© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Accounting for Property, Plant, Equipment & Intangible Assets Chapter 16

Learning Objective 1 Calculating the cost of an asset © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

Cost of Land Costs that add permanent value to land Surveying Commissions to attorneys Commissions to real estate brokers Title searches Grading, draining, and clearing Special one-time assessments © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

Cost of Land Improvements Improvements that have limited useful lives Have their own account Subject to depreciation ◦ Driveways ◦ Fences ◦ Shrubbery ◦ Paving of parking lots ◦ Sprinkler systems © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

Cost of Buildings All costs necessary to acquire building and get it ready for use ◦ Purchase price, repairs, expenses If land and building are purchased for lump-sum price, cost must be allocated to each asset New Buildings ◦ Includes all reasonable/necessary payments for labor, insurance, permits, architect’s fees, legal fees, etc… © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

Exercise 16-1 Cost of Machine: Invoice less discount$27,000 Freight charges500 Assembly charges1,400 Special base505 Total cost of machine$29,405 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

Learning Objective 2 Calculating depreciation using one of three methods: straight-line, double declining-balance, and units-of-production © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2

Depreciation Allocate the cost of an asset to expense over its useful life Must estimate ◦ Useful life ◦ Residual value – amount of asset’s cost that will be recovered when the asset is sold, traded in, or scrapped © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2

Straight-line Method Allocates an equal amount of depreciation over an asset’s period of usefulness Cost – Residual Value Service Useful Life in Years © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2

Depreciation We will use Problem 16B-2 to apply these concepts. © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2

Problem 16B-2 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater $117,000 – 9,000 4 = $27,000 each year 1 117,000 27,000 27,000 90, ,000 27,000 54,000 63, ,000 27,000 81,000 36, ,000 27, ,000 9,000 LO-2

Units-of-Production Method © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2

Problem 16B-2 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater $117,000 – 9,000 90,000 units = $1.20 per unit 1 117,000 13,200 13, , ,000 10,800 24,000 93, ,000 13,200 37,200 79, ,000 70, ,000 9,000 Year 1 = $1.20 x 11,000 units = $13,200 Year 2 = $1.20 x 9,000 units = $10,800 Year 3 = $1.20 x 11,000 units = $13,200 Year 4 = $1.20 x 59,000 units = $70,800 LO-2

Double Declining-Balance Method Accelerated method – more depreciation taken in early years of asset’s life, decreasing amounts in later years Called an accelerated depreciation method Depreciates at twice the straight line rate Residual value is not subtracted from cost © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2

Double Declining-Balance Metho d 1. Calculate the straight-line rate and double it. 100% Useful life 2. At the end of each year multiply the rate times the book value of the asset at the beginning of the year. © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater X 2 LO-2

Problem 16B-2 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Rate: 100% 4 x 2 = 50% Year 1 = $117,000 x.50 = $58,500 Year 2 = $58,500 x.50 = $29,250 Year 3 = $29,250 x.50 = 14,625 Year 4 = $14,625 – 9,000 = $5, ,000 58,500 58,500 58, ,000 29,250 87,750 29, ,000 14, ,375 14, ,000 5, ,000 9,000 LO-2

Depreciation for Partial Years Depreciation to nearest full month If asset is purchased before the 15 th, calculate for full month If purchased after the15 th, depreciation is disregarded for month © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2

Depreciation for Partial Years Assume a $20,000 truck with a $2,000 salvage value and a 5 year life was purchased. Straight-Line Method If a truck was purchased on July 4, depreciation expense would be calculated as follows: $20,000 - $2,000 5 Years © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2 X 6 12 = $1,800

Depreciation for Partial Years Assume a $20,000 truck with a $2,000 salvage value and a 5-year life was purchased. Double Declining-Balance Method If a truck was purchased on July 4, depreciation expense would be calculated as follows: © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2 X = $4,000 ($20,000 x.40)

Learning Objective 3 Calculating depreciation for tax purposes using the Modified Accelerated Cost Recovery System © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-3

Depreciation for Tax Purposes Modified Accelerated Cost Recovery System (MACRS) Must know ◦ Recovery classification  Classes 3, 5, 7, and 10 use 200% declining balance, switching to straight-line  Classes 15 & 20 use 150% declining balance, switching to straight-line ◦ MACRS depreciation rates © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-3

