Reporting and InterpretingReporting and InterpretingProperty, Plant and Equipment; Natural Property, Plant and Equipment; Natural

Resources; and IntangiblesResources; and Intangibles

Chapter 8

McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.

Slide 2McGraw-Hill/Irwin

Measuring and Recording Acquisition Cost

Acquisition cost includes the purchase price and all expenditures needed to prepare the asset for its intended use.

Acquisition cost does not includefinancing charges and cash discounts.

Acquisition cost includes the purchase price and all expenditures needed to prepare the asset for its intended use.

Acquisition cost does not includefinancing charges and cash discounts.

Buildings• Purchase price• Renovation and repair costs• Legal and realty fees• Title fees

Buildings• Purchase price• Renovation and repair costs• Legal and realty fees• Title fees

Slide 3McGraw-Hill/Irwin

Measuring and Recording Acquisition Cost

Equipment

• Purchase price

• Installation costs

• Modification to buildingnecessary to install equipment

• Transportation costs

Equipment

• Purchase price

• Installation costs

• Modification to buildingnecessary to install equipment

• Transportation costs

Land

• Purchase price

• Real estate commissions

• Title insurance premiums

• Delinquent taxes

• Surveying fees

• Title search and transfer fees

Land

• Purchase price

• Real estate commissions

• Title insurance premiums

• Delinquent taxes

• Surveying fees

• Title search and transfer fees

Land is not depreciable.Land is not depreciable.

Slide 4McGraw-Hill/Irwin

Acquisition by Construction

Asset cost includes:Asset cost includes:

All materials andlabor traceable tothe construction.

A reasonableamount ofoverhead.

Interest on debtincurred during

the construction.

Slide 5McGraw-Hill/Irwin

Repairs, Maintenance, and Additions

Type of Capital orExpenditure Revenue Identifying Characteristics

Ordinary Revenue 1. Maintains normal operating conditionrepairs and 2. Does not increase productivity

maintenance 3. Does not extend life beyond original estimate

Extraordinary Capital 1. Major overhauls or partialrepairs replacements

2. Extends life beyond original estimate

Additions Capital 1. Increases productivity2. May extend useful life3. Improvements or expansions

Slide 6McGraw-Hill/Irwin

Depreciation is a cost allocation process that systematically and rationally matches acquisition costs

of operational assets with periods benefited by their use.

Depreciation is a cost allocation process that systematically and rationally matches acquisition costs

of operational assets with periods benefited by their use.

Cost

Allocation(Unused)

Balance Sheet

(Used)

Income Statement

Expense

Depreciation Concepts

AcquisitionCost

DepreciationExpense

IncomeStatement

BalanceSheet

AccumulatedDepreciation

Depreciation for

the current year

Total of depreciation

to date on an asset

Slide 7McGraw-Hill/Irwin

Depreciation Concepts

The calculation of depreciation requiresthree amounts for each asset: Acquisition cost. Estimated useful life. Estimated residual value.

The calculation of depreciation requiresthree amounts for each asset: Acquisition cost. Estimated useful life. Estimated residual value.

Alternative depreciation methods: Straight-line Units-of-production Accelerated Method: Declining balance

Alternative depreciation methods: Straight-line Units-of-production Accelerated Method: Declining balance

Slide 8McGraw-Hill/Irwin

Measuring Asset ImpairmentImpairment is the loss of a significant portion

of the utility of an asset through . . .• Casualty.• Obsolescence.• Lack of demand for the asset’s services.

Recognize aloss whenan assetsuffers a

permanentimpairment.

Disposal of Property, Plant and EquipmentVoluntary disposals:

• Sale• Trade-in• Retirement

Involuntary disposals:• Fire • Accident

Disposal of Property, Plant and EquipmentVoluntary disposals:

• Sale• Trade-in• Retirement

Involuntary disposals:• Fire • Accident

Slide 9McGraw-Hill/Irwin

Disposal of Property, Plant, and Equipment

Journalize disposal by:

Writing off accumulateddepreciation (debit).

