Presentation is loading. Please wait.

Presentation is loading. Please wait.

Property, Plant & Equipment (PP&E)

Similar presentations


Presentation on theme: "Property, Plant & Equipment (PP&E)"— Presentation transcript:

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


Download ppt "Property, Plant & Equipment (PP&E)"

Similar presentations


Ads by Google