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Plant Assets, Natural Resources, and Intangibles Chapter 9 Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall9-1.

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Presentation on theme: "Plant Assets, Natural Resources, and Intangibles Chapter 9 Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall9-1."— Presentation transcript:

1 Plant Assets, Natural Resources, and Intangibles Chapter 9 Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall9-1

2 What Are Plant Assets? Long-lived, tangible assets used in the operation of the business. Land Buildings Equipment Furniture Automobiles Cost Principle The actual cost of a plant asset is its purchase price plus all the costs necessary to get the asset ready for its intended use. 9-2

3 The Cost of Land Land is not depreciable. Includes: Purchase price Brokerage commissions Survey and legal fees Delinquent property taxes Title transfer fees Cost of clearing the land Cost of removing old buildings 9-3

4 The Cost of Land These costs are referred to as Land Improvements. Land Improvements ARE depreciated. Does Not Include: Fencing Paving Sprinkler systems Lighting Signs 9-4

5 The Cost of Land Smart Touch Learning purchases land on August 1, 2015, for $50,000 with a note payable. Other costs related to this transaction include $4,000 in delinquent property taxes, $2,000 in transfer taxes, $5,000 to remove an old building, and a $1,000 survey fee. The additional costs are paid in cash. What is the cost of the land on Smart Touch Learning’s books? 9-5

6 The Cost of Land 9-6

7 The Cost of Land Prepare the journal entry to record the purchase of the land. 9-7

8 The Cost of Buildings When a Building is constructed, the costs include: –Site excavation –Building permits –Contractor charges –Materials –Labor 9-8

9 The Cost of Buildings When a Building is purchased, the costs include: –Purchase Price –Brokerage fees –Renovation Costs 9-9

10 The Cost of Machinery and Equipment and Furniture and Fixtures The costs include: 9-10 Purchase Price Transportation Charges Insurance during transit Sales Taxes Purchase commission Installation costs Testing cost prior to use of asset

11 Lump-Sum Purchases Purchasing several assets for a single price. –Sometimes called a “basket purchase” Each asset must be recorded separately. Allocate total cost to each asset based on relative market value. On August 1, Smart Touch Learning purchased land and building with a $100,000 note. The land is appraised at $30,000 and the building is appraised at $90,

12 Lump-Sum Purchases 9-12

13 Lump-Sum Purchases Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall9-13

14 What Is Depreciation? Plant assets are recorded as assets when purchased. Depreciation is the process of allocating an asset’s cost to expense over its useful life. To record depreciation, we debit Depreciation Expense and credit Accumulated Depreciation (a contra- asset) Land is not depreciable.

15 The Depreciation computation requires three main factors: The estimated expected use from an asset. Total amount of cost to be allocated. The estimated value of the asset at the end of its useful life. Capitalized Cost Estimated useful life Estimated residual value Factors in Computing Depreciation 9-15

16 Smart Touch Learning purchases a truck on January 1, 2014 Depreciation Methods There are three common depreciation methods: Straight-Line Units-of- Production Declining- Balance There are three common depreciation methods: Straight-Line Units-of- Production Declining- Balance 9-16

17 Depreciation Methods 17 Straight- line Units-of production Declining- balance Equal amounts per period Different amounts; based upon usage Decreasing amount over time as it ages

18 Straight-Line Method The most widely used and most easily understood method. Results in the same amount of depreciation in each year of the asset’s service life. 9-18

19 Straight-Line Method 9-19

20 Net Book Value The carrying value of an asset as it depreciates Calculated as: Cost – Accumulated depreciation As an asset is used –Accumulated depreciation increases –Net book value decreases 20

21 Units-of-Production Method Depreciation is a function of how much an asset is USED, rather than its age. Less predictable than other methods Smart Touch Learning purchases a truck on January 1, 2014

22 Units-of-Production Method Assuming Smart Touch Learning drives the truck 20,000 miles in the first year, how much depreciation should be recorded? 9-22

23 Units-of-Production Method Assuming Smart Touch Learning drives the truck 20,000 miles in the first year, how much depreciation should be recorded? 9-23

24 Depreciation amount changes per year 24

25 Double-Declining Balance Method An accelerated method. More depreciation early in an asset’s life. Total depreciation the same over the asset’s full life Smart Touch Learning purchases a truck on January 1, 2014

26 Double-Declining Balance Method Multiply an asset’s declining book value by twice the straight-line depreciation rate %

27 Double-Declining Balance Method Multiply an asset’s declining book value by twice the straight-line depreciation rate. Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall9-27

28 Double-Declining-Balance Method 28 2 times straight line rate Book value declines Book value becomes period’s depreciable cost Depreciation expense declines Final year’s expense leaves book value equal to residual value, no lower

29 Comparing Depreciation Methods 29 Cost = $41,000 Life = 5 years or 100,000 units Residual value = $1,000

30 Accounting for Partial-Year Depreciation Only for methods using months –Straight-line –Double-declining balance 30 Period of time used changes the formula for time

