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© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-1
8 Reporting and Analyzing Long-Term Assets
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-2
Property, Plant, and Equipment
Expected to Benefit Future Periods
Actively Used in Operations
Tangible
Plant Assets
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-3
Exh. 8.1
Plant Assets of Selected Companies
78%
63%
47%
29%
0% 20% 40% 60% 80%
McDonald's
Anheuser-Busch
Wal-Mart
e-Bay
As a percent of total assets
$44 million
$32,839 million
$7,965 million
$16,325 million
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-4
Acquisition1. Compute cost
Decline in asset value over its useful life
Use2. Allocate cost to periods benefited3. Account for subsequent expenditures
Disposal 4. Record disposal
Exh. 8.2
Issues in Accounting for Plant Assets
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-5
Acquisitioncost
Acquisition cost excludes financing charges and
cash discounts.
All expenditures
needed to prepare the asset for its intended use
Purchaseprice
Cost of Plant Assets
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-6
Land is not depreciable.
Purchaseprice
Real estatecommissions
Title insurance premiums
Delinquenttaxes
Surveyingfees
Title search and transfer fees
Land
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-7
Purchaseprice
Architecturalfees
Cost ofpermits
Excavation andconstruction costs
Installationcosts
Transportationcosts
Buildings and Equipment
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-8
Land Improvements
Parking lots, driveways, fences, walks, etc.
Depreciate over useful
life
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-9
On January 1, UpCo purchased land and building for $200,000 cash. The appraised values are
building, $162,500, and land, $87,500.
How much of the $200,000 purchase price will be charged to the building and land accounts?
Lump-Sum Asset PurchaseThe total cost of a combined
purchase of land and building is separated on the basis of their relative market values.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-10
Appraised % of Purchase ApportionedAsset Value Value Price Cost
a b* c b × c
Land 87,500$ 35% × 200,000$ = 70,000$ Building 162,500 65% × 200,000 = 130,000 Total 250,000$ 100% 200,000$
* $87,500 ÷ $250,000 = 35%
$162,500 ÷ $250,000 = 65%
Lump-Sum Asset Purchase
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-11
Depreciation is a cost allocation process that systematically and rationally matches
acquisition costs of plant assets with periods benefited by their use.
Cost
AllocationAcquisition
Cost
(Unused)
Balance Sheet
(Used)
Income Statement
Expense
Depreciation
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-12
Income
StatementDepreciation
ExpenseDepreciation for
the current year
Balance
SheetAccumulatedDepreciation
Total depreciation to
date of balance sheet
Depreciation
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-13
The calculation of depreciation requiresthree amounts for each asset:
Cost.
Salvage Value.
Useful Life.
Factors in Computing Depreciation
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-14
Straight-line
Units-of-production
Declining balance
Depreciation Methods
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-15
On December 31, 2001, equipment was purchased for $50,000 cash. The
equipment has an estimated useful life of 5 years and an estimated residual
value of $5,000.SL
Straight-Line Method
Cost - Salvage Value
Useful life in years
Depreciation
Expense per Year=
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-16
Depreciation
Expense per Year=
Depreciation
Expense per Year= $9,000
$50,000 - $5,000
5 years
Straight-Line Method
SL
Cost - Salvage Value
Useful life in years
Depreciation
Expense per Year=
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-17
Depreciation Accumulated Accumulated UndepreciatedExpense Depreciation Depreciation Balance
Year (debit) (credit) Balance (book value)2001 50,000$ 2002 9,000$ 9,000$ 9,000$ 41,000 2003 9,000 9,000 18,000 32,000 2004 9,000 9,000 27,000 23,000 2005 9,000 9,000 36,000 14,000 2006 9,000 9,000 45,000 5,000
45,000$ 45,000$
Salvage Value
Straight-Line Method
SL
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-18
Dep
reci
atio
n
Exp
ense Depreciation Expense is reported on the Income
Statement.
Book Value is reported on the Balance Sheet.
