PHM Poa1 ch09 Stu

Long-Term Assets: Plant Assets and Intangibles
Chapter 9
Copyright 2007 Prentice-Hall. All rights reserved
Objective 1
Define and describe the life cycle of long-term assets
Long-lived Assets
Plant Assets Natural Resources Intangible Assets
Depreciation
Depletion
Amortization
Internal Controls
All plant assets should be labeled Maintain a subsidiary ledger Reconcile the total balance of subsidiary accounts with the controlling account Physically inspect each asset at least once a year
Objective 2
Calculate and record the cost to acquire plant assets
Cost Principle
Assets should be recorded at their historical cost Cost of an asset all costs necessary to acquire the asset and get it ready for its intended use
Land and Land Improvements

Land Purchase price Legal fees Costs of grading and clearing Additional permanent improvements Not depreciated Land Improvements - Improvements with limited life Driveways and parking lots Sidewalks Fences Depreciated
Buildings
Purchase price Legal fees Repairs and renovations If self-constructed
Architectural fees Building permits Material Labor Overhead Some interest costs
Copyright 2007 Prentice-Hall. All rights reserved 8
Machinery and Equipment

Purchase price (less any discounts) Transportation charges Insurance while in transit Sales tax Installation costs Cost of testing before asset is used
Furniture and Fixtures

Purchase price (less any discounts) Shipping charges Costs to assemble
10
E9-14
Land Purchase price $200,000 Property tax 2,100 Title insurance 2,500 Remove and level 10,400 $215,000
Building and Land Improvements are the assets to be depreciated
Building Cost
$800,000
Land improvements Fence $51,000 Signage 15,000 Lighting 6,000 $72,000
11
Lump Sum Purchases

Assign cost to individual assets based on relative sales values
12
E9-16
Bed Appraised Cost
1
Percent of Value
Cost
Allocated Cost
$3,000 $3,000/$12,000 25.0% X $10,000
$2,500 4,170 3,330 $10,000
2
3
5,000 $5,000/$12,000 10,000 41.7% X

4,000 $4,000/$12,000 10,000 33.3% X $12,000
100%
13
E9-16
GENERAL JOURNAL
DATE DESCRIPTION REF DEBIT CREDIT
Bed 1 Bed 2 Bed 3 Cash Note Payable
2,500 4,170 3,330

5,000 5,000
14
Capital Expenditures
Does the expenditure increase capacity or efficiency or extend useful life? YES NO
Capital Expenditure Debit asset account
Expense Debit repairs and maintenance expense

15
E9-16
Expenditure benefits more Capital Expenditures Purchase price than one period. Debit an Lubrication before machine asset is placed in service
Major overhaul Sales tax Transportation and insurance Expenditure that maintains Installation the asset in its current Training of personnel
Expenses:
Ordinary recurring repairs Periodic lubrication Income tax
working condition. Debit an expense
16
Objective 3
Calculate and record depreciation of plant assets
17
Depreciation
Process of allocating the cost of a plant asset to expense over its useful life in a rational and systematic way
Matching Principle
18
Depreciation Adjusting Entry

GENERAL JOURNAL
Depreciation Expense Accumulated Depreciation
Partial balance sheet: Building Less Accumulated Depreciation

Book Value
$120,000 (80,000) $40,000

19
Factors in Computing Depreciation

1. Cost 2. Estimated Residual Value
Depreciable cost = Cost Residual Value
3. Estimated Useful Life

Physical wear and tear Obsolescence
20
Depreciation Methods
Straight-line Units-of-production Declining balance
21
Straight-Line Method
Depreciation Expense per Year
Cost - Residual Value Useful life in years
Allocates an equal amount each year Depreciation is a function of time Appropriate for assets that generate revenues evenly over time, like building
E9-19
Straight-line $30,000 $6,000 / 4 years = $6,000 per yr
Depr Exp for Year Total Accum Depr Year-End Book Value
Year 2006
2007 2008 2009
$6,000 6,000
$6,000 12,000
$24,000
18,000
6,000
6,000
18,000
24,000
12,000
6,000
23
Units-of-Production Method
1: Compute depreciation per unit: Cost - Residual Value Total Units of Production
2: Compute depreciation expense:

