© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Plant Assets, Natural Resources, and Intangibles Chapter 10

© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin

Plant Assets, Natural Resources, and Intangibles

Chapter

1010


Called Property, Plant, & EquipmentCalled Property, Plant, & Equipment

Plant AssetsPlant Assets

Expected to Benefit Future PeriodsExpected to Benefit Future Periods

Actively Used in OperationsActively Used in Operations

Tangible in NatureTangible in Nature



Plant Assets as a Percent of Total Assets

5%

51%

59%

78%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

eBay Wal-Mart Anheuser-Busch

McDonald's


Decline in asset value over its useful life

Use2. Allocate cost to periods benefited.3. Account for subsequent expenditures.

Use2. Allocate cost to periods benefited.3. Account for subsequent expenditures.

Disposal 4. Record disposal Disposal 4. Record disposal


Acquisition1. Compute cost. Acquisition1. Compute cost.


Land is not depreciable.Land is not depreciable.

Purchaseprice

Purchaseprice

Real estatecommissionsReal estate

commissions

Title insurance premiumsTitle insurance premiums

Delinquenttaxes

Delinquenttaxes

Surveyingfees

Surveyingfees

Title search and transfer feesTitle search and transfer fees

LandLand


Land ImprovementsLand Improvements

Parking lots, driveways, fences, walks, shrubs, and lighting systems.

Parking lots, driveways, fences, walks, shrubs, and lighting systems.

Depreciate over useful life of

improvements.


Cost of purchase or construction

Cost of purchase or construction

Brokeragefees

Brokeragefees

TaxesTaxes

Title feesTitle fees

Attorney feesAttorney fees

BuildingsBuildings


Purchaseprice

Purchaseprice

Installing,assembling, and

testing

Installing,assembling, and

testing

Insurance whilein transit

Insurance whilein transit

TaxesTaxes

Transportationcharges

Transportationcharges

Machinery and EquipmentMachinery and Equipment


Depreciation is the process of allocating the cost of a plant asset to expense in the

accounting periods benefiting from its use.

Depreciation is the process of allocating the cost of a plant asset to expense in the

accounting periods benefiting from its use.

Cost

AllocationAcquisition

CostAcquisition

Cost

(Unused)

Balance Sheet

(Used)

Income Statement

ExpenseExpense

DepreciationDepreciation


The calculation of depreciation requires three amounts for each asset:

Cost.

Salvage Value.

Useful Life.

Factors in Computing DepreciationFactors in Computing Depreciation


Straight-line

Units-of-production

Declining balance

Depreciation MethodsDepreciation Methods


On January 1, 2004, 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.

Cost - Salvage Value

Useful life in periods

Depreciation

Expense for Period=

Straight-Line MethodStraight-Line Method



Cost - Salvage Value

Useful life in periods

Depreciation

Expense for Period=

$9,000 Depreciation

Expense per Year=

$50,000 - $5,000

5 years=

Dec. 31 Depreciation Expense 9,000 Accumulated Depreciation - Equipment 9,000

To record annual depreciation


Depreciation AccumulatedExpense Depreciation Accumulated Book

Year (debit) (credit) Depreciation Value50,000$

2004 9,000$ 9,000$ 9,000$ 41,000 2005 9,000 9,000 18,000 32,000 2006 9,000 9,000 27,000 23,000 2007 9,000 9,000 36,000 14,000 2008 9,000 9,000 45,000 5,000

45,000$ 45,000$

Salvage ValueSalvage Value


DepreciationRate

= (100% ÷ 5 years) = 20% per year


Dep

reci

atio

n

Exp

ense Depreciation Expense reported on the

Income Statement.

$0$1,000

$3,000

$5,000

$7,000

$9,000

2004 2005 2006 2007 2008

For the year ended December 31

Book Valuereported on theBalance Sheet.

$41,000

$32,000

$23,000

$14,000

$5,000

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

$45,000

2004 2005 2006 2007 2008

As of December 31

Bo

ok

Val

ue


Step 2:Depreciation Expense =

DepreciationPer Unit

×Number of

Units Producedin the Period

Units-of-Production MethodUnits-of-Production Method

DepreciationPer Unit

= Cost - Salvage Value Total Units of Production

Step 1:


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?



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



Depreciation Accumulated BookYear Units Expense Depreciation Value

50,000$ 2004 22,000 9,900$ 9,900$ 40,100 2005 28,000 12,600 22,500 27,500 2006 - - 22,500 27,500 2007 32,000 14,400 36,900 13,100 2008 18,000 8,100 45,000 5,000

100,000 45,000$

No depreciation expense if the equipment is idle.



