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10 - 1©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Accounting for Plant Assets,
Intangible Assets, andRelated Expenses
Chapter 10
10 - 2©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Asset Account on Related Expense Accountthe Balance Sheet on the Income Statement
Plant AssetsLand……………………………………… noneBuildings, Machinery and Equipment,
Furniture and Fixtures,and Land Improvements……………… Depreciation
Natural Resources……………………….. DepletionIntangibles………………………………….. Amortization
Plant Assets
10 - 3©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Measure the cost
of a plant asset.
Objective 1
10 - 4©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
An asset must be carried on thebalance sheet at the amount paid for it.
An asset must be carried on thebalance sheet at the amount paid for it.
The cost of an asset equals the sum ofall of the costs incurred to bring the assetto its intended purpose, net of discounts
The cost of an asset equals the sum ofall of the costs incurred to bring the assetto its intended purpose, net of discounts
Cost Principle
10 - 5©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Land and Land Improvements
Purchase price of land$500,000Add related costs:Back property taxes $40,000Transfer taxes 8,000Removal of buildings 5,000Survey fees 1,000 54,000
Total cost of land $554,000
Purchase price of land$500,000Add related costs:Back property taxes $40,000Transfer taxes 8,000Removal of buildings 5,000Survey fees 1,000 54,000
Total cost of land $554,000
10 - 6©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
PavingFences
Sprinkler systemsLights in parking lot
PavingFences
Sprinkler systemsLights in parking lot
Land Improvements
All improvements located on the land but subject to decay:
10 - 7©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Buildings – Construction
Architectural feesBuilding permits
Contractor’s charges
Architectural feesBuilding permits
Contractor’s charges
MaterialsLabor
Overhead
MaterialsLabor
Overhead
10 - 8©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Buildings – Purchasing
Purchase priceBrokerage commissions
Sales and other taxesRepairing or renovating building
for its intended purpose
Purchase priceBrokerage commissions
Sales and other taxesRepairing or renovating building
for its intended purpose
10 - 9©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Machinery and Equipment
Purchase price less discountsTransportation charges
Insurance in transitSales and other taxes
Purchase commissionsInstallation cost
Expenditures to test assetbefore it is placed in service
Purchase price less discountsTransportation charges
Insurance in transitSales and other taxes
Purchase commissionsInstallation cost
Expenditures to test assetbefore it is placed in service
10 - 10©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Capital Leases
What are capital leases? They are lease arrangements similar to
installment purchases. Capital leases are reported as assets, even
though the company does not own the asset. Leasehold improvements are similar to land
improvements.
10 - 11©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Capitalizing the Cost of Interest
Suppose on January 2, 2002, The Home Depot borrows $1,000,000 on a one-year, 10% note payable, to build a warehouse.
Total interest for the year is $100,000. Assume average accumulated expenditures
on the project during 2002 are $700,000. How much interest is capitalized? $70,000
10 - 12©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Dec. 31, 2002Building (700,000 × 10%) 70,000Interest Expense 30,000
Interest Payable100,000
Accrued interest of construction loan
Dec. 31, 2002Building (700,000 × 10%) 70,000Interest Expense 30,000
Interest Payable100,000
Accrued interest of construction loan
Capitalizing the Cost of Interest
10 - 13©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Lump-Sum Purchases Example
Andrea Ortiz paid $110,000 for a combined purchase of land and a building.
The land is appraised at $90,000 and the building at $60,000.
How much of the purchase price is allocated to land and how much to the building?
10 - 14©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Lump-Sum Purchases Example
Building: $60,000 ÷ $150,000 = 40%$110,000 × 40% = $44,000
Land: $90,000 ÷ $150,000 = 60%$110,000 × 60% = $66,000
10 - 15©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Does the expenditure increase capacityor efficiency or extend useful life?
Does the expenditure increase capacityor efficiency or extend useful life?
YES NO
Capital ExpenditureDebit Plant Assets
accounts
Capital ExpenditureDebit Plant Assets
accounts
Revenue ExpenditureDebit Repairs and
Maintenance account
Revenue ExpenditureDebit Repairs and
Maintenance account
Distinction Between Capital and Revenue Expenditures
10 - 16©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Cost or basis
Estimated residual value
Estimated useful life
Measuring the Depreciationof Plant Assets
10 - 17©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Objective 2
Account for depreciation.