Exercise 16-6 Light general-purpose truck = 5-year class Depreciation for 1991: $9,000 x 20% = $1, : $9,000 x 32% =2, : $9,000 x 19.20% =1, : $9,000 x 11.52% = 1, : $9,000 x 11.52% =1, : $9,000 x 5.76% = $9, © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-3

Learning Objective 4 Explaining the difference between capital expenditures and revenue expenditures © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-4

Capital Expenditures Original cost of an asset as well as Additions or enlargements ◦ Add to value of asset ◦ Debit asset account Extraordinary repairs ◦ Extend useful life ◦ Debit Accumulated Depreciation Betterments ◦ Improve efficiency ◦ Debit asset account © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-4

Revenue Expenditures Payments made for ordinary maintenance of an asset Occur on a regular basis Recorded as expenses Examples include oil changes, replacing window panes, changing tires, and adding a sun roof © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-4

Journalizing Transactions We will use Problem 16B-1 to apply these concepts. © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1, 4

PROBLEM 16B-1 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1, 4

PROBLEM 16B-1 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1, 4

PROBLEM 16B-1 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1, 4

Learning Objective 5 Journalizing entries for discarding, selling, or exchanging plant assets © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-5

Disposal of Plant Assets Discard Sell Exchange for similar assets © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-5

Disposal by Discarding Recognize depreciation up to date of disposal If fully depreciated, don’t have to bring depreciation up-to-date Determine gain or loss on disposal ◦ If book value > assets received, loss ◦ If book value < assets received, gain © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-5

Disposal by Selling - Gain If amount received is greater than book value - a Gain results Categorized as “Other Income” on income statement © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-5

Disposal by Selling - Loss When price is less than book value - a Loss results Categorized as “Other Expense” on the income statement © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-5

Disposal by Exchanging - Loss Calculate book value of old asset. Compare book value of old asset with trade-in to determine gain or loss. Loss results if book value of old asset is greater than what is received for trade- in allowance. If loss, recognize it. © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-5

Disposal by Exchanging - Gain Determining cost of new asset: Calculate book value of old asset. Identify cash paid. Add Steps 1 and 2. If gain, do not recognize it. The gain is absorbed into the cost of the new asset. © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-5

Income Tax Method & Accounting for Exchanges Both gains and losses are absorbed in cost of new asset © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-5

Journalizing entries for discarding, selling, and exchanging plant assets We will use Problem 16B-4 to apply these concepts. © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-5

PROBLEM 16B-4 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-5

PROBLEM 16B-4 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Cost$4,000 Accum Depr3,390 Book Value$610 Insurance Proceeds150 Loss$460 Cost$18,500 Accum Depr15,750 Book Value$2,750 Trade in2,600 Loss$150 LO-5

PROBLEM 16B-4 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Cost$39,500 Accum Depr35,700 Book Value$3,800 + Cash Paid32,500 New Machinery$36,300 Cost$18,500 Accum Depr15,750 Book Value$2,750 + Cash Paid23,600 New Machinery$26,350 LO-5

PROBLEM 16B-4 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-5

Learning Objective 6 Explaining amortization and how it applies to intangible assets © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-6

Natural Resources Natural assets (coal, timber, oil) Record at cost Recognize depletion as resource is removed from earth Depletion is similar to units-of- production method © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-6

Intangible Assets Assets having no physical substance Long-lived Represent legal rights and monetary relationships that benefit company Patents, copyrights, franchises, goodwill © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-6

Intangible Assets Record at cost Amortization – process of allocating cost of intangible assets to expense Intangibles with indefinite lives are not subject to amortization © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-6

Patent Exclusive right to sell or produce a discovery or invention Right is granted by federal government Legal life of 20 years Usually amortized for shorter period of time © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-6

Exercise 16-5 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-6

Copyright Exclusive right granted by federal government to publish artistic, literary, or musical work Granted for life of creator plus 50 years Cost is recorded as cost and amortized over useful life © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-6

Franchise Right granted by business or government to produce or sell goods in a specific geographic region Useful lives of many franchises are indefinite – not amortized © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-6

Goodwill Difference between price paid and value of the identifiable assets when a business is purchased Occurs when expected rate of future earnings is greater than rate of earnings for industry standard Brand names, business location and service are examples Not amortized © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-6

Accounting for Impairment of Intangible If an intangible loses value, recognize a loss by a debit to Loss on Goodwill and a credit to Goodwill. © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-6

© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater End of Chapter 16