Chapter 41 Cash, Short-term Investments and Accounts Receivable Chapter 4

Chapter 6 Long-term Assets: Property, Plant and Equipment, and Intangibles

Chapter 63 3 Chapter 6 Learning Objectives Determine the acquisition cost of property, plant and equipment assets. Compute depreciation expense using three depreciation methods. Account for disposals of property, plant and equipment. Identify major types of intangible assets and the key accounting issues related to these assets. Determine the treatment of costs made for property, plant and equipment assets after acquisition. Identify the key information needs of decision makers regarding long-term assets.

Chapter 64 Acquisition Costs The acquisition cost of a PP&E asset includes all reasonable and necessary expenditures incurred to obtain the asset and to prepare it for use.

Chapter 65 Acquisition of PP&E Elmer company purchases a large pneumatic heat transfer press machine on account with a retail price of $40,000. Elmer is allowed a 10% discount off the retail price. Freight charges to deliver the heat press are $550, and installation expenses total $320. During installation, the press is damaged, resulting in a repair cost of $410.

Chapter 66 Journal Entries to Record the Acquisition of PP&E Elmer Company would prepare the following entries for the previous transactions.

Chapter 67 Relative Market Valuation MarketProportion ofTotalAllocated ValueTotal Market ValueCostCost Land$160, /800 = 20%$600,000 $120,000 Building 400,000400/800 = 50%$600, ,000 Equipment 240,000240/800 = 30%$600, ,000 $800,000$600,000

Chapter 68 Journal Entries to Record the Acquisition of PP&E The journal entry on May 10 to record the acquisition of the assets in the previous slide would be prepared as follows:

Chapter 69 Depreciation Salvage value is the estimated value of an asset at the end of its useful life. When computing depreciation, the term depreciable cost is often used, which refers to the asset's acquisition cost less its salvage value. Thus, depreciable cost is the amount of asset cost that is expected to be consumed or "used up" over its useful life.

Chapter 610 Depreciation Methods Straight-line Units-of-production Double-declining-balance

Chapter 611 Depreciation Example Assume that Movie Mogul acquired a motor home on January 1, The following data are used to illustrate the three depreciation methods. Equipment: Motor home (Asset #1427B) Acquisition Date: January 1, 2009 Acquisition Cost: $168,000 Useful Life: 5 years or 100,000 miles Salvage Value: $48,000 Depreciable Cost: $168,000 - $48,000 = $120,000

Chapter 612 Straight-line Method Under the straight-line method, a business allocates an equal amount of depreciation expense to each year of an asset's estimated useful life. Depreciation Expense = Depreciable Cost/ Useful Life in Years Depreciation Expense24,000 Accumulated Depreciation - #1427B24,000 Record annual depreciation on motor home.

Chapter 613 Units of Production Method Under the units of production method, a business allocates an equal amount of depreciation expense to each unit produced by the asset. Depreciation Expense = Depreciable amount / useful life in units Dec. 31 Depreciation Expense22,680 Accumulated Depreciation - #1427B 22,680 Record annual depreciation on motor home. Assume 18,900 miles were driven during year 1.

Chapter 614 Double Declining Balance Under the double-declining-balance method (DDB) of depreciation, annual depreciation expense is computed by multiplying an asset's book value at the beginning of a year by twice the straight-line rate of depreciation.

Chapter 615 Double Declining Balance Continued Dec. 31 Depreciation Expense 67,200 Accumulated Depreciation - #1427B67,200 Record annual depreciation on motor home. The entry to record depreciation on the motor home for year 1 under double declining balance is prepared as follows:

Chapter 616Chapter 516 Brent Company acquired an asset on January 1, 2009 for $50,000 with a 5-year life and a salvage value of $5,000. Brent will record depreciation under the straight- line method for 2010 of: a. $9,500. b. $9,000. c. $10,000. d. $8,000.

Chapter 617Chapter 517 Brent Company acquired an asset on January 1, 2009 for $50,000 with a 5-year life and a salvage value of $5,000. Brent will record depreciation under the straight- line method for 2010 of: a. $9,500. b. $9,000. c. $10,000. d. $8,000.

Chapter 618Chapter 518 Brent Company acquired an asset on January 1, 2009 for $50,000 with a 5-year life and a salvage value of $5,000. Brent will record depreciation under the double declining balance method for 2010 of: a. $10,000. b. $20,000. c. $12,000. d. $10,800.

Chapter 619Chapter 519 Brent Company acquired an asset on January 1, 2009 for $50,000 with a 5-year life and a salvage value of $5,000. Brent will record depreciation under the double declining balance method for 2010 of: a. $10,000. b. $20,000. c. $12,000. d. $10,800.