10 - 18©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Straight-Line (SL)
Units-of-Production (UOP)
Double-Declining-Balance (DDB)
Depreciation Methods
10 - 19©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Depreciation Methods Example
Donishia and Richard Catering, Inc., purchased a delivery van on January 1, 200x, for $22,000.
The company expects the van to have a trade-in value of $2,000 at the end of its useful life.
The van has an estimated service life of 100,000 miles or 4 years.
10 - 20©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
(Cost – Residual value) ÷ years of useful life(Cost – Residual value) ÷ years of useful life
($22,000 – 2,000) ÷ 4 = $20,000 ÷ 4 = $5,000($22,000 – 2,000) ÷ 4 = $20,000 ÷ 4 = $5,000
Year 1 Depreciation: $ 5,000Year 2 Depreciation: 5,000Year 3 Depreciation: 5,000Year 4 Depreciation: 5,000Total Depreciation: $20,000
Year 1 Depreciation: $ 5,000Year 2 Depreciation: 5,000Year 3 Depreciation: 5,000Year 4 Depreciation: 5,000Total Depreciation: $20,000
Straight-Line Method Example
10 - 21©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
($22,000 – 2,000) ÷ 100,000 = $.20/mile($22,000 – 2,000) ÷ 100,000 = $.20/mile
Year 1: 30,000 miles = $ 6,000Year 2: 27,000 miles = 5,400Year 3: 23,000 miles = 4,600Year 4: 20,000 miles = 4,000 Total: 100,000 miles = $20,000(Actual mileage in year 4 was 22,000)
Year 1: 30,000 miles = $ 6,000Year 2: 27,000 miles = 5,400Year 3: 23,000 miles = 4,600Year 4: 20,000 miles = 4,000 Total: 100,000 miles = $20,000(Actual mileage in year 4 was 22,000)
Units-of-ProductionMethod Example
10 - 22©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Double-Declining-Balance Method Example
Straight-line rate is 100% ÷ 4 = 25% Double-declining-balance = 2 times the
straight-line rate = 50% What is the book value of the van at the
end of the first year? $22,000 × 50% = $11,000 $22,000 – $11,000 = $11,000
10 - 23©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Double-Declining-Balance Method Example
Dec. 31, 200xDepreciation Expense $11,000
Accumulated Depreciation $11,000To record depreciation expense for a one-year
period
Dec. 31, 200xDepreciation Expense $11,000
Accumulated Depreciation $11,000To record depreciation expense for a one-year
period
10 - 24©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Depreciation Methods Comparison
Year SL UOP DDB1 $ 5,000 $ 6,000 $11,0002 $ 5,000 $ 5,400 $ 5,5003 $ 5,000 $ 4,600 $ 2,7504 $ 5,000 $ 4,000 $ 750
Totals $20,000 $20,000 $20,000
10 - 25©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Use of Depreciation Methods
83%
6%
5%4%2%
Straight-line
Accelerated –(not specified)UOP
Declining-balanceOther
10 - 26©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Objective 3
Select the best depreciationmethod for income tax
purposes.
10 - 27©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Relationship Between Depreciation and Taxes
MACRS was created by the Tax Reform Act of 1986.
It is an accelerated method used for depreciating equipment.
10 - 28©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Straight-line method:$5,000 × 3/12 = $1,250
Straight-line method:$5,000 × 3/12 = $1,250
Double-declining-balance method:$11,000 × 3/12 = $2,750
Double-declining-balance method:$11,000 × 3/12 = $2,750
Depreciation for Partial Years
Assume that Donishia and Richard Catering, Inc., owned the van for 3 months.
How much is the van’s depreciation?
10 - 29©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Remaining useful life
Revised SL depreciation
=
Cost – Accumulated depreciation
–
New residual value
÷
Revising Depreciation Rates
10 - 30©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Objective 4
Account for the disposal
of a plant asset.
10 - 31©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Disposing of Plant Assets
– selling– exchanging– discarding (scrapping it) Gain/loss is reported on the income
statement...– and closed to Income Summary.
