)
Accelerated Method (recognize higher depreciation expense in early
years of assets life, and less in later years than with S/L)
2
life
X
(cost - accum. depr)
=
annual depr. expense
EXAMPLE:
On 1/2/10 ABC Co. bought a truck for $70,000.
The controller
believes it has an estimated life of 5 years or 100,000 miles and
estimated salvage value of $10,000.
Calculate depreciation expense for all years using S/L, DDB and
Units of Production. The truck was driven 10,000 miles in 2010,
12,000 miles in 2011 and 15,000 miles in 2012.
S/L
DDB
Units of Production
For the same facts as above, except the truck was bought on July
1, 2010.
Calculate depreciation expense for each year of the
assets life.
S/L
DDB
Units of Productions
What about a change in estimate? If the life were changed at the
beginning of 2013 to a TOTAL life of 8 years (watch the wording
because it could be expressed as the number of years remaining in
the assets life, which is ......)
Using S/L:
undepreciated depreciable cost
remaining useful life
entry to record depreciation in 2013:
If new life is longer,
______________than before.
annual
deprecation
expense
will
be
If new life is shorter,
________
than before.
annual
depreciation
expense
will
be
Is book value going to be any different at the end of the assets
life? Why or why not?
How is this handled on the financial statements?
Ordinary repairs (revenue expenditures):
Additions and improvements (capital expenditures):
Dispose of assets -
Remove from books (retirement):
Accumulated Depreciation
Machinery
Accumulated Depreciation
Loss on Disposal
Asset
Instead of discarding the asset, it can be sold:
selling price > BV
=
gain
selling price < BV
=
loss
Example - Sale of used asset
On July 1, 2013, XYZ Co. sold for $29,000 cash a piece of drilling
machinery that had been in use since January 3, 2004.
The
original cost of the machine was $134,000.
XYZ has recorded
$12,000 of straight line depreciation annually thru December 31,
2012. In general journal form, record the sale.
Natural Resources:
Assets which are consumed in the generation of revenue and which
cannot be replaced except by nature (ex/ timber, oil, coal)
Depletion -
Depletion is usually computed like units of production, across the
life of the natural resources.
Step 1
Step 2
total cost - salvage
# of units estimated
to be in resource
(cost per unit)
X
=
cost per unit
(# extracted and sold)
Example - Computation of depletion cost
Nevada Mines purchased a piece of land and the mineral rights for
$3,200,000.
Company engineers estimated that the property
contains 500,000 tons of ore and that Nevada can sell the land for
$100,000 when it completes mining operations. In the first year,
Nevada mined 120,000 tons of ore. Compute depletion cost for the
first year.
Intangible assets -
As usual, record at cost. Development of intangibles is expensed.
Allocation process:
Amortize across useful or legal life, whichever is shorter.
If the life is indefinite, do not amortize.
Patent -
Copyrights -
Trademarks/Trade Names -
Franchises -
Licenses -
Goodwill -
Example - Amortization of franchise
Radio station WHUS received a franchise to transmit on channel
89.3 for seven years.
The accounting, legal, clerical, and
consultant fees for obtaining this franchise amounted to $98,000.
These costs were recorded as an intangible asset, FRANCHISE, on
April 1, 2008. Make adjusting entries to record amortization of
the franchise for the years ending December 31, 2008 and December
31, 2009.
research and development -
Statement Presentation:
Asset turnover ratio: