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1
PLANT AND INTANGIBLE ASSETS – Non current assets
Chapter
9
2
Long-lived assets acquired for use in business operations.
Long-lived assets acquired for use in business operations.
Similar to long-term prepaid expenses
The cost of plant assets is the advance purchase
of services.
As years pass, and the services are used, the cost is transferred to depreciation expense.
A - Plant Assets – IAS 16A - Plant Assets – IAS 16
3
L an d , b u ild in g s ,eq u ip m en t,
fu rn itu re , fixtu res .
L on g -te rmasse ts h avin g
p h ys ica l su b s tan ce .
Tangible PlantAssets
P aten ts , cop yrig h ts ,trad em arks ,
fran ch ises , g ood w ill.
N on cu rren t asse tsw ith n o p h ys ica l
su b s tan ce .
IntangibleAssets
O il reserves ,t im b er, o th er
m in era ls .
S ites acq u ired fo rextrac tin g va lu ab le
resou rces .
NaturalResources
Major Categories of Plant AssetsMajor Categories of Plant Assets
4
Acquisition.Allocation of the
acquisition cost to expense over the asset’s useful life (depreciation).
Sale or disposal.
Acquisition.Allocation of the
acquisition cost to expense over the asset’s useful life (depreciation).
Sale or disposal.
Accountable EventsAccountable Events
5
Asset price
Asset price
Reasonable and necessary costs . . .
Reasonable and necessary costs . . .
. . . for getting the asset to the
desired location.
. . . for getting the asset to the
desired location.
. . . for getting the asset ready
for use.
. . . for getting the asset ready
for use.
CostCost
Acquisition of Plant AssetsAcquisition of Plant Assets
+
6
On May 4, Heat Co., an Ohio maker of stoves, buys a new machine from a Texas company. The new machine has a price of $52,000. GCT
was computed at 15%.
Heat Co. pays $500 shipping cost to get the machine to Ohio. After the machine arrives,
set-up costs of $1,300 are incurred, along with $4,000 in testing costs.
Compute the cost of Heat Co.’s new machine.
On May 4, Heat Co., an Ohio maker of stoves, buys a new machine from a Texas company. The new machine has a price of $52,000. GCT
was computed at 15%.
Heat Co. pays $500 shipping cost to get the machine to Ohio. After the machine arrives,
set-up costs of $1,300 are incurred, along with $4,000 in testing costs.
Compute the cost of Heat Co.’s new machine.
Determining CostDetermining Cost
7
Prepare the journal entry.
Determining CostDetermining Cost
8
Improvements to land such as driveways,
fences, and landscaping are recorded separately.
Improvements to land such as driveways,
fences, and landscaping are recorded separately.
Cost includes real estate commissions, escrow
fees, legal fees, clearing and grading the property.
Cost includes real estate commissions, escrow
fees, legal fees, clearing and grading the property.
Land Improvements
Land Improvements
LandLand
Special ConsiderationsSpecial Considerations
9
Repairs made prior to the building being put in use are considered part of the
building’s cost.
Repairs made prior to the building being put in use are considered part of the
building’s cost.
BuildingsBuildings
Special ConsiderationsSpecial Considerations
EquipmentEquipment
Related interest, insurance, and property
taxes are treated as expenses of the current
period.
Related interest, insurance, and property
taxes are treated as expenses of the current
period.
10
I think I’ll buy the whole thing; barn, land, and animals.
Special ConsiderationsSpecial Considerations
The allocation is based on the relative Fair Market
Value of each asset
purchased.
The allocation is based on the relative Fair Market
Value of each asset
purchased.
The total cost must be
allocated to separate
accounts for each asset.
The total cost must be
allocated to separate
accounts for each asset.
Allocation of a Lump-Sum PurchaseAllocation of a Lump-Sum Purchase
11
CapitalExpenditure
CapitalExpenditure
RevenueExpenditure
RevenueExpenditure
Any material expenditurethat will benefit several
accounting periods.
Any material expenditurethat will benefit several
accounting periods.
To capitalize an expendituremeans to charge it to an
asset account.
To capitalize an expendituremeans to charge it to an
asset account.
Expenditure forordinary repairs
and maintenance.
Expenditure forordinary repairs
and maintenance.
To expense an expendituremeans to charge it to an
expense account.
To expense an expendituremeans to charge it to an
expense account.
Capital Expenditures and Revenue Expenditures
Capital Expenditures and Revenue Expenditures
12
The allocation of the cost of a plant asset to expense in the periods in which services are received from the asset.
The allocation of the cost of a plant asset to expense in the periods in which services are received from the asset.
