1. Property, Plant & Equipment (PP&E)
201Lec09.PPTX 9
Long - Lived Assets
Property, Plant & Equipment (PP&E)
Intangible Assets
Have physical substance
Used in business (not just investment)
Not for sale to customers
Consist of:
legal rights
processes
name recognition
patient lists
contracts
licenses
goodwill 1

2. GAAP rules and issues regarding Long Lived Assets
Purchase - companies must record plant assets at cost.
Cost consists of all expenditures necessary to acquire an asset and make it ready for use.
Improvements, called capital expenditures, are added to the asset account. Extend life, efficiency or capacity
Repairs, maintenance and recurring costs are expensed immediately Called revenue expenditures.
Record Depreciation or Amortization Expense each year if asset has a limited life. 2

3. Land (not land improvements. See later)
Determining the Cost of Plant Assets
Land (not land improvements. See later)
Debit the land account for costs such as:
the cash purchase price,
closing costs such as title and attorney’s fees,
real estate brokers’ commissions, and
Accrued property taxes and other liens on the land assumed by the purchaser.
Costs to prepare the land for use such as grading, filling, clearing, razing net of salvage proceeds
Land has unlimited life so NO depreciation expense 3

4. Land Improvements Determining the Cost of Plant Assets
Limited useful lives.
Expense (depreciate) the cost of land improvements over their useful lives.
Examples are driveways, parking lots, fences, landscaping, and underground sprinklers. 4

5. Chuck Co. International headquarters
Determining the Cost of Plant Assets
Buildings
Purchase costs:
Purchase price, closing costs (attorney’s fees, title insurance, etc.) and real estate broker’s commission.
Remodeling and replacing roof, floors, electrical wiring, and plumbing.
Construction costs:
Contract price plus payments for architects’ fees, building permits, interest and taxes during construction period and excavation costs.
Chuck Co. International headquarters 5 5

6. Equipment Determining the Cost of Plant Assets
Debit the equipment account for costs such as:
cash purchase price
sales taxes
freight charges
insurance during transit paid by the purchaser
expenditures required in assembling, installing, and testing the unit
Reduce by rebates 6

7. Effect of Plant Assets on the Financial Statements
Stays on balance sheet at cost less accumulated depreciation (called book value). This is NOT intended to equal MARKET value.
One exception, if permanent decline (called impairment) then write down asset to market value.
Spread cost over useful life to depreciation expense.
Not a valuation but rather an allocation
Gain or loss will be recorded when disposed. 7

8. Depreciation rules in general
GAAP allows choice of several depreciation methods.
- Choose separate method for each asset category
Goal is to reflect best measure of asset’s contribution to operations over its useful life.
- Depreciable Cost = Portion of asset that will be depreciated = Cost less salvage value*
*Salvage value is estimated value at end of asset’s useful life*
*Useful life is estimated time asset will be used in your business
Method used for taxes is different than on books! Called MACRS (Modified Accelerated Cost Recovery System) 8

9. (Cost - Salvage value ) x 1/(useful life)
Depreciation Methods - SL
EXPENSE
ANNUAL
Y E A R OF ASSET LIFE
STRAIGHT LINE (SL) formula:
Base x Rate
(Cost - Salvage value ) x 1/(useful life)
Expense is same amount for each year. 9

10. (Cost – Accum Depreciation) x 2 / (useful life)
Depreciation Methods - DDB
EXPENSE
ANNUAL
Y E A R OF ASSET LIFE
DOUBLE DECLINING BALANCE (DDB) formula: Base x Rate
(Cost – Accum Depreciation) x 2 / (useful life)
Considered an “accelerated” method since more depreciation in early years that later ones. 10

11. (Current Units Used) x (Unit Rate*)
Depreciation Methods - Units
EXPENSE
ANNUAL
Up/Down - Depends on usage
YEAR OF ASSET LIFE
UNITS OF ACTIVITY(Units) formula: Base x Rate
(Current Units Used) x (Unit Rate*)
*Unit Rate = Cost - Salvage value Life in Units 11

12. Example: Depreciation calculations
Chuck Co. purchased a small delivery truck on Jan 1, 2017.
Cost $30,000
Expected salvage value $3,000
Estimated useful life in years
Estimated useful life in miles ,000
Required: Compute depreciation using the following.
(a) Straight-Line.
(b) Declining Balance.
(c) Units-of-Activity. 12

13. Example: (a) Straight Line
Depreciable Annual Accum Book
Year Cost x Rate = Expense Deprec. Value
2017
$ 27,000 *
20% *
$ 5,400
$ 5,400
$ 24,600
2018
27,000 20
5,400
10,800
Cost ,000
-Acc Depr (5,400)
19,200
2019
27,000 20
5,400
16,200
13,800
2020
27,000 20
5,400
21,600
8,400
2021
27,000 20
5,400
27,000
3,000
* $30,000 cost less $3,000 estimated salvage value
* 1 / 5 years times 100 (to convert to percent)
Variation: Assume the delivery truck was purchased on 4/1/17.
2017 depreciation = $5,400 x 9/12 = $4,050. 13