Depreciation RepairExpense Expense

Early Years High Low

Later Years Low High

Early years’ total expense approximates later years’ total expense.

Declining Balance MethodDeclining Balance Method


Double-Declining-Balance MethodDouble-Declining-Balance Method

Step 2:Double-declining-

balance rate= 2 × Straight-line rate = 2 × 20% = 40%

Step 1:Straight-line

rate= 100 % ÷ Useful life = 100% ÷ 5 = 20%

Step 3:Depreciation

expense =Double-declining-

balance rate ×Beginning period

book value

40% × $50,000 = $20,000 for 2004


2004 Depreciation: 40% × $50,000 = $20,000


2005 Depreciation: 40% × ($50,000 - $20,000) = $12,000


Depreciation Accumulated BookYear Expense Depreciation Value

50,000$ 2004 20,000$ 20,000$ 30,000 2005 12,000 32,000 18,000 2006 7,200 39,200 10,800 2007 4,320 43,520 6,480 2008 2,592 46,112 3,888

46,112$ Below salvage value



Depreciation Accumulated BookYear Expense Depreciation Value

50,000$ 2004 20,000$ 20,000$ 30,000 2005 12,000 32,000 18,000 2006 7,200 39,200 10,800 2007 4,320 43,520 6,480 2008 1,480 45,000 5,000

45,000$

We usually must force depreciation expense in thelast year so that book value equals salvage value.We usually must force depreciation expense in thelast year so that book value equals salvage value.


© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin Life in Years

An

nu

al D

DB

Dep

reci

atio

n

$0

$5,000

$10,000

$15,000

$20,000

1 2 3 4 5

Comparing Depreciation MethodsComparing Depreciation Methods

An

nu

al P

rod

uct

ion

Dep

reci

atio

n

Life in Years

$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

al S

LD

epre

ciat

ion

$0

$2,000

$4,000

$6,000

$8,000

$10,000

1 2 3 4 5


When a plant asset is acquired during the year, depreciation is calculated for the fraction of the

year the asset is owned.

When a plant asset is acquired during the year, depreciation is calculated for the fraction of the

year the asset is owned.

June 30

Partial-Year DepreciationPartial-Year Depreciation


Calculate the straight-line depreciation on December 31, 2004, for equipment purchased

on June 30, 2004. The equipment cost $75,000, has a useful life of 10 years and an

estimated salvage value of $5,000.

Calculate the straight-line depreciation on December 31, 2004, for equipment purchased

on June 30, 2004. 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 all 2004

Depreciation = $7,000 × 6/12 = $3,500

Depreciation = ($75,000 - $5,000) ÷ 10

= $7,000 for all 2004

Depreciation = $7,000 × 6/12 = $3,500

Partial Year DepreciationPartial Year Depreciation


Reporting DepreciationReporting Depreciation

Property, 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$


Recording cashreceived (debit)or paid (credit).


Removing accumulateddepreciation (debit).


Update depreciation to the date of disposal.

Journalize disposal by: Journalize disposal by:

Removing the asset cost (credit).


Recording again (credit)

or loss (debit).


or loss (debit).

Disposals of Plant AssetsDisposals of Plant Assets


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.

Selling Plant AssetsSelling Plant Assets








or loss (debit).


or loss (debit).


On September 30, 2004, Evans Company sells a machine that originally cost

$100,000 for $60,000 cash. The machine was placed in service on January 1, 2000. It was depreciated using the straight-line method with an estimated salvage value of $20,000 and a useful life of 10 years.

Selling Plant AssetsSelling Plant Assets


Selling Plant AssetsUpdate Depreciation to Date of DisposalUpdate Depreciation to Date of Disposal

Annual Depreciation:($100,000 - $20,000) ÷ 10 Yrs. = $8,000

Depreciation to September 30, 2004:9/12 × $8,000 = $6,000

Annual Depreciation:($100,000 - $20,000) ÷ 10 Yrs. = $8,000

Depreciation to September 30, 2004:9/12 × $8,000 = $6,000

Sep. 30 Depreciation expense 6,000 Accumulated Depreciation - Machine 6,000

To update depreciation to date of disposal


Selling Plant AssetsDetermine Book Value of AssetDetermine Book Value of Asset

Cost 100,000$ Accumulated Depreciation: ( yrs. × $8,000) + $6,000 = 38,000

Book Value 62,000$


Selling Plant AssetsDetermine Gain or Loss on DisposalDetermine Gain or Loss on Disposal

Cost 100,000$ Accumulated depreciation 38,000

Book Value 62,000 Cash Received 60,000

Loss on disposal (2,000)$

If Cash > BV, record a gain (credit).