Cost of plant
assets
Balance SheetBalance Sheet
Assets: Plant and equipment
Assets: Plant and equipment
Income StatementIncome Statement
Revenues:Expenses: Depreciation
Revenues:Expenses: Depreciation
as the services are received
DepreciationDepreciation
13
Book Value Cost – Accumulated Depreciation
Accumulated Depreciation Contra-asset Represents the portion of an
asset’s cost that has alreadybeen allocated to expense.
Causes of Depreciation Physical deterioration Obsolescence
Book Value Cost – Accumulated Depreciation
Accumulated Depreciation Contra-asset Represents the portion of an
asset’s cost that has alreadybeen allocated to expense.
Causes of Depreciation Physical deterioration Obsolescence
DepreciationDepreciation
14
Cost - Residual Value
Years of Useful Life
Depreciation
Expense per Year=
Method 1 – Straight-Line Depreciation
Method 1 – Straight-Line Depreciation
15
On January 1, 2003, Bass Co. buys a new boat. Bass Co. pays $24,000 for the boat. The boat has an
estimated residual value of $3,000 and an estimated useful life of 5 years.
Compute depreciation for 2003 using the straight-line method.
On January 1, 2003, Bass Co. buys a new boat. Bass Co. pays $24,000 for the boat. The boat has an
estimated residual value of $3,000 and an estimated useful life of 5 years.
Compute depreciation for 2003 using the straight-line method.
Straight-Line DepreciationStraight-Line Depreciation
16
Bass Co. will record $4,200 depreciation each year for five years. Total depreciation over the estimated useful
life of the boat is:
Bass Co. will record $4,200 depreciation each year for five years. Total depreciation over the estimated useful
life of the boat is:
Salvage ValueSalvage Value
Straight-Line DepreciationStraight-Line Depreciation
17
Depends on the Company’s policy:Depends on the Company’s policy:
•Some charge a full year•While some prorate it
•Some charge a full year•While some prorate it
Depreciation for Assets bought during the year
Depreciation for Assets bought during the year
18
Depreciation in the early years of an asset’s estimated useful life is higher than in later years.
Depreciation in the early years of an asset’s estimated useful life is higher than in later years.
Method 2 – Reducing-Balance Method
Method 2 – Reducing-Balance Method
19
On January 1, 2003, Bass Co. buys a new boat. Bass Co. pays $24,000 for the boat. The boat has an
estimated residual value of $3,000 and an estimated useful life of 5 years.
Compute depreciation for 2003 using the reducing-balance method with a rate of 34%.
On January 1, 2003, Bass Co. buys a new boat. Bass Co. pays $24,000 for the boat. The boat has an
estimated residual value of $3,000 and an estimated useful life of 5 years.
Compute depreciation for 2003 using the reducing-balance method with a rate of 34%.
Reducing-Balance MethodReducing-Balance Method
20
Compute depreciation for the rest of the boat’s estimated useful life.
Compute depreciation for the rest of the boat’s estimated useful life.
Reducing-Balance MethodReducing-Balance Method
Total depreciation over the estimated useful life of an asset is the same using either the straight-line method or
the reducing-balance method.
Total depreciation over the estimated useful life of an asset is the same using either the straight-line method or
the reducing-balance method.
21
Depreciation in the early years of an asset’s estimated useful life is also higher than in later years.
Depreciation in the early years of an asset’s estimated useful life is also higher than in later years.
Method 3 – Sum of the Years’ Digits Method
Method 3 – Sum of the Years’ Digits Method
Depreciable Cost = Cost – Residual Value
Fraction for year = Year’s digit/(Sum of all the years’ digits)
This is normally in reverse order
22
On January 1, 2003, Bass Co. buys a new boat. Bass Co. pays $24,000 for the boat. The boat has an
estimated residual value of $3,000 and an estimated useful life of 5 years.
Compute depreciation for 2003 using the sum of the years’ digits method.
On January 1, 2003, Bass Co. buys a new boat. Bass Co. pays $24,000 for the boat. The boat has an
estimated residual value of $3,000 and an estimated useful life of 5 years.
Compute depreciation for 2003 using the sum of the years’ digits method.
Sum of the Years’ Digits MethodSum of the Years’ Digits Method
23
Compute depreciation for the rest of the boat’s estimated useful life.
Compute depreciation for the rest of the boat’s estimated useful life.
Sum of the Years’ Digits MethodSum of the Years’ Digits Method
Total depreciation over the estimated useful life of an asset is the same using any of the three methods.
Total depreciation over the estimated useful life of an asset is the same using any of the three methods.
24
Estimates of Useful Life and Residual Value May differ from company to
company. The reasonableness of
management’s estimates is evaluated by external auditors.
Principle of Consistency Companies should avoid switching
depreciation methods from period to period.
Estimates of Useful Life and Residual Value May differ from company to
company. The reasonableness of
management’s estimates is evaluated by external auditors.