SL
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-19
DepreciationPer Unit =
Cost - Salvage Value Total Units of Production
Step 1:
Step 2:
Depreciation Expense =
DepreciationPer Unit
×Number of
Units Producedin the Period
Units-of-Production Method
Exh. 8.9
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-20
On December 31, 2001, equipment was purchased for $50,000 cash. The equipment is expected to produce
100,000 units during its useful life and has an estimated salvage value of $5,000.
If 22,000 units were produced in 2002, what is the amount of depreciation expense?
On December 31, 2001, equipment was purchased for $50,000 cash. The equipment is expected to produce
100,000 units during its useful life and has an estimated salvage value of $5,000.
If 22,000 units were produced in 2002, what is the amount of depreciation expense?
Units-of-Production Method
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-21
Step 2:Depreciation Expense = $.45 per unit × 22,000 units = $9,900
Step 1:Depreciation
Per Unit= $50,000 - $5,000
100,000 units = $.45 per unit
Units-of-Production Method
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-22
Accumulated UndepreciatedDepreciation Depreciation Balance
Year Units Expense Balance (book value)2001 50,000$ 2002 22,000 9,900$ 9,900$ 40,100 2003 28,000 12,600 22,500 27,500 2004 - - 22,500 27,500 2005 32,000 14,400 36,900 13,100 2006 18,000 8,100 45,000 5,000
100,000 45,000$
No depreciation expense if the equipment is idle.
Salvage Value
Units-of-Production Method
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-23
Depreciation RepairExpense Expense
Early Years High Low
Later Years Low High
Early years’ total expense approximates later years’ total expense.
Declining Balance Method
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-24
Step 2:Double-declining-
balance rate= 2 ×
Straight-linedepreciation rate
Exh. 8.11
Step 3:Depreciation
expense=
Double-declining-balance rate
×Beginning period
book value
Double-Declining-Balance MethodStep 1:
Straight-linedepreciation rate
= 100 % Useful life in periods
Ignores salvage value
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-25
On December 31, 2001, equipment was purchased for $50,000 cash. The
equipment has an estimated useful life of 5 years and an estimated residual
value of $5,000.
Calculate the depreciation expense for 2002 and 2003.
On December 31, 2001, equipment was purchased for $50,000 cash. The
equipment has an estimated useful life of 5 years and an estimated residual
value of $5,000.
Calculate the depreciation expense for 2002 and 2003.
Double-Declining-Balance Method
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-26
Step 2:Double-declining-
balance rate= 2 × 20% = 40%
Step 3:Depreciation
expense= 40% × $50,000 = $20,000 (2002)
Double-Declining-Balance MethodStep 1:
Straight-linedepreciation rate
= 100 % 5 years
= 20%
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-27
2002 Depreciation: 40% × $50,000 = $20,000
2003 Depreciation: 40% × ($50,000 - $20,000) = $12,000
Double-Declining-Balance Method
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-28
Depreciation Accumulated UndepreciatedExpense Depreciation Balance
Year (debit) Balance (book value)2001 50,000$ 2002 20,000$ 20,000$ 30,000 2003 12,000 32,000 18,000 2004 7,200 39,200 10,800 2005 4,320 43,520 6,480 2006 2,592 46,112 3,888
46,112$
($50,000 – $43,520) × 40% = $2,592
Below salvage value
Double-Declining-Balance Method
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-29
Depreciation Accumulated UndepreciatedExpense Depreciation Balance
Year (debit) Balance (book value)2001 50,000$ 2002 20,000$ 20,000$ 30,000 2003 12,000 32,000 18,000 2004 7,200 39,200 10,800 2005 4,320 43,520 6,480 2006 1,480 45,000 5,000
45,000$
We usually have to force depreciation expense in thelatter years to an amount that brings BV to salvage value.
Double-Declining-Balance Method
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-30
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
$16,000
1 2 3 4 5Life in Years
An
nu
alD
epre
ciat
ion
Units-of-Production
Life in Years
An
nu
alD
epre
ciat
ion
$0
$5,000
$10,000
$15,000
$20,000
1 2 3 4 5
Double-Declining-Balance
Comparing Depreciation Methods
Life in Years
$0
$2,000
$4,000
$6,000
$8,000
$10,000
1 2 3 4 5
An
nu
alD
epre
ciat
ion
Straight-Line
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-31
Comparing Depreciation Method
Trends in Depreciation
Straight-line 80%
Accelerated & Other 9%
Declining-balance 4%
Units-of-production 7%
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-32
Most corporations use the Modified Accelerated Cost Recovery System
(MACRS) for tax purposes.
