1. 9-1

2. 9-2 Reporting and Analyzing Long-Lived Assets Kimmel ● Weygandt ● Kieso Financial Accounting, Eighth Edition 9

3. 9-3 Apply depreciation methods to plant assets. CHAPTER OUTLINE Explain the accounting for plant asset expenditures. 1 2 LEARNING OBJECTIVES Explain how to account for the disposal of plant assets. 3 Identify the basic issues related to reporting intangible assets. 4 Discuss how long-lived assets are reported and analyzed. 5

4. 9-4 Referred to as property, plant, and equipment; plant and equipment; and fixed assets.  physical substance (a definite size and shape),  are used in the operations of a business,  are not intended for sale to customers,  are expected to provide service to the company for a number of years, except for land. Plant assets are resources that have LEARNING OBJECTIVE Explain the accounting for plant asset expenditures. 1 LO 1

5. 9-5 Historical Cost Principle  Requires that companies record plant assets at cost.  Cost consists of all expenditures necessary to acquire an asset and make it ready for its intended use. Revenue expenditure – costs incurred to acquire a plant asset that are expensed immediately. Capital expenditures - costs included in a plant asset account. THE COST OF PLANT ASSETS LO 1

6. 9-6 Cost is measured by the cash paid in a cash transaction or the cash equivalent price paid. Cash equivalent price is the  fair value of the asset given up or  fair value of the asset received, whichever is more clearly determinable. INTERNATIONAL NOTE IFRS is flexible regarding asset valuation. Companies revalue to fair value when they believe this information is more relevant. THE COST OF PLANT ASSETS LO 1

7. 9-7 Land All necessary costs incurred in making land ready for its intended use increase (debit) the Land account. Costs typically include: 1)cash purchase price, 2)closing costs such as title and attorney’s fees, 3)real estate brokers’ commissions, and 4)accrued property taxes and other liens on the land assumed by the purchaser. THE COST OF PLANT ASSETS LO 1

8. 9-8 Illustration: Assume that Hayes Manufacturing Company acquires real estate at a cash cost of $100,000. The property contains an old warehouse that is razed at a net cost of $6,000 ($7,500 in costs less $1,500 proceeds from salvaged materials). Additional expenditures are the attorney’s fee, $1,000, and the real estate broker’s commission, $8,000. Required: Determine the amount to be reported as the cost of the land. THE COST OF PLANT ASSETS LO 1

9. 9-9 Land Required: Determine amount to be reported as the cost of the land. Cash price of property ($100,000) Net removal cost of warehouse ($6,000) Attorney's fees ($1,000) 1,000 6,000 $100,000 $115,000Cost of Land Real estate broker’s commission ($8,000) 8,000 THE COST OF PLANT ASSETS ILLUSTRATION 9-2 Computation of cost of land LO 1

10. 9-10 Land Improvements Includes all expenditures necessary to make the improvements ready for their intended use.  Examples: driveways, parking lots, fences, landscaping, and underground sprinklers.  Limited useful lives.  Expense (depreciate) the cost of land improvements over their useful lives. THE COST OF PLANT ASSETS LO 1

11. 9-11 Buildings Includes all costs related directly to purchase or construction. Purchase costs:  Purchase price, closing costs (attorney’s fees, title insurance, etc.) and real estate broker’s commission.  Remodeling and replacing or repairing the roof, floors, electrical wiring, and plumbing. Construction costs:  Contract price plus payments for architects’ fees, building permits, and excavation costs. THE COST OF PLANT ASSETS LO 1

12. 9-12 Equipment Include all costs incurred in acquiring the equipment and preparing it for use. Costs typically include:  Cash purchase price.  Sales taxes.  Freight charges.  Insurance during transit paid by the purchaser.  Expenditures required in assembling, installing, and testing the unit. THE COST OF PLANT ASSETS LO 1

13. 9-13 Illustration: Lenard Company purchases a delivery truck at a cash price of $22,000. Related expenditures are sales taxes $1,320, painting and lettering $500, motor vehicle license $80, and a three-year accident insurance policy $1,600. Compute the cost of the delivery truck. Truck Cash price Sales taxes Painting and lettering 500 1,320 $22,000 $23,820Cost of Delivery Truck THE COST OF PLANT ASSETS LO 1 ILLUSTRATION 9-3

