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Chapter 9-1
Chapter 9-2
Reporting and AnalyzingReporting and Analyzing
Long-Lived AssetsLong-Lived Assets
Accounting, Third Edition
Chapter 9-3
1. Describe how the cost principle applies to plant assets.
2. Explain the concept of depreciation.
3. Compute periodic depreciation using the straight-line method, and contrast its expense pattern with those of other methods.
4. Describe the procedure for revising periodic depreciation.
5. Explain how to account for the disposal of plant assets.
6. Describe methods for evaluating the use of plant assets.
7. Identify the basic issues related to reporting intangible assets.
8. Indicate how long-lived assets are reported in the financial statements.
9. Compute periodic depreciation using the declining-balance method and the units-of-activity method.
Study ObjectivesStudy ObjectivesStudy ObjectivesStudy Objectives
Chapter 9-4
Plant AssetsPlant AssetsPlant AssetsPlant Assets
Determining the cost of Determining the cost of plant assetsplant assets
Accounting for plant Accounting for plant assetsassets
Analyzing plant assetsAnalyzing plant assets
Intangible Intangible
AssetsAssetsIntangible Intangible
AssetsAssets
Accounting for Accounting for intangibles assetsintangibles assets
Types of intangibles Types of intangibles assetsassets
Financial statement Financial statement presentation of long-presentation of long-lived assetslived assets
Reporting and Analyzing Long-Lived AssetsReporting and Analyzing Long-Lived AssetsReporting and Analyzing Long-Lived AssetsReporting and Analyzing Long-Lived Assets
Chapter 9-5
Plant assets are resources that have
physical substance (a definite size and shape),
are used in the operations of a business,
are not intended for sale to customers,
are expected to provide service to the company for a number of years, except for land.
Plant AssetsPlant Assets
Referred to as property, plant, and equipment; plant and equipment; and fixed assets.
Section One
Chapter 9-6
Plant assets are critical to a company’s success
Plant AssetsPlant Assets Section One
Illustration 9-1
Chapter 9-7
Cost Principle - requires that companies record plant assets at cost.
Cost consists of all expenditures necessary to acquire an asset and make it ready for its
intended use.
Determining the Cost of Plant AssetsDetermining the Cost of Plant Assets
SO 1 Describe how the cost principle applies to plant assets.SO 1 Describe how the cost principle applies to plant assets.
Revenue expenditure - If a cost is not included in a plant asset account, then it must be expensed immediately.
Capital expenditures - costs that are not expensed immediately but are instead included in a plant asset account.
Chapter 9-8
Determining the Cost of Plant AssetsDetermining the Cost of Plant Assets
SO 1 Describe how the cost principle applies to plant assets.SO 1 Describe how the cost principle applies to plant assets.
Cost is measured by the cash paid in a cash transaction or by the cash equivalent price paid.
The cash equivalent price is equal to
the fair market value of the asset given up or
the fair market value of the asset received,
whichever is more clearly determinable.
Chapter 9-9
All necessary costs incurred in making land ready for its intended use increase (debit) the Land account.
Land
Determining the Cost of Plant AssetsDetermining the Cost of Plant Assets
Costs typically include:
1) the cash purchase price,
2) closing costs such as title and attorney’s fees,
3) real estate brokers’ commissions, and
4) Accrued property taxes and other liens on the land assumed by the purchaser.
SO 1 Describe how the cost principle applies to plant assets.SO 1 Describe how the cost principle applies to plant assets.
Chapter 9-10
Illustration: Illustration: Assume that Hayes Manufacturing Company acquires real estate at a cash cost of $100,000. The property contains an old warehouse that is razed at a net cost of $6,000 ($7,500 in costs less $1,500 proceeds from salvaged materials). Additional expenditures are the attorney’s fee, $1,000, and the real estate broker’scommission, $8,000.
Required: Required: Determine amount to be reported as the cost of the land.
Determining the Cost of Plant AssetsDetermining the Cost of Plant Assets
SO 1 Describe how the cost principle applies to plant assets.SO 1 Describe how the cost principle applies to plant assets.
Chapter 9-11
LandLand
Required: Required: Determine amount to be reported as the cost of the land.
Determining the Cost of Plant AssetsDetermining the Cost of Plant Assets
SO 1 Describe how the cost principle applies to plant assets.SO 1 Describe how the cost principle applies to plant assets.
