Previous Lecture The Principle of Consistency Just-In-Time (JIT) Inventory Systems Taking a Physical Inventory LCM and Other Write-Downs of Inventory Goods

Previous Lecture

• The Principle of Consistency• Just-In-Time (JIT) Inventory Systems• Taking a Physical Inventory• LCM and Other Write-Downs of Inventory• Goods In Transit• Periodic Inventory Systems• valuation methods in a periodic inventory

system.1

Previous Lecture

1. Specific Identification2. Average-Cost Method3. First-In, First-Out Method (FIFO)4. Last-In, First-Out Method (LIFO)• The Gross Profit Method• Inventory Turnover Rate• Accounting Methods Can Affect Analytical

Ratios2

PLANT AND INTANGIBLE ASSETS

Chapter

9

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Pakistan Cargo Services

What kind of plant and intangible assets would you expect Pakistan Cargo Services (PCS) to have? Probably the first thing you would think of is vehicles, truck, because you may used to seeing PCS trucks on the street and highways virtually every day.

Pakistan Cargo Services has a very large investment in aircraft along with significant investment on property, plant, and equipment

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Pakistan Cargo Services

Plant assets are very important for a company such as Pakistan Cargo Services to be successful in its daily operations. But it is depend upon the nature of company and volume of operation.

In addition, some companies required certain intangible assets to do business. It is rights & privileges that have been developed or acquired, such as trade names & patents; these may be as important to a business as its equipment, building & land.

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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 Assets

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L an d , b u ild in g s ,eq u ip m en t,

fu rn itu re , fixtu res .

L on g -te rmasse ts h avin g

p h ys ica l su b s tan ce .

Tangible PlantAssets

P aten ts , cop yrig h ts ,trad em arks ,

fran ch ises , g ood w ill.

N on cu rren t asse tsw ith n o p h ys ica l

su b s tan ce .

IntangibleAssets

O il reserves ,t im b er, o th er

m in era ls .

S ites acq u ired fo rextrac tin g va lu ab le

resou rces .

NaturalResources

Major Categories of Plant Assets

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Accountable Events

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.

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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 Assets

+

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Determining Cost

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.

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Prepare the journal entry.

Determining Cost

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Improvements to land such as driveways,

fences, and landscaping are recorded separately.

Improvements to land such as driveways,

fences, and landscaping are recorded separately.

Cost includes real estate commissions, escrow

fees, legal fees, clearing and grading the property.

Cost includes real estate commissions, escrow

fees, legal fees, clearing and grading the property.

Land Improvements

Land Improvements

LandLand

Special Considerations

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Repairs made prior to the building being put in use are considered part of the

building’s cost.

Repairs made prior to the building being put in use are considered part of the

building’s cost.

BuildingsBuildings


EquipmentEquipment

Related interest, insurance, and property

taxes are treated as expenses of the current

period.

Related interest, insurance, and property

taxes are treated as expenses of the current

period.13

I think I’ll buy the whole thing; barn, land, and animals.


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

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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

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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

Depreciation

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Depreciation

Book Value– Cost – Accumulated Depreciation

Accumulated Depreciation– Contra-asset– Represents the portion of an asset’s

cost that has already been 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 already been allocated to expense.

Causes of Depreciation– Physical deterioration– Obsolescence

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Cost - Residual Value

Years of Useful Life

Depreciation

Expense per Year=

Straight-Line Depreciation

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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.


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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


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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 Periods

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Half-Year Convention

Using the half-year convention, calculate the straight-line depreciation on December 31,

2001, 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 = $3,50022

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 Method

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



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


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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.

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Financial Statement Disclosures

• 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.

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So depreciationis an estimate.

So depreciationis an estimate.

Predicted salvage value

Predicted salvage value

Predicteduseful life

Predicteduseful life

Revising Depreciation Rates

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.

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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.

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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$

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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 Assets

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Update depreciation to the date of disposal.

Update depreciation to the date of disposal.

Recording cashreceived (debit)or paid (credit).


Removing accumulateddepreciation (debit).


Removing the asset cost (credit).


Recording again (credit)

or loss (debit).


or loss (debit).

Disposal of Plant and Equipment

Journalize disposal by: Journalize disposal by:

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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.








or loss (debit).


or loss (debit).


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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.


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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


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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$


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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$


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End of Todays Session

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Documents

Previous Lecture The Principle of Consistency Just-In-Time (JIT) Inventory Systems Taking a Physical Inventory LCM and Other Write-Downs of Inventory Goods