© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 9-1 PLANT AND INTANGIBLE ASSETS Chapter 9

© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin

Slide 9-1

PLANT AND INTANGIBLE ASSETS

Chapter

9


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


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


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


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

+


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


Slide 9-7

Prepare the journal entry.

Determining CostDetermining Cost


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


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


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


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


Slide 9-12

Cost - Residual Value

Years of Useful Life

Depreciation

Expense per Year=

Straight-Line DepreciationStraight-Line Depreciation


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.



Compute depreciation for 2003 using the straight-line method.



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



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


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


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


Slide 9-18



Compute depreciation for 2003 using the double-declining balance method.



Compute depreciation for 2003 using the double-declining balance method.



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.


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.


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


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


Slide 9-22


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.


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

–


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$


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


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


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.



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



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$



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$



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



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.




Slide 9-32



Prepare the journal entry to record the trade.

Prepare the journal entry to record the trade.

Documents

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 9-1 PLANT AND INTANGIBLE ASSETS Chapter 9