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11-1 & I NTANGIBLE A SSETS N ATURAL R ESOURCES, P LANT A SSET D ISPOSALS, Patent CHAPTER 11.

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Presentation on theme: "11-1 & I NTANGIBLE A SSETS N ATURAL R ESOURCES, P LANT A SSET D ISPOSALS, Patent CHAPTER 11."— Presentation transcript:

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2 11-1 & I NTANGIBLE A SSETS N ATURAL R ESOURCES, P LANT A SSET D ISPOSALS, Patent CHAPTER 11.

3 11-2 Disposal of Plant Assets Plant assets (except land) eventually become inadequate or obsolete and must be sold, retired (junked) or exchanged for new assets.

4 11-3 Disposal of Plant Assets General Procedure* Record the asset depreciation up to date of sale Record the disposal by credit u Writing off asset cost (credit) debit u Writing off Accumulated Depreciation (debit) debit u Record any cash, received (debit) creditdebit u Record gain (credit) or loss (debit) Record the asset depreciation up to date of sale Record the disposal by credit u Writing off asset cost (credit) debit u Writing off Accumulated Depreciation (debit) debit u Record any cash, received (debit) creditdebit u Record gain (credit) or loss (debit) * * No matter which way disposed

5 11-4 Steps in Sale of Plant Assets ÊUpdate depreciation to the date of sale ËDetermine the current book value (BV) of the asset being sold Remember: Book value equals acquisition cost less accumulated depreciation

6 11-5 ÌDetermine if there is a gain or loss by comparing cash received for the asset with the assets book value If Cash > BV, record a gain (credit) If Cash < BV, record a loss (debit) If Cash = BV, no gain or loss Steps in Sale of Plant Assets

7 11-6 Steps in Sale of Plant Assets ÍPrepare journal entry to record the sale Debit Cash received Debit Accumulated Depreciation Credit Asset for original cost (i.e., a PLUG) Record gain (credit) or loss (debit) (i.e., a PLUG)

8 11-7 Sale of Plant Assets Example BV = cost - accumulated depreciation BV = $100,000 - $46,000 BV = $54,000 On September 30, 1999, Evans Company sold a machine that originally cost $100,000 for $60,000 cash. Accumulated depreciation taken on the machine was $46,000.

9 11-8 Gain = excess of cash received over book value of asset sold Gain = $60,000 - $54,000 = $6,000 On September 30, 1999, Evans Company sold a machine that originally cost $100,000 for $60,000 cash. Accumulated depreciation taken on the machine was $46,000. Sale of Plant Assets Example

10 11-9 Prepare the journal entry to record Evans sale of the machine on September 30, 1999 assuming that depreciation has already been recorded to that date. Sale of Plant Assets Example

11 11-10 GENERAL JOURNAL Page: 1 DateDescriptionPRDebitCredit 9/30Cash60,000 Accumulated Depreciation46,000 Gain on Sale6,000 Machine100,000 To record sale of machine Sale of Plant Assets Example

12 11-11 GENERAL JOURNAL Page: 1 DateDescriptionPRDebitCredit 9/30Cash60,000 Accumulated Depreciation46,000 Gain on Sale6,000 Machine100,000 To record sale of machine Sale of Plant Assets Example Plug!

13 11-12 Plant Asset Retirement (i.e., Junked) No sale, so no cash received. Use same procedure as for a sale Ê Update depreciation to date of sale Ë Determine current book value Ì Determine loss, if any Í Prepare journal entry Use same procedure as for a sale Ê Update depreciation to date of sale Ë Determine current book value Ì Determine loss, if any Í Prepare journal entry

14 11-13 retired Now assume the Evans Company retired the machine on September 30, All information is the same except the asset is retired with no cash received. Plant Asset Retirement Example

15 11-14 retired Now assume the Evans Company retired the machine on September 30, All information is the same except the asset is retired with no cash received. Loss = Cash Received - Book Value Loss = 0 - $54,000 Loss = $54,000 Plant Asset Retirement Example

