Welcome to Week 11!
Financial Accounting: Chapter 7
Ashton Converse
Plant Assets, Natural Resources, and
Intangibles
Objectives/Schedule
 Welcome
 Review
 Long-lived Assets Chapter 7
 Statement of Retained Earnings
 Intangible Assets!
 Application and Practice
Review
 What is the consistency principle?
 What does conservatism mean in accounting
terms?
 The disclosure principle means?
 Tell me what LCM means?
 Another name for gross profit is?
 What is gross profit percentage?
 What is the inventory turnover?
 How do we figure out the “goods available”?
Types of Long-Lived Assets
 What is a “plant asset”?
 Long-lived assets, such as land, buildings, and
equipment, used in the operation of the businesses
 Also called fixed assets
 What is an “intangible asset”?
 An asset with no physical form, a special right to
current and expected future benefits
 The cost of land does not include “land
improvements”
Example: Lets See
 Lets say that Chipotle wants to open a store in Xinzheng.
 FOREIGNERS SHOUT IN EXCITEMENT!
 They sign a $300,000 note payable to purchase land for their
new store. In building, McDonalds must also pay $10,000 for
real estate commission, $8,000 of property tax, $5,000 for
removal of an old building, a $1,000 survey fee.
 Now, Chipotle has the big question for Sias Students to help
figure out their money situation.
 What is Chipotle’s cost of this land?
Answer for Chipotle
 Purchase price of land…………………….$300,000
 Add Related Costs:
 Real Estate Commission.......... $10,000
 Property Tax…......................... 8,000
 Removal of Building…………. 5,000
 Survey Fee……………………. 1,000
 Total Related…………………
24,000
 Total Cost of Land………………
$324,000
Transaction Accounting Slip
 Land ………324,000
 Note Payable……
 Cash……
Assets
+324,000
-24,000
=
=
Liabilities
+300,000
300,000
24,000
+
+
Stockholders’ Equity
0
 Summary: The purchase increases both assets and
liabilities…no impact on equity.
Converse about Concepts
 Capital Expenditure:
 Expense that increases an asset’s capacity or efficiency or
extends its useful life.
 Costs that do not add life or value to an asset, but only help
make it continue to just work, are just considered expenses
 Most firms must make the big decision to capitalize or
expense a certain cost for a plant asset
LAND…how is its life?
 Only land has unlimited life and is not depreciated
 Usually always true
 Other plant assets must be
 For most plant assets, depreciation is caused by these 2
things:
1. Physical Wear and Tear
2. Obsolescence
Measuring Depreciation
 Must know 3 things before measuring an assets
depreciation.
1. Cost
2. Estimated Useful Life
3. Estimated Residual Value
 We have discussed cost before and understand its mean to
be: “a known amount for something”.
 The other two parts to measure depreciation must be
“ESTIMATED”.
Measuring Depreciation
 Estimated Useful Life:
 Length of a service that a business expects to get from
an asset.
 May be life in years, units of output (work), miles, or
other measures.
 Estimated Residual Life:
 Expected cash value of an asset at the end of its useful
life.
 How much you can sell it for at the end of its
life…market value after use.
Depreciation Methods
 There are 3 Main Depreciation Methods
 Straight-Line
 Units-of-Production
 Double-declining-balance
 The Accelerated Depreciation Method
 Double-Declining-balance method (DDB)
To Know Before Looking at Methods
 The cost of a plant asset minus its estimated residual value
Depreciable cost = Asset’s cost – Estimated residual value
Straight-line Method (SL)
Depreciation method in which an equal amount of depreciation
expense is given to each year of asset use
 Meaning:
 Depreciable Cost is divided by useful life in years to determine
the annual depreciation expense.
 Equation:
SL depreciation per year = Cost – Residual Value/Useful life (years)
Straight-Line Method Example
 If DHL, a large shipping and mailing company wants to buy a new
truck for $41,000. The estimated residual value is 1,000. DHL plans
on the truck lasting 5 years and producing 100,000 units in miles.
 First, what is the depreciable cost?
 40,000
 Second, what is the Straight-Line Method Depreciation Cost?
 $8,000
 The recorded entry will look as follows:
 Depreciation Expense = 8,000 and Accumulated Depreciation =
8,000
Units-of-Production (UOP)
Depreciation method by which a fixed amount of depreciation is
assigned to each unit of output produced by the plant asset.
Meaning:
 The depreciable cost is divided by useful life (in units of
production).
 We then multiply this number by the number of units
produced each period to figure out depreciation.
Equation:
 UOP = Cost – Residual Value/Useful life (in units of production)
UOP Method Example
 Same information as before for SL, but the useful life is
100,000 miles.
 Depreciable Cost remains the same @ 40,000
So what is the equation:
 $41,000 – $1,000/100,000 miles = ?
 UOP Depreciation for DHL = $0.40 per mile
 Multiply this by the number of units per year and you will
get the depreciation expense per year…which can be used
to know the book value
Double-Declining-Balance Method
 Accelerated Depreciation Method (fast)
 Computes the annual depreciation by multiplying the assets
decreasing book value by a constant percentage
 Which is 2 times the straight-line rate
 First Step:
 Compute the straight-line depreciation rate per year
 Second Step:
 Multiply the straight-line rate by 2 to compute the DDB rate
 Third Step:
 Multiply the DDB rate by the period’s beginning asset book value
(cost – accumulated depreciation)
DDB Equation
Fourth Step:
 Determine the final year’s depreciation amount
DDB depreciation rate per year = (1/Useful life, in years) *2
 DDB = (1 / 5)*2
 DDB = 20% * 2 = 40%
 Multiply by asset book value to get depreciation expense
 .4 * 41,000 = 16,400
 Subtract expense from book value to get new book value
for the next year.
 Now .4 * 24,600 = $9,840 (year 2 depreciation expense)
Accounting for Natural Expenses
Depletion Expense
 Portion of a natural resource’s cost that is used up in
a particular period.
 Calculated in the same way as Units-of-production
depreciation
Accounting for Intangibles
 Intangible Assets are long-lived assets
 Each intangible asset is unique, and the accounting can
be different from one intangible to another
 Intangibles are very valuable because of their special
rights for that company.
 Examples: patents, copyrights, trademarks, franchises,
leaseholds, and goodwill.
Converse about Intangibles
Amortization:
 Cost is expensed through amortization over the intangible’s
estimated useful life unless the asset has a indefinite life.
 What is a Patent?
 Federal government grant giving the holder the right for 20
years to produce and sell an invention
 What is a Copyright?
 Right to produce and sell a book, musical composition,
film, or other work of art and computer programming.
Intangibles Continued
 What is a Trademark, trade name?
 A specific identification of a product or service (brand
name)
 What are Franchises and licenses?
 Privileges given by a private business or a government to
sell a product or service.
 What is Goodwill?
 Extra cost of purchasing another company over the sum of
the market values of its net assets.
 A purchaser is willing to pay for goodwill when it buys a
company with big earning power.