If Cash < BV, record a loss (debit).

If Cash = BV, no gain or loss.


Selling Plant AssetsRecord the Disposal in the JournalRecord the Disposal in the Journal

Sep. 30 Cash 60,000 Accumulated Depreciation - Machine 38,000 Loss on Disposal of Asset 2,000

Machine 100,000 To record disposal of equipment


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 AssetsExchanging Plant Assets

SIMILAR



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.

A loss is recognized when the book value given up is less than

the market value received.

A loss is recognized when the book value given up is less than

the market value received.

A gain is not 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 more than the market

value received.

SIMILAR


On May 30, 2004, Matrix, Inc. exchanged a used bus and $35,000 cash for a new European-style

bus. The old bus originally cost $40,000, had up-to-date accumulated depreciation of $30,000. The

new bus had a market value of $39,000.

On May 30, 2004, Matrix, Inc. exchanged a used bus and $35,000 cash for a new European-style

bus. The old bus originally cost $40,000, had up-to-date accumulated depreciation of $30,000. The

new bus had a market value of $39,000.


SIMILAR


Market value of asset received 39,000$ Cost of old bus 40,000$ Accumulated depreciation 30,000

Book value of old bus 10,000 Cash 35,000 45,000

Loss on exchange 6,000$


May 30 Bus (new) 39,000 Accumulated Depreciation - Bus 30,000 Loss on Exchange 6,000

Bus (old) 40,000 Cash 35,000

Remember -- Losses are always recorded immediately.

Remember -- Losses are always recorded immediately.


On May 30, 2004, Matrix, Inc. exchanged a used bus and $35,000 cash for a new

European-style bus. The old bus originally cost $40,000, had up-to-date accumulated

depreciation of $30,000. The new bus had a market value of $49,000.

On May 30, 2004, Matrix, Inc. exchanged a used bus and $35,000 cash for a new

European-style bus. The old bus originally cost $40,000, had up-to-date accumulated

depreciation of $30,000. The new bus had a market value of $49,000.

SIMILAR



Market value of asset received 49,000$ Cost of old bus 40,000$ Accumulated depreciation 30,000

Book value of old bus 10,000 Cash 35,000 45,000

Gain on exchange 4,000$


May 30 Bus (new) 45,000 Accumulated Depreciation - Bus 30,000

Bus (old) 40,000 Cash 35,000

Market value of new bus – gain not recognized$49,000 - $4,000 = $45,000

Market value of new bus – gain not recognized$49,000 - $4,000 = $45,000



Comparison of Treatment of Gains and Losses

The $4,000 gain in not recognizedThe $4,000 gain in not recognized


Let’s change the subject!Now Let’s Look at Intangible Assets!Now Let’s Look at Intangible Assets!


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

IntangibleAssets

Often provideexclusive rights

or privileges.

Often provideexclusive rights

or privileges.

Intangible AssetsIntangible Assets


Types of IntangiblesTypes of Intangibles

PatentsThe exclusive right granted to its owner to

manufacture and sell a patented item or use a process for 17 years. Patents are generally

amortized, using the straight-line method, over its useful life not to exceed 17 years.


Type’ of IntangiblesType’ of Intangibles

CopyrightsThe exclusive right to publish and sell a musical,

literary, or artistic work during the life of the creator plus 70 years.

LeaseholdsThe rights the lessor grants to the lessee under

the terms of a lease. Most leases have a determinable life.



Leasehold ImprovementsA lessee may pay for alternations or

improvements to the leased property such as partitions, painting, and storefronts. These costs are usually amortized over the term of the lease.

Franchises and LicensesThe right granted by a company or the

government to deliver a product or service under specified conditions.



Trademarks and Trade NamesA symbol, name, phrase, or jingle identified with a

company, product, or service.


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 TurnoverTotal Asset Turnover

2002 2001 2000 1999Coors 1.25 1.44 1.52 1.49 Anheuser-Busch 0.97 0.95 0.97 0.94

Total Asset Turnover


Homework for Chapter 10Homework for Chapter 10

Ex 10-5


End of Chapter 10End of Chapter 10

Documents

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Plant Assets, Natural Resources, and Intangibles Chapter 10