1. Property, Plant, and Equipment, and Intangibles
Chapter 8
Operating Assets:
Property, Plant, and Equipment,
and Intangibles
Using Financial Accounting Information:
The Alternative to Debits and Credits, 6e by
Gary A. Porter and Curtis L. Norton
Copyright © 2009 South-Western, a part of Cengage Learning.

2. Nike, Inc. Property, Plant, and Equipment
2006
(in millions)
Land $
Buildings
Machinery and equipment 1,661.7
Leasehold improvements
Construction in progress
$ 3,408.3
Less accumulated depreciation (1,750.6)
Property, plant, and equipment (net) $ 1,657.7 At
Cost
Book Value
LO 1

3. Acquisition Cost of PP&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

4. Group Asset Purchases Fair Market % of Cost Allocated Value Market
Allocate cost of lump-sum purchase based on fair market values:
Land =
$30,000
Building =
$90,000
Fair Market
Value
$75,000
$25,000
Allocated
Cost
75% X
25% X
% of
Market
Value
Cost
$100,000 =
LO 3

5. 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

6. Depreciation of PP&E via Match costs of With periods assets benefited
Straight-Line
Accelerated
Methods
Units of
Production
LO 5

7. 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

8. Units-of-Production Method
Allocate asset cost based on number of units produced over its useful life
Depreciation =
$ per unit

9. 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 x 2

10. Depreciation Example On January 1, 2008, ExerCo purchases
a machine for $20,000. The life of the
machine is estimated at five years, after
which it is expected to be sold for $2,000.

11. $20,000 cost - $2,000 residual value = $18,000 to be depreciated
Depreciation Example
Calculate ExerCo’s depreciation of the
machine for using the
units-of-production and double-declining-
balance depreciation methods.
$20,000 cost - $2,000 residual value = $18,000 to be depreciated

12. Straight-Line Depreciation
Depreciation = Cost - Residual Value Life
= $20,000 - $2,000
5 years
= $3,600/year
$18,000
5-year life
$3,600
2008
$3,600
2009
$3,600
2010
$3,600
2011
$3,600
2012

13. Units-of-Production Depreciation
ExerCo’s estimated machine production:
,600 units
,600 units
,600 units
,600 units
,600 units
Total 18,000 units

14. Units-of-Production Depreciation
Depreciation = Cost - Residual Value
per unit Life in Units
= $20,000 - $2, ,000
= $ 1.00 per unit

15. Units-of-Production Depreciation
ExerCo’s depreciation in 2008:
4,000 units x $1/unit = $ 4,000

16. Double-Declining-Balance Depreciation
DDB rate = (100% / useful life) x 2
= (100% / 5 years) x 2
= 40%
Initially
ignore
residual value

17. Double-Declining-Balance Depreciation
2008 Depreciation = Beginning book value x rate
= $20, x 40%
= $8,000
Beginning Ending
Year Rate Book Value Depreciation Book Value
% $20, $8, $12,000

18. Double-Declining-Balance Depreciation
2008 Depreciation = Beginning Book Value × Rate
= $12,000 × 40%
= $4,800
Beginning Ending
Year Rate Book Value Depreciation Book Value
40% $20, $8, $12,000
40% $12, $4, $ 7,200

19. 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

20. Straight-line vs. DDB Depreciation
2008
2009
2010
2011
2012

21. Reasons for Choosing Straight-Line Depreciation
Simplicity
Reporting to stockholders
Comparability
Bonus plans

22. Reasons for Choosing Accelerated Methods
Technological rate of change and competitiveness
Minimize taxable income
Comparability

23. Changes in Depreciation Estimates
Recompute depreciation schedule using new estimates
Record prospectively (i.e., change should affect current and future years only)
LO 6

24. Change in Estimate Example: planned $3,600 $3,600 $3,600 2008 2009
$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
2008
2009
2010
2011
2012
Depreciation
Revise
estimate

25. Change in Estimate Example: 2008 2009 2010 2011 2012 2013 2014 Revise
$12,800 remaining book value allocated prospect over remaining life
$3,600
$2,160
$2,160
$2,160
2008
2009
2010
2011
2012
2013
2014
Revise
estimate
Depreciation

26. 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
LO 7

27. 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

28. Capital Expenditures Example: planned $3,600 $3,600 $3,600 2008 2009
A $20,000 machine purchased on January 1, 2008 is originally
expected to be depreciated over 5 years. After 2 years, an
overhaul of the machine is made at a cost of $3,000. Machine
life is increased by 3 years.
planned
$3,600
$3,600
$3,600
2008
2009
2010
2011
2012
Major
overhaul

29. Capital Expenditures Example: 2008 2009 2010 2011 2012 2013 2014
$12,800 remaining book value + $3,000 capital expenditure depreciated prospectively over remaining life
$3,600
$2,300
$2,300
$2,300
2008
2009
2010
2011
2012
2013
2014
Major
overhaul

30. 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
LO 8

31. 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

32. Long-term assets with no physical properties
Intangible Assets
Long-term assets with no physical properties
Patents
Copyrights
Trademarks
Goodwill
LO 9

33. Acquisition Cost (i.e., legal fees, registration fees, etc.)
Intangible Assets
Includes cost to acquire and prepare for intended
use
Acquisition Cost (i.e., legal fees, registration fees, etc.) +
Purchase Price +

34. Nike, Inc. Partial Balance Sheet
(in millions)
2006
Amortized Intangible Assets:
Patents $ 23.6
Trademarks
Other
$ 64.0
Unamortized intangible assets:
Trademarks $341.5
Total $405.5
Goodwill $130.8
Intangible
Assets

35. Research & Development
Must be expensed in period incurred
Difficult to identify future benefits

36. Amortization of Intangibles
Normally recorded using straight-line method
Reported net of accumulated amortization
Amortized over legal or useful life, whichever is shorter
LO 10

37. Amortization of Intangibles
Only amortize intangible assets with definite life
E.g.. Patents, copyrights

38. Amortization of Intangibles
Example:
Nike developed a patent for $10,000. The patent’s legal life is 20 years, but its anticipated useful life is 5 years.

39. Amortization of Intangibles with Finite Life
To record amortization of patent for one year
Balance Sheet Income Statement
Assets = Liabilities + Stockholders’ Revenues - Expenses
Equity
Patent (2,000) Patent Amortization
Expense (2,000)
Nike’s annual amortization:
Patent approval costs $10,000
Divided by:
Lesser of legal or useful life years
Annual amortization $ 2,000

40. Intangibles with Indefinite Life
These intangibles are not amortized
E.g., Broadcast license, trademarks, goodwill
Should test annually for “impairment”
If asset is impaired, record “Loss on Impairment”

41. 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
LO 11

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

43. Analyzing Long-term Assets
Average Age = Accumulated Depreciation Depreciation Expense
Are assets old or new?

44. Analyzing Long-term Assets
Asset Turnover = Net Sales
Average Total Assets
How productive are the company’s assets?

45. End of Chapter 8