Financial Accounting & Information
Systems
Objectives:
Session 7
• Fundamentals of Accounting for fixed assets
(Chapter 10)
• Review of Examination Paper
Chapter
10-1
Chapter
10-2
Chapter
10
Plant Assets, Natural
Resources, and
Intangible Assets
Chapter
10-3
Accounting Principles, Ninth Edition
Section 1 – Plant Assets
Plant assets include land, land improvements,
buildings, and equipment (machinery, furniture, tools).
Major characteristics include:
“Used in operations” and not for resale.
Long-term in nature and usually depreciated.
Possess physical substance.
Referred to as property, plant, and equipment; plant and
equipment; and fixed assets.
Chapter
10-4
Determining the Cost of Plant Assets
While recording Fixed Assets, all of the direct costs
incurred in association with the acquiring of that
asset are recorded as part of the cost of the asset.
Direct costs include purchase price, attorney’s fee,
title deed / documents charges, Excise duty, import
duty, un-adjustable sales tax broker’s commissionetc.
Borrowing costs and closing costs also need to be
capitalized
Chapter
10-5
SO 1 Describe how the cost principle applies to plant assets.
Determining the Cost of Plant Assets
Illustration: Assume that Hayes Manufacturing Company
acquires real estate at a cash cost of $100,000. The
property contains an old warehouse that is razed at a net
cost of $6,000 ($7,500 in costs less $1,500 proceeds from
salvaged materials). Additional expenditures are the
attorney’s fee, $1,000, and the real estate broker’s
commission, $8,000.
Required: Determine amount to be reported as the cost of
the land.
Chapter
10-6
SO 1 Describe how the cost principle applies to plant assets.
Determining the Cost of Plant Assets
Required: Determine amount to be reported as the cost of
the land.
Land
Cash price of property of $100,000
$100,000
Old warehouse razed at a cost of $6,000
6,000
Attorney's fees of $1,000
1,000
Real estate broker’s commission of $8,000
8,000
Cost of Land
Chapter
10-7
$115,000
SO 1 Describe how the cost principle applies to plant assets.
Some Types of Property Plant and Equipments
Land, Land Improvements, Plant &
Machinery, Equipments, Buildings, Furniture,
Vehicles etc.
Note that Property Plant and Equipment
(Fixed Assets) is just one type of non
current asssets
Imagine other types!
Chapter
10-8
SO 1 Describe how the cost principle applies to plant assets.
Depreciation
Depreciation is the process of allocating the cost of
tangible assets to expense in a systematic and rational
manner to those periods expected to benefit from the
use of the asset.
Process of cost allocation, not asset valuation
(Imp)
Applies to land improvements, buildings, and
equipment, not land unless it’s a mine etc..
Depreciable, because the revenue-producing
ability of asset will decline over the asset’s
useful life.
Chapter
10-9
SO 2 Explain the concept of depreciation.
Depreciation
Factors in Computing Depreciation
Cost
Chapter
10-10
Useful Life
Illustration 10-6
Salvage Value
SO 2 Explain the concept of depreciation.
Depreciation
Depreciation Methods
Objective is to select the method that best measures
an asset’s contribution to revenue over its useful life.
Examples include:
(1) Straight-line method
(2) Units-of-Activity method
(3) Declining-balance method
All methods are allowed under
IAS 16
Chapter
10-11
SO 3 Compute periodic depreciation using different methods.
Depreciation
Illustration: Barb’s Florists purchased a small delivery
truck on January 1, 2010.
Illustration 10-7
Required: Compute depreciation using the following.
(a) Straight-Line.
(b) Units-of-Activity.
(c) Declining Balance.
Chapter
10-12
SO 3 Compute periodic depreciation using different methods.
Depreciation
Straight-Line
Expense is same amount for each year.
Depreciable cost is cost of the asset less its
salvage value.
Illustration 10-9
Chapter
10-13
SO 3 Compute periodic depreciation using different methods.
Depreciation
Illustration: (Straight-Line Method)
Illustration 10-10
Year
Depreciable
Cost
2010
$ 12,000
2011
12,000
20
2,400
4,800
8,200
2012
12,000
20
2,400
7,200
5,800
2013
12,000
20
2,400
9,600
3,400
2014
12,000
20
2,400
12,000
1,000
2010
Journal
Entry
Chapter
10-14
x
Rate
=
20%
Annual
Expense
Accum.