31 Issues in Accounting for Plant Assets Changes in Useful Life –The asset’s remaining depreciable book value is spread over the asset’s remaining life –Truck has been used for 2 years, and we think it will last for 6 more years making useful life 8 years Change in residual value The asset’s remaining depreciable book value is spread over the asset’s remaining life 31

32 Fully Depreciated Assets Asset has reached the end of its estimated life If still useful, a company will continue to use it Report book value on balance sheet Record no more depreciation Asset never reported below residual value 32

33 Discarding Plant Assets When an asset is disposed, sold, or retired, it must be removed from the books. All related Accumulated Depreciation must also be removed from the books. Gains/Losses on disposal are recorded. STEPS Bring depreciation up to date. Remove original cost of asset and accumulated depreciation from the books. Record any cash received. Record the difference between book value and the cash received as a gain or loss. 9-33

34 Discarding Plant Assets Example #1 On July 1, Smart Touch Learning discards equipment that cost $10,000. The accumulated depreciation on the asset is $10,

35 Discarding Plant Assets Example #2 On July 1, Smart Touch Learning discards equipment that cost $10,000. As of December 31 the previous year, the accumulated depreciation on the asset was $8,000. Annual depreciation per year is $1, First, we have to update the depreciation.

36 Discarding Plant Assets Example #2 On July 1, Smart Touch Learning discards equipment that cost $10,000. As of December 31 the previous year, the accumulated depreciation on the asset was $8,000. Annual depreciation per year is $1, Second, record the disposal.

37 Discarding Plant Assets Example #3 On July 1, Smart Touch Learning sells equipment for $4,000. The equipment cost $10,000. As of December 31 the previous year, the accumulated depreciation on the asset was $8,000. Annual depreciation per year is $1,000. Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall9-37 First, update depreciation.

38 Discarding Plant Assets Example #3 On July 1, Smart Touch Learning sells equipment for $4,000. The equipment cost $10,000. As of December 31 the previous year, the accumulated depreciation on the asset was $8,000. Annual depreciation per year is $1, Second, record the sale.

39 Discarding Plant Assets When sold for cash(no exchange for new asset) Cash received = Book Value (no gain or loss) –Cash received $1,500 (Cash received = BV $1,500) Cash received > Book Value (gain) –Cash Received $2,000 (gain of $500) Cash Received < Book Value (loss) –Cash received $1,000 (loss of $500) Cost = $10,000 (asset) Accumulated Depreciation = $8,500(contra asset) Book Value = $1,500

40 Natural Resources Assets that come from the earth and are consumed. The value of the “reserves” that a company owns/controls is a long-term asset.Includes: Iron ore Oil Natural Gas Coal Timber Diamonds Gold and silver 9-40

41 Natural Resources As the resources are extracted, Depletion Expense is recorded. A contra-asset Accumulated Depletion is also recorded. Steps (similar to Units-of-Production) 1.Compute Depletion per Unit (based on estimated reserves) 2.Compute Depletion for the period (based on actual extraction) 9-41

42 Natural Resources A company owns oil reserves that cost $700,000 and is estimated to contain 70,000 barrels of oil. During the year, 3,000 barrels of oil are extracted. Prepare the journal entry for Depletion Expense. 9-42

43 Natural Resources Step 1: Compute Depletion per Unit. 9-43

44 Natural Resources Step 2: Compute Depletion for the Period. Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall9-44

45 Natural Resources Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall9-45 Prepare the journal entry for Depletion Expense.

46 Exxon Mobil Partial Income Statement 10-46

47 Exxon Mobil Partial Balance Sheet 10-47

48 Intangible Assets Assets that have no physical substance. Usual convey rights to the owner. Recorded at cost. Research and development costs are NOT included. Includes Patents Copyrights Trademarks Franchise Agreements Licenses Goodwill 9-48

49 Intangible Assets As intangible assets “expire,” they must be “amortized.” Amortization expense is recorded: –Based on the straight-line method –Use the shorter of the useful life or the legal life –Only for intangible assets with definite life 9-49

50 Exclusive 20- year right to produce & sell an invention Amortized over its useful life Exclusive right to sell a book, musical work, film, art, software, or intellectual property (70 years beyond the authors life) Amortized over its useful life Represent distinctive products or services Nike - swoosh, Chevrolet – “Like a Rock” Amortized over its useful life Types of Intangibles 50 PatentCopyright Trademarks - brand names Issued by the federal government

51 Types of Intangibles 51 Franchises & licenses Privilege to sell goods or services under specific conditions Examples: McDonalds, Holiday Inn, Dallas Cowboys Amortized over its useful life Goodwill Excess of cost to purchase another company over market value of its net assets Recorded only by an acquiring company Goodwill is not amortized, current value is adjusted

52 Intangible Assets There is no contra-asset account used with the amortization process. –The intangible asset is credited directly. –Each year the asset’s book value will decrease by the amount of the amortization. 9-52

53 Asset Turnover Ratio Used to measure how well a company is using its assets to generate sales revenue. Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall10-53


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