Depreciation is a function of use of units produced Depreciation Number method for an asset that This is an appropriate per unit in the period depreciates due to wear and tear, like a vehicle
24
E9-19
Units of Production ($30,000 - $6,000) / 1,000 operations = $24.00 per operation
Year 2006 2007 2008 2009 Depr Exp for Year Total Accum Depr Year-End Book Value
$24 x 100 $2,400 $24 x 300 7,200
$2,400 9,600 19,200 24,000
$27,600 18,000 10,800 6,000

25
9,600
4,800
Double-Declining Balance Method

Accelerated method writes off a greater amount of the cost of an asset in earlier years of assets useful life. Amount of depreciation expense Depreciation is a function of time recognized declines each year
This method is appropriate for assets that produce more revenues in their early years (match higher depreciation expense with higher revenues)
26
Double-Declining-Balance Method
1: Compute straight-line rate and multiply it by 2
1 Useful life in years
X2
2: Multiply beginning book value by rate

Depreciation Double-decliningBeginning period = expense balance rate book value
Ignores residual value
Switchover to Straight Line

A method employed by some companies Change from double-declining balance to straight-line during the next-to-last year of assets life Eliminates the need to use a plug figure for depreciation expense in last year
Switch to Straight line Double declining Balance: Rate = 2/4 or 50%

Year 20x6 20x7 Depr Exp for Year Total Accum Depr Year-End Book Value
E9-19
$30,000 x 50% $15,000 $15,000
$15,000 7,500 6,750 6,000

29
$15,00 x 50% 22,500 7,500 6,000)/223,250 750 20x8 ($7,500

20x9
750
24,000
Use of Depreciation Methods

10% 84% 5% 1%
Straight-line
Accelerated
UOP
Other
30
Partial Year Depreciation

When plant asset is acquired during the year, compute full years depreciation and multiply that by the fraction of the year the asset is owned
31
Revising Depreciation
Depreciation is an estimate
Estimated residual value Estimated useful life
Book value New residual value Remaining life in years
32
E9-20
Cost Residual value Depreciable base $700,000 100,000 $600,000 /40 years $15,000
Depreciation expense per year
33
E9-20
Depreciation expense per year Accumulated depreciation after 15 years $15,000 X 15 years $225,000
34
E9-20
Book value after 15 years Cost $700,000 Accumulated depreciation (225,000) Cost left to depreciate $475,000 Residual value (175,000) New depreciable base $300,000 Life (30 years 15 years taken) /15 year New depreciation per year $20,000
35
E9-20
GENERAL JOURNAL
Yr
15 Depreciation Expense Accumulated Depreciation 16 Depreciation Expense Accumulated Depreciation
15,000
15,000
Yr
20,000
20,000
36
Fully Depreciated Assets

If still useful, a company will continue to use it Report book value on balance sheet Record no more depreciation
37
Depreciation for Tax Reporting

Modified Accelerated Cost Recovery System (MACRS) Assets are classified into categories by asset life Depreciation method is specified according to category
38
Objective 4
Calculate and record the disposal of plant assets
39
Disposing of a Plant Asset

Sell Exchange Discard
40
Disposing of a Plant Asset

Bring depreciation up to date Compare assets received with book value of asset being disposed of to determine if there is a gain or loss
Gain increases net income credit balance Loss decreases net income debit balance
Record entry to remove asset from books