Cash price of property ($100,000)
Net removal cost of warehouse ($6,000)
Attorney's fees ($1,000) 1,000
6,000
$100,000
$115,000
Cost of Land
Real estate broker’s commission ($8,000) 8,000
Chapter 9-12
Includes all expenditures necessary to make the improvements ready for their intended use.
Land Improvements
Determining the Cost of Plant AssetsDetermining the Cost of Plant Assets
Examples are driveways, parking lots, fences, landscaping, and underground sprinklers.
Limited useful lives.
Expense (depreciate) the cost of land improvements over their useful lives.
SO 1 Describe how the cost principle applies to plant assets.SO 1 Describe how the cost principle applies to plant assets.
Chapter 9-13
Includes all costs related directly to purchase or construction.
Buildings
Purchase costs:
Purchase price, closing costs (attorney’s fees, title insurance, etc.) and real estate broker’s commission.
Remodeling and replacing or repairing the roof, floors, electrical wiring, and plumbing.
Construction costs:
Contract price plus payments for architects’ fees, building permits, and excavation costs.
Determining the Cost of Plant AssetsDetermining the Cost of Plant Assets
SO 1 Describe how the cost principle applies to plant assets.SO 1 Describe how the cost principle applies to plant assets.
Chapter 9-14
Include all costs incurred in acquiring the equipment and preparing it for use.
Costs typically include:
Equipment
cash purchase price
sales taxes
freight charges
insurance during transit paid by the purchaser
expenditures required in assembling, installing, and testing the unit
Determining the Cost of Plant AssetsDetermining the Cost of Plant Assets
SO 1 Describe how the cost principle applies to plant assets.SO 1 Describe how the cost principle applies to plant assets.
Chapter 9-15
Illustration: Lenard Company purchases a delivery truck at a cash price of $22,000. Related expenditures are sales taxes $1,320, painting and lettering $500, motor vehicle license $80, and a three-year accident insurance policy $1,600. Compute the cost of the delivery truck.
Determining the Cost of Plant AssetsDetermining the Cost of Plant Assets
SO 1 Describe how the cost principle applies to plant assets.SO 1 Describe how the cost principle applies to plant assets.
TruckTruck
Cash price
Sales taxes
Painting and lettering 500
1,320
$22,000
$23,820Cost of Delivery Truck
Chapter 9-16
Illustration: Lenard Company purchases a delivery truck at a cash price of $22,000. Related expenditures are sales taxes $1,320, painting and lettering $500, motor vehicle license $80, and a three-year accident insurance policy $1,600. Prepare the journal entry to record these costs.
Determining the Cost of Plant AssetsDetermining the Cost of Plant Assets
SO 1 Describe how the cost principle applies to plant assets.SO 1 Describe how the cost principle applies to plant assets.
Delivery truck 23,820
License expense 80
Prepaid insurance 1,600
Prepaid insurance 25,500
Chapter 9-17
A lease is a contractual agreement in which the owner of an asset (the lessor) allows another party (the lessee) to use the asset for a period of time at an agreed price.
To Buy or Lease?
Some advantages of leasing
1. Reduced risk of obsolescence.
2. Little or no down payment.
3. Shared tax advantages.
4. Assets and liabilities not reported.
Determining the Cost of Plant AssetsDetermining the Cost of Plant Assets
SO 1 Describe how the cost principle applies to plant assets.SO 1 Describe how the cost principle applies to plant assets.
Capital lease - lessees show the asset and liability on the balance sheet.
Chapter 9-18
Chapter 9-19
Process of cost allocation, not asset valuation.
Applies to land improvements, buildings, and equipment, not land.
Depreciable, because the revenue-producing ability of asset will decline over the asset’s useful life.
The process of allocating to expense the cost of a plant asset over its useful (service) life in a rational and systematic manner.
Accounting for Plant AssetsAccounting for Plant Assets
SO 2 Explain the concept of depreciation.SO 2 Explain the concept of depreciation.
Depreciation
Chapter 9-20
Factors in Computing Depreciation
Cost
SO 2 Explain the concept of depreciation.SO 2 Explain the concept of depreciation.
Useful Life Salvage Value
Illustration 9-6
Accounting for Plant AssetsAccounting for Plant Assets
Chapter 9-21
Management selects the method it believes best measures an asset’s contribution to revenue over its useful life.
Depreciation Methods
Examples include:
(1) Straight-line method.