Deprec.
Book
Value
$ 2,400
$ 2,400
$ 10,600
Depreciation expense
Accumulated depreciation
2,400
2,400
SO 3 Compute periodic depreciation using different methods.
Depreciation
Units-of-Activity
Companies estimate total units of activity to calculate
depreciation cost per unit.
Expense varies based on units of activity.
Depreciable cost is
cost less salvage
value.
Chapter
10-15
Illustration 10-11
SO 3 Compute periodic depreciation using different methods.
Depreciation
Illustration: (Units-of-Activity Method)
Illustration 10-12
Hours
Rate per
=
Book
Expense
Deprec.
Value
Used
2010
15,000
$ 0.12
$ 1,800
$ 1,800
$ 11,200
2011
30,000
0.12
3,600
5,400
7,600
2012
20,000
0.12
2,400
7,800
5,200
2013
25,000
0.12
3,000
10,800
2,200
2014
10,000
0.12
1,200
12,000
1,000
Chapter
10-16
Hour
Accum.
Year
2010
Journal
Entry
x
Annual
Depreciation expense
Accumulated depreciation
1,800
1,800
SO 3 Compute periodic depreciation using different methods.
Depreciation
Declining-Balance
Decreasing annual depreciation expense over the
asset’s useful life.
Declining-balance rate is double the straight-line
rate.
Rate applied to book value.
Illustration 10-13
Chapter
10-17
SO 3 Compute periodic depreciation using different methods.
Depreciation
Illustration: (Declining-Balance Method)
Declining
Balance
x Rate =
Illustration 10-14
Year
Beginning
Book value
2010
13,000
40%
2012
7,800
40
3,120
8,320
4,680
2013
4,680
40
1,872
10,192
2,808
2014
2,808
40
1,123
11,315
1,685
2015
1,685
40
12,000
1,000
2010
Journal
Entry
Chapter
10-18
Annual
Expense
Accum.
Deprec.
Book
Value
$ 5,200
$ 5,200
$ 7,800
685*
Depreciation expense
5,200
Accumulated depreciation
* Computation of $674 ($1,685 x 40%) is adjusted to $685.
5,200
Depreciation
Comparison of Depreciation Methods
Illustration 10-15
Illustration 10-16
Chapter
10-19
SO 3 Compute periodic depreciation using different methods.
Depreciation for Partial Year
The following five slides are included to
illustrate the calculation of partial-year
depreciation expense.
The amounts are consistent with the previous
slides illustrating the calculation of depreciation
expense.
Chapter
10-20
SO 3 Compute periodic depreciation using different methods.
Depreciation for Partial Year
Illustration: Barb’s Florists purchased a small delivery
truck on October 1, 2010.
Illustration 10-7
Required: Compute depreciation using the following.
(a) Straight-Line.
(b) Units-of-Activity.
(c) Declining Balance.
Chapter
10-21
SO 3 Compute periodic depreciation using different methods.
Depreciation for Partial Year
Illustration: (Straight-line Method)
Current
Year
Expense
Year
Depreciable
Cost
2010
$ 12,000
x
20% =
$ 2,400
2011
12,000
x
20% =
2,400
2,400
3,000
2012
12,000
x
20% =
2,400
2,400
5,400
2013
12,000
x
20% =
2,400
2,400
7,800
2014
12,000
x
20% =
2,400
2,400
10,200
2015
12,000
x
20% =
2,400
1,800
12,000
Rate
Annual
Expense
Partial
Year
x
x
3/12
9/12
=
=
$
600
Accum.
Deprec.
$
600
$ 12,000
Journal entry:
2010
Depreciation expense
Accumultated depreciation
Chapter
10-22
600
600
SO 3 Compute periodic depreciation using different methods.
Depreciation for Partial Year
Illustration: (Units-of-Activity Method)
Hours
Rate per
=
Accum.
Book
Expense
Deprec.
Value
Used
2010
15,000
$ 0.12
$ 1,800
$ 1,800
$ 11,200
2011
30,000
0.12
3,600
5,400
7,600
2012
20,000
0.12
2,400
7,800
5,200
2013
25,000
0.12
3,000
10,800
2,200
2014
10,000
0.12
1,200
12,000
1,000
Chapter
10-23
Hour
Annual
Year
2010
Journal
Entry
x
Illustration 10-12
Depreciation expense
Accumulated depreciation
1,800
1,800
SO 3 Compute periodic depreciation using different methods.