14. Example: (b) Double Declining Balance
Cost less x SL Annual Accum Book
Year Accum Depr x Rate = Expense Deprec. Value
2017
30,000
40%
$ 12,000
$ 12,000
$ 18,000
2018
18,000 40
7,200
19,200
10,800
2019
10,800 40
4,320
23,520
6,480
2020
6,480 40
2,592
26,112
3,888
2021
3,888 40
888*
27,000
3,000
* Annual expense in last year limited. Book value can’t be lower than estimated salvage value.
Variation: Assume the delivery truck was purchased on 4/1/17.
2017 depreciation = $12,000 x 9/12 = $9,000. 14

15. Example: (c) Units Miles Rate Per Annual Accum. Book
Year Used x Mile = Expense Deprec. Value
2017
15,000 *
$ 0.27*
$ 4,050
$ 4,050
$ 25,950
2018
30,000 *
0.27
8,100
12,150
17,850
2019
20,000 *
0.27
5,400
17,550
12,450
2020
25,000 *
0.27
6,750
24,300
5,700
2021
10,000 *
0.27
2,700
27,000
3,000
* Assume these additional facts.
* ($30,000 – 3,000) / 100,000 units = 27 cents per mile 15

16. GAAP Rule requiring Revised depreciation Amount
Recompute depreciation expense for future periods for improvements that modify useful life/salvage or if you later discover that original useful life or salvage estimates were inaccurate.
Use Book Value at date of change instead of Cost and Revised remaining Life (and/or salvage) in depreciation calculations.
Fix Or
Repair
Daily 16

17. Original Cost = 250,000, Salvage = 50,000, Life = 10 Years, SL used.
Example:
Original Cost = 250,000, Salvage = 50,000, Life = 10 Years, SL used.
After 4 years, revise total life to 6 years Revised salvage = 0.
Years 1, 2, 3, 4 : Depreciation Expense = (250, ,000) / = 20,000 per year.
Years 5, 6: Depreciation Expense
= [(Book Value) - New Salvage ] / (Remaining life) = [(250,000-80,000) ] / (6-4) = 85,000 per year.
Total: 4 x 20, x 85,000 = 250,000 17

18. Sale or discarding of Plant Assets
Recording gain or loss on DISPOSAL
Sale or discarding of Plant Assets
Compare the book value*of the asset with the proceeds (if any) received from the sale.
If proceeds exceed the book value, record a credit to gain on disposal.
If proceeds are less than the book value, record a debit to loss on disposal.
* If disposed in the middle of the year, record depreciation expense for the partial year before the disposal. 18

19. Example: Disposals
Assume that Chuck Co in the previous example sells the truck at the end of 2018 for cash of $20,000. Also assume straight line depreciation was elected. (accumulated = $10,800)
Cash 20,000
Accumulated depreciation 10,800
Trucks 30,000
Gain on disposal 800 19

20. Example: Disposals
Variation: Assume that the sales price was instead only $10,000.
Cash 10,000
Accumulated depreciation 10,800
Loss on disposal ,200
Trucks 30,000 20

21. Patents: Exclusive right to make and sell
Intangible Assets
Patents: Exclusive right to make and sell
Copyrights: Like patent for artistic work
Trademark: Protect name, phrase, jingle
Franchise/license: Contract to use above
Goodwill: Extra “value” of ongoing business
Research & Development (R&D): costs incurred in creating intangibles
Goodwill
License
Trademark
Franchise
Patent
Copyright 21

22. Amortize (typically straight line) asset over useful life.
GAAP rules and issues regarding Intangibles
Capitalize (record as asset) only cost of purchase, filing and legal fees in acquiring or defending in court.
Amortize (typically straight line) asset over useful life.
- Debit Amortization Expense and credit Asset Account
- Goodwill and trademarks have unlimited life (No amortization.) Impairment rule applies to all intangibles
R & D is to be treated as EXPENSE (Not capitalized.) -Theory is its impossible to track how much results in asset or is used up Examples: advertising, trial and error product research. 22

23. Lease versus Buy Assets - Cash flow differences
Miscellaneous
Lease versus Buy Assets
- Cash flow differences
Typically lower up front cost for lease, lower monthly payments
- Income statement difference
Rent expense or Depreciation + interest expense
- Balance sheet difference
Assets and liabilities not reported with lease
Example: Lease Buy
Assets $1,000,000 $11,000,000
Liabilities , ,100,000
Debt/assets % % 23

24. Miscellaneous
Return on Asset Ratio indicates the amount of net income generated by each dollar of assets. 24 18

25. Miscellaneous
Asset Turnover Ratio indicates how efficiently a company uses its assets to generate sales. 25