Writing off the asset cost (credit).

Recording cashreceived (debit)or paid (credit).

Recording again (credit)

or loss (debit).

Update depreciation to the date of disposal.

Slide 10McGraw-Hill/Irwin

Acquisition and Depletion of Natural Resources

Examples: oil, coal, gold

Extracted fromthe natural

environment.

A noncurrentasset presented

at cost lessaccumulated

depletion.Total cost of

asset is the costof acquisition, exploration,

and development.

Total cost isallocated over

periods benefitedby means of

depletion.

Depletion is like units-of-production depreciation.

Slide 11McGraw-Hill/Irwin

Acquisition and Amortization of Intangible Assets

Noncurrent assetswithout physical

substance.

Noncurrent assetswithout physical

substance.

Useful life isoften difficultto determine.

Useful life isoften difficultto determine.

Usually acquired for operational

use.

Usually acquired for operational

use.

Often provideexclusive rights

or privileges.

Often provideexclusive rights

or privileges.Intangible

Assets

Record at current cash equivalent cost, including purchase price, legal fees, and filing fees.

Slide 12McGraw-Hill/Irwin

Occurs when onecompany buys

another company.

The amount by which the purchase price exceedsthe fair market value of net assets acquired.

Only purchased goodwill is an

intangible asset.

Goodwill

Acquisition and Amortization of Intangible Assets

Goodwill is not amortized. Its value must be reviewedat least annually for possible impairment, and the

book value is reduced to fair value if impaired.

Goodwill is not amortized. Its value must be reviewedat least annually for possible impairment, and the

book value is reduced to fair value if impaired.

Slide 13McGraw-Hill/Irwin

Trademarks

• A symbol, design, orlogo associated witha business.

• An exclusive legal rightto use a name, imageor slogan.

• Purchased trademarksare recorded at cost.

Trademarks

• A symbol, design, orlogo associated witha business.

• An exclusive legal rightto use a name, imageor slogan.

• Purchased trademarksare recorded at cost.

Acquisition and Amortization of Intangible Assets

Copyrights

• The exclusive right to publish, use, and sell a literary, musical, or artistic work.

• Legal life is life of creator plus 70 years.

• Amortize cost over the period benefited.

Copyrights

• The exclusive right to publish, use, and sell a literary, musical, or artistic work.

• Legal life is life of creator plus 70 years.

• Amortize cost over the period benefited.

Slide 14McGraw-Hill/Irwin

Acquisition and Amortization of Intangible Assets

Patents

• Exclusive right granted by the federal government to sell or manufacture an invention.

• Cost is purchase price plus legal cost to defend.

• Amortize cost over the shorter of useful life or 20 years.

• Research and development costs that might result in a patent are normally expensed as incurred.

Patents

• Exclusive right granted by the federal government to sell or manufacture an invention.

• Cost is purchase price plus legal cost to defend.

• Amortize cost over the shorter of useful life or 20 years.

• Research and development costs that might result in a patent are normally expensed as incurred.

Technology

• A category of intangible assets that includes a company’s website and any computer programs written by its employees.

Technology

• A category of intangible assets that includes a company’s website and any computer programs written by its employees.

Slide 15McGraw-Hill/Irwin

Franchises

• Legally protected right purchased by a franchisee to sell products or provide services for a specified period and purpose.

• Purchase price is an intangible asset that is amortized.

Franchises

• Legally protected right purchased by a franchisee to sell products or provide services for a specified period and purpose.

• Purchase price is an intangible asset that is amortized.

Acquisition and Amortization of Intangible AssetsLicenses and Operating

Rights

• Limited permissions to use a product or service according to specific terms and conditions.

• You may be using computer software that is made available to you through a campus licensing agreement.

Licenses and Operating Rights

• Limited permissions to use a product or service according to specific terms and conditions.

• You may be using computer software that is made available to you through a campus licensing agreement.

Slide 16McGraw-Hill/Irwin

Focus on Cash Flows

© 2009 The McGraw-Hill Companies, Inc.

End of Chapter 8