MACRS depreciation provides for rapid write-off of an asset’s cost in order to stimulate
new investment.
Depreciation for Tax Reporting
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-33
When a plant asset is acquiredduring the year, depreciation
is calculated for the fraction ofthe year the asset is owned.
When a plant asset is acquiredduring the year, depreciation
is calculated for the fraction ofthe year the asset is owned.
June 30
Partial Year Depreciation
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-34
Calculate the straight-line depreciation on December 31, 2003, for equipment purchased
on June 30, 2003. The equipment cost $75,000, has a useful life of 10 years and an
estimated salvage value of $5,000.
Depreciation = ($75,000 - $5,000) ÷ 10
= $7,000 for a full year
Depreciation = $7,000 × 6/12 = $3,500
Depreciation = ($75,000 - $5,000) ÷ 10
= $7,000 for a full year
Depreciation = $7,000 × 6/12 = $3,500
Partial Year Depreciation
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-35
So depreciationis an estimate.
Predicted salvage value
Predicteduseful life
Over the life of an asset, new information may come to light that indicates the
original estimates were inaccurate.
Over the life of an asset, new information may come to light that indicates the
original estimates were inaccurate.
Revising Depreciation Rates
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-36
On January 1, 2000, equipment was purchased that cost $30,000, has a useful life of 10 years and no salvage value. During 2003, the useful life was
revised to 8 years total (5 years remaining).
Calculate depreciation expense for the yearended December 31, 2003, using the
straight-line method.
On January 1, 2000, equipment was purchased that cost $30,000, has a useful life of 10 years and no salvage value. During 2003, the useful life was
revised to 8 years total (5 years remaining).
Calculate depreciation expense for the yearended December 31, 2003, using the
straight-line method.
Revising Depreciation Rates
Book value at date of change
Salvage value at date of change
Remaining useful life at date of change
–
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-37
Revising Depreciation RatesAsset cost 30,000$ Accumulated depreciation, 12/31/2002 ($3,000 per year × 3 years) 9,000 Remaining book value 21,000$ Divide by remaining life ÷ 5Revised annual depreciation 4,200$
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-38
Net property, plant, and equipment is the undepreciated cost (book value) of the plant assets.
Book value Market value
Reporting DepreciationProperty, plant, and equipment: Land and buildings 150,000$ Machinery and equipment 200,000 Office furniture and equipment 175,000 Land improvements 50,000 Total 575,000$ Less Accumulated depreciation (122,000) Net property, plant, and equipment 453,000$
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-39
If the amounts involved are not material, most companies expense the item.
If the amounts involved are not material, most companies expense the item.
Revenue and Capital Expenditures
Financial Statement Effect
Current Current Treatment Statement Expense Income Taxes
Capital Balance sheetExpenditure account debited Deferred Higher Higher
Revenue Income statement CurrentlyExpenditure account debited recognized Lower Lower
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-40
Revenue and Capital ExpendituresType of Capital or
Expenditure Revenue Identifying CharacteristicsOrdinary Revenue 1. Maintains normal operating condition.
repairs and 2. Does not increase productivity.maintenance 3. Does not extend life beyond original
estimate.Extraordinary Capital 1. Major overhauls or partial
repairs replacements.2. Extends life beyond original estimate.
Betterments Capital 1. Increases productivity.2. May extend useful life.3. Improvements or expansions.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-41
Recording cashreceived (debit)or paid (credit).
Removing accumulateddepreciation (debit).
Removing the asset cost (credit).
Recording again (credit)
or loss (debit).
Update depreciation to the date of disposal.
Journalize disposal by:
Discarding Plant Assets
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-42
Update depreciation to the date of disposal.
Journalize disposal by:
If Cash > BV, record a gain (credit).
