Long-Lived
Nonmonetary
Assets and Their
Amortization
Part One: Financial Accounting
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© The McGraw-Hill Companies, Inc., 1999
Types of Long-Lived Assets
Type of Asset
Tangible assets:
Land
Plant and equipment
Natural resources
Intangible assets:
Goodwill
Patents, copyrights, etc.
Leasehold improvements
Deferred charges
Research and development costs
Irwin/McGraw-Hill
Slide 7-1
Method of Converting
to Expense
not amortized
depreciation
depletion
amortization
amortization
amortization
amortization
not capitalized
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Items Included in Cost
Slide 7-2
 Purchase price
 Sales tax
 Transportation costs
 Installation cost
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
Straight-Line Method
Slide 7-3
The expected amount to
be recovered at the end
of the service life.
Original cost - Residual value
Depreciation Expense =
Service life (years)
The number of
accounting periods over
which the asset will be
useful to the entity.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
Straight-Line Method
Slide 7-4
Original cost - Residual value
Depreciation Expense =
Service life (years)
$10,000 - $1,000
Depreciation Expense =
Depreciation Expense =
Irwin/McGraw-Hill
5 years
$1,800
© The McGraw-Hill Companies, Inc., 1999
Declining-Balance Method
Depreciation
Expense
Year 1:
Year 2:
Year 3:
Year 4:
Year 5:
$10,000 x .40
$6,000 x .40
$3,600 x. 40
$2,160 x .40
$1,296 - $1,000
= $4,000
= 2,400
= 1,440
= 864
= 296
Slide 7-5
Book
Value
$10,000
6,000
3,600
2,160
1,296
1,000
Note that this amount reduces the
book value to the salvage value.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
Years’-Digits Method
Slide 7-6
First, determine the sum by using the following equation:
n
n+1
2
=
5
5+1
2
Next, build a table:
Year 1:
Year 2:
Year 3:
Year 4:
Year 5:
Irwin/McGraw-Hill
5/15 x ($10,000 - $1,000)
4/15 x ($10,000 - $1,000)
3/15 x ($10,000 - $1,000)
2/15 x ($10,000 - $1,000)
1/15 x ($10,000 - $1,000)
= 15
Annual
Depreciation
$3,000
2,400
1,800
1,200
600
Book
Value
$10,000
7,000
4,600
2,800
1,600
1,000
© The McGraw-Hill Companies, Inc., 1999
Units-of-Production Method
Slide 7-7
Original cost - Residual value
Depreciation Expense =
Service life (units)
$10,000 - $1,000
Depreciation Expense =
Depreciation Expense =
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90,000 miles
$.10 per mile
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Accounting for Depreciation
Slide 7-8
December 31, 1996
Building, at net
$1,000,000
Less: Accumulated depreciation
25,000
Building, net
$975,000
December 31, 1997
Building, at net
$1,000,000
Less: Accumulated depreciation
50,000
Building, net
$950,000
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
Accounting for Depreciation
Slide 7-9
The annual journal entry to record depreciation is:
Depreciation Expense
Accumulated Depreciation
25,000
25,000
A fully depreciated building still in use (assume no
salvage value) would appear on the balance sheet as
follows:
Building, at net
$1,000,000
Less: Accumulated depreciation 1,000,000
Building, net
Irwin/McGraw-Hill
$0
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Disposal of Plant and Equipment
Slide 7-10
A building is sold for its book value of $750,000:
Cash
Accumulated Depreciation
Building
750,000
250,000
1,000,000
Assume instead that the building was sold for
$650,000:
Cash
Accumulated Depreciation
Loss on Sale of Building
Building
Irwin/McGraw-Hill
650,000
250,000
100,000
1,000,000
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Exchanges and Trade-Ins
Slide 7-11
Assume a company trades in two automobiles, each of which
originally cost $20,000 and each has a book value of $5,000.
Each car has a market value of $7,000.
$18,000 + $7,000 “gain”
$2,000
The first car is traded for another car with
a listofprice
of $30,000,
and $18,000 cash is given to the dealer in addition to the trade-in.
Automobile (New)
Accumulated Depreciation (Automobile)
Cash
Automobile (Old)
Irwin/McGraw-Hill
23,000
15,000
18,000
20,000
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Exchanges and Trade-Ins
Slide 7-12
Assume a company trades in two automobiles, each of which
originally cost $20,000 and each has a book value of $5,000.
Each car has a market value of $7,000.
The second automobile is traded for a piece of equipment
that also has a list price of $30,000 and $18,000 cash
is given in addition to the trade-in.
$18,000
+
Equipment (New)
25,000
$7,000
Accumulated Depreciation (Automobile) 15,000
Cash
18,000
Automobile (Old)
20,000
Gain on Disposal of Automobile
2,000
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© The McGraw-Hill Companies, Inc., 1999
Group Depreciation
Slide 7-13
Group depreciation treats all similar assets (such as
automobile or office chairs) as a “pool” or group rather
than making the calculation for each one separately.
A used microcomputer which originally cost $3,000 is
disposed of for $400 cash.
Cash
Accumulated Depreciation, Microcomputers
Microcomputers
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400
2,600
3,000
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MACRS
Slide 7-14
 A method provided by the tax code
 Designed as an incentive to invest in capital
assets
 Shortened assets’ lives for tax purposes
 Most classes of property acquired or
disposed of at any point during the year are
assumed to have been acquired or disposed
of at the midpoint of the year
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
MACRS
Slide 7-15
Assume that a machine in the five-year class is
acquired at some point in 19x1 for $100,000.
Year
Cost Recovery
Deduction
19x1
19x2
19x3
19x4
19x5
19x6
Total
$ 20,000
32,000
19,200
11,520
11,520
5,760
$100,000
Irwin/McGraw-Hill
Computation
1/2 * 40% * $100,000
40% * ($100,000 - $20,000)
40% * ($80,000 - $32,000)
40% * ($48,000 - $19,200)
change to straight-line
1/2 * 19x5 amount
© The McGraw-Hill Companies, Inc., 1999
Investment Tax Credit
Slide 7-16
In late December 19x1 a company purchased a $200,000
machine that qualified for a $20,000 investment tax credit.
Income Tax Liability
Income Tax Expense
20,000
20,000
This is the
flow-through
method.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
Investment Tax Credit
Slide 7-17
An alternative approach is to record the investment tax credit
as a deferred credit--which is analogous to unearned revenue.
Income Tax Liability
Deferred Investment Tax Credits
20,000
20,000
This approach is
called the
deferred method.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
Investment Tax Credit
Slide 7-18
In 19x2 and the subsequent nine years, Income
Tax Expense would be decrease by $2,000.
Deferred Investment Tax Credits
Income Tax Expense
2,000
2,000
This method has the
effect of increasing net
income each year
the entry is made.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
Depletion Expense
Slide 7-19
An oil property cost $250 million and is
estimated to contain 50 million barrels of oil.
Original cost - Residual value
Depletion Expense =
Total barrels of oil
$250 million - $0
Depletion Expense =
Depletion Expense =
Irwin/McGraw-Hill
50 million
$5 per barrel
© The McGraw-Hill Companies, Inc., 1999
Intangible Assets
•
•
•
•
•
•
•
Slide 7-20
Goodwill
Patent
Copyrights
Franchise rights
Leasehold improvements
Deferred charges
Research and development costs
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
Chapter 7
The End
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999