Plant Assets & Intangibles
Chapter 9
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1
Long-lived Assets
Plant
Assets
Natural
Resources
Intangible
Assets
Depreciation
Depletion
Amortization
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2
Objective 1
Measure the cost of a plant asset
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3
Cost Principle
• Assets should be recorded at their
historical cost
• Cost of an asset – all costs necessary to
acquire the asset and get it ready for its
intended use
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4
Land and Land Improvements
Land
• Purchase price
• Legal fees
• Costs of grading and
clearing
• Additional permanent
improvements
• Not depreciated
Land Improvements Improvements with
limited life
• Driveways and
parking lots
• Sidewalks
• Fences
• Depreciated
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5
Buildings
•
•
•
•
Purchase price
Legal fees
Repairs and renovations
If self-constructed
–
–
–
–
–
–
Architectural fees
Building permits
Material
Labor
Overhead
Some interest costs
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6
Machinery and Equipment
•
•
•
•
•
•
Purchase price (less any discounts)
Transportation charges
Insurance while in transit
Sales tax
Installation costs
Cost of testing before asset is used
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7
Furniture and Fixtures
• Purchase price (less any discounts)
• Shipping charges
• Costs to assemble
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8
E9-14
• Land
Purchase price $380,000
Property tax
2,000
Title insurance
3,000
Remove and level
5,000
$390,000
Building and Land
Improvements are the
assets to be depreciated
• Building
Cost
$500,000
Land improvements
Fence
$50,000
Signage
10,000
Lighting
6,000
$66,000
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9
Lump Sum Purchases
• Assign cost to individual assets based on
relative sales values
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10
E9-15
Lot Appraised Percent of
Cost
Value
Cost
Allocated
Cost
1
$50,000 $50,000/$180,000
27.8% X $150,000
$41,700
2
60,000 $60,000/$180,000
33.3% X 150,000
49,950
3
70,000 $70,000/$180,000
38.9% X 150,000
58,350
$180,000
100%
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$150,000
11
Exercise 9-15
GENERAL JOURNAL
DATE
DESCRIPTION
REF
Land, Lot 1
Land, Lot 2
Land, Lot 3
Cash
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DEBIT
CREDIT
41,700
49,950
58,350
150,000
12
Capital Expenditures
Does the expenditure increase capacity
or efficiency or extend useful life?
YES
NO
Capital Expenditure
Debit asset
account
Expense
Debit repairs and
maintenance
expense
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13
E9-16
Capital Expenditures Expenditure benefits more
than one period. Debit an
– Purchase price
– Lubrication before machine is placed
assetin service
–
–
–
–
–
Major overhaul
Sales tax
Transportation and insurance
Expenditure that maintains
Installation
the asset in its current
Training of personnel
Expenses:
– Ordinary recurring repairs
– Periodic lubrication
– Income tax
working condition.
Debit an expense
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14
Objective 2
Account for depreciation
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15
Depreciation
• Process of allocating the cost of a plant
asset to expense over its useful life in a
rational and systematic way
Matching Principle
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16
Depreciation – Adjusting Entry
GENERAL JOURNAL
DATE
DESCRIPTION
REF
DEBIT
CREDIT
Depreciation Expense
Accumulated Depreciation
Partial balance sheet:
Building
Less Accumulated Depreciation
$120,000
(80,000)
$40,000
Book Value
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17
Factors in Computing
Depreciation
1. Cost
2. Estimated Residual Value
•
Depreciable cost = Cost – Residual Value
3. Estimated Useful Life
•
•
Physical wear and tear
Obsolescence
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18
Depreciation Methods
• Straight-line
• Units-of-production
• Declining balance
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Straight-Line Method
Depreciation
Expense per Year
=
Cost - Residual Value
Useful life in years
•Allocates an equal amount each year
•Depreciation is a function of time
•Appropriate for assets that generate revenues
evenly over time, like building
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20
E9-19
Straight-line
$15,000 – $3,000 / 4 years = $3,000 per yr
Year
Depr Exp for
Total
Year
Accum Depr
Year-End
Book Value
2006
$3,000
$3,000
$12,000
2007
3,000
6,000
9,000
2008
3,000
9,000
6,000
2009
3,000
12,000
3,000
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21
Units-of-Production Method
1: Compute depreciation per unit:
Cost - Residual Value
Total Units of Production
2: Compute depreciation expense:
Depreciation
is a function
of use. of units produced
Depreciation
Number
×
Thisper
is anunit
appropriate method for
asset
that
inan
the
period
depreciates due to wear and tear, like a vehicle
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22
E9-19
Units of Production
($15,000 - $3,000) / 3,000 jobs = $4.00 per job
Year
Depr Exp for
Total
Year
Accum Depr
Year-End
Book Value
$1,200
$13,800
2007
$4 x 300=
$1,200
$1,200
$4 x 900=
3,600
4,800
9,000
2008
4,800
9,600
5,400
2009
2,400
12,000
3,000
2006
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23
Double-Declining Balance Method
• Accelerated method – writes off a greater
amount of the cost of an asset in earlier
years of asset’s useful life.