If Cash < BV, record a loss (debit).
If Cash = BV, no gain or loss.
Discarding Plant Assets
Recording cashreceived (debit)or paid (credit).
Removing accumulateddepreciation (debit).
Removing the asset cost (credit).
Recording again (credit)
or loss (debit).
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-43
On September 30, 2001, Evans Company sells a machine that originally cost
$100,000 for $58,000 cash. The machine was placed in service on January 1, 1996. It was depreciated using the straight-line method with an estimated salvage value of $20,000 and a useful life of 10 years.
Let’s answer the following questions.
On September 30, 2001, Evans Company sells a machine that originally cost
$100,000 for $58,000 cash. The machine was placed in service on January 1, 1996. It was depreciated using the straight-line method with an estimated salvage value of $20,000 and a useful life of 10 years.
Let’s answer the following questions.
Selling Plant Assets
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-44
The amount of depreciation recorded on September 30, 2001,
to bring depreciation up to date is:
a. $8,000.
b. $6,000.
c. $4,000.
d. $2,000.
The amount of depreciation recorded on September 30, 2001,
to bring depreciation up to date is:
a. $8,000.
b. $6,000.
c. $4,000.
d. $2,000.
Selling Plant Assets
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-45
The amount of depreciation recorded on September 30, 2001,
to bring depreciation up to date is:
a. $8,000.
b. $6,000.
c. $4,000.
d. $2,000.
The amount of depreciation recorded on September 30, 2001,
to bring depreciation up to date is:
a. $8,000.
b. $6,000.
c. $4,000.
d. $2,000.
Annual Depreciation:($100,000 - $20,000) ÷ 10 Yrs. = $8,000
Depreciation to Sept. 30:9/12 × $8,000 = $6,000
Selling Plant Assets
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-46
After updating the depreciation, the machine’s book value on September 30, 2001, is:
a. $54,000.
b. $46,000.
c. $40,000.
d. $60,000.
After updating the depreciation, the machine’s book value on September 30, 2001, is:
a. $54,000.
b. $46,000.
c. $40,000.
d. $60,000.
Selling Plant Assets
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-47
After updating the depreciation, the machine’s book value on September 30, 2001, is:
a. $54,000.
b. $46,000.
c. $40,000.
d. $60,000.
After updating the depreciation, the machine’s book value on September 30, 2001, is:
a. $54,000.
b. $46,000.
c. $40,000.
d. $60,000.
Cost 100,000$ Accumulated Depreciation: (5 yrs. × $8,000) + $6,000 = 46,000
Book Value 54,000$
Selling Plant Assets
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-48
The machine’s sale resulted in:
a. a gain of $6,000.
b. a gain of $4,000.
c. a loss of $6,000.
d. a loss of $4,000.
The machine’s sale resulted in:
a. a gain of $6,000.
b. a gain of $4,000.
c. a loss of $6,000.
d. a loss of $4,000.
Selling Plant Assets
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-49
The machine’s sale resulted in:
a. a gain of $6,000.
b. a gain of $4,000.
c. a loss of $6,000.
d. a loss of $4,000.
The machine’s sale resulted in:
a. a gain of $6,000.
b. a gain of $4,000.
c. a loss of $6,000.
d. a loss of $4,000.
Now, you are ready to prepare the journal entry to record the sale of the asset.
Selling Plant Assets
Cost 100,000$ Accumulated Depreciation 46,000 Book Value 54,000 Cash Received 58,000 Gain on Sale 4,000$
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-50
Selling Plant Assets
GENERAL JOURNAL Page 25
Date DescriptionPost. Ref. Debit Credit
Sept 30 Cash 58,000
Accumulated Depreciation 46,000
Gain on Sale 4,000
Machine 100,000
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-51
Accounting for exchanges of similar assets depends on
whether the book value of the asset(s) given up is less or
more than the market value of the asset(s) received.
Accounting for exchanges of similar assets depends on
whether the book value of the asset(s) given up is less or
more than the market value of the asset(s) received.
Exchanging Plant Assets
SIMILAR
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-52
Exchanging Plant Assets
Accounting for exchanges of similar assets depends on whether the book value of the asset(s) given up is less or more than the market value of
the asset(s) received.