(2) Declining-balance method.
(3) Units-of-Activity method.
SO 3 SO 3 Compute periodic depreciation using the straight-Compute periodic depreciation using the straight-line method, line method, and contrast its expense pattern and contrast its expense pattern with those of other methods.with those of other methods.
Illustration 9-7 Use of depreciation methods in major U.S. companies
Accounting for Plant AssetsAccounting for Plant Assets
Chapter 9-22
Illustration: Bill’s Pizzas purchased a small delivery truck on January 1, 2010.
Required: Compute depreciation using the following.
(a) Straight-Line.
(b) Units-of-Activity.
(c) Declining Balance.
SO 3 SO 3 Compute periodic depreciation using the straight-Compute periodic depreciation using the straight-line method, line method, and contrast its expense pattern and contrast its expense pattern with those of other methods.with those of other methods.
Accounting for Plant AssetsAccounting for Plant Assets
Chapter 9-23
Straight-Line
Expense is same amount for each year.
Depreciable cost is cost of the asset less its salvage value.
Illustration 9-8
SO 3 SO 3 Compute periodic depreciation using the straight-Compute periodic depreciation using the straight-line method, line method, and contrast its expense pattern and contrast its expense pattern with those of other methods.with those of other methods.
Accounting for Plant AssetsAccounting for Plant Assets
Chapter 9-24
Depreciable Annual Accum. BookYear Cost x Rate = Expense Deprec. Value
Illustration: (Straight-Line Method)
2010 $ 12,000 20% $ 2,400 $ 2,400 $ 10,6002011 12,000 20 2,400 4,800 8,200
2012 12,000 20 2,400 7,200 5,800
2013 12,000 20 2,400 9,600 3,400
2014 12,000 20 2,400 12,000 1,000
2010 Journal Entry
Depreciation expense 2,400
Accumulated depreciation2,400
Illustration 9-9
SO 3 SO 3 Compute periodic depreciation using the straight-Compute periodic depreciation using the straight-line method, line method, and contrast its expense pattern and contrast its expense pattern with those of other methods.with those of other methods.
Accounting for Plant AssetsAccounting for Plant Assets
Chapter 9-25
CurrentDepreciable Annual Partial Year Accum.
Year Cost Rate Expense Year Expense Deprec.
2010 12,000$ x 20% = 2,400$ x 9/12 = 1,800$ 1,800$
2011 12,000 x 20% = 2,400 2,400 4,200
2012 12,000 x 20% = 2,400 2,400 6,600
2013 12,000 x 20% = 2,400 2,400 9,000
2014 12,000 x 20% = 2,400 2,400 11,400
2015 12,000 x 20% = 2,400 x 3/12 = 600 12,000
12,000$
J ournal entry:
2010 Depreciation expense 1,800
Accumultated depreciation 1,800
SO 3 SO 3 Compute periodic depreciation using the straight-Compute periodic depreciation using the straight-line method, line method, and contrast its expense pattern and contrast its expense pattern with those of other methods.with those of other methods.
Accounting for Plant AssetsAccounting for Plant Assets Partial Year
Illustration: (Straight-Line Method)Assuming the delivery truck was purchased on April 1, 2010.
Chapter 9-26
Declining-Balance
SO 3 SO 3 Compute periodic depreciation using the straight-Compute periodic depreciation using the straight-line method, line method, and contrast its expense pattern and contrast its expense pattern with those of other methods.with those of other methods.
Accounting for Plant AssetsAccounting for Plant Assets
Accelerated method.
Decreasing annual depreciation expense over the asset’s useful life.
Double declining-balance rate is double the straight-line rate.
Rate applied to book value.
Chapter 9-27
Declining
Beginning Balance Annual Accum. Book
Year Book value x Rate = Expense Deprec. Value
Illustration: (Declining-Balance Method)
2010 13,000
40% $ 5,200 $ 5,200 $ 7,800
2012 7,800 40 3,120 8,320 4,680
2013 4,680 40 1,872 10,192 2,808
2014 2,808 40 1,123 11,315 1,685
2015 1,685 40 685* 12,000 1,000
* Computation of $674 ($1,685 x 40%) is adjusted to $685.
Depreciation expense 5,200
Accumulated depreciation5,200
2010 Journal Entry
Illustration 9-10
Accounting for Plant AssetsAccounting for Plant Assets
Chapter 9-28
Companies estimate total units of activity to calculate depreciation cost per unit.