E9-21
Depreciation for 2007: $10,000 / 5 = $2,000 Depreciation for 2008 (through Sept 30) ($10,000 / 5) x 9/12 = $1,500
Accumulated Depreciation
2,000 1,500
3,500 balance
E9-21
Book Value of Fixtures: Cost $10,000 Accumulated Depreciation 3,500 $6,500 Cash Received (5,000) Loss on sale of fixtures $1,500
A loss is similar to an expense and appears on the income statement as an Other revenues and expenses
E9-21
GENERAL JOURNAL
Sep 30 Depreciation Expense Accumulated Depreciation 30 Cash Accumulated Depreciation Loss on Sale of Fixtures Fixtures
1,500 1,500 5,000 3,500 1,500 10,000
44
Exchanging Plant Assets

Market value of new asset
>
Book value of old asset + cash given
Cost of the new asset =
45
Exchanging Plant Assets

Market value of new asset
<
Book value of old asset + cash given
Cost of the new asset = Recognize a loss for the difference

E9-23
Depreciation Rate: ($350,000 - $100,000) / 1,000,000 miles = $0.25 per mile Depreciation Expense: 2006: $0.25 x 80,000 miles = $20,000 2007: $0.25 x 120,000 miles = 30,000 2008: $0.25 x 160,000 miles = 40,000 2009: $0.25 x 40,000 miles = 10,000 Total accumulated depreciation $100,000
47
E9-23
Book value of old truck: Cost Accumulated depreciation Cash paid Cost of new truck
$350,000 (100,000) $250,000 50,000 $300,000
48
Objective 5
Calculate and record depletion of natural resources
49
Natural Resources
Plant assets extracted from the natural environment Expensed through depletion using the units of production method Reported on balance sheet at cost less accumulated depletion
50
Depletion
Compute depletion rate per unit:
Cost Residual Value Estimated total units of natural resource
Compute depletion expense:

Number of units Depletion extracted this rate per unit period
E9-24
Mine: Filing fee License Survey Total cost Divided by $398,500 500 1,000 60,000 $460,000 200,000 tons = $2.30 per ton
Depletion: 40,000 tons @ $2.30/ton = $92,000

E9-24
GENERAL JOURNAL
a)
Mineral Asset Cash Mineral Asset Cash To record filing and license fees
398,500 398,500 1,500 1,500
b)
53
E9-24
GENERAL JOURNAL
b)
Mineral Asset Cash Paid for geological survey
60,000 60,000
c)
Depletion Expense, Mineral Asset Accumulated Depletion, Mineral Asset
92,000 92,000
54
Objective 6
Account for intangible assets
55
Intangible Assets
Noncurrent assets with no physical form Provide exclusive rights or privileges Acquired to help generate revenues Expensed through amortization using the straight-line method over the assets useful life Written off the asset directly
Patents
Exclusive 20-year right to produce and sell an invention Granted by federal government
57
Copyrights
Exclusive right to reproduce and sell artistic works or intellectual property Issued by federal government Legal life 70 years beyond life of the creator
58
Trademarks, Brand Names

Represent distinctive identifications of a product or service
59
Franchises, Licenses
Franchises - privileges granted by private business or government to sell goods or services Acquisition cost is capitalized and amortized
60
E9-25
GENERAL JOURNAL
DATE DESCRIPTION
REF
DEBIT
CREDIT
a)
Patent Cash
1,000,000
1,000,000
b)
Amortization Expense, Patent Patent ($1,000,000 / 8 years)

125,000 125,000
61
E9-25
Cost Less amortization for 4 years (125,000 x 4) Carrying value of patent
GENERAL JOURNAL DATE DESCRIPTION REF DEBIT CREDIT
$1,000,000 500,000 $500,000
Yr 5
Amortization Expense, Patent Patent ($500,000 / 2 years)

250,000 250,000
62
Goodwill
Excess of purchase price of a company over market value of net assets acquired Only recorded in the purchase of another company Not amortized Measure value of each year
If value has increased record nothing If value has decreased recognize loss and decrease carrying value
E9-26
Goodwill Purchase price $11,000,000 Market value of net assets: Assets $15,000,000 Liabilities (10,000,000) 5,000,000 Cost of goodwill purchased $6,000,000
64
E9-26
GENERAL JOURNAL
DATE DESCRIPTION
REF
DEBIT
CREDIT
(in millions) Other Assets Goodwill Liabilities Cash 15 6 10 11
65
Objective 7
Report long-term assets on the balance sheet
66
Balance Sheet Presentation

