We think you have liked this presentation. If you wish to download it, please recommend it to your friends in any social system. Share buttons are a little bit lower. Thank you!
Presentation is loading. Please wait.
Published byAlexandro Revill
Modified over 2 years ago
Chapter 9 Long Term Operating Assets May 2010 ©Kimberly Lyons 1
Long Term Operating Assets Purchased, produced, or leased for long term use by the business May be tangible or intangible Capitalized cost may include any cost incurred to get the asset and get it ready for its intended use Purchase price, tax, title, license, delivery, installation, setup, testing, improvements, clearing, grading, landscaping, etc. May 2010©Kimberly Lyons 2
Tangible vs. Intangible Tangible long-term assets might include Property, plant, and equipment Buildings, equipment, machinery, furniture, etc. Land Land improvements Intangible long-term assets might include Patents Trademarks Copyrights Franchise agreements Customer lists Goodwill May 2010©Kimberly Lyons 3
Basket Purchase Putnam Company purchases Land, a building, and equipment for $500,000 cash. If the fair market values of the assets are: FMV Land$200,000 FMV Building 250,000 FMV Equipment 150,000 Total FMV$600,000 What amount will Putnam record for each of the assets? May 2010©Kimberly Lyons 4
Relative Fair Market Value The historical cost principle states that assets should be recorded at cost, which is value given in an exchange In this case the value given is $500,000 while the value received is $600,000 We will use the fair market values of the assets to help divide up the cost Land $200,000/$600,000 = 33% (rounded) Building $250,000/$600,000 = 42% (rounded) Equipment $150,000/$600,000 = 25% May 2010©Kimberly Lyons 5
Relative Fair Market Value Continued Use the percentage of each assets market value relative to total market value to divide up the cost: Land 33% x $500,000 = $165,000 Building42% x $500,000 = $210,000 Equipment25% x $500,000 = $125,000 Record the assets as follows: Land165,000 Building210,000 Equipment125,000 Cash500,000 May 2010©Kimberly Lyons 6
Leased Assets Leases are short-term rental agreements for use of property The lessor is the property owner The lessee uses the property in exchange for rent payments There are two types of lease accounting, depending on the nature of the contract Operating leases Capital leases May 2010©Kimberly Lyons 7
Operating Lease An operating lease is a simple rental agreement where the lessee makes rental payments to the lessor in exchange for use of the asset The only evidence of an operating lease is the payment Rent (lease) expenseXXX CashXXX May 2010©Kimberly Lyons 8
Capital Lease Certain rental agreements are more complex, or may be a purchase structured to look like a lease If the lease is non-cancellable and any one of the following four criteria is met, it will be treated as a capital lease 1.Title will transfer at the end of the lease term, or 2.The lease contains a bargain purchase option, or 3.The lease term 75% of the assets economic life, or 4.The present value of lease payments 90% of the assets fair market value May 2010©Kimberly Lyons 9
Capital Lease Example Dental Co. enters into a lease agreement with Drillers Inc. on 1/1/2009 for the use of special equipment. The lease is non-cancellable and calls for the equipment to be returned to the lessor at the end of the 5 year term. The equipment has a useful life of 6 years. The present value of lease payments is $100,000 and the fair market value of the equipment is $105,000. There is no bargain purchase option. Dental will make payments of $26,380 at the end of each year for five years. Is this an operating lease or a capital lease? May 2010©Kimberly Lyons 10
Capital Lease Continued Evaluate the terms of the lease It is non-cancellable and: Title transfer? No Bargain purchase option? No Lease life relative to asset life? 5/6 = 83% Yes Present value of lease payments to FMV? $100,000/$105,000 = 95% Yes This lease will be recorded as a capital lease May 2010©Kimberly Lyons 11
Capital Lease Continued At the inception of the lease on 1/1/2009 Dental will record the leased asset and related lease liability for an amount equal to the present value of lease payments 1/1Leased equipment100,000 Lease liability 100,000 May 2010©Kimberly Lyons 12
Capital Lease Continued The first payment of $26,380 is made on 12/31/2009, and it includes $10,000 of interest 12/31 Interest expense10,000 Lease liability16,380 Cash 26,380 Each payment will include interest at an amount equal to the interest rate x the outstanding liability The remainder of the payment goes toward reducing the liability May 2010©Kimberly Lyons 13
Depreciation The systematic allocation of an assets cost to expense over the assets useful life Methods include: Straight line (SL) Units of production (Units) Sum-of-the-years digits (SYD) Double declining balance (DDB) Modified Accelerated Cost Recovery (MACRS) May 2010©Kimberly Lyons 14
Straight Line Depreciation Straight line depreciation allocates an equal mount of depreciable cost to expense each period A machine is purchased at the beginning of the year at a cost of $100,000, has a useful life of 10 years or 1,000,000 units and an $8,000 salvage value at the end of its useful life Annual depreciation expense: (Cost – Salvage)/Useful life in years (100,000 – 8,000)/10 years = $9,200/year Record at December 31 st : 12/31 Depreciation expense9,200 Accumulated depreciation9,200 May 2010©Kimberly Lyons 15
Accumulated Depreciation Accumulated depreciation is a contra-asset Reported in the balance sheet net to the machine Machine$100,000 Less: Accumulated Depreciation (9,200) Net Book Value$ 90,800 As a balance sheet account, the balance of accumulated depreciation will carry over from period to period and accumulate As accumulated depreciation increases, the assets net book value decreases An asset cannot be depreciated below its salvage value or zero if there is no salvage May 2010©Kimberly Lyons 16