16 11-15 GENERAL JOURNAL Page: 1 DateDescriptionPRDebitCredit 9/30Accumulated Depreciation46,000 Loss on Retirement54,000 Machine100,000 To record machine retirement Plant Asset Retirement Example

17 11-16 Accounting depends on whether assets are similar or dissimilar. Plant Asset Exchanges Airplane for Airplane Truck for Airplane

18 11-17 Key to Recording These Exchanges Compute gain or loss by comparing book value of asset given up with the fair value of asset given up. Fair value is frequently determined by the trade-in allowance received for old asset. Plant Asset Exchanges

19 11-18 Only situations where cash is paid will be demonstrated Plant Asset Exchanges General Procedure Only recognize if assets are dissimilar If gainIf loss Always recognize losses regardless of whether assets are similar or dissimilar

20 11-19 ÊUpdate depreciation fair value ËCompute gain or loss by comparing book value of asset given up with the fair value of asset given up ÌPrepare journal entry to record the transaction Plant Asset Exchanges General Procedure

21 11-20 Plant Asset Exchanges Dissimilar Assets First lets look at exchanges of dissimilar assets. Gains and losses are always recognized when the exchange involves dissimilar assets. DISSIMILAR

22 11-21 On April 30, 1998, Essex Company exchanged a used airplane and $25,000 for a new lift truck worth $31,000. The airplane originally cost $50,000, had up-to-date accumulated depreciation of $40,000, and a fair value of $6,000. Dissimilar Assets Example #1 DISSIMILAR

23 11-22 The exchange resulted in a: a.Loss of $10,000. b.Loss of $6,000. c.Loss of $4,000. d. Loss of $2,000. The exchange resulted in a: a.Loss of $10,000. b.Loss of $6,000. c.Loss of $4,000. d. Loss of $2,000. Dissimilar Assets Question

24 11-23 The exchange resulted in a: a.Loss of $10,000. b.Loss of $6,000. c.Loss of $4,000. d. Loss of $2,000. The exchange resulted in a: a.Loss of $10,000. b.Loss of $6,000. c.Loss of $4,000. d. Loss of $2,000. Dissimilar Assets Question Prepare the journal entry to record the exchange.

25 11-24 GENERAL JOURNAL Page: 1 DateDescriptionPRDebitCredit 4/30Lift Truck31,000 Accumulated Depreciation40,000 Loss on Exchange4,000 Airplane50,000 Cash25,000 To record exchange of airplane for lift truck Dissimilar Assets Example #1 Plug Note that the debit to the new asset, lift truck, for $31,000 was a plug figure in the entry.

26 11-25 Dissimilar Assets Lets look at an exchange of dissimilar assets that results in a gain.

27 11-26 On June 1, 1998, Rogers Company exchanged equipment and $30,000 for land worth $130,000. The equipment originally cost $200,000, had up-to-date accumulated depreciation of $120,000, and a fair value of $100,000. Dissimilar Assets Example #2 DISSIMILAR

28 11-27 The exchange resulted in a gain of: a.$10,000. b.$20,000. c.$30,000. d. $40,000. The exchange resulted in a gain of: a.$10,000. b.$20,000. c.$30,000. d. $40,000. Dissimilar Assets Question

29 11-28 The exchange resulted in a gain of: a.$10,000. b.$20,000. c.$30,000. d. $40,000. The exchange resulted in a gain of: a.$10,000. b.$20,000. c.$30,000. d. $40,000. Dissimilar Assets Question Prepare a journal entry to record the exchange.

