CHAPTER
10
Investments in Property,
Plant, and Equipment
and in Intangible Assets
Learning Objective 1
Identify the two major
categories of longterm operating assets:
property, plant, and
equipment and
intangible assets.
Define and Provide Examples of
Operating Assets
Name and Define the Two Types
of Operating Assets
Diagram the Time Line of
Business Issues
Learning Objective 2
Understand the
factors important in
deciding whether to
acquire a long-term
operating asset.
Define Capital Budgeting
What is the Time Value of
Money?
Learning Objective 3
Record the acquisition of
property, plant, and
equipment through a
simple purchase as well
as through a lease, selfconstruction, and as part
of the purchase of
several assets at once.
Assets Acquired by Purchase
Frank’s Fruit Farm purchased a fork lift
for use in its wholesale business.
Frank’s paid $12,000 cash for the fork
lift. Make the necessary journal entry
for this purchase.
Assets Acquired by Purchase
Frank’s Fruit Farm purchased a fork lift
for use in its wholesale business.
Frank’s paid $12,000 for the fork lift.
What entry is necessary if Frank paid
$3,000 cash and borrowed the remaining
$9,000? Make the appropriate entry.
What is a Lease?
Match Lease Terms
Capital
Lease
Lessor
Operating
Lease
Lessee
The party that is granted the right
to use the property under the
terms of a lease.
The owner of property that is
leased (rented) to another party.
A simple rental agreement.
A leasing transaction that is
recorded as a purchase by the
lessee.
Operating Lease
Frank’s Fruit Farm leases a
building with monthly rental
payments of $1,000. Make the
appropriate entry if rent is paid in
cash the first month.
Capital Lease
Frank’s Fruit Farm enters into a non-cancelable
lease agreement that requires lease payments
of $100,000 a year for 20 years. At the end of 20
years, Frank’s will own the property. Make the
appropriate entries.
Classifying Leases
Respond YES or NO. If the item below
occurs, is the lease a capital lease?
Transfer of Ownership?
Bargain Purchase
Option?
Term  75% of
Useful Life?
Capital
Lease
PV Payment 90%
of FMV?
Operating
Lease
Assets Acquired by
Self Construction
Self-constructed assets
recorded at cost
include all expenditures incurred to build
the asset and make it ready for its
intended use
Costs include
materials used to build the asset
the construction labor
capitalized interest
some reasonable share of the general
company overhead
Acquisition of Several
Assets at Once—
Define the Terms Below
Basket Purchase
Relative Fair Market
Value Method
Example: Basket Purchase
When two or more assets are acquired at a single
price, the prices are allocated on the “relative fair market
value” method. In this example, Frank’s Fruit Farm
purchased land and a new sorting facility at a total cost of
$3,600,000. Prepare the entry to record the purchase.
Asset
FMV
% of Total
Value
Cost
Learning Objective 4
Compute straight-line
and units-ofproduction
depreciation expense
for plant and
equipment.
Define these Depreciation Terms
Depreciation
Book Value
Salvage Value
Methods of Depreciation
Straight-Line
The cost of the asset is allocated
equally over the periods of an asset’s
estimated useful life.
Units-of-Production
The cost of an asset is allocated to
each period on the basis of the
productive output or use of the asset
during the period.
Example: Depreciation Methods
Frank’s Fruit Farm purchased a fork lift on
January 1 for transporting fresh produce to and
from the warehouse. The following facts apply:
Acquisition cost. . . . . . . . . . . .
$24,000
Estimated salvage value. . . . .
$ 2,000
Estimated life:
In years. . . . . . . . . . . . . . . .
4 years
In miles driven. . . . . . . . . . .
60,000 miles
Compute Frank’s annual depreciation expense using
both the straight-line and units-of-production methods
and determine the appropriate journal entries.
What is the Formula for the
Straight-Line Method?
Annual
Depreciation
Expense
Do the
calculation.
=
=
=
Make the
Journal
Entry
What is the Formula for the
Units-of-Production Method?
Per Unit
Depreciation
=
Depreciation
Expense
=
Do the
Depreciation
calculation.
Expense
=
=
Make the
Journal
Entry
Comparison of Methods
Year
Straight-Line Units-of-Production
$8,000
2000
$ 5,500
$ 4,400
2001
5,500
6,600
$6,000
$4,000
2002
$2,000
Units-of-Production
5,500
7,700
Straight-Line
2003
5,500
3,300
$0
Total
$22,000
$22,000
2000
2001
2002
2003
Partial-Year Depreciation
What are the two steps to compute
depreciation expense for less than a full year?
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More Depreciation Terms
Defined.
Natural Resources
Depletion
Example: Depletion
Hard Hat’s mine contains an
estimated 200,000 tons of coal. The
depletion expense for each ton of
coal is $6. Determine the journal
entry if 12,000 tons are mined.
Learning Objective 5
Account for repairs and
improvements of
property, plant, and
equipment.
Expenditures on Existing Assets
Ordinary expenditures
Capitalized expenditures
Learning Objective 6
Identify whether a
long-term operating
asset has suffered a
decline in value and
record the decline.