• Amount of depreciation expense
recognized declines each year
Depreciation is a function of time.
This method is appropriate for assets that produce
more revenues in their early years (match higher
depreciation expense with higher revenues)
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24
Double-Declining-Balance
Method
1: Compute straight-line rate and multiply it by 2
1
Useful life in years
X2
2: Multiply beginning book value by rate
Depreciation
Double-decliningBeginning period
=
×
expense
balance rate
book value
Ignores residual
value
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25
Switchover to Straight Line
• A method employed by some companies
• Change from double-declining balance to
straight-line during the next-to-last year of
asset’s life
• Eliminates the need to use a plug figure
for depreciation expense in last year
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26
E9-19
Switch to Straight line.
Double declining
Balance
$3,750
– 3,000 / 2 years
Rate = 2/4 or 50%
Year
Depr Exp for
Total
Year
Accum Depr
Year-End
Book Value
x 50%
2006 $15,000
$7,500
$7,500
$7,500
x
50%
2007 $7,500
3,750
11,250
3,750
3,000)/2 11,625
2008($3,750 –375
3,375
2009
3,000
375
12,000
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27
E9-19
• The units-of-production method tracks the
wear and tear on the equipment most
closely
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28
Use of Depreciation Methods
10%
5%
84%
1%
Straight-line
Accelerated
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UOP
Other
29
Objective 3
Select the best depreciation
method for tax purposes
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30
Depreciation for Tax Reporting
• Modified Accelerated Cost Recovery
System (MACRS)
• Assets are classified into categories by
asset life
• Depreciation method is specified
according to category
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31
E9-20
Double-declining balance
Year 1:($140,000 x 2/10)
$28,000
Year 2:($140,000–28,000) x 2/10 22,400
$50,400
Straight-line
Year 1: ($140,000 – 40,000)/10
Year 2:
$10,000
10,000
20,000
$30,400
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32
Partial Year Depreciation
• When plant asset is acquired during the
year, compute full year’s depreciation and
multiply that by the fraction of the year the
asset is owned
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33
Revising Depreciation
• Depreciation is an estimate
– Estimated residual value
– Estimated useful life
Book value – New residual value
Remaining life in years
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34
E9-21
Cost
Residual value
Depreciable base
Depreciation expense per year
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$500,000
100,000
$400,000
/40 years
$10,000
35
E9-21
Depreciation expense per year
Accumulated depreciation
after 15 years
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$10,000
X 15 years
$150,000
36
Exercise 9-8
Book value after 15 years
Cost
Accumulated depreciation
Cost left to depreciate
Residual value
New depreciable base
Life (25 years – 15 years taken)
New depreciation per year
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$500,000
(150,000)
$350,000
(100,000)
$250,000
/10 year
$25,000
37
Exercise 9-8
GENERAL JOURNAL
DATE
Yr
Yr
DESCRIPTION
REF
DEBIT
15 Depreciation Expense
Accumulated Depreciation
10,000
16 Depreciation Expense
Accumulated Depreciation
25,000
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CREDIT
10,000
25,000
38
Fully Depreciated Assets
• If still useful, a company will continue to
use it
• Report book value on balance sheet
• Record no more depreciation
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39
Objective 4
Account for the disposal of a plant
asset
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40
Disposing of a Plant Asset
• Sell
• Exchange
• Discard
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41
Disposing of a Plant Asset
• Bring depreciation up to date
• Compare assets received with book value
of asset being disposed of to determine if
there is a gain or loss
– Gain increases net income – credit balance
– Loss decreases net income – debit balance
• Record entry to remove asset from books
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42
E9-22
Depreciation for 2006:
10,000 x 2/5 = $4,000
Depreciation for 2007 (through Sept 30)
(10,000 – 4,000) x 2/5 x 9/12 = $1,800
Accumulated Depreciation
4,000
1,800
5,800 balance
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43
E9-22
Cash Received
$6,200
Book Value of Fixtures:
Cost
$10,000
Accumulated Depreciation 5,800 4,200
Gain on Sale
$2,000
A gain is similar to a revenue and
appears on the income statement as
an “Other revenues and expenses”
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44
E9-22
GENERAL JOURNAL
DATE
DESCRIPTION
Sep 30 Depreciation Expense
Accumulated Depreciation
30 Cash
Accumulated Depreciation
Fixtures
Gain on Sale of Assets
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REF
DEBIT
CREDIT
1,800
1,800
6,200
5,800
10,000
2,000
45
Exchanging Plant Assets
Market value
of new asset
>
Book value of
old asset +
cash given
“Cost” of the new asset =
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46
Exchanging Plant Assets
Market value
of new asset
<
Book value of
old asset +
cash given
“Cost” of the new asset =
Recognize a loss for the difference
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47
E9-23
Old fixtures:
Cost
Accumulated depreciation
Book value
Cash paid
Cost of new fixtures
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$90,000
(75,000)
$15,000
100,000
$115,000
48
E9-23
GENERAL JOURNAL
DATE
1.