Units of Production A machine is purchased at the beginning of the year at a cost of $100,000, has a useful life of 10 years or 1,000,000 units and an $8,000 salvage value at the end of its useful life. It produces 110,000 units in year 1 and 106,000 units in year 2. Annual depreciation expense for the first two years (Cost – Salvage)/Useful life in units = Cost per unit Cost per unit x units produced = depreciation expense ($100,000 – 8,000)/1,000,000u = $0.092/unit Year 1: $0.092 x 110,000u = $10,120 depreciation expense Year 2: $0.092 x 106,000u = $9,752 depreciation expense May 2010©Kimberly Lyons 17
Sum-of-the-Years Digits A machine is purchased at the beginning of the year at a cost of $100,000, has a useful life of 10 years or 1,000,000 units and an $8,000 salvage value at the end of its useful life SYD is an accelerated depreciation method where depreciable cost is expensed at a rate of the declining useful life to the sum of the years digits Annual depreciation expense for the first two years (Cost – salvage) x (remaining life/SYD) SYD = 1+2+3+4+5+6+7+8+9+10 = 55 SYD = n(n+1)/2 = (10 x 11)/2 = 55 Year 1: ($100,000 – 8,000) x (10/55) = $16,727 Year 2: ($100,000 – 8,000) x (9/55) = $15,055 May 2010©Kimberly Lyons 18
Double Declining Balance This is the most accelerated method, depreciating Book value (the declining balance) at two times the straight- line rate Book value = Cost – accumulated depreciation As accumulated depreciation increases, book value decreases Salvage value is not incorporated in the initial calculation, that would reduce the depreciation expense May 2010©Kimberly Lyons 19
Double Declining Balance Continued A machine is purchased at the beginning of the year at a cost of $100,000, has a useful life of 10 years or 1,000,000 units and an $8,000 salvage value at the end of its useful life Annual depreciation expense for the first three years 2 x 1/SL x (cost – accumulated depreciation) Year 1: 2 x 1/10 ($100,000 – 0) = $20,000 Year 2: 2 x 1/10 ($100,000 – 20,000) = $16,000 Year 3: 2 x 1/10 ($100,000 – 36,000) = $12,800 Be careful not to depreciate below salvage This means total accumulated depreciation cannot exceed $92,000 May 2010©Kimberly Lyons 20
Recording Partial Years Depreciation The year of acquisition and disposal usually require partial years allocation Purchases and sales of long-term assets typically do not occur on January 1 All methods except units-of-production will require proration Units of production is based on production, not time Some companies apply a first and last year convention or assumption to simplify One half year in the first and last year regardless of the date of purchase A full year in the first year and none in the last regardless of the date of purchase Watch the dates May 2010©Kimberly Lyons 21
Asset Disposal Disposing of long-term assets for more (less) less than book value creates gains (losses) To record a disposal Depreciation must be recorded and up-to-date Remove the cost of the asset from the books Remove all related accumulated depreciation Record cash or assets received upon disposal Debit difference = loss Credit difference = gain If cash received = book value, no gain or loss May 2010©Kimberly Lyons 22
Asset Disposal Continued A machine is purchased at the beginning of the year at a cost of $100,000, has a useful life of 10 years or 1,000,000 units and an $8,000 salvage value at the end of its useful life After recording the third year of depreciation (straight-line) the asset is sold for $75,000 Accumulated depreciation (100,000 – 8,000)/10 x 3 = $27,600 Record the disposal Cash 75,000 Accumulated depreciation27,600 Machine100,000 Gain on sale 2,600 May 2010©Kimberly Lyons 23
Asset Impairment An impairment represents a decline in the value of a long-term asset The value of a long-term asset depends on the future cash flows (benefit) it will generate When an asset is considered impaired Future cash flows < book value The loss of value equals Fair market value – book value May 2010©Kimberly Lyons 24
Recording an Impairment Dalton Inc. has a piece of equipment with the following information Original cost$400,000 Accumulated depreciation$130,000 Expected future cash flows$200,000 Fair market value$190,000 Is the asset impaired? How much is the impairment? Record the impairment May 2010©Kimberly Lyons 25
Recording an Impairment Continued Is the asset impaired? Future cash flows < book value? $200,000 - $270,000 = (70,000) Yes How much is the impairment? Book value – fair market value $270,000 - $190,000 = $80,000 Loss Record the impairment Accumulated depreciation130,000 Loss on impairment 80,000 Equipment 210,000 May 2010©Kimberly Lyons 26
Recording an Impairment Continued Debiting accumulated depreciation removes it from the books Debiting the loss records it Crediting the asset for the difference between recorded cost and fair market value reduces recorded cost to fair market value If future estimates of cash flows show an increase in value, this increase is not recorded May 2010©Kimberly Lyons 27
Review for Exam Identify different categories of long-term assets Record a basket purchase Distinguish between an operating lease and a capital lease Record the journal entries for both types of lease Calculate and record depreciation using SL, Units, SYD, DDB Calculate book value Calculate a gain or loss on disposal and record the disposal Calculate and record an asset impairment May 2010©Kimberly Lyons 28
Financial and Managerial Accounting Wild, Shaw, and Chiappetta Fourth Edition Wild, Shaw, and Chiappetta Fourth Edition McGraw-Hill/Irwin Copyright © 2011.
McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 16 Recording and Evaluating Capital Resource Activities:
Investments in Property, Plant, and Equipment and in Intangible Assets Investments in Property, Plant, and Equipment and in Intangible Assets C H A P T.
Financial and Managerial Accounting John J. Wild Third Edition John J. Wild Third Edition McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies,
COPYRIGHT © 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license.
Financial Accounting John J. Wild Seventh Edition John J. Wild Seventh Edition Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction.
Financial and Managerial Accounting Wild, Shaw, and Chiappetta Fifth Edition Wild, Shaw, and Chiappetta Fifth Edition McGraw-Hill/Irwin Copyright © 2013.
© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Plant Assets, Natural Resources, and Intangibles Chapter 10.
Income Measurement and Profitablity Analysis
© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 9-1 PLANT AND INTANGIBLE ASSETS Chapter 9.
Partial Year Depreciation, Disposals, and Impairment Chapter 8 McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.
Chapter 11 Intangible Assets.
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Plant and Intangible Assets Chapter 9.
6-1 CHAPTER 6 Accounting for and Presentation of Property, Plant, and Equipment, and Other Noncurrent Assets McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies,
ACTG 2110 Chapter 10 – Fixed Assets and Intangible Assets.
Copyright 2003 Prentice Hall Publishing1 Chapter 5 Acquisitions: Purchase and Use of Business Assets.
McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-1 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights.
PLANT ASSETS, NATURAL RESOURCES, AND INTANGIBLE ASSETS
Financial Accounting Chapter 8. Property, Plant and Equipment and Intangibles.
Chapter 8 Long-Term Assets
Financial Accounting - BUS Spring 2015 Sessions Tangible & Intangible Assets.
Selling Goods and Services May 2010©Kimberly Lyons 1.
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Plant and Intangible Assets Chapter 9.
Financial Accounting, Seventh Edition
Review of the Accounting Process
Property, Plant, and Equipment, and Intangibles
Chapter 16: Depreciation
THERE ARE TWO TYPES OF LONG TERM ASSETS WE WILL LEARN ABOUT I. PLANT ASSETS II. INTANGIBLE ASSETS Long-Term Assets.
Accounting for Property, Plant Equipment, and Intangible Assets Chapter 17.
1 Module 6, Part 3: PPE (Property, Plant and Equipment) 1. Costs to Capitalize 2. Depreciation 3. Asset Sale or Impairment 4. Disclosure 5. Ratios.
Long-Lived Non-monetary Assets and
Chapter Objectives Be able to: n Explain how the standardized system for depreciable property works including the declining balance method and pooling.
11 Property, Plant, and Equipment and Intangible Assets: Utilization and Impairment Chapter 11: Property, Plant, and Equipment and Intangible Assets:
Valuation and Reporting of Fixed and Intangible Assets Chapter 7.
1 Chapter 6: Reporting & Analyzing Operating Assets Part 3: Property, Plant & Equipment.
Chapter Six Accounting for Long-Term Operational Assets © 2015 McGraw-Hill Education.
Accounting for Depreciation
© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide Reporting and Analyzing Long-Term Assets.
1 Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Chapter 8 Operating Assets: Property, Plant, and Equipment, Natural Resources,
C Learning Objectives Power Notes 1.Nature of Fixed Assets 2.Accounting for Depreciation 3.Capital and Revenue Expenditures 4.Disposal of Fixed Assets.
1 Chapter 8 Operating Assets: Property, Plant, and Equipment, Natural Resources, and Intangibles Financial Accounting, Alternate 4e by Porter and Norton.
COPYRIGHT © 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license.
Property, Plant, and Equipment
1 Chapter 10 Long-term Assets: Property, Plant, and Equipment, Natural Resources, and Intangibles Adapted from Financial Accounting 4e by Porter and Norton.
Reporting and Interpreting Property, Plant and Equipment; Natural Resources; and Intangibles Chapter 8 McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies,
© The McGraw-Hill Companies, Inc., 2002 Slide 11-1 McGraw-Hill/Irwin 11 Plant Assets, Natural Resources, and Intangibles.
© 2017 SlidePlayer.com Inc. All rights reserved.