1. Acquisition Cost of P,P&E
All costs necessary to acquire asset and prepare for intended use
Examples:
Purchase price
Taxes paid at time of purchase
Transportation charges
Installation Costs
Purchase
Price +
Taxes
LO 2
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2. Group Asset Purchases Allocated Cost % of Fair Market Cost Market
Allocate cost of lump-sum purchase based on fair market values
$75,000
$25,000
Allocated
Cost
Land =
$30,000
Building =
$90,000
Fair Market
Value
75% X
25% X
% of
Market
Value
Cost
$100,000 =
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LO 3

3. Capitalization of Interest
Interest can be included as part of the cost of an asset if:
company constructs asset over time, and
borrows money to finance construction
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4. Land Improvements
Land improvements with a limited life should be kept separate from the land since:
Land improvements that have a limited life would be subject to depreciation over the useful life of the improvement
Land has an unlimited life and therefore is not subject to depreciation
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5. Depreciation of P,P & E via Match costs of assets With periods
benefited
via
Straight-Line
Accelerated
Methods
Units of
Production
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LO 5

6. Straight-Line Method
Allocates cost of asset evenly over its useful life
$9,000
3-year life
$3,000
Year 1
Year 2
Year 3
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7. Units-of-Production Method
Allocate asset cost based on number of units produced over its useful life
Depreciation =
$ per unit
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8. Double-Declining-Balance Method
Double the straight-line rate on a declining balance (book value)
Accelerated method - higher amount of depreciation in early years
Straight-line
Rate
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9. $20,000 cost – $2,000 residual value = $18,000 to be depreciated
Depreciation Example
Calculate ExerCo’s depreciation of the
machine for 2012–2016 using the
units-of-production and double-declining-
balance depreciation methods.
$20,000 cost – $2,000 residual value = $18,000 to be depreciated
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10. Straight-Line Depreciation
Depreciation = Cost – Residual Value Life
= $20,000 – $2,000
5 years
= $3,600/year
$18,000
5-year life
$3,600
2012
$3,600
2013
$3,600
2014
$3,600
2015
$3,600
2016
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11. Units-of-Production Depreciation
Depreciation = Cost – Residual Value
per unit Life in Units
= $20,000 – $2, ,000
= $ 1.00 per unit
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12. Units-of-Production Depreciation
ExerCo’s depreciation in 2012:
4,000 units x $1/unit = $ 4,000
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13. Double-Declining-Balance Depreciation
DDB rate = (100% / useful life) x 2
= (100% / 5 years) x 2
= 40%
Initially
ignore
residual value
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14. Double Declining-Balance Depreciation
Beginning Ending
Year Rate Book Value Depreciation Book Value
% $20, $8, $12,000
% 12, , ,200
% , , ,320
% , , ,592
% , ,000
$18,000
Final year’s depreciation = amount needed to equate book value with salvage value
= Residual
Value
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15. Reasons for Choosing Straight-Line Depreciation
Simplicity
Reporting to stockholders
Comparability
Bonus plans
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16. Reasons for Choosing Accelerated Methods
Technological rate of
change and competitiveness
Minimize taxable income
Comparability
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17. Changes in Depreciation Estimates
Recompute depreciation schedule
using new estimates
Record prospectively (i.e., change
should affect current and future
years only)
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LO 6

18. Change in Estimate Example:
$20,000 machine originally expected to be depreciated over
5 years. After 2 years, useful life is increased to 7 years.
planned
$3,600
$3,600
$3,600
2012
2013
2014
2015
2016
Depreciation
revise
estimate
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19. Change in Estimate Example:
$10,800 ($12,800 remaining book value – $2,000
salvage) allocated over remaining life
$3,600
$2,160
$2,160
$2,160
2012
2013
2014
2015
2016
2017
2018
revise
estimate
Depreciation
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20. Capital vs. Revenue Expenditures
Balance
Sheet
Capital Expenditure
Treat as asset addition to be depreciated over a period of time
Income
Statement
Revenue Expenditure
Expense immediately
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LO 7