Expense varies based on units of activity.
Depreciable cost is cost less salvage value.
Units-of-Activity
SO 3 SO 3 Compute periodic depreciation using the straight-Compute periodic depreciation using the straight-line method, line method, and contrast its expense pattern and contrast its expense pattern with those of other methods.with those of other methods.
Accounting for Plant AssetsAccounting for Plant Assets
Illustration 9A-3
Chapter 9-29
Hours Rate per Annual Accum. Book
Year Used x Hour = Expense Deprec. Value
Illustration: (Units-of-Activity Method)
2010 15,000
$ 0.12 $ 1,800 $ 1,800 $ 11,2002011 30,00
00.12 3,600 5,400 7,600
2012 20,000
0.12 2,400 7,800 5,200
2013 25,000
0.12 3,000 10,800 2,200
2014 10,000
0.12 1,200 12,000 1,000
Depreciation expense 1,800
Accumulated depreciation 1,800
2010 Journal Entry
Illustration 9-11
SO 3 SO 3 Compute periodic depreciation using the straight-Compute periodic depreciation using the straight-line method, line method, and contrast its expense pattern and contrast its expense pattern with those of other methods.with those of other methods.
Accounting for Plant AssetsAccounting for Plant Assets
Chapter 9-30
Comparison of Depreciation
Methods
Illustration 9-12
Illustration 9-13
SO 3 SO 3 Compute periodic depreciation using the straight-Compute periodic depreciation using the straight-line method, line method, and contrast its expense pattern and contrast its expense pattern with those of other methods.with those of other methods.
Accounting for Plant AssetsAccounting for Plant Assets
Each method is acceptable because each recognizes the
decline in service potential of the asset
in a rational and systematic manner.
Chapter 9-31
IRS does not require taxpayer to use the same depreciation method on the tax return that is used in preparing financial statements.
IRS requires the straight-line method or a special accelerated-depreciation method called the Modified Accelerated Cost Recovery System (MACRS). MACRS is NOT acceptable under GAAP.
Depreciation and Income Taxes
Accounting for Plant AssetsAccounting for Plant Assets
SO 3 SO 3 Compute periodic depreciation using the straight-Compute periodic depreciation using the straight-line method, line method, and contrast its expense pattern and contrast its expense pattern with those of other methods.with those of other methods.
Chapter 9-32
Revising Periodic Depreciation
Accounted for in the period of change and future periods (Change in Estimate).
Not handled retrospectively.
Not considered error.
SO 4 Describe the procedure for revising periodic depreciation.SO 4 Describe the procedure for revising periodic depreciation.
Accounting for Plant AssetsAccounting for Plant Assets
Chapter 9-33
Ordinary Repairs - expenditures to maintain the operating efficiency and productive life of the unit.
Debit - Repair (or Maintenance) Expense.
Additions and Improvements - costs incurred to increase the operating efficiency, productive capacity, or useful life of a plant asset.
Debit - the plant asset affected.
Referred to as capital expenditures.
Expenditure During Useful Life
Accounting for Plant AssetsAccounting for Plant Assets
SO 4 Describe the procedure for revising periodic depreciation.SO 4 Describe the procedure for revising periodic depreciation.
Chapter 9-34
A permanent decline in the market value of an asset.
So as not to overstate the asset on the books, the company writes the asset down to its new market value during the year in which the decline in value occurs.
Impairments
Accounting for Plant AssetsAccounting for Plant Assets
SO 4 Describe the procedure for revising periodic depreciation.SO 4 Describe the procedure for revising periodic depreciation.
Chapter 9-35
Companies dispose of plant assets in three ways —Retirement, Sale, or Exchange (appendix).
SO 5 Explain how to account for the disposal of a plant SO 5 Explain how to account for the disposal of a plant asset.asset.
Record depreciation up to the date of disposal.
Eliminate asset by (1) debiting Accumulated Depreciation, and (2) crediting the asset account.
Illustration 9-15
Plant Asset Disposals
Accounting for Plant AssetsAccounting for Plant Assets
Chapter 9-36
Sale of Plant Assets
Compare the book value of the asset with the proceeds received from the sale.
If proceeds exceed the book value, a gain on disposal occurs.
If proceeds are less than the book value, a loss on disposal occurs.
