Accounting for Property, Plant Equipment, and Intangible Assets Chapter 17

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.

Calculating the cost of an asset. Learning Objective 1

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

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.

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.

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.

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.

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

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

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.

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

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

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

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%

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

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.

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

Learning Unit 17-2 n $.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

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]

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

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

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.

Explaining the difference between capital expenditures and revenue expenditures. Learning Objective 4

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.

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

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.

Learning Objective 5 Journalizing entries for discarding, selling, or exchanging plant assets.

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

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.

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

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

Learning Objective 6 Explaining amortization and how it applies to intangible assets.

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.

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

End of Chapter 17