21. Capital vs. Revenue Expenditures
Category Example Asset or Expense
Normal maintenance Repainting Expense
Minor repair Replace spark plugs Expense
Major repair Replace a vehicle’s
engine Asset*
Addition Add a wing to a
building Asset
*if life or productivity is enhanced
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22. Capital Expenditures Example:
$12,800 remaining book value + $3,000 capital expenditure depreciated prospectively over remaining life
$3,600
$2,300
$2,300
$2,300
2012
2013
2014
2015
2016
2017
2018
replace
engine
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23. Disposal of Operating Assets
Record depreciation up to date of disposal
Compute gain or loss on disposal
Proceeds > Book Value = Gain
Proceeds < Book Value = Loss
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LO 8

24. Disposal of Operating Assets
Example:
Sell truck (cost $20,000; accumulated depreciation $9,000) for $12,400
Sale price $ 12,400
Less book value:
Asset cost $20,000
Less: accumulated
depreciation , ( 11,000)
Gain on sale $ 1,400
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25. Disposal of Operating Assets
Example:
Sell truck (cost $20,000; accumulated depreciation $9,000) for $10,000
Sale price $ 10,000
Less book value:
Asset cost $20,000
Less: accumulated
depreciation , ( 11,000)
Loss on sale $ 1,000
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26. Gain/Loss on Sale of Operating Asset
Gain or Loss on Sale of Operating Asset
appears on the Income Statement
Gain or Loss on Sale of Operating Asset is
reported as Other Income/Expense since
it does not constitute the company’s
ongoing or central activity
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27. IFRS and Property, Plant, and Equipment
There are two important differences between U.S.
GAAP and International Accounting Standards(IFRS):
IFRS requires estimates of residual value and the life of the asset be reviewed at least annually. FASB standards does not require the annual review
International Standards allow (but do not require) companies to revalue these assets to reflect their
fair market values. FASB does not allow this revaluing to fair market value.
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28. Long-term assets with no physical properties
Intangible Assets
Long-term assets with no physical properties
Patents
Copyrights
Trademarks
Goodwill
LO 9
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29. Acquisition Cost (ie. legal fees, registration fees, etc.)
Intangible Assets
Includes cost to acquire and prepare for intended use
Acquisition Cost (ie. legal fees, registration fees, etc.)
Purchase Price + +
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30. Research & Development
Must be expensed in period incurred
Difficult to identify future benefits
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31. Amortization of Intangibles
Normally recorded using straight-line method
Reported net of accumulated amortization
Amortized over legal or useful life, whichever is
shorter
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LO 10

32. Amortization of Intangibles
Journal entry:
Patent Amortization Expense 2,000
Accumulated Amortization—Patent 2,000
To record amortization of patent for one year.
Nike’s annual amortization:
Patent approval costs $10,000
Divided by:
Lesser of legal or useful life years
Annual amortization $ 2,000
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33. Intangibles with Indefinite Life
Amortization is not recognized on an asset with an indefinite life
eg. Trademarks, goodwill and broadcast licenses
For intangibles with indefinite lives, impairment of these assets must be considered.
If an impairment has occurred, a loss should be recognized
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34. IFRS and Intangible Assets
International Standards are more flexible in allowing the use of market values for intangible assets for those assets with an “active market”
FASB requires all research and development costs be treated as an expense while International Standards require research cost be expensed and development costs can be capitalized if certain criteria are met
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35. Long-term Assets and the Statement of Cash Flows
Operating Activities
Net income xxx
Depreciation and amortization
Gain on sale of asset
Loss on sale of asset
Investing Activities
Purchase of asset
Sale of asset
Financing Activities
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LO 11

36. Analyzing Long-term Assets
Average Life = Property, Plant & Equipment
Depreciation Expense
What is the average depreciable period (or life) of the company’s assets?
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LO 12

37. Analyzing Long-term Assets
Average Age = Accumulated Depreciation Depreciation Expense
Are assets old or new?
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38. Analyzing Long-term Assets
Asset Turnover = Net Sales
Average Total Assets
How productive are the company’s assets?
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39. End of Chapter 8