Plant Asset DisposalsPlant Asset Disposals
SO 5 Explain how to account for the disposal of a plant SO 5 Explain how to account for the disposal of a plant asset.asset.
Chapter 9-37
Illustration: On July 1, 2010, Wright Company sells office furniture for $16,000 cash. The office furniture originally cost $60,000. As of January 1, 2010, it had accumulated depreciation of $41,000. Depreciation for the first six months of 2010 is $8,000. Prepare the journal entry to record depreciation expense up to the date of sale.
SO 5 Explain how to account for the disposal of a plant SO 5 Explain how to account for the disposal of a plant asset.asset.
Depreciation expense 8,000
Accumulated depreciation 8,000
July 1
Plant Asset DisposalsPlant Asset Disposals
Chapter 9-38
Illustration: Wright records the sale as follows.
SO 5 Explain how to account for the disposal of a plant SO 5 Explain how to account for the disposal of a plant asset.asset.
Cash 16,000
Accumulated depreciation 49,000
Illustration 9-16Computation of gain on disposal
Office equipment60,000Gain on disposal
5,000
July 1
Plant Asset DisposalsPlant Asset Disposals
Chapter 9-39 SO 5 Explain how to account for the disposal of a plant SO 5 Explain how to account for the disposal of a plant
asset.asset.
Cash 9,000
Accumulated depreciation 49,000
Illustration 9-17Computation of loss on disposal
Office equipment60,000Gain on disposal 2,000
July 1
Plant Asset DisposalsPlant Asset Disposals
Illustration: Assume that instead of selling the office furniture for $16,000, Wright sells it for $9,000.
Chapter 9-40
Illustration: Assume that Hobart Enterprises retiresits computer printers, which cost $32,000. The accumulated depreciation on these printers is $32,000. The journal entry to record this retirement is?
SO 5 Explain how to account for the disposal of a plant SO 5 Explain how to account for the disposal of a plant asset.asset.
Accumulated depreciation 32,000
Printing equipment32,000
Question: What happens if a fully depreciated plant asset is still useful to the company?
Plant Asset DisposalsPlant Asset Disposals
Chapter 9-41
Retirement of Plant Assets
Plant Asset DisposalsPlant Asset Disposals
SO 5 Explain how to account for the disposal of a plant SO 5 Explain how to account for the disposal of a plant asset.asset.
No cash is received.
Decrease (debit) Accumulated Depreciation for the full amount of depreciation taken over the life of the asset.
Decrease (credit) the asset account for the original cost of the asset.
Chapter 9-42
Return on Asset Ratio indicates the amount of net income generated by each dollar of assets.
Illustration 9-18
Analyzing Plant AssetsAnalyzing Plant Assets
SO 6 Describe methods for evaluating the use of plant assets.SO 6 Describe methods for evaluating the use of plant assets.
(Answers on notes page)
Chapter 9-43
Chapter 9-44
Asset Turnover Ratio indicates how efficiently a company uses its assets to generate sales.
Illustration 9-19
Analyzing Plant AssetsAnalyzing Plant Assets
SO 6 Describe methods for evaluating the use of plant assets.SO 6 Describe methods for evaluating the use of plant assets.
Chapter 9-45
Profit Margin Ratio Revisited
Illustration 9-20
Analyzing Plant AssetsAnalyzing Plant Assets
SO 6 Describe methods for evaluating the use of plant assets.SO 6 Describe methods for evaluating the use of plant assets.
Tells how effective a company is in turning its sales into income—that is, how much income each dollar of sales provides.
Illustration 9-21 You can evaluate the return on
assets ratio by evaluating its components.
Chapter 9-46
Intangible assets are rights, privileges, and competitive advantages that result from ownership of long-lived assets that do not possess physical substance.
Intangible AssetsIntangible Assets
Patents
Copyrights
Franchises or licenses
Trademarks
Trade names
Goodwill
Limited life or an indefinite life.
Common types of intangibles:
SO 7 Identify the basic issues related to reporting intangible SO 7 Identify the basic issues related to reporting intangible assets.assets.
Section Two
Chapter 9-47
Amortization of Intangibles
Limited-Life Intangibles:
Amortize to expense.
Credit asset account or accumulated amortization.
Indefinite-Life Intangibles:
No foreseeable limit on time the asset is expected to provide cash flows.
No amortization.