30 11-29 GENERAL JOURNAL Page: 1 DateDescriptionPRDebitCredit 6/1Land130,000 Accumulated Depreciation120,000 Gain on Exchange20,000 Equipment200,000 Cash30,000 To record exchange of equipment for land. Dissimilar Assets Example #2 Plug

31 11-30 Now lets look at exchanges of similar assets. Remember that when the exchange involves similar assets, losses are always recognized, but gains are never recognized. SIMILAR Plant Asset Exchanges Similar Assets

32 11-31 On May 30, 1998, Huge Company exchanged a used airplane and $35,000 cash for a new airplane worth $39,000. The old airplane originally cost $40,000, had up-to-date accumulated depreciation of $30,000, and a fair value of $4,000. Similar Assets Example #1 SIMILAR

33 11-32 The exchange resulted in a: a.Loss of $10,000. b.Loss of $6,000. c.Loss of $4,000. d. Loss of $2,000. The exchange resulted in a: a.Loss of $10,000. b.Loss of $6,000. c.Loss of $4,000. d. Loss of $2,000. Similar Assets Question

34 11-33 The exchange resulted in a: a.Loss of $10,000. b.Loss of $6,000. c.Loss of $4,000. d. Loss of $2,000. The exchange resulted in a: a.Loss of $10,000. b.Loss of $6,000. c.Loss of $4,000. d. Loss of $2,000. Similar Assets Question Prepare a journal entry to record the exchange.

35 11-34 Similar Assets Example #1 GENERAL JOURNAL Page: 1 DateDescriptionPRDebitCredit 5/30New Airplane39,000 Accumulated Depreciation30,000 Loss on Exchange6,000 Old Airplane40,000 Cash35,000 To record exchange of airplanes The Rule: The new airplane is recorded at the fair value of the old airplane plus the cash paid, just like an exchange of dissimilar assets.

36 11-35 GENERAL JOURNAL Page: 1 DateDescriptionPRDebitCredit 5/30New Airplane39,000 Accumulated Depreciation30,000 Loss on Exchange6,000 Old Airplane40,000 Cash35,000 To record exchange of airplanes Similar Assets Example #1 Plug The Rule: The new airplane is recorded at the fair value of the old airplane plus the cash paid, just like an exchange of dissimilar assets. Rice says: Forget the rule and plug it!

37 11-36 Lets change the example so that a gain is indicated. The assets are still similar. Similar Assets Example SIMILAR

38 11-37 On July 31, 1998, SimCo exchanged a used airplane and $100,000 cash for a new airplane. The old airplane originally cost $4,000,000, had up-to-date accumulated depreciation of $3,000,000, and a fair value of $1,400,000. Similar Assets Example #2 SIMILAR

39 11-38 The exchange indicates a gain of: a.$ 400,000. b.$1,400,000. c.$1,000,000. d. $2,600,000. The exchange indicates a gain of: a.$ 400,000. b.$1,400,000. c.$1,000,000. d. $2,600,000. Similar Assets Question

40 11-39 The exchange indicates a gain of: a.$ 400,000. b.$1,400,000. c.$1,000,000. d. $2,600,000. The exchange indicates a gain of: a.$ 400,000. b.$1,400,000. c.$1,000,000. d. $2,600,000. Cost4,000,000$ Accum. Depr.3,000,000 Book Value1,000,000 Fair Value1,400,000 Indicated Gain400,000$ Prepare a journal entry to record the exchange. Similar Assets Question

41 11-40 GENERAL JOURNAL Page: 1 DateDescriptionPRDebitCredit 7/31New Airplane1,100,000 Accumulated Depreciation3,000,000 Old Airplane4,000,000 Cash100,000 To record exchange of airplanes Similar Assets Example #2 The Rule Book value of old asset + cash paid $1,000,000 + $100,000 = $1,100,000

42 11-41 GENERAL JOURNAL Page: 1 DateDescriptionPRDebitCredit 7/31New Airplane1,100,000 Accumulated Depreciation3,000,000 Old Airplane4,000,000 Cash100,000 To record exchange of airplanes Similar Assets Example #2 Remember, gains are not recognized when similar assets are exchanged. PLUG IT!

43 11-42 Dissimilar AssetsSimilar Assets Recognize Gains? YesNo Recognize Losses Yes Plant Asset Exchanges Summary

44 11-43 Lets change the subject!

45 11-44 Natural Resources Examples: oil, coal, gold Extracted from the natural environment A noncurrent asset presented at cost less accumulated depletion

46 11-45 Natural Resources Depletion is like depreciation Total cost of asset is the cost of acquisition, exploration, and development Total cost is allocated over periods benefited by means of depletion

47 11-46 Lets change the subject again!

