2. 17 - 1 Accounting for Property, Plant Equipment, and Intangible Assets Chapter 17

3. 17 - 2 Assets that benefit more than one accounting period must be capitalized. Property, Plant, and Equipment To capitalize is to debit an asset for the original cost.

4. 17 - 3 Calculating the cost of an asset. Learning Objective 1

5. 17 - 4 Types of Long-Term Assets Tangible assets: – land – buildings – equipment Tangible assets: – land – buildings – equipment Intangible assets: – patents – copyrights – franchises – goodwill Intangible assets: – patents – copyrights – franchises – goodwill Natural resources: timber, oil, coal

6. 17 - 5 Learning Unit 17-1 What is included in the cost of an asset? n Purchase price of the asset plus all costs necessary to place the asset into service. n It does not include the cost of negligence. n Cash discounts are deducted from the price. n Debit the asset account and credit Cash and/or Liabilities to record the asset.

7. 17 - 6 Learning Unit 17-1 n Debiting an asset account instead of expensing the cost is called capitalization. n The cost of the asset will be allocated to periods of use to be matched with revenue of those periods. n This process is called depreciation.

8. 17 - 7 Learning Unit 17-1 n The cost of driveways, shrubbery, paving of parking lots, sprinkler systems, light poles, etc., have a limited useful life. n These assets would be depreciated over that useful life.

9. 17 - 8 Learning Unit 17-1 n The cost of land includes related costs of surveying, commissions, title searches, and clearing. In other words, any cost necessary to prepare it for its designated purpose. n Land has an unlimited useful life, so it is not depreciated.

10. 17 - 9 Calculating depreciation using one of four methods: straight-line, declining-balance, units-of-production, and sum-of-the-years’-digits. Learning Objective 2

11. 17 - 10 Learning Unit 17-2 n What are the different depreciation methods? 1 Straight-line 2 Double declining-balance 3 Units-of-production 4 Sum-of-the-years’ digits n MACRS – Modified Accelerated Cost Recovery System

12. 17 - 11 Learning Unit 17-2 n Melvin Company purchased a delivery truck on January 1, 200x for $20,000. n The company expects the van to have a residual value of $2,000 at the end of its useful life. n The truck has an estimated service life of 90,000 miles or 5 years.

13. 17 - 12 Learning Unit 17-2 The straight-line method assigns an equal amount of depreciation expense to each year. n (Cost – Residual value) ÷ Useful life in years Depreciation: ($20,000 – $2,000) ÷ 5 = $18,000 ÷ 5 = $3,600

14. 17 - 13 Learning Unit 17-2 Year 1 Accumulated Depreciation 200x $3,600 $3,600 200x

15. 17 - 14 Learning Unit 17-2 n (Cost – Residual value) ÷ Years of useful life n ($20,000 – 2,000) ÷ 5 = $18,000 ÷ 5 = $3,600 Year 1 depreciation:$ 3,600 Year 2 depreciation:$ 3,600 Year 3 depreciation:$ 3,600 Year 4 depreciation:$ 3,600 Year 5 depreciation:$ 3,600 Total depreciation:$18,000

16. 17 - 15 Learning Unit 17-2 n The double declining-balance method is an accelerated depreciation method. n It writes off a relatively larger amount of the asset’s cost nearer the start of its useful life than the straight-line method does. n 100% ÷ 5 = 20% n The double declining balance is two times the straight-line rate, or 40%

17. 17 - 16 Learning Unit 17-2 n The book value is the unexpired portion of the cost of an asset. n What is the book value of the truck at the end of the first year? n $20,000  40% = $8,000 n $20,000 – $8,000 = $12,000

18. 17 - 17 Learning Unit 17-2 n The units-of-production method assigns a fixed amount of depreciation to each unit of output or service produced by the plant asset.