Principle of Consistency Companies should avoid switching
depreciation methods from period to period.
Financial Statement DisclosuresFinancial Statement Disclosures
25
So depreciationis an estimate.
So depreciationis an estimate.
Predicted salvage value
Predicted salvage value
Predicteduseful life
Predicteduseful life
Over the life of an asset, new information may come to light that indicates the
original estimates need to be revised.
Over the life of an asset, new information may come to light that indicates the
original estimates need to be revised.
Revising Depreciation RatesRevising Depreciation Rates
26
Revising Depreciation RatesRevising Depreciation Rates
On January 1, 2003, equipment was purchased that cost $30,000, has a useful
life of 10 years and no salvage value. During 2006, the useful life was revised to 8
years total (5 years remaining).
Calculate depreciation expense for the year ended December 31, 2006, using the
straight-line method.
On January 1, 2003, equipment was purchased that cost $30,000, has a useful
life of 10 years and no salvage value. During 2006, the useful life was revised to 8
years total (5 years remaining).
Calculate depreciation expense for the year ended December 31, 2006, using the
straight-line method.
27
When our estimates change, depreciation is:
When our estimates change, depreciation is:
Book value at date of change
Salvage value at date of change
Remaining useful life at date of change
–
Revising Depreciation RatesRevising Depreciation Rates
Asset cost 30,000$ Accumulated depreciation, 12/31/2005 ($3,000 per year × 3 years) 9,000 Remaining book value 21,000$ Divide by remaining life ÷ 5Revised annual depreciation 4,200$
Asset cost 30,000$ Accumulated depreciation, 12/31/2005 ($3,000 per year × 3 years) 9,000 Remaining book value 21,000$ Divide by remaining life ÷ 5Revised annual depreciation 4,200$
28
If the cost of an asset cannot be recovered through future use or sale, the asset should be written down to its net realizable value.
If the cost of an asset cannot be recovered through future use or sale, the asset should be written down to its net realizable value.
Impairment of Assets – IAS 36Impairment of Assets – IAS 36
29
Update depreciation to the date of disposal.
Update depreciation to the date of disposal.
Recording cashreceived (debit)or paid (credit).
Recording cashreceived (debit)or paid (credit).
Removing accumulateddepreciation (debit).
Removing accumulateddepreciation (debit).
Removing the asset cost (credit).
Removing the asset cost (credit).
Recording again (credit)
or loss (debit).
Recording again (credit)
or loss (debit).
Disposal of Plant and EquipmentDisposal of Plant and Equipment
Journalize disposal by: Journalize disposal by:
30
If Cash > BV, record a gain (credit).
If Cash < BV, record a loss (debit).
If Cash = BV, no gain or loss.
If Cash > BV, record a gain (credit).
If Cash < BV, record a loss (debit).
If Cash = BV, no gain or loss.
Recording cashreceived (debit)or paid (credit).
Recording cashreceived (debit)or paid (credit).
Removing accumulateddepreciation (debit).
Removing accumulateddepreciation (debit).
Removing the asset cost (credit).
Removing the asset cost (credit).
Recording again (credit)
or loss (debit).
Recording again (credit)
or loss (debit).
Disposal of Plant and EquipmentDisposal of Plant and Equipment
31
On September 30, 2003, Evans Map Company sells a machine that originally cost $100,000 for
$60,000 cash. The machine was placed in service on January 1, 1998. It has been
depreciated using the straight-line method with an estimated salvage value of $20,000 and an
estimated useful life of 10 years.
Let’s answer the following questions.
On September 30, 2003, Evans Map Company sells a machine that originally cost $100,000 for
$60,000 cash. The machine was placed in service on January 1, 1998. It has been
depreciated using the straight-line method with an estimated salvage value of $20,000 and an
estimated useful life of 10 years.
Let’s answer the following questions.
Disposal of Plant and EquipmentDisposal of Plant and Equipment
32
The amount of depreciation recorded on September 30, 2003,
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, 2003,
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
Disposal of Plant and EquipmentDisposal of Plant and Equipment
33
After updating the depreciation, the machine’s book value on September 30, 2003, 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, 2003, is:
a. $54,000.
b. $46,000.
c. $40,000.
d. $60,000.
Cost 100,000$ Accumulated Depreciation: (5 yrs. × $8,000) + $6,000 = 46,000
Book Value 54,000$
Cost 100,000$ Accumulated Depreciation: (5 yrs. × $8,000) + $6,000 = 46,000
Book Value 54,000$
Disposal of Plant and EquipmentDisposal of Plant and Equipment
34
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 $4,000. Cost 100,000$ Accum. Depr. 46,000 Book value 54,000$ Cash received 60,000 Gain 6,000$
Disposal of Plant and EquipmentDisposal of Plant and Equipment
35
On May 30, 2003, 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.