Chapter 620Chapter 520 Brent Company acquired an asset on January 1, 2009 for $50,000. The asset is expected to produce 75,000 units and have a salvage value of $5,000. In 2010, the asset produced 20,000 units. Brent will record depreciation under the units of production method for 2010 of: a. $12,000. b. $13,333. c. $9,000. d. $10,000.

Chapter 621Chapter 521 Brent Company acquired an asset on January 1, 2009 for $50,000. The asset is expected to produce 75,000 units and have a salvage value of $5,000. In 2010, the asset produced 20,000 units. Brent will record depreciation under the units of production method for 2010 of: a. $12,000. b. $13,333. c. $9,000. d. $10,000.

Chapter 622 Disposal of Assets ¥Depreciate to the date of the disposal or sale. ¥Record any cash or other assets at FMV ¥Reduce the asset and its related accumulated depreciation to zero ¥Record the gain or loss

Chapter 623 Disposal of PP&E at a Loss Assume on January 2, 2012, the motor home was wrecked. The insurance company determined the value of the motor home to be $60,000 and writes Movie Mogul a check. Movie Mogul has been using straight-line depreciation. The following entry records the disposal of the motor home.

Chapter 624 Disposal of PP&E at a Gain Assume on March 31, 2012, Movie Mogul sells the motor home for $98,600. Movie Mogul must first record depreciation using straight-line for the first three months of Then the entry can be prepared to sell the motor home. The following entry records the depreciation for the first quarter of 2012.

Chapter 625 Disposal of PP&E at a Gain The following entry records the sale of the motor home on March 31, 2012.

Chapter 626Chapter 526 Jake Company acquires equipment on January 1, 2009 for $100,000. The equipment has a 5-year life and an estimated salvage value of $10,000. Jake uses straight-line depreciation. On June 30, 2011, Jake sells the equipment for $62,000. Prepare the entry to record the sale of the equipment.

Chapter 627Chapter 527 Date 2011 DescriptionDebitCredit Jun. 30Cash62,000 Accumulated Depreciation45,000 Equipment100,000 Gain on Disposal of Asset 7,000

Chapter 628Chapter 528 Jake Company acquires equipment on January 1, 2009 for $100,000. Jake uses units of production depreciation. The equipment is estimated to produce 75,000 units and an estimated salvage value of $10,000. On June 30, 2011, after the asset has produced 32,000 units, Jake sells the equipment for $57,000. Prepare the entry to record the sale of the equipment.

Chapter 629Chapter 529 Date 2011 DescriptionDebitCredit Jun. 30Cash57,000 Accumulated Depreciation38,400 Loss on Disposal of Equip. 4,600 Equipment100,000

Chapter 630 Natural Resources Natural resources include long-term assets that are extracted or harvested from or beneath the earth's surface.

Chapter 631 Accounting for Depletion Assume Joyner Oil pays $20 million for oil rights on a property that has an estimated two million barrels of oil. $20,000,000/2,000,000 barrels = $10 per barrel Joyner Oil extracts 300,000 barrels and sells 200,000 barrels of oil during 2009.

Chapter 632 Depletion Entries Joyner Oil prepares the following entries to record depletion and cost of goods sold.

Chapter 633Chapter 533 Brent Company acquired a natural asset on January 1, 2009 for $2,500,000. The asset has an estimated 2,000,000 tons of ore. In 2010, 400,000 tons were extracted and 350,000 tons of ore were sold. Brent Company will record cost of goods sold on its income statement at: a. $500,000. b. $400,000. c. $450,000. d. $437,500.

Chapter 634Chapter 534 Brent Company acquired a natural asset on January 1, 2009 for $2,500,000. The asset has an estimated 2,000,000 tons of ore. In 2010, 400,000 tons were extracted and 350,000 tons of ore were sold. Brent Company will record cost of goods sold on its income statement at: a. $500,000. b. $400,000. c. $450,000. d. $437,500.

Chapter 635 Intangible Assets Long-term assets that do not have a physical form or substance are called intangible assets. Patents Copyrights Trademarks Goodwill

Chapter 636 The general rule is that most intangible assets should be amortized over the shorter of their legal life, their useful life, or forty years (which is an arbitrary period established for financial accounting purposes). Goodwill Goodwill, however, should be analyzed annually to determine any decreases in it value.

Chapter 637 Amortization of Intangibles A company purchases a patent for $1,000,000 with a useful life of 10 years. Intangibles are amortized using the straight-line method. At the end of the first year, the following entry would be prepared.

Chapter 638 Capitalization versus Expensing When a company makes an expenditure related to a long-term assets, the amount may be capitalized or expensed depending on the circumstances.

Chapter 639 Ratio Analysis Two ratios can be used to assess the age and useful life of PP&E accounts. Average useful life = Average investment in PP&E / Depreciation expense Average asset age = Accumulated depreciation / Depreciation expense

Chapter 640 Long-Term Assets: Acquisition and Use under US GAAP

Chapter 641Chapter 541 THE END!