2. 16 - 1 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater Accounting for Property, Plant Equipment, and Intangible Assets Accounting for Property, Plant Equipment, and Intangible Assets Chapter 16

3. 16 - 2 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater Calculating the cost of an asset. Learning Objective 1

4. 16 - 3 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater Types of Long-Term Assets Tangible assets: – land – buildings – equipment Intangible assets: – patents – copyrights – franchises – goodwill Natural resources: timber, oil, coal

5. 16 - 4 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater Learning Unit 16-1 (Cost of Property, Plant, and Equipment) Purchase price less discounts Freight Insurance in transit Sales and other taxes Purchase commission Installation costs Expenditures to test the asset Special foundation

6. 16 - 5 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater Learning Unit 16-1 (Cost of Property, Plant, and Equipment) The cost of land includes related costs of surveying, commissions, title searches, and clearing. In other words, any cost necessary to prepare it for its designated purpose. Land has an unlimited useful life, so it is not depreciated.

7. 16 - 6 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater Learning Unit 16-1 (Cost of Property, Plant, and Equipment) What is the cost of the land? It pays $1,000 in back property tax, $6,000 in transfer taxes, $4,000 for removal of an old building, a $1,000 survey fee, and $150,000 to pave the parking lot. A business signs a $100,000 note payable to purchase land for a new building site.

8. 16 - 7 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater Learning Unit 16-1 (Cost of Property, Plant, and Equipment) Purchase price of land$100,000 Add related costs: Back property taxes$ 1,000 Transfer taxes 6,000 Removal of buildings 4,000 Survey fees 1,000 12,000 Total cost of land $112,000

9. 16 - 8 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater Learning Unit 16-1 (Cost of Property, Plant, and Equipment) These assets would be depreciated over that useful life. The cost of driveways, shrubbery, paving of parking lots, sprinkler systems, light poles, etc., have a limited useful life.

10. 16 - 9 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater Calculating depreciation using one of four methods: straight line, declining balance, units of production, and sum of the years’ digits. Learning Objective 2

11. 16 - 10 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater Straight line (SL) Double declining balance (DDB) Units of production (UOP) Learning Unit 16-2 (Depreciation Methods) Sum of the years’ digits (SYM) MACRS

12. 16 - 11 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater Learning Unit 16-2 (Depreciation Methods) Data Items Amount Cost of truck$20,000 Less: Estimated residual value– 2,000 Depreciable cost$18,000 Estimated useful life 5 years Units of production 90,000 miles

13. 16 - 12 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater (Cost – Residual value) ÷ Years of useful life ($20,000 – $2,000) ÷ 5 = $3,600 Year 1 depreciation:$ 3,600 Year 2 depreciation: 3,600 Year 3 depreciation: 3,600 Year 4 depreciation: 3,600 Year 5 depreciation: 3,600 Total depreciation:$18,000 Learning Unit 16-2 (Depreciation Methods: SL)

14. 16 - 13 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater Melvin Company Learning Unit 16-2 (Depreciation Methods: SL) Year 1 Depreciation 20xx $3,600 AccumulatedDepreciation $3,600 20xx

15. 16 - 14 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater ($20,000 – $2,000) ÷ 90,000 = $.20/mile Year 1:30,000 miles × $.20 =$6,000 Year 2:21,000 miles × $.20 = 4,200 Year 3:15,000 miles × $.20 = 3,000 Year 4: 5,000 miles × $.20 = 1,000 Year 5:19,000 miles × $.20 = 3,800 Learning Unit 16-2 (Depreciation Methods: UOP)

16. 16 - 15 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater Learning Unit 16-2 (Depreciation Methods: DDB) Straight-line rate per year: 100% ÷ 5 = 20% Book value of truck at the end of the first year: $20,000 × 40% = $8,000 $20,000 – $8,000 = $12,000 Double declining balance: 2 times the straight-line rate = 40%

17. 16 - 16 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater Learning Unit 16-2 (Depreciation Methods: SYM) The sum-of-the -years’-digits method formula follows: D is the Denominator = Sum of the year’s digits divided by two = [N(N + 1) ÷ 2] N is the numerator = Number of years of life remaining

18. 16 - 17 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater Learning Unit 16-2 (Depreciation Methods: SYM) What is the book value of the truck at the end of the first year? What is the book value of the truck at the end of the second year? $18,000 × 5 ÷ 15 = $6,000 $20,000 – $6,000 = $14,000 $18,000 × 4 ÷ 15 = $4,800 $20,000 – $10,800 = $9,200

19. 16 - 18 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater Calculating depreciation for tax purposes using the Modified Accelerated Cost Recovery System. Learning Objective 3

20. 16 - 19 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater Learning Unit 16-2 (Depreciation Methods: MACRS) MACRS stands for Modified Accelerated Cost Recovery System. Depreciation rates are found in the relevant table provided by the IRS. Class asset life is determined. Listed property items are those which are subject to personal use such as computers and automobiles.

21. 16 - 20 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater Explaining the difference between capital expenditures and revenue expenditures. Learning Objective 4

22. 16 - 21 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater Categories of capital expenditures: Additions or enlargements: (charged to asset account) Extraordinary repairs: (charged to accumulated depreciation) Betterments: (charged to asset account) Learning Unit 16-3 (Capital and Revenue Expenditures)

23. 16 - 22 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater Learning Unit 16-3 (Capital and Revenue Expenditures) What are revenue expenditures? – payments made for ordinary maintenance – another name for expenses These payments occur often. All payments are debited to expense accounts.

24. 16 - 23 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater Learning Objective 5 Journalizing entries for discarding, selling, or exchanging plant assets.

25. 16 - 24 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater Learning Unit 16-3 (Capital and Revenue Expenditures) Discarding plant assets Selling plant assets Exchanging for similar plant assets

26. 16 - 25 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater Learning Unit 16-3 (Capital and Revenue Expenditures) Boulder Company is disposing of a $7,000 truck with no residual value. The truck has been fully depreciated. Accumulated Depreciation7,000 Truck7,000 Assume that the accumulated depreciation on the truck is $6,000.

27. 16 - 26 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater Learning Unit 16-3 (Capital and Revenue Expenditures) Truck cost:$7,000 Accumulated depreciation:$6,000 Book value$1,000 Accumulated Depreciation6,000 Loss on disposal1,000 Truck 7,000 To dispose of truck

28. 16 - 27 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater Dissimilar assets exchange: Gain/loss is recognized in the same manner as if the asset were sold. Similar assets exchange: No gain is recognized. Gain is absorbed into the new asset. The IRS allows neither a gain or loss to be recognized on similar exchanges. Learning Unit 16-3 (Capital and Revenue Expenditures)

29. 16 - 28 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater Learning Objective 6 Explaining amortization and how it applies to intangible assets.

30. 16 - 29 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater Learning Unit 16-4 (Natural Resources and Intangibles) Depletion method is similar to units-of-production depreciation method. (Cost – Residual value) ÷ Estimated units of natural resource = Depletion per unit

31. 16 - 30 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater Learning Unit 16-4 (Natural Resources and Intangibles) Patents Copyrights Franchises Goodwill

32. 16 - 31 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater End of Chapter 16