On May 30, 2003, 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.
Trading in Used Assetsfor New Ones
Trading in Used Assetsfor New Ones
36
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 $4,000.
Cost 40,000$ Accum. Depr. 30,000
Book Value 10,000$ Fair Value 4,000
Loss 6,000$
Prepare a journal entry to record the exchange.
Trading in Used Assetsfor New Ones
Trading in Used Assetsfor New Ones
37
Trading in Used Assetsfor New Ones
Trading in Used Assetsfor New Ones
Prepare the journal entry to record the trade.
Prepare the journal entry to record the trade.
38
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.
Often provideexclusive rights
or privileges.
Often provideexclusive rights
or privileges.
B - Intangible Assets – IAS 38B - Intangible Assets – IAS 38
CharacteristicsCharacteristics
39
Patents Copyrights Leaseholds Leasehold
Improvements Goodwill Trademarks and
Trade Names
Record at current cash
equivalent cost, including
purchase price, legal fees, and
filing fees.
Intangible AssetsIntangible Assets
40
For those with finite lives, amortize according to pattern of use.
If pattern of use is unclear, use straight-line method.
Research development costs arenormally expensed as incurred.
Only under strict conditions can development costs be capitalized
For those with finite lives, amortize according to pattern of use.
If pattern of use is unclear, use straight-line method.
Research development costs arenormally expensed as incurred.
Only under strict conditions can development costs be capitalized
Intangible AssetsIntangible Assets
41
The amount by which thepurchase price exceeds the fair
market value of net assets acquired.
The amount by which thepurchase price exceeds the fair
market value of net assets acquired.
Occurs when onecompany buys
another company.
Occurs when onecompany buys
another company.
Only purchased goodwill is an
intangible asset.
Only purchased goodwill is an
intangible asset.
Intangible Assets – GoodwillIntangible Assets – Goodwill
GoodwillGoodwill
42
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.
Intangible Assets – GoodwillIntangible Assets – Goodwill
43
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.
Intangible Assets – GoodwillIntangible Assets – GoodwillIntangible Assets – Goodwill
44
Exclusive right grantedby federal government to sell or
manufacture an invention.
Exclusive right grantedby federal government to sell or
manufacture an invention.
Cost is purchaseprice plus legalcost to defend.
Cost is purchaseprice plus legalcost to defend.
Intangible Assets – PatentsIntangible Assets – Patents
45
A symbol, design, or logo associated with a business.
A symbol, design, or logo associated with a business.
Purchasedtrademarks
are recordedat cost.
Internallydevelopedtrademarks
have norecorded
asset cost.
Intangible Assets –Trademarks and Trade Names
Intangible Assets –Trademarks and Trade Names
46
Legally protected right to sell products or provide services purchased by
franchisee from franchisor.
Legally protected right to sell products or provide services purchased by
franchisee from franchisor.
Intangible Assets – FranchisesIntangible Assets – Franchises
47
Exclusive right granted by the federal government to protect
artistic or intellectual properties.
Exclusive right granted by the federal government to protect
artistic or intellectual properties.
Intangible Assets – CopyrightsIntangible Assets – Copyrights
48
Total cost,including
exploration anddevelopment,is charged to
depletion expenseover periods
benefited.
Total cost,including
exploration anddevelopment,is charged to
depletion expenseover periods
benefited.
Examples: oil, coal, goldExamples: oil, coal, gold
Extracted fromthe natural
environmentand reportedat cost less
accumulateddepletion.
Extracted fromthe natural
environmentand reportedat cost less
accumulateddepletion.
Natural ResourcesNatural Resources
49
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 ResourcesDepletion of Natural Resources
50
Total depletion cost for a period is:
Unit Depletion
Rate
Number of Units
Extracted in Period×
Depletion of Natural ResourcesDepletion of Natural Resources
51
Specialized plant assets may be required to extract the natural resource.
These assets are recorded in a separate account and depreciated.
Depletion of Natural ResourcesDepletion of Natural Resources
52
Cost per Unit
of Output=
Cost - Residual Value
Estimated Units of Output
DepreciationExpense =
Cost per Unit
of Output×
Number of
Units Produced
The Units-of-Output MethodThe Units-of-Output Method
53
A survey of 600 Publicly Owned Corporations
563
44
11
70
53
9
Straight-line
Declining-balance
Sum-of-the-years'-digits
Accelerated methods (not specified)
Units-of-output
Other
A survey of 600 Publicly Owned Corporations
563
44
11
70
53
9
Straight-line
Declining-balance
Sum-of-the-years'-digits
Accelerated methods (not specified)
Units-of-output
Other
Which Depreciation MethodsDo Most Businesses Use?
Which Depreciation MethodsDo Most Businesses Use?
54
End of Chapter 9End of Chapter 9
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