14. 9-14 Illustration: Lenard Company purchases a delivery truck at a cash price of $22,000. Related expenditures are sales taxes $1,320, painting and lettering $500, motor vehicle license $80, and a three-year accident insurance policy $1,600. Prepare the journal entry to record these costs. Equipment 23,820 License Expense 80 Prepaid Insurance 1,600 Cash 25,500 THE COST OF PLANT ASSETS LO 1

15. 9-15 Ordinary Repairs are expenditures to maintain the operating efficiency and productive life of the unit.  Debited to Maintenance and Repairs Expense. Additions and Improvements are costs incurred to increase the operating efficiency, productive capacity, or useful life of a plant asset.  Debited to the plant asset affected. EXPENDITURE DURING USEFUL LIFE LO 1

16. 9-16 A lease is a contractual agreement in which the owner of an asset (lessor) allows another party (lessee) to use the asset for a period of time at an agreed price. Some advantages of leasing 1.Reduced risk of obsolescence. 2.Little or no down payment. 3.Shared tax advantages. 4.Assets and liabilities not reported. TO BUY OR LEASE? LO 1

17. 9-17  Process of cost allocation, not asset valuation.  Applies to land improvements, buildings, and equipment, not land.  Depreciable, because the revenue- producing ability of asset will decline over the asset’s useful life. Process of allocating to expense the cost of a plant asset over its useful life in a rational and systematic manner. Depreciation ▼ HELPFUL HINT Land does not depreciate because it does not wear out. LEARNING OBJECTIVE Apply depreciation methods to plant assets. 2 LO 2

18. 9-18 FACTORS IN COMPUTING DEPRECIATION ILLUSTRATION 9-6 Three factors in computing depreciation ▼ HELPFUL HINT Depreciation expense is reported on the income statement. Accumulated depreciation is reported on the balance sheet as a deduction from plant assets. LO 2

19. 9-19 Management selects the method it believes best measures an asset’s contribution to revenue over its useful life. Examples include: (1)Straight-line method. (2)Declining-balance method. (3)Units-of-activity method. ILLUSTRATION 9-7 Use of depreciation methods in major U.S. companies DEPRECIATION METHODS LO 2

20. 9-20 Illustration: Bill’s Pizzas purchased a small delivery truck on January 1, 2017. Cost $13,000 Expected salvage value $1,000 Estimated useful life (in years)5 Estimated useful life (in miles)100,000 Required: Compute depreciation using the following. (a) Straight-Line. (b) Units-of-Activity. (c) Declining-Balance. DEPRECIATION METHODS LO 2

21. 9-21  Expense is same amount for each year.  Depreciable cost = Cost less salvage value. Straight-Line Method ILLUSTRATION 9-8 Formula for straight-line method LO 2

22. 9-22 Illustration: 2017$ 12,00020%$ 2,400 $ 10,600 201812,000202,4004,8008,200 201912,000202,4007,2005,800 202012,000202,4009,6003,400 202112,000202,40012,0001,000 2017 Journal Entry Depreciation Expense 2,400 Accumulated Depreciation2,400 Straight-Line Method ILLUSTRATION 9-9 Straight-line depreciation schedule LO 2

23. 9-23 Assume the delivery truck was purchased on April 1, 2017. Straight-Line Method Partial Year Illustration: LO 2

24. 9-24  Accelerated method.  Decreasing annual depreciation expense over the asset’s useful life.  Double declining-balance rate is double the straight- line rate.  Rate applied to book value. Declining-Balance Method LO 2

25. 9-25 201713,00040%$ 5,200 $ 7,800 20187,800403,1208,3204,680 20194,680401,87210,1922,808 20202,808401,12311,3151,685 20211,68540685*12,0001,000 * Computation of $674 ($1,685 x 40%) is adjusted to $685. Depreciation Expense 5,200 Accumulated Depreciation5,200 2017 Journal Entry Declining-Balance Method Illustration: ILLUSTRATION 9A-2 Double-declining-balance depreciation schedule LO 2

26. 9-26 Illustration: Declining-Balance Method Partial Year Purchased on 4/1/17 LO 2

27. 9-27  Companies estimate total units of activity to calculate depreciation cost per unit.  Expense varies based on units of activity.  Depreciable cost is cost less salvage value. Units-of-Activity Method ILLUSTRATION 9A-3 Formula for units-of- activity method LO 2

