Chapter 10
LONG-TERM ASSETS
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
Winston Kwok, Ph.D., CA
Copyright © 2015 by McGraw-Hill Education (Asia). All rights reserved
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C1
PROPERTY, PLANT AND EQUIPMENT
Tangible in Nature
Actively Used in Operations
Expected to Benefit Future Periods
Called Property, Plant, & Equipment
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C1
PROPERTY, PLANT AND EQUIPMENT
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C1
COST DETERMINATION
Purchase
price
Acquisition
Cost
Acquisition cost excludes
financing charges and
cash discounts
All expenditures
needed to
prepare the
asset for its
intended use
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C1
LAND
Title insurance premiums
Purchase
price
Delinquent
taxes
Real estate
commissions
Surveying
fees
Title search and transfer fees
Land is not depreciable.
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C1
LAND IMPROVEMENTS
Parking lots, driveways, fences, walks, shrubs,
and lighting systems.
Depreciate
over useful life of
improvements.
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C1
BUILDINGS
Cost of purchase or
construction
Title fees
Brokerage
fees
Attorney fees
Taxes
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C1
MACHINERY AND EQUIPMENT
Purchase
price
Taxes
Transportation
charges
Installing,
assembling, and
testing
Insurance while
in transit
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P1
LUMP-SUM ASSET PURCHASE
The total cost of a combined purchase of land and building is
separated on the basis of their relative fair market values.
CarMax paid $90,000 cash to acquire a group of items
consisting of land appraised at $30,000, land improvements
appraised at $10,000, and a building appraised at $60,000.
The $90,000 cost will be allocated on the basis of appraised
values as shown:
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P1
DEPRECIATION
Depreciation is the process of allocating the
cost of an item of property, plant and
equipment to expense in the accounting
periods benefiting from its use.
Statement of Financial Position
Acquisition
Cost
(Unused)
Income Statement
Cost
Allocation
Expense
(Used)
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P1
FACTORS IN COMPUTING DEPRECIATION
The calculation of depreciation requires
three amounts for each asset:
1. Cost
2. Residual Value
3. Useful Life
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P1
DEPRECIATION METHODS
1.
Straight-line
2.
Units-of-production
3.
Declining-balance
Asset we will depreciate in future screens
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P1
Straight-Line Method
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P1
Straight-Line Method
At the end of year 2:
Statement of Financial Position Presentation
Machinery
Accumulated depreciation
$ 10,000
(3,600)
$
6,400
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P1
STRAIGHT-LINE DEPRECIATION SCHEDULE
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P1
UNITS-OF-PRODUCTION METHOD
Step 1:
Depreciation
Per Unit
=
Cost - Residual Value
Total Units of Production
Step 2:
Depreciation
Expense
=
Depreciation
Per Unit
Number of Units
×
Produced
in the Period
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P1
UNITS-OF-PRODUCTION METHOD
Assume that 7,000 units were inspected
during 2011. Depreciation would be
calculated as follows:
Step 1:
Depreciation = Cost - Residual Value = $9,000
36,000
Per Unit
Total Units of Production
= $0.25/unit
Step 2:
Number of Units
Depreciation
Depreciation
= $0.25 × 7,000 = $1,750
Produced
×
=
Expense
Per Unit
in the Period
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P1
UNITS-OF-PRODUCTION
DEPRECIATION SCHEDULE
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P1
DOUBLE-DECLINING-BALANCE METHOD
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P1
DOUBLE-DECLINING-BALANCE METHOD
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P1
COMPARING DEPRECIATION METHODS
Period
2011
2012
2013
2014
2015
Totals
StraightLine
$ 1,800
1,800
1,800
1,800
1,800
$ 9,000
Units of
Production
$ 1,750
2,000
2,250
1,750
1,250
$ 9,000
DoubleDecliningBalance
$ 4,000
2,400
1,440
864
296
$ 9,000
$4,000
$3,500
$3,000
$2,500
$2,000
$1,500
$1,000
$500
$2011
Straight-Line
2012
2013
Units-of-Production
2014
2015
Double-Declining-Balance
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C2
PARTIAL-YEAR DEPRECIATION
When an item of property, plant and equipment is
acquired during the year, depreciation is calculated for
the fraction of the year the asset is owned.