Total Current Assets Property, Plant, and Equipment Land Buildings Equipment Less: Accumulated Depreciation, Buildings and Equipment Oil Less: Accumulated Depletion, Oil Property, Plant, and Equipment, net Goodwill
$880,000 120,000 $800,000 160,000 960,000 (410,000) $380,000 (80,000) 300,000 970,000 350,000
67
550,000
End of Chapter 9
68

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Long-Term Assets: Plant Assets and Intangibles

Copyright 2007 Prentice-Hall. All rights reserved

Copyright 2007 Prentice-Hall. All rights reserved

Copyright 2007 Prentice-Hall. All rights reserved

Copyright 2007 Prentice-Hall. All rights reserved

Copyright 2007 Prentice-Hall. All rights reserved

Copyright 2007 Prentice-Hall. All rights reserved

Land and Land Improvements

Copyright 2007 Prentice-Hall. All rights reserved

Machinery and Equipment

Copyright 2007 Prentice-Hall. All rights reserved

Furniture and Fixtures

Copyright 2007 Prentice-Hall. All rights reserved

Land improvements Fence $51,000 Signage 15,000 Lighting 6,000 $72,000

Copyright 2007 Prentice-Hall. All rights reserved

Lump Sum Purchases

Copyright 2007 Prentice-Hall. All rights reserved

$3,000 $3,000/$12,000 25.0% X $10,000

$2,500 4,170 3,330 $10,000

5,000 $5,000/$12,000 10,000 41.7% X

Copyright 2007 Prentice-Hall. All rights reserved

Bed 1 Bed 2 Bed 3 Cash Note Payable

2,500 4,170 3,330

Copyright 2007 Prentice-Hall. All rights reserved

Capital Expenditure Debit asset account

Expense Debit repairs and maintenance expense

Copyright 2007 Prentice-Hall. All rights reserved

Ordinary recurring repairs Periodic lubrication Income tax

working condition. Debit an expense

Copyright 2007 Prentice-Hall. All rights reserved

Copyright 2007 Prentice-Hall. All rights reserved

Copyright 2007 Prentice-Hall. All rights reserved

Depreciation Adjusting Entry

Depreciation Expense Accumulated Depreciation

Partial balance sheet: Building Less Accumulated Depreciation

$120,000 (80,000) $40,000

Factors in Computing Depreciation

3. Estimated Useful Life

Copyright 2007 Prentice-Hall. All rights reserved

Copyright 2007 Prentice-Hall. All rights reserved

Depreciation Expense per Year

Cost - Residual Value Useful life in years

2: Compute depreciation expense:

Copyright 2007 Prentice-Hall. All rights reserved

$24 x 100 $2,400 $24 x 300 7,200

$2,400 9,600 19,200 24,000

$27,600 18,000 10,800 6,000

Copyright 2007 Prentice-Hall. All rights reserved

Double-Declining Balance Method

Copyright 2007 Prentice-Hall. All rights reserved

2: Multiply beginning book value by rate

Switchover to Straight Line

Switch to Straight line Double declining Balance: Rate = 2/4 or 50%

$30,000 x 50% $15,000 $15,000

$15,000 7,500 6,750 6,000

$15,00 x 50% 22,500 7,500 6,000)/223,250 750 20x8 ($7,500

Use of Depreciation Methods

Partial Year Depreciation

Copyright 2007 Prentice-Hall. All rights reserved

Book value New residual value Remaining life in years

Copyright 2007 Prentice-Hall. All rights reserved

Depreciation expense per year

Copyright 2007 Prentice-Hall. All rights reserved