28. 9-28 201715,000$ 0.12$ 1,800 $ 11,200 201830,0000.123,6005,4007,600 201920,0000.122,4007,8005,200 202025,0000.123,00010,8002,200 202110,0000.121,20012,0001,000 Depreciation Expense 1,800 Accumulated Depreciation 1,800 2017 Journal Entry Illustration: ILLUSTRATION 9A-4 Units-of-activity depreciation schedule Units-of-Activity Method LO 2

29. 9-29 ILLUSTRATION 9-12 Comparison of depreciation methods Management’s Choice Annual depreciation expense varies considerably among the methods, but total depreciation expense is the same ($12,000) for the five-year period. LO 2

30. 9-30 ILLUSTRATION 9-12 Comparison of depreciation methods Management’s Choice ILLUSTRATION 9-13 Patterns of depreciation LO 2

31. 9-31 IRS does not require taxpayer to use the same depreciation method on the tax return that is used in preparing financial statements. IRS requires the straight-line method or a special accelerated-depreciation method called the Modified Accelerated Cost Recovery System (MACRS). MACRS is NOT acceptable under GAAP. Depreciation and Income Taxes LO 2

32. 9-32 Depreciation Disclosure in the Notes SOUTHWEST AIRLINES Notes to the Financial Statements Property and equipment Depreciation is provided by the straight- line method to estimated residual values over periods ranging from 23 to 25 years for flight equipment and 5 to 30 years for ground property and equipment once the asset is placed in service.... Amortization of property under capital leases is on a straight-line basis over the lease term and is included in depreciation and amortization expense. ILLUSTRATION 9-14 Disclosure of depreciation policies LO 2

33. 9-33  Accounted for in the period of change and future periods (Change in Estimate).  Not handled retrospectively.  Not considered error. REVISING PERIODIC DEPRECIATION LO 2

34. 9-34 Permanent decline in the fair value of an asset. So as not to overstate the asset on the books, the company writes the asset down to its new fair value during the year in which the decline in value occurs. IMPAIRMENTS LO 2

35. 9-35 Companies dispose of plant assets in three ways — Retirement, Sale, or Exchange. Record depreciation up to the date of disposal. Eliminate asset by (1) debiting Accumulated Depreciation, and (2) crediting the asset account. ILLUSTRATION 9-16 Methods of plant asset disposal LEARNING OBJECTIVE Explain how to account for the disposal of plant assets. 3 LO 3

36. 9-36 Compare the book value of the asset with the proceeds received from the sale.  If proceeds exceed the book value, a gain on disposal occurs.  If proceeds are less than the book value, a loss on disposal occurs. SALE OF PLANT ASSETS LO 3

37. 9-37 Depreciation Expense8,000 Accumulated Depreciation—Equipment 8,000 Illustration: On July 1, 2017, Wright Company sells office furniture for $16,000 cash. The office furniture originally cost $60,000. As of January 1, 2017, it had accumulated depreciation of $41,000. Depreciation for the first six months of 2017 is $8,000. Prepare the journal entry to record depreciation expense up to the date of sale, July 1. SALE OF PLANT ASSETS LO 3

38. 9-38 Illustration: Wright records the sale as follows on July 1. SALE OF PLANT ASSETS ILLUSTRATION 9-17 Computation of gain on disposal Cash 16,000 Accumulated Depreciation—Equipment 49,000 Equipment 60,000 Gain on Disposal of Plant Assets 5,000 LO 3

39. 9-39 ILLUSTRATION 9-18 Computation of loss on disposal Illustration: Assume that instead of selling the office furniture for $16,000, Wright sells it for $9,000. SALE OF PLANT ASSETS Cash 9,000 Accumulated Depreciation—Equipment 49,000 Loss on Disposal of Plant Assets 2,000 Equipment 60,000 LO 3

40. 9-40  No cash is received.  Decrease (debit) Accumulated Depreciation for the full amount of depreciation taken over the life of the asset.  Decrease (credit) the asset account for the original cost of the asset. RETIREMENT OF PLANT ASSETS LO 3

41. 9-41 Overland Trucking has an old truck that cost $30,000 and has accumulated depreciation of $16,000. Assume two different situations: 1.The company sells the old truck for $17,000 cash. 2.The truck is worthless, so the company simply retires it. What entry should Overland use to record scenario 1? Plant Asset Disposal DO IT! 3 LO 3 Cash 17,000 Accumulated Depreciation—Equipment 16,000 Equipment 30,000 Gain on Disposal of Plant Assets 3,000