Cost
Residual value
Depreciable cost
Useful life
Accounting periods
Units inspected
$
$
10,000
1,000
9,000
5 years
36,000 units
Assume our machinery was purchased
on October 8, 2010. Let’s calculate
depreciation expense for 2010,
assuming we use straight-line
depreciation.
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C2
CHANGE IN ESTIMATES FOR DEPRECIATION
Predicted
residual value
Predicted
useful life
Depreciation
is an estimate
Over the life of an asset, new information may
come to light that indicates the original estimates
were inaccurate.
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C2
CHANGE IN ESTIMATES FOR DEPRECIATION
Let’s look at our machinery from the previous examples
and assume that at the beginning of the asset’s third year,
its carrying amount is $6,400 ($10,000 cost less $3,600
accumulated depreciation using straight-line depreciation).
At that time, it is determined that the machinery will have a
remaining useful life of 4 years, and the estimated residual
value will be revised downward from $1,000 to $400.
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C2
REPORTING DEPRECIATION
Nestlé 2013
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C3
ADDITIONAL EXPENDITURES
Treatment
Capital
Expenditure
Revenue
Expenditure
Financial Statement Effect
Current
Statement
Expense
Profit
Statement of
financial position
Deferred Higher
account debited
Income statement Currently
Lower
account debited recognized
If the amounts involved are not material,
most companies expense the item.
Current
Taxes
Higher
Lower
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C3
REVENUE AND CAPITAL EXPENDITURES
Capital or
Revenue
1.
2.
Revenue
3.
1.
Capital
2.
Identifying Characteristics
Maintains normal operating condition.
Does not increase productivity.
Does not extend life beyond original
estimate.
Major overhauls or partial
replacements.
Extends life beyond original estimate.
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C4
MEASUREMENT MODELS
The Cost Model states that after recognition as an asset, an
item of PPE shall be carried at its cost less any accumulated
depreciation and any accumulated impairment losses.
The Revaluation Model states that after recognition as an
asset, an item of PPE whose fair value can be measured
reliably shall be carried at a revalued amount, being its fair
value at the date of the revaluation less any subsequent
accumulated depreciation and subsequent accumulated
impairment losses. The fair value of PPE is usually
determined from market-based evidence by professional
appraisal or valuation.
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C4
REVALUATION MODEL
If land which was bought for $1 million in 2013 is revalued to
$1.5 million on June 30, 2015 (no depreciation for land), the
journal entry for the revaluation on that date is:
Revaluation surplus is part of other comprehensive income
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C4
REVALUATION MODEL
KC Corp has an equipment bought on July 1, 2013 with a cost of
$200,000, no residual value and estimated useful life of five years. After
two years on June 30, 2015, KC obtains market information for
revaluation suggesting that the fair value of the equipment is $300,000.
Method (a):
Restated accumulated depreciation proportionately with the change in
the gross carrying amount of the asset so that the carrying amount of the
asset after revaluation equals its revalued amount.
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C4
REVALUATION MODEL
KC Corp has an equipment bought on July 1, 2013 with a cost of
$200,000, no residual value and estimated useful life of five years. After
two years on June 30, 2015, KC obtains market information for
revaluation suggesting that the fair value of the equipment is $300,000.
Method (b):
Eliminate accumulated depreciation against the gross carrying amount of
the asset and the net amount restated to the revalued amount of the
asset
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C4
IMPAIRMENT
An impairment is the amount by which the carrying amount
of an asset exceeds its recoverable amount.
For example, an equipment bought before 2015 has a
carrying amount of $8,000 ($9,000 cost less $1,000
accumulated depreciation) and a recoverable amount of
$7,500.
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P2
DISPOSALS OF
PROPERTY, PLANT AND
EQUIPMENT
Update depreciation
to the date of disposal.
Journalize disposal by:
Recording cash
received (debit)
or paid (credit).
Removing accumulated
depreciation (debit).
Recording a
gain (credit)
or loss (debit).
Removing the
asset cost (credit).
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P2
DISCARDING
PROPERTY, PLANT AND EQUIPMENT
depreciation
If Cash >Update
CA, record
a gain (credit).
to the date of disposal.
If Cash < CA, record a loss (debit).