DESCRIPTION
REF
Fixtures (new)
Accumulated Depreciation,
Fixtures
Fixtures (old)
Cash
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DEBIT
CREDIT
115,000
75,000
90,000
100,000
49
E9-23
Old fixtures:
Cost
Accumulated depreciation
Book value
Cash paid
Cost of assets given up
Market value of new fixtures
Loss
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$90,000
(75,000)
$15,000
100,000
$115,000
110,000
$5,000
50
E9-23
GENERAL JOURNAL
DATE
1.
DESCRIPTION
REF
Fixtures (new)
Accumulated Depreciation,
Fixtures
Loss on Exchange of Assets
Fixtures (old)
Cash
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DEBIT
CREDIT
110,000
75,000
5,000
90,000
100,000
51
Objective 5
Account for natural resources
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52
Natural Resources
• Plant assets extracted from the natural
environment
• Expensed through depletion using the
units of production method
• Reported on balance sheet at cost less
accumulated depletion
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53
Depletion
• Compute depletion rate per unit:
Cost – Residual Value
Estimated total units of natural resource
• Compute depletion expense:
Number of units
Depletion
× extracted this
rate per unit
period
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54
E9-25
Mine:
Filing fee
License
Survey
Total cost
Divided by
$428,500
500
1,000
70,000
$500,000
200,000 tons = $2.50 per ton
Depletion: 30,000 tons @ $2.50/ton = $75,000
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55
E9-25
GENERAL JOURNAL
DATE
a)
b)
DESCRIPTION
REF
DEBIT
Mineral Asset
Cash
428,000
Mineral Asset
1,500
Cash
To record filing and license
fees
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CREDIT
428,000
1,500
56
E9-25
GENERAL JOURNAL
DATE
b)
c)
DESCRIPTION
REF
Mineral Asset
Cash
Paid for geological survey
Depletion Expense, Mineral
Asset
Accumulated Depletion,
Mineral Asset
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DEBIT
CREDIT
70,000
70,000
75,000
75,000
57
Objective 6
Account for intangible assets
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58
Intangible Assets
•
•
•
•
Noncurrent assets with no physical form
Provide exclusive rights or privileges
Acquired to help generate revenues
Expensed through amortization using the
straight-line method
• Written off the asset directly
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Patents
• Exclusive 20-year right to produce and sell
an invention
• Granted by federal government
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60
Copyrights
• Exclusive right to reproduce and sell
artistic works or intellectual property
• Issued by federal government
• Legal life – 70 years beyond life of the
creator
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61
Trademarks, Brand Names
• Represent distinctive identifications of a
product or service
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62
Franchises, Licenses
• Franchises - privileges granted by private
business or government to sell goods or
services
• Acquisition cost is capitalized and
amortized
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63
E9-26
GENERAL JOURNAL
DATE
a)
b)
DESCRIPTION
REF
Patent
Cash
DEBIT
CREDIT
600,000
600,000
Amortization Expense,
Patent
Patent
($600,000 / 8 years)
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75,000
75,000
64
E9-26
Cost
Less amortization for 4 years
(75,000 x 4)
Carrying value of patent
$600,000
300,000
$300,000
GENERAL JOURNAL
DATE
Yr 5
DESCRIPTION
REF
Amortization Expense,
Patent
Patent
($300,000 / 2 years)
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DEBIT
CREDIT
150,000
150,000
65
Goodwill
• Goodwill - excess of purchase price of a
company over the market value of the net
assets acquired
• Goodwill can only be recorded in the
purchase of another company
• Goodwill is not amortized
• Measure value of goodwill each year
– If value has increased – record nothing
– If value has decreased – recognize loss and
decrease carrying value of goodwill
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66
E9-27
Goodwill
Purchase price
Market value of net assets:
Assets
$12,000,000
Liabilities (10,000,000)
Cost of goodwill purchased
$8,000,000
2,000,000
$6,000,000
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67
E9-27
GENERAL JOURNAL
DATE
DESCRIPTION
REF
DEBIT
CREDIT
(in millions)
Other Assets
Goodwill
Liabilities
Cash
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12
6
10
8
68
Research & Development
Costs
• Expense them as they are incurred
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69
End of Chapter 9
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70