19. 17 - 18 Learning Unit 17-2 Depreciation per unit: n (Cost – Residual value) ÷ Useful life in units n ($20,000 – $2,000) ÷ 90,000 miles n $18,000 ÷ 90,000 miles = $.20/mile How much is the depreciation expense if the van was driven 30,000 miles the first year? n 30,000 miles × $.20 ÷ mile = $6,000

20. 17 - 19 Learning Unit 17-2 n Depreciation @ $.20/mile: Year 1:30,000 miles = $ 6,000 Year 2:21,000 miles = $ 4,200 Year 3:15,000 miles = $ 3,000 Year 4: 5,000 miles = $ 1,000 Year 5: 19,000 miles =$ 3,800 Total: 90,000 miles =$18,000

21. 17 - 20 Learning Unit 17-2 The sum-of-the -years’ digits method formula follows: n N is the Numerator = number of years of life remaining n D is the Denominator = sum of the year’s digits divided by two = [N(N + 1) ÷ 2]

22. 17 - 21 Learning Unit 17-2 What is the book value of the truck at the end of the first year? n $18,000 × 5 ÷ 15 = $6,000 n $20,000 – $6,000 = $14,000 What is the book value of the truck at the end of the second year? n $18,000  4 ÷ 15 = $4,800 n $20,000 – $10,800 = $9,200

23. 17 - 22 Calculating depreciation for tax purposes using the Modified Accelerated Cost Recovery System. Learning Objective 3

24. 17 - 23 Learning Unit 17-2 n MACRS stands for Modified Accelerated Cost Recovery System. n Class asset life is determined. n Depreciation rates are found in the relevant table provided by the IRS. n Listed property items are those which are subject to personal use such as computers and automobiles.

25. 17 - 24 Explaining the difference between capital expenditures and revenue expenditures. Learning Objective 4

26. 17 - 25 16 Learning Unit 17-3 n What are capital expenditures? – original cost of assets – additions or enlargements – extraordinary repair or betterment n All capital expenditures, except for land, are debited to asset accounts and depreciated.

27. 17 - 26 Categories of Capital Expenditures Additions or Enlargements: (charged to asset account) Additions or Enlargements: (charged to asset account) Extraordinary Repairs: (charged to accumulated depreciation) Extraordinary Repairs: (charged to accumulated depreciation) Betterments: (charged to asset account) Betterments: (charged to asset account) Learning Unit 17-3

28. 17 - 27 Learning Unit 17-3 n What are revenue expenditures? – another name for expenses – payments made for ordinary maintenance n These payments occur often. n All payments are debited to expense accounts.

29. 17 - 28 Learning Objective 5 Journalizing entries for discarding, selling, or exchanging plant assets.

30. 17 - 29 Learning Unit 17-3 n How does a company dispose of its plant assets? – discarding – selling – exchanging for similar plant assets

31. 17 - 30 Learning Unit 17-3 Boulder Company is disposing of a $7,000 truck with no residual value. n The truck has been fully depreciated. What is the entry? Accumulated Depreciation 7,000 Truck 7,000 n Assume that the accumulated depreciation on the truck is $6,000.

32. 17 - 31 Loss on Disposal 1,000 Accumulated Depreciation 6,000 Truck 7,000 Loss on Disposal 1,000 Accumulated Depreciation 6,000 Truck 7,000 What is the entry? Learning Unit 17-3

33. 17 - 32 Dissimilar assets exchange: Gain/loss is recognized in the same manner as if the asset were sold. Dissimilar assets exchange: Gain/loss is recognized in the same manner as if the asset were sold. Similar assets exchange: No gain is recognized. Gain is absorbed into the new asset. Similar assets exchange: No gain is recognized. Gain is absorbed into the new asset. The IRS allows neither a gain nor a loss to be recognized on similar exchanges. The IRS allows neither a gain nor a loss to be recognized on similar exchanges. Learning Unit 17-3

34. 17 - 33 Learning Objective 6 Explaining amortization and how it applies to intangible assets.

35. 17 - 34 Learning Unit 17-4 n The cost of original intangible asset rights is allocated over the life of the asset in terms of estimated units of total production over the life of the asset. n Depletion method is similar to units of production depreciation method.

36. 17 - 35 Learning Unit 17-4 n Amortization is the allocation of the cost of original asset rights over the shorter of 40 years, legal life, or useful life of the asset. n Patents – life of patent or 17 years n Copyrights – useful life or 50 years n Franchises – life of franchise or 40 years n Goodwill – usually 40 years

37. 17 - 36 End of Chapter 17