Plant Assets -Long-lived assets acquired for use in business operations. Major Categories of Plant Assets – Tangible Plant Assets – Intangible Assets – Natural Resources Accountable Events Acquisition of Plant Assets 1

Determining Cost Special Considerations –Land:Cost includes real estate commissions, escrow fees, legal fees, clearing and grading the property. –Land Improvement: Improvements to land such as driveways, fences, and landscaping are recorded separately. –Building : Repairs made prior to the building being put in use are considered part of the building’s cost. 2

– Equipment:Related interest, insurance, and property taxes are treated as expenses of the current period. Allocation of a Lump-Sum Purchase Capital Expenditures & Revenue Expenditures Depreciation – Straight-Line Depreciation Depreciation for Fractional Periods Declining-Balance Method 3

Financial Statement Disclosures Revising Depreciation Rates Impairment of Assets Disposal of Plant and Equipment 4

USED ASSETS MANAGEMENT Chapter 9 5

Accounting depends on whether assets are similar or dissimilar. Airplane for Airplane Truck for Airplane Only situations where cash is paid will be demonstrated. Trading in Used Assets for New Ones 6

7

On May 30, 2003, Essex Company exchanged a used airplane and $35,000 cash for a new airplane. The old airplane originally cost $40,000, had up-to-date accumulated depreciation of $30,000, and a fair value of $4,000. SIMILAR Trading in Used Assets for New Ones – Similar Assets 8

The exchange resulted in a: a.gain of $6,000. b.loss of $6,000. c.loss of $4,000. d. gain of $4,000. The exchange resulted in a: a.gain of $6,000. b.loss of $6,000. c.loss of $4,000. d. gain of $4,000. Prepare a journal entry to record the exchange. Trading in Used Assets for New Ones – Similar Assets 9

Prepare the journal entry to record the trade. 10

On June 30, 2004, Rancho Landscape exchanged a used truck and $11,500 cash for a new truck. The old airplane originally cost $10,000, had up-to-date accumulated depreciation of $8,000, and a trade in allowance of $3,500 and has a book value of $2,000 Trading in Used Assets for New Ones – Similar Assets 11

The exchange resulted in a: a.gain of $1,500. b.loss of $1,500. c.loss of $2,000. d. gain of $3,000. The exchange resulted in a: a.gain of $1,500. b.loss of $1,500. c.loss of $2,000. d. gain of $3,000. Prepare a journal entry to record the exchange. Trading in Used Assets for New Ones – Similar Assets 12

Trading in Used Assets for New Ones – Similar Assets Prepare the journal entry to record the trade. 13

Noncurrent assets without physical substance. Useful life is often difficult to determine. Usually acquired for operational use. Often provide exclusive rights or privileges. Intangible Assets Characteristics 14

Intangible Assets Record at current cash equivalent cost, including purchase price, legal fees, and filing fees. Patents Copyrights Leaseholds Leasehold Improvements Goodwill Trademarks and Trade Names 15

Intangible Assets Amortize over shorter of economic life or legal life, subject to a maximum of 40 years. Use straight-line method. Research and development costs are normally expensed as incurred. Amortize over shorter of economic life or legal life, subject to a maximum of 40 years. Use straight-line method. Research and development costs are normally expensed as incurred. 16

The amount by which the purchase price exceeds the fair market value of net assets acquired. Occurs when one company buys another company. Only purchased goodwill is an intangible asset. Goodwill 17

Positive attributes of goodwill are: – Favorable reputation – Positive market share – Positive advertising image – Reputation of high quality and loyal employees – Superior Management – Manufacturing and other operating efficiency 18

Eddy Company paid $1,000,000 to purchase all of James Company’s assets and assumed liabilities of $200,000. The acquired assets were appraised at a fair value of $900,

What amount of goodwill should be recorded on Eddy Company books? a.$100,000. b.$200,000. c.$300,000. d.$400,000. What amount of goodwill should be recorded on Eddy Company books? a.$100,000. b.$200,000. c.$300,000. d.$400,

Intangible Assets – Patents Exclusive right granted by federal government to sell or manufacture an invention. Cost is purchase price plus legal cost to defend. Amortize cost over the shorter of useful life or 17 years. 21

Assume that the patent is purchased from the inventor at a cost of $100,000 after 5 years of legal life have expired, therefore the remaining legal life is 12 years. But if estimated useful life is only four years, amortization should be based on this shorter period. The entry to record this amortization is Patents 22

Patent Prepare the journal entry to record the trade. 23

Intangible Assets – Trademarks and Trade Names A symbol, design, or logo associated with a business. Purchased trademarks are recorded at cost, and amortized over shorter of legal or economic life, or 40 years. Internally developed trademarks have no recorded asset cost. 24

Intangible Assets – Franchises Legally protected right to sell products or provide services purchased by franchisee from franchisor. Purchase price is intangible asset which is amortized over the shorter of the protected right or 40 years. 25

Intangible Assets – Copyrights Exclusive right granted by the federal government to protect artistic or intellectual properties. Amortize cost over a period not to exceed 40 years. Legal life is life of creator plus 50 years. 26

Total cost, including exploration and development, is charged to depletion expense over periods benefited. Examples: oil, coal, gold Extracted from the natural environment and reported at cost less accumulated depletion. Natural Resources 27

Depletion is calculated using the units-of-production method. Unit depletion rate is calculated as follows: Total Units of Capacity Cost – Salvage Value Depletion of Natural Resources 28

Depletion of Natural Resources Total depletion cost for a period is: Unit Depletion Rate Number of Units Extracted in Period × Total depletion cost Inventory for sale Unsold Inventory Cost of goods sold 29

Depletion of Natural Resources Specialized plant assets may be required to extract the natural resource. These assets are recorded in a separate account and depreciated. 30

Assume that rainbow minerals pay $45 million to acquire red valley mine that has 10 million tons of coal. The residual is estimated to be $5 million. The depletion over life is of 40 million and rate $4 per million. Assume that 2 million tons are mined during first year so prepare journal entry Natural resources 31

Natural resources Prepare the journal entry to record the trade. 32

Natural resources Rainbow Mineral’s Balance sheet 33

Cost per Unit of Output = Cost - Residual Value Estimated Units of Output Depreciation Expense = Cost per Unit of Output × Number of Units Produced The Units-of-Output Method 34

Consider S & G delivery truck which cost $17,000 and has an estimated salvage value of $ 2,000. Assume that S & G plans to retire this truck after it has been delivered 100,000 mile. Calculate the deprecation rate Unit of Output method 35

Unit of Output Cost per Unit of Output Cost - Residual Value Estimated Units of Output Cost per Unit of Output 17, , ,000 miles $0.15 Depreciation per mile 36

MACRS = M odified A ccelerated C ost R ecovery S ystem Based on Declining- Balance Methods Asset Cost × MACRS rate Rates are available from tables provided by the IRS. Asset Cost × MACRS rate Rates are available from tables provided by the IRS. The only accelerated method allowed by the IRS when computing depreciation for tax return purposes. MACRS: The “Tax Method” 37

Which Depreciation Methods Do Most Businesses Use?

End of Chapter 9 39