What is the Impairment Test?
Sum of future cash flows
(from asset)
Book value
(of asset)
Sum of future cash flows
less than book value
NO IMPAIRMENT
Asset continues to be
reported at book value
IMPAIRMENT
Record asset at its
fair value
Learning Objective 7
Record the
discarding and
selling of property,
plant, and equipment.
Discarding Property, Plant,
and Equipment
Frank’s Fruit Farm purchased a
conveyor system for $15,000. It
has a 5-year life, no salvage
value, and is depreciated on a
straight-line basis. If Frank’s
scraps the conveyor after 5 full
years, what is the appropriate
entry?
Discarding Property, Plant,
and Equipment
Frank’s Fruit Farm purchased a conveyor
system for $15,000. It has a 5-year life, no
salvage value, and is depreciated on a
straight-line basis. If Frank pays $300 to
have the conveyor dismantled and
removed, what is the appropriate entry?
Selling Property, Plant, and
Equipment
Frank’s Fruit Farm purchased a conveyor
system for $15,000. It has a 5-year life,
no salvage value, and is depreciated on a
straight-line basis. If Frank scraps the
conveyor after only 4 years of service,
there will be a loss of $3,300. What is the
appropriate journal entry?
Selling Property, Plant, and
Equipment
Frank’s Fruit Farm purchased a conveyor
system for $15,000. It has a 5-year life, no
salvage value, and is depreciated on a
straight-line basis. If the conveyor is sold
for $600 after 5 full years of service, what is
the appropriate journal entry?
Selling Property, Plant, and
Equipment
Frank’s Fruit Farm purchased a conveyor
system for $15,000. It has a 5-year life, no
salvage value, and is depreciated on a
straight-line basis. If the conveyor is sold
for $600 after only four years of service,
Frank’s will experience a loss of $2,400.
Make the appropriate entry.
Learning Objective 8
Account for the
acquisition and
amortization of intangible
assets and understand
the special difficulties
associated with
accounting for
intangibles.
What are Intangible Assets?
Rights and privileges that are
Amortization
Define Each of These Intangible
Assets.
Patent
Franchise
License
Amortizing a Patent
$200,000 Patent with useful life of 8 years:
Benefit
Calculate
PATENT the
amortization
for each of the
eight years.
Goodwill
An intangible asset that exists when a
business is valued at more than the fair
market value of its net assets, usually due to:
strategic location
reputation
good customer relations
similar factors
Equal to the excess of the purchase price
over the fair market value of the net assets
purchased.
Example: Goodwill
Frank’s Fruit Farm purchased
Farmers’ Market for $1,200,000.
At the time of the purchase,
Farmers’ recorded the following
market values of its assets and
liabilities:
Inventory
Long-term operating assets
Other assets
Liabilities
Total Net Assets
$750,000
220,000
25,000
(18,000)
$977,000
Example: Goodwill
Frank’s Fruit Farm purchased
Farmers’ Market for $1,200,000.
Make the journal entry in Frank’s
books to appropriately recognize
goodwill.
Inventory. . . . . . . . . . . . . . . . . . . . . . 750,000
Long-Term Operating Assets . . . . 220,000
Other Assets. . . . . . . . . . . . . . . . . . 25,000
Goodwill . . . . . . . . . . . . . . . . . . . . . 223,000
Liabilities. . . . . . . . . . . . . . . . . .
18,000
Cash . . . . . . . . . . . . . . . . . . . . . .
1,200,000
Purchased Farmers’ Market for $1,200,000.
Learning Objective 9
Use the fixed asset
turnover ratio as a
measure of how
efficiently a company
is using its property,
plant, and equipment.
Define Fixed Asset Turnover
Expanded Material
Learning Objective 10
Compute decliningbalance and sum-ofthe-years’-digits
depreciation expense
for plant and
equipment.
Accelerated Depreciation
Define each term.
Declining-Balance Method
Sum-of-the-Years’-Digits Method (SYD)
Accelerated Depreciation Methods
Frank’s Fruit Farm purchased a fork lift
for $12,000. The fork lift has a salvage
value of $2,000 and a useful life of 4
years. Compute depreciation using both
the DDB and SYD depreciation methods.
Double- Book Value
Depreciation
X2=
Declining Asset’s Life
Expense
in Years
Balance
Book Value = Cost – Accumulated Depreciation
Sum-of(Cost – Salvage Value)
the-Year’sCurrent Year / (4+3+2+1)
Digits
Sum of the
years of the
asset’s life
Expanded Material
Learning Objective 11
Account for
changes in
depreciation
estimates.
Change in Estimates
Frank’s purchased a fork lift for $12,000 with a $2,000
salvage value Fruit Farm a 4-year useful life. After 3
years, better information reveals the fork lift has a 6-year
useful life and a $3,000 salvage value. Calculate a new
depreciation expense for the next three years.
Formula
Annual depreciation
for first 3 years
Book value after 3 years
Annual depreciation for last
3 years (based on new
total life of 6 years and new
salvage value of $3,000)
Calculation
Total
Depreciation
This completes Chapter 10