Accounting for Intangible AssetsAccounting for Intangible Assets
SO 7 Identify the basic issues related to reporting intangible SO 7 Identify the basic issues related to reporting intangible assets.assets.
Chapter 9-48
Patents
Exclusive right to manufacture, sell, or otherwise control an invention for a period of 20 years from the date of the grant.
Capitalize costs of purchasing a patent and amortize over its 20-year life or its useful life, whichever is shorter.
Expense any R&D costs in developing a patent.
Legal fees incurred successfully defending a patent are capitalized to Patent account.
Types of Intangible AssetsTypes of Intangible Assets
SO 7 Identify the basic issues related to reporting intangible SO 7 Identify the basic issues related to reporting intangible assets.assets.
Chapter 9-49
Illustration: Assume that National Labs purchases a patent at a cost of $60,000 on June 30. National estimates the useful life of the patent to be eight years. Prepare the journal entry to record the amortization for the six-month period ended December 31.
Amortization expense 3,750
Patent 3,750
Cost $60,000Useful life / 8Annual expense $ 7,5006 months x 6/12Amortization $ 3,750
Journal Entry
SO 7 Identify the basic issues related to reporting intangible SO 7 Identify the basic issues related to reporting intangible assets.assets.
Types of Intangible AssetsTypes of Intangible Assets
Chapter 9-50
Expenditures that may lead to
patents,
copyrights,
new processes, and
new products.
All R & D costs are expensed
when incurred.
Research and Development Costs
SO 7 Identify the basic issues related to reporting intangible SO 7 Identify the basic issues related to reporting intangible assets.assets.
Types of Intangible AssetsTypes of Intangible Assets
Chapter 9-51
Copyrights
Give the owner the exclusive right to reproduce and sell an artistic or published work.
Copyright is granted for the life of the creator plus 70 years.
Capitalize costs of acquiring and defending it.
Amortized to expense over useful life.
SO 7 Identify the basic issues related to reporting intangible SO 7 Identify the basic issues related to reporting intangible assets.assets.
Types of Intangible AssetsTypes of Intangible Assets
Chapter 9-52
Trademarks and Trade Names
Word, phrase, jingle, or symbol that identifies a particular enterprise or product.
Wheaties, Monopoly, Sunkist, Kleenex, Coca-Cola, Big Mac, and Jeep.
Trademark or trade name has legal protection for indefinite number of 20 year renewal periods.
Capitalize acquisition costs.
No amortization.
SO 7 Identify the basic issues related to reporting intangible SO 7 Identify the basic issues related to reporting intangible assets.assets.
Types of Intangible AssetsTypes of Intangible Assets
Chapter 9-53
Franchises and Licenses
Contractual arrangement between a franchisor and a franchisee.
Toyota, Shell, Subway, and Marriott are franchises.
Franchise (or license) with a limited life should be amortized to expense over the life of the franchise.
Franchise with an indefinite life should be carried at cost and not amortized.
SO 7 Identify the basic issues related to reporting intangible SO 7 Identify the basic issues related to reporting intangible assets.assets.
Types of Intangible AssetsTypes of Intangible Assets
Chapter 9-54
Chapter 9-55
Goodwill
Includes exceptional management, desirable location, good customer relations, skilled employees, high-quality products, etc.
Only recorded when an entire business is purchased.
Goodwill is recorded as the excess of ...purchase price overover the FMV of the identifiable net assets acquired.
Internally created goodwill should not be capitalized.
SO 7 Identify the basic issues related to reporting intangible SO 7 Identify the basic issues related to reporting intangible assets.assets.
Types of Intangible AssetsTypes of Intangible Assets
Chapter 9-56
1. The allocation to expense of the cost of an intangible asset over the asset’s useful life.
2. Rights, privileges, and competitive advantages that result from the ownership of long-lived assets that do not possess physical substance.
3. An exclusive right granted by the federal government to reproduce and sell an artistic or published work.
Amortization
Intangible Assets
Copyrights
Illustration: Identify the term most directly associated with each statement.
SO 7 Identify the basic issues related to reporting intangible SO 7 Identify the basic issues related to reporting intangible assets.assets.
Types of Intangible AssetsTypes of Intangible Assets
Chapter 9-57
Illustration: Identify the term most directly associated with each statement.
4. A right to sell certain products or services or to use certain trademarks or trade names within a designated geographic area.