42. 9-42 Overland Trucking has an old truck that cost $30,000 and has accumulated depreciation of $16,000. Assume two different situations: 1.The company sells the old truck for $17,000 cash. 2.The truck is worthless, so the company simply retires it. What entry should Overland use to record scenario 2? Plant Asset Disposal DO IT! 3 LO 3 Accumulated Depreciation—Equipment 16,000 Loss on Disposal of Plant Assets 14,000 Equipment 30,000

43. 9-43 Intangible assets are rights, privileges, and competitive advantages that result from ownership of long-lived assets that do not possess physical substance.  Patents  Copyrights  Franchises or licenses  Trademarks  Trade names  Goodwill Limited life or an indefinite life. Common types of intangibles: LEARNING OBJECTIVE Identify the basic issues related to reporting intangible assets. 4 LO 4

44. 9-44 Limited-Life Intangibles:  Amortize to expense.  Credit asset account or accumulated amortization. Indefinite-Life Intangibles:  No foreseeable limit on time the asset is expected to provide cash flows.  No amortization. ACCOUNTING FOR INTANGIBLES LO 4

45. 9-45 Patents  Exclusive right to manufacture, sell, or otherwise control an invention for a period of 20 years from the date of the grant.  Capitalize costs of purchasing a patent and amortize over its 20-year life or its useful life, whichever is shorter.  Expense any R&D costs in developing a patent.  Legal fees incurred successfully defending a patent are capitalized to Patent account. TYPES OF INTANGIBLES LO 4

46. 9-46 Expenditures that may lead to  patents,  copyrights,  new processes, and  new products. All R&D costs are expensed when incurred. Research and Development Costs ▼ HELPFUL HINT Research and development costs are not intangible costs, but because these expenditures may lead to patents and copyrights, we discuss them in this section. TYPES OF INTANGIBLES LO 4

47. 9-47 Copyrights  Give the owner the exclusive right to reproduce and sell an artistic or published work.  Granted for the life of the creator plus 70 years.  Capitalize costs of acquiring and defending it.  Amortized to expense over useful life. TYPES OF INTANGIBLES LO 4

48. 9-48 Trademarks and Trade Names  Word, phrase, jingle, or symbol that distinguishes or identifies a particular enterprise or product. ► Wheaties, Monopoly, Sunkist, Kleenex, Coca-Cola, Big Mac, and Jeep.  Legal protection for indefinite number of 20 year renewal periods.  Capitalize acquisition costs.  No amortization. TYPES OF INTANGIBLES LO 4

49. 9-49 Franchises  Contractual arrangement between a franchisor and a franchisee. ► Toyota, Shell, Subway, and Marriott are franchises.  Franchise (or license) with a limited life should be amortized to expense over the life of the franchise.  Franchise with an indefinite life should be carried at cost and not amortized. TYPES OF INTANGIBLES LO 4

50. 9-50 Goodwill  Includes exceptional management, desirable location, good customer relations, skilled employees, high-quality products, etc.  Only recorded when an entire business is purchased.  Goodwill is recorded as the excess of... ► purchase price over ► the FMV of the identifiable net assets acquired.  Internally created goodwill should not be capitalized. TYPES OF INTANGIBLES LO 4

51. 9-51 Match the term most directly associated with each statement. Copyright Amortization Intangible assets Franchise Research and development costs 1. The allocation to expense of the cost of an intangible asset over the asset’s useful life. 2. Rights, privileges, and competitive advantages that result from the ownership of long-lived assets that do not possess physical substance. 3. An exclusive right granted by the federal government to reproduce and sell an artistic or published work. Amortization Intangible assets Copyright Classification Concepts DO IT! 4 LO 4

52. 9-52 Match the term most directly associated with each statement. Copyright Amortization Intangible assets Franchise Research and development costs 4.A right to sell certain products or services or to use certain trademarks or trade names within a designated geographic area. 5.Costs incurred by a company that often lead to patents or new products. These costs must be expensed as incurred. Classification Concepts DO IT! 4 Franchise Research and development costs LO 4

53. 9-53 LEARNING OBJECTIVE Discuss how long-lived assets are reported and analyzed. 5 ILLUSTRATION 9-19 Presentation of property, plant, and equipment and intangible assets LO 5