10 - 1 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Accounting for Plant Assets, Intangible Assets, and Related

10 - 1©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber

Accounting for Plant Assets,

Intangible Assets, andRelated Expenses

Chapter 10


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


Measure the cost

of a plant asset.

Objective 1


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


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


PavingFences

Sprinkler systemsLights in parking lot

PavingFences

Sprinkler systemsLights in parking lot

Land Improvements

All improvements located on the land but subject to decay:


Buildings – Construction

Architectural feesBuilding permits

Contractor’s charges

Architectural feesBuilding permits

Contractor’s charges

MaterialsLabor

Overhead

MaterialsLabor

Overhead


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


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


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.


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


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


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?


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


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


Cost or basis

Estimated residual value

Estimated useful life

Measuring the Depreciationof Plant Assets


Objective 2

Account for depreciation.


Straight-Line (SL)

Units-of-Production (UOP)

Double-Declining-Balance (DDB)

Depreciation Methods


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.


(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


($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


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


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


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


Use of Depreciation Methods

83%

6%

5%4%2%

Straight-line

Accelerated –(not specified)UOP

Declining-balanceOther


Objective 3

Select the best depreciationmethod for income tax

purposes.


Relationship Between Depreciation and Taxes

MACRS was created by the Tax Reform Act of 1986.

It is an accelerated method used for depreciating equipment.


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?


Remaining useful life

Revised SL depreciation

=

Cost – Accumulated depreciation

–

New residual value

÷

Revising Depreciation Rates


Objective 4

Account for the disposal

of a plant asset.


Disposing of Plant Assets

– selling– exchanging– discarding (scrapping it) Gain/loss is reported on the income

statement...– and closed to Income Summary.


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


($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


Assume the equipment is discarded on November 30.

What is the accumulated depreciation on November 30?



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


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


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


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


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


Objective 5

Account for natural resource

assets and depletion.


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


Objective 6

Account for intangibleassets and

amortization.


PatentsCopyrightsTrademarksFranchisesLeaseholdsGoodwill

Not physical in natureNot physical in nature

Intangible Assets


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?


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


Literary compositions (novels)Musical compositionsFilms (movies)SoftwareOther works of art

Intangible Assets: Copyrights


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


Intangible Assets: Franchises

Franchises are privileges granted by private business or government to sell a product or service.


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


International accounting for goodwillInternational accounting for goodwill

Research and developmentResearch and development

Capitalize or expense a costCapitalize or expense a cost

Special Issues


End of Chapter 10

Documents

10 - 1 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Accounting for Plant Assets, Intangible Assets, and Related