5. Costs incurred by a company that often lead to patents or new products. These costs must be expensed as incurred.
Franchise
Research and
Development Costs
SO 7 Identify the basic issues related to reporting intangible SO 7 Identify the basic issues related to reporting intangible assets.assets.
Types of Intangible AssetsTypes of Intangible Assets
Chapter 9-58
Chapter 9-59
Illustration 9-22
Statement Presentation of Long-Lived AssetsStatement Presentation of Long-Lived Assets
SO 8 Indicate how long-lived assets are reported in the financial SO 8 Indicate how long-lived assets are reported in the financial statements.statements.
Chapter 9-60
Statement Presentation of Long-Lived AssetsStatement Presentation of Long-Lived Assets
A difference between accrual-accounting net income and net cash provided by operating activities is caused by depreciation and amortization expense.
SO 8 Indicate how long-lived assets are reported in the financial SO 8 Indicate how long-lived assets are reported in the financial statements.statements.
Chapter 9-61
Decreasing annual depreciation expense over the asset’s useful life.
Double declining-balance rate is double the straight-line rate.
Rate applied to book value.
Declining-Balance
Depreciation using Other MethodsDepreciation using Other Methods
Illustration 9-A1
Appendix
SO 9 SO 9 Compute periodic depreciation using the Compute periodic depreciation using the declining-declining- balance method and the units-balance method and the units-of-activity method.of-activity method.
Chapter 9-62
Declining
Beginning Balance Annual Accum. Book
Year Book value x Rate = Expense Deprec. Value
Illustration: (Declining-Balance Method)
2010 13,000
40% $ 5,200 $ 5,200 $ 7,800
2012 7,800 40 3,120 8,320 4,680
2013 4,680 40 1,872 10,192 2,808
2014 2,808 40 1,123 11,315 1,685
2015 1,685 40 685* 12,000 1,000
* Computation of $674 ($1,685 x 40%) is adjusted to $685.
Depreciation expense 5,200
Accumulated depreciation5,200
2010 Journal Entry
Illustration 9-A2
Depreciation using Other MethodsDepreciation using Other Methods
Chapter 9-63
Declining CurrentBeginning Balance Annual Partial Year Accum.
Year Book Value Rate Expense Year Expense Deprec.
2010 13,000$ x 40% = 5,200$ x 9/12 = 3,900$ 3,900$
2011 9,100 x 40% = 3,640 3,640 7,540
2012 5,460 x 40% = 2,184 2,184 9,724
2013 3,276 x 40% = 1,310 1,310 11,034
2014 1,966 x 40% = 786 786 11,821
2015 1,179 x 40% = 472 Plug 179 12,000
12,000$
J ournal entry:
2010 Depreciation expense 3,900
Accumultated depreciation 3,900
Depreciation using Other MethodsDepreciation using Other Methods
Illustration: (Declining-Balance Method)
Partial YearPurchased on 4/1/10
SO 9 SO 9 Compute periodic depreciation using the Compute periodic depreciation using the declining-declining- balance method and the units-balance method and the units-of-activity method.of-activity method.
Chapter 9-64
Suited to equipment whose activity can be measured in units of output, miles driven, or hours in use.
Calculate depreciation cost per unit.
Expense varies based on units of activity.
Depreciable cost is cost less salvage value.
Units-of-Activity
Depreciation using Other MethodsDepreciation using Other Methods
Illustration 9A-3
SO 9 SO 9 Compute periodic depreciation using the Compute periodic depreciation using the declining-declining- balance method and the units-balance method and the units-of-activity method.of-activity method.
Chapter 9-65
Hours Rate per Annual Accum. Book
Year Used x Hour = Expense Deprec. Value
Illustration: (Units-of-Activity Method)
2010 15,000
$ 0.12 $ 1,800 $ 1,800 $ 11,2002011 30,00
00.12 3,600 5,400 7,600
2012 20,000
0.12 2,400 7,800 5,200
2013 25,000
0.12 3,000 10,800 2,200
2014 10,000
0.12 1,200 12,000 1,000
Depreciation expense 1,800
Accumulated depreciation 1,800
2010 Journal Entry
Illustration 9A-4
Depreciation using Other MethodsDepreciation using Other Methods
SO 9 SO 9 Compute periodic depreciation using the Compute periodic depreciation using the declining-declining- balance method and the units-balance method and the units-of-activity method.of-activity method.
Chapter 9-66
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