A loss is recognized when the book value
given up is more than the market value
received.
A gain is not recognized when the
book value given up is less than the market
value received.
SIMILAR
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-53
On May 30, 2001, Essex Company exchanged a used airplane and $35,000
cash for a new airplane. The old airplane originally cost $40,000, had up-to-date
accumulated depreciation of $30,000, and a fair value of $4,000.
Exchanging Plant Assets
SIMILAR
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-54
The exchange resulted in a:
a. gain of $6,000.
b. loss of $6,000.
c. loss of $4,000.
d. gain of $4,000.
The exchange resulted in a:
a. gain of $6,000.
b. loss of $6,000.
c. loss of $4,000.
d. gain of $4,000.
Exchanging Plant Assets
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-55
The exchange resulted in a:
a. gain of $6,000.
b. loss of $6,000.
c. loss of $4,000.
d. gain of $4,000.
The exchange resulted in a:
a. gain of $6,000.
b. loss of $6,000.
c. loss of $4,000.
d. gain of $4,000.
Exchanging Plant Assets
Let’s prepare the journal entry for this exchange.
Cost 40,000$ Accumulated Depreciation 30,000 Book Value 10,000 Fair Value 4,000 Loss on Exchange 6,000$
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-56
GENERAL JOURNAL Page 30
Date DescriptionPost. Ref. Debit Credit
May 30 Airplane (new) 39,000
Accumulated Depreciation 30,000
Loss on Exchange 6,000
Airplane (old) 40,000
Cash 35,000
Remember that losses are always recorded immediately.
Exchanging Plant Assets
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-57
On May 30, 2001, Essex Company exchanged a used airplane and $35,000
cash for a new airplane. The old airplane originally cost $40,000, had up-to-date
accumulated depreciation of $30,000, and a fair value of $14,000.
SIMILAR
Exchanging Plant Assets
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-58
Computing Gain or Loss on Similar Asset ExchangePrevious Example Current Example
Loss GainAirplane Fair Value 4,000$ 14,000$ Cost of Airplane 40,000$ 40,000$ Accum. Depr. 30,000 30,000 Book Value 10,000 10,000 Gain (Loss) (6,000)$ 4,000$
The $4,000 gain is not recognized.
Exchanging Plant Assets
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-59
GENERAL JOURNAL Page 30
Date DescriptionPost. Ref. Debit Credit
May 30 Airplane (new) 45,000
Accumulated Depreciation 30,000
Airplane (old) 40,000
Cash 35,000
Exchanging Plant Assets
Book value of old asset + cash paid$10,000 + $35,000 = $45,000
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-60
Let’s Change the Subject!Let’s Change the Subject!
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-61
Total cost,including
exploration anddevelopment,is charged to
depletion expenseover periods
benefited.
Examples: oil, coal, gold
Extracted fromthe natural
environmentand reportedat cost less
accumulateddepletion.
Natural Resources
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-62
Depletion is calculated using theunits-of-production method.
Unit depletion rate is calculated as follows:
Total Units of Capacity
Cost – Salvage Value
Depletion of Natural Resources
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-63
Total depletion cost for a period is:
Unit Depletion
Rate
Number of Units
Extracted in Period×
Totaldepletion
cost
Inventoryfor sale
UnsoldInventory
Cost ofgoods sold
Depletion of Natural Resources
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-64
ABC Mining acquired a tract of land containing ore deposits. Total costs of acquisition and
development were $1,000,000 and ABC estimated the land contained 40,000 tons of
ore.
