View
213
Download
1
Category
Preview:
Citation preview
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 9-1
PLANT AND INTANGIBLE ASSETS
Chapter
9
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 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.
Plant AssetsPlant Assets
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 9-3
L a nd , bu ild in g s,e q u ip m e n t,
fu rn itu re , f ix tu re s.
L o n g-te rma sse ts ha v ing
p h ys ica l su b s tan ce .
Tangible P lantAssets
P a te n ts , co p yrig h ts,tra d e m a rks,
fra n ch ise s , g oo d w ill.
N o n curre n t a sse tsw ith n o p h ys ica l
su bs ta nce .
IntangibleAssets
O il re se rve s,t im be r, o th e r
m in e ra ls.
S ite s a cqu ired fo re x tra c tin g va lua b le
re so urce s.
NaturalResources
Major Categories of Plant AssetsMajor Categories of Plant Assets
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 9-4
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
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 9-5
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
+
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 9-6
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. Sales tax was computed at 8%.
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. Sales tax was computed at 8%.
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
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 9-7
Prepare the journal entry.
Determining CostDetermining Cost
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 9-8
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
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 9-9
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
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 9-10
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
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 9-11
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
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 9-12
Cost - Residual Value
Years of Useful Life
Depreciation
Expense per Year=
Straight-Line DepreciationStraight-Line Depreciation
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 9-13
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
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 9-14
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
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 9-15
When an asset is acquired during the year, depreciation in the year of acquisition must be
prorated.
When an asset is acquired during the year, depreciation in the year of acquisition must be
prorated.
Half-Year ConventionIn the year of
acquisition, record six months of depreciation.
Half-Year ConventionIn the year of
acquisition, record six months of depreciation. ½
Depreciation for Fractional PeriodsDepreciation for Fractional Periods
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 9-16
Half-Year ConventionHalf-Year Convention
Using the half-year convention, calculate the straight-line depreciation on December 31,
2003, for equipment purchased in 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 × 1/2 = $3,500
Depreciation = ($75,000 - $5,000) ÷ 10
= $7,000 for a full year
Depreciation = $7,000 × 1/2 = $3,500
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 9-17
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.
The double-declining balance depreciation rate is 200% of the straight-line
depreciation rate of 1/Useful Life.
The double-declining balance depreciation rate is 200% of the straight-line
depreciation rate of 1/Useful Life.
Declining-Balance MethodDeclining-Balance Method
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 9-18
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 double-declining balance 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 double-declining balance method.
Declining-Balance MethodDeclining-Balance Method
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 9-19
Compute depreciation for the rest of the boat’s estimated useful life.
Compute depreciation for the rest of the boat’s estimated useful life.
Declining-Balance MethodDeclining-Balance Method
Total depreciation over the estimated useful life of an asset is the same using either the straight-line method or
the declining-balance method.
Total depreciation over the estimated useful life of an asset is the same using either the straight-line method or
the declining-balance method.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 9-20
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
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 9-21
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
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 9-22
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 $30,000, has a useful
life of 10 years and no salvage value. During 2006, the useful life was revised to 8
years total (5 years remaining).
Calculate depreciation expense for the year ended December 31, 2006, using the
straight-line method.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 9-23
When our estimates change, depreciation is:
When our estimates change, depreciation is:
Book value at date of change
Salvage value at date of change
Remaining useful life at date of change
–
Revising Depreciation RatesRevising Depreciation Rates
Asset cost 30,000$ 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$
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 9-24
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 AssetsImpairment of Assets
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 9-25
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
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 9-26
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
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 9-27
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
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 9-28
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
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 9-29
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
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 9-30
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.
SIMILAR
Trading in Used Assetsfor New Ones – Similar Assets
Trading in Used Assetsfor New Ones – Similar Assets
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 9-31
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 – Similar Assets
Trading in Used Assetsfor New Ones – Similar Assets
Recommended