10 - 32©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Disposing by Discarding Example
On September 1, Joe, manager of Joe’s Landscaping, is contemplating the disposal of an old piece of equipment:
Equipment cost: $36,000 Residual value: $ 6,000 Accumulated depreciation: $20,000 Estimated useful life at acquisition: 10 years
10 - 33©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
($36,000 – $6,000) ÷ 10 = $3,000$3,000 ÷ 12 = $250$250 × 3 = $750$20,000 + $750 = $20,750
($36,000 – $6,000) ÷ 10 = $3,000$3,000 ÷ 12 = $250$250 × 3 = $750$20,000 + $750 = $20,750
Disposing by Discarding Example
Assume the equipment is discarded on November 30.
What is the accumulated depreciation on November 30?
10 - 34©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Disposing by Discarding Example
November 30, 20xxAccumulated Depreciation 20,750Loss on disposal 15,250
Equipment 36,000
To record discarding of equipment
November 30, 20xxAccumulated Depreciation 20,750Loss on disposal 15,250
Equipment 36,000
To record discarding of equipment
10 - 35©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Selling a Plant Asset Example
Assume the equipment is sold for $10,000. What is the gain or loss? Nov. 30, 20xx
Cash 10,000 Accumulated Depreciation 20,750 Loss on Sale of Equipment 5,250 Equipment 36,000 To record sale of equipment for $10,000
10 - 36©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Selling a Plant Asset Example
Equipment is sold for $20,000. What is the gain or loss? Nov. 30, 20xx
Cash 20,000 Accumulated Depreciation 20,750 Gain on Sale of Equipment 4,750 Equipment 36,000 To record sale of equipment for $20,000
10 - 37©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Exchanging Plant Assets
Assume equipment with a cost of $36,000 and a book value of $15,250 is exchanged for new, similar equipment having a cost of $42,000 with a trade-in of $18,000 allowed.
Cash payment is $24,000. What is the cost of the new asset? $24,000 + $15,250 = $39,250
10 - 38©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Exchanging Plant Assets
Equipment (new) $39,250Accumulated Depreciation (old) $20,750
Equipment (old) $36,000Cash $24,000
Equipment (new) $39,250Accumulated Depreciation (old) $20,750
Equipment (old) $36,000Cash $24,000
10 - 39©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Objective 5
Account for natural resource
assets and depletion.
10 - 40©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Natural gas and oilPrecious metals and gemsTimber, coal, and iron ore
Natural gas and oilPrecious metals and gemsTimber, coal, and iron ore
Cost – Residual value) ÷ Estimated unitsof natural resources = Depletion per unitCost – Residual value) ÷ Estimated unitsof natural resources = Depletion per unit
Accounting for Natural Resources
10 - 41©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Objective 6
Account for intangibleassets and
amortization.
10 - 42©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
PatentsCopyrightsTrademarksFranchisesLeaseholdsGoodwill
Not physical in natureNot physical in nature
Intangible Assets
10 - 43©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Intangible Assets: Patents
Patents are federal government grants. They give the holder the right to produce and
sell an invention. Suppose a company pays $170,000 to acquire
a patent on January 1. The company believes that its expected
useful life is 5 years. What are the entries?
10 - 44©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Jan. 1Patents 170,000
Cash 170,000To acquire a patent
Dec. 31Amortization Expense 34,000
Patents 34,000To amortize the cost of a patent
Intangible Assets: Patents
10 - 45©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Literary compositions (novels)Musical compositionsFilms (movies)SoftwareOther works of art
Intangible Assets: Copyrights
10 - 46©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Trademarks, Trade Names,or Brand Names are assets that represent
distinctive identifications of a product or service.
Trademarks, Trade Names,or Brand Names are assets that represent
distinctive identifications of a product or service.
Intangible Assets: Trademarks
10 - 47©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Intangible Assets: Franchises
Franchises are privileges granted by private business or government to sell a product or service.
10 - 48©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Purchase price paid forMexana Company $10 millionAssets at market value 9 millionLess Mexana’s liabilities 1 millionMarket value ofMexana’s net assets 8 millionGoodwill $ 2 million
Purchase price paid forMexana Company $10 millionAssets at market value 9 millionLess Mexana’s liabilities 1 millionMarket value ofMexana’s net assets 8 millionGoodwill $ 2 million
Goodwill Example
Intangible Assets: Goodwill
10 - 49©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
International accounting for goodwillInternational accounting for goodwill
Research and developmentResearch and development
Capitalize or expense a costCapitalize or expense a cost
Special Issues