Depletion of Natural Resources
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-65
What is ABC’s depletion rate?
a. $40 per ton
b. $50 per ton
c. $25 per ton
d. $20 per ton
What is ABC’s depletion rate?
a. $40 per ton
b. $50 per ton
c. $25 per ton
d. $20 per ton
Depletion of Natural Resources
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-66
What is ABC’s depletion rate?
a. $40 per ton
b. $50 per ton
c. $25 per ton
d. $20 per ton
What is ABC’s depletion rate?
a. $40 per ton
b. $50 per ton
c. $25 per ton
d. $20 per ton
Cost ÷ Units
$1,000,000 ÷ 40,000 Tons
= $25 Per Ton
Depletion of Natural Resources
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-67
For the year ABC mined and sold 13,000 tons. What is the total depletion cost for
the year?
a. $300,000
b. $325,000
c. $225,000
d. $275,000
For the year ABC mined and sold 13,000 tons. What is the total depletion cost for
the year?
a. $300,000
b. $325,000
c. $225,000
d. $275,000
Depletion of Natural Resources
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-68
For the year ABC mined and sold 13,000 tons. What is the total depletion cost for
the year?
a. $300,000
b. $325,000
c. $225,000
d. $275,000
For the year ABC mined and sold 13,000 tons. What is the total depletion cost for
the year?
a. $300,000
b. $325,000
c. $225,000
d. $275,000
Depletion cost = 13,000 x $25
= $325,000
Depletion of Natural Resources
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-69
Plant Assets Used in Extracting Natural Resources
Specialized plant assets may be required to extract the natural resource.
These assets are recorded in a separate account and depreciated.
Specialized plant assets may be required to extract the natural resource.
These assets are recorded in a separate account and depreciated.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-70
Let’s Change the Subject Again!Let’s Change the Subject Again!
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-71
Noncurrent assetswithout physical
substance.
Noncurrent assetswithout physical
substance.
Useful life isoften difficultto determine.
Useful life isoften difficultto determine.
Usually acquired for operational
use.
Usually acquired for operational
use.
IntangibleAssets
Often provideexclusive rights
or privileges.
Often provideexclusive rights
or privileges.
Intangible Assets
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Slide 8-72
Patents Copyrights Leaseholds Leasehold
Improvements Franchises and
Licenses Goodwill Trademarks and
Trade Names
Record at current cash equivalent cost, including purchase price, legal fees, and
filing fees.
Accounting for Intangible Assets
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Slide 8-73
Usually amortized over shorter of economic life or legal life.
Use straight-line method.
Research and development costs arenormally expensed as incurred.
Usually amortized over shorter of economic life or legal life.
Use straight-line method.
Research and development costs arenormally expensed as incurred.
Accounting for Intangible Assets
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-74
Occurs when onecompany buys
another company.
The amount by which thepurchase price exceeds the fair
market value of net assets acquired.
Goodwill
Only purchased goodwill is an
intangible asset.
Goodwill
Goodwill is not amortized.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-75
Eddy Company paid $1,000,000 to purchase all of James Company’s assets and assumed liabilities of $200,000. The acquired assets were appraised at a fair value of $900,000.
Eddy Company paid $1,000,000 to purchase all of James Company’s assets and assumed liabilities of $200,000. The acquired assets were appraised at a fair value of $900,000.
Goodwill
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-76
What amount of goodwill should be recorded on Eddy Company books?
a. $100,000
b. $200,000
c. $300,000
d. $400,000
What amount of goodwill should be recorded on Eddy Company books?
a. $100,000
b. $200,000
c. $300,000
d. $400,000
Goodwill
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-77
What amount of goodwill should be recorded on Eddy Company books?
a. $100,000
b. $200,000
c. $300,000
d. $400,000
What amount of goodwill should be recorded on Eddy Company books?
a. $100,000
b. $200,000
c. $300,000
d. $400,000
FMV of Assets 900,000$ Debt Assumed 200,000
FMV of Net Assets 700,000$ Purchase Price 1,000,000
Goodwill 300,000$
Goodwill
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-78
Cash Flow Impacts ofLong-Term Assets
Investing Cash Inflow: Sale of Long-term Assets
Investing Cash Outflow: Purchase of Long-term Assets
Investing Cash Inflow: Sale of Long-term Assets
Investing Cash Outflow: Purchase of Long-term Assets
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-79
Provides information about a company’s efficiency in using its assets.
Provides information about a company’s efficiency in using its assets.
Total AssetTurnover =
Net SalesAverage Total Assets
Total Asset Turnover
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 8-80
End of Chapter 8
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