If CashJournalize
= CA, nodisposal
gain orby:
loss.
Recording cash
received (debit)
or paid (credit).
Removing accumulated
depreciation (debit).
Recording a
gain (credit)
or loss (debit).
Removing the
asset cost (credit).
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P2
DISCARDING
PROPERTY, PLANT AND EQUIPMENT
A machine costing $9,000, with accumulated depreciation of
$9,000 on December 31st of the previous year was
discarded on June 5th of the current year. The company is
depreciating the equipment using the straight-line method
over eight years with zero residual value.
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P2
DISCARDING
PROPERTY, PLANT AND EQUIPMENT
Equipment costing $8,000, with accumulated depreciation of
$6,000 on December 31st of the previous year was
discarded on July 1st of the current year. The company is
depreciating the equipment using the straight-line method
over eight years with zero residual value.
Step 1: Bring the depreciation up-to-date.
Step 2: Record discarding of asset.
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P2
SELLING
PROPERTY, PLANT AND EQUIPMENT
On March 31st, BTO sells equipment that originally cost $16,000 and has
accumulated depreciation of $12,000 at December 31st of the prior
calendar year-end. Annual depreciation on this equipment is $4,000 using
straight-line depreciation. The equipment is sold for $3,000 cash.
Step 1: Update depreciation to March 31st.
Step 2: Record sale of asset at carrying amount ($16,000 - $13,000 = $3,000).
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P2
SELLING
PROPERTY, PLANT AND EQUIPMENT
On March 31st, BTO sells equipment that originally cost $16,000 and has
accumulated depreciation of $12,000 at December 31st of the prior
calendar year-end. Annual depreciation on this equipment is $4,000 using
straight-line depreciation. The equipment is sold for $2,500 cash.
Step 1: Update depreciation to March 31st.
Step 2: Record sale of asset at a loss (Carrying amount $3,000 - $2,500 cash
received).
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P3
NATURAL RESOURCES
Total cost,
including
exploration and
development,
is charged to
depletion expense
over periods
benefited.
Extracted from
the natural
environment
and reported
at cost less
accumulated
depletion.
Examples: oil, coal, gold
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P3
COST DETERMINATION AND DEPLETION
Let’s consider a mineral deposit with an estimated 250,000
tons of available ore. It is purchased for $500,000, and we
expect zero residual value.
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P3
DEPLETION OF NATURAL RESOURCES
Depletion expense in the first year would be:
Statement of Financial Position presentation of natural resources:
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P3
PROPERTY, PLANT AND EQUIPMENT
USED IN
EXTRACTING
 Specialized
property, plant and equipment
may be required to extract the natural
resource.
 These assets are recorded in a separate
account and depreciated.
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P4
INTANGIBLE ASSETS
Often provide
exclusive rights
or privileges.
Noncurrent assets
without physical
substance.
Intangible
Assets
Useful life is
often difficult
to determine.
Usually acquired
for operational
use.
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P4
COST DETERMINATION AND AMORTIZATION
Record at current
cash equivalent
cost, including
purchase price,
legal fees, and
filing fees.
o
o
o
o
o
o
Patents
Copyrights
Franchises and Licenses
Goodwill
Trademarks and Trade Names
Other Intangibles
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A1
TOTAL ASSET TURNOVER
Net Sales
Total Asset =
Turnover
Average Total Assets
Provides information about a company’s
efficiency in using its assets.
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P5
10A – EXCHANGING PROPERTY, PLANT
AND EQUIPMENT
Many property, plant and equipment such as machinery,
automobiles, and office equipment are disposed of by
exchanging them for newer assets. In a typical exchange
of property, plant and equipment, a trade-in allowance is
received on the old asset and the balance is paid in cash.
Accounting for the exchange of assets depends on
whether the transaction has commercial substance.
Commercial substance implies the
company’s future cash flows will be
altered.
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P5
EXCHANGE WITH COMMERCIAL
SUBSTANCE: A LOSS
A company acquires $42,000 in new equipment. In exchange, the company
pays $33,000 cash and trades in old equipment. The old equipment
originally cost $36,000 and has accumulated depreciation of $20,000
(carrying amount is $16,000). This exchange has commercial substance.
The old equipment has a trade-in allowance of $9,000.
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END OF CHAPTER 10