48 11-47 Intangible Assets Non-current assets without physical substance Useful life is often difficult to determine Often provide exclusive rights or privileges to use the asset Intangible Assets

49 11-48 l Patents l Copyrights l Franchises l Trademarks l Leaseholds l Leasehold improvements l Goodwill Intangible Assets Examples

50 11-49 Intangible Assets Accounting Procedures l Cost is allocated over the period the asset is expected to produce revenue using a process called amortization l Amortize cost over u economic life u legal life or u 40 years... whichever is shorter Why? Because FASB said so! l Use straight-line method Record cost at current cash equivalent, including purchase price, legal fees, and filing fees.

51 11-50 Intangible Assets Patents Exclusive right granted by federal government to sell or manufacture invention Cost is purchase price plus any legal cost to defend Legal life is 17 years Research and Development costs to develop a patent are expensed as cost is incurred.

52 11-51 Intangible Assets Copyrights Exclusive right granted by the federal government to protect artistic or intellectual properties Legal life is life of creator plus 50 years

53 11-52 Right to sell products or provide services purchased by franchisee from franchisor Purchase price is intangible asset which is amortized over shorter of legal life, economic life, or 40 years Intangible Assets Franchises

54 11-53 A symbol, design, or logo associated with a business If purchased, trademarks are recorded at cost, and amortized over shorter of legal or economic life, or 40 years If internally developed, trademarks have no recorded asset cost Intangible Assets Trademarks

55 11-54 Intangible Assets Leases l A contract to rent property. Right to use is granted by lessor to lessee. l Two types of leases u Capital leases u Operating leases

56 11-55 l A means of financing acquisition of property u Lessor transfers ownership to lessee at end of lease l However, lessee records leased property from the beginning as if it were purchased, ignoring the legal reality. Intangible Assets Capital Leases

57 11-56 l If a lease does not qualify as capital lease, it is an operating lease. l Common rental agreements are normally operating leases. u Rent expense is normally recorded as incurred. u However, if there is a prepayment at the start of the lease, it is accounted for as long-term prepaid rent in an intangible asset account called leasehold. Intangible Assets Operating Leases

58 11-57 Intangible Assets Leasehold Improvements Long-lived alterations made by lessee to leased property Leasehold improvements are amortized over the shorter of the life of the improvement or the life of the lease.

59 11-58 Occurs when one company buys the assets and assumes the liabilities of another company Only purchased goodwill is recorded as an asset Goodwill is the amount by which cost exceeds the fair market value of net assets acquired Goodwill = Cost - (FMV of net assets acquired) Net assets = assets - liabilities Synergism Goodwill is the amount by which cost exceeds the fair market value of net assets acquired Goodwill = Cost - (FMV of net assets acquired) Net assets = assets - liabilities Synergism Intangible Assets Goodwill

60 11-59 Intangible Assets Goodwill Example Eddy Company paid $1,000,000 to purchase all of James Companys assets and assumed James Company liabilities of $200,000. James Companys assets were appraised at a fair value of $900,000.

61 11-60 What amount of goodwill should be recorded on Eddy Company books? a.$100,000 b.$200,000 c.$300,000 d.$400,000 What amount of goodwill should be recorded on Eddy Company books? a.$100,000 b.$200,000 c.$300,000 d.$400,000 Goodwill Question

62 11-61 What amount of goodwill should be recorded on Eddy Company books? a.$100,000 b.$200,000 c.$300,000 d.$400,000 What amount of goodwill should be recorded on Eddy Company books? a.$100,000 b.$200,000 c.$300,000 d.$400,000 FMV of Assets900,000$ Debt Assumed200,000 FMV of Net Assets700,000$ Purchase Price1,000,000 Goodwill300,000$ Goodwill Question

63 11-62 THE END THIS CHAPTER HAS BEEN A MOUNTAIN-TOP EXPERIENCE, BUT IM GLAD ITS FINISHED!


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