Depreciation for Partial Year
Illustration: (Declining-Balance Method)
Declining
Balance
Rate
Annual
Expense
Partial
Year
3/12
Year
Beginning
Book Value
2010
$ 13,000 x
40%
= $ 5,200 x
2011
11,700 x
40%
=
2012
7,020 x
40%
2013
4,212 x
2014
2015
Current
Year
Expense
1,300
$ 1,300
4,680
4,680
5,980
=
2,808
2,808
8,788
40%
=
1,685
1,685
10,473
2,527 x
40%
=
1,011
1,011
11,484
1,516 x
40%
=
607
516
12,000
Plug
= $
Accum.
Deprec.
$ 12,000
Journal entry:
2010
Depreciation expense
Accumultated depreciation
Chapter
10-24
1,300
1,300
SO 3 Compute periodic depreciation using different methods.
Depreciation
Depreciation and Income Taxes
IRS does not require taxpayer to use the same depreciation method on the tax
return that is used in preparing financial statements.
IRS requires the straight-line method or a special accelerated-depreciation
method called the Modified Accelerated Cost Recovery System (MACRS).
MACRS is NOT acceptable under GAAP.
FBR requires depreciation calculation as per
third schedule of Income Tax Ordinance 2001
Mostly declining balance method with exact
rates mentioned for different classes of
assets
Chapter
10-25
SO 3 Compute periodic depreciation using different methods.
Depreciation
Revising Periodic Depreciation
Accounted for in the period of change and
future periods (Change in Estimate).
Not handled retrospectively.
Not considered error.
Chapter
10-26
SO 4 Describe the procedure for revising periodic depreciation.
Depreciation
Illustration: Assume that Barb’s Florists decides on
January 1, 2013, to extend the useful life of the truck one
year because of its excellent condition. The company has
used the straight-line method to depreciate the asset to
date, and book value is $5,800 ($13,000 - $7,200).
Questions:
1. What is the journal entry to correct
the prior years’ depreciation?
No Entry
Required
2. Calculate the depreciation expense
for 2013.
Chapter
10-27
SO 4 Describe the procedure for revising periodic depreciation.
Depreciation
Book value, 1/1/13
Salvage value
Depreciable cost
Useful life (revised)
Annual depreciation
First,
establish
Book Value
at the date
of change in
estimate.
$5,800
- 1,000
4,800
/ 3 years
$ 1,600
Illustration 10-17
Journal entry for 2013
Depreciation expense
Accumulated depreciation
Chapter
10-28
1,600
1,600
SO 4 Describe the procedure for revising periodic depreciation.
Expenditures During Useful Life
Ordinary Repairs - expenditures to maintain the
operating efficiency and productive life of the unit.
Debit - Repair (or Maintenance) Expense.
Referred to as revenue expenditures.
Additions and Improvements - costs incurred to
increase the operating efficiency, productive capacity, or
useful life of a plant asset.
Debit - the plant asset affected.
Referred to as capital expenditures.
Chapter
10-29
SO 5 Distinguish between revenue and capital expenditures,
and explain the entries for each.
Plant Asset Disposals
Companies dispose of plant assets in three ways —
Retirement, Sale, or Exchange (appendix).
Illustration 10-18
Record depreciation up to the date of disposal.
Eliminate asset by (1) debiting Accumulated Depreciation, and
(2) crediting the asset account.
Chapter
10-30
SO 6 Explain how to account for the disposal of a plant asset.
Plant Asset Disposals - Retirement
Illustration: Assume that Hobart Enterprises retires
its computer printers, which cost $32,000. The accumulated
depreciation on these printers is $32,000. The journal entry
to record this retirement is?
Accumulated depreciation
Printing equipment
32,000
32,000
Question: What happens if a fully depreciated plant asset is still
useful to the company?
Chapter
10-31
SO 6 Explain how to account for the disposal of a plant asset.
Plant Asset Disposals - Retirement
Illustration: Assume that Sunset Company discards delivery
equipment that cost $18,000 and has accumulated
depreciation of $14,000. The journal entry is?
Accumulated depreciation
Loss on disposal
Delivery equipment
14,000
4,000
18,000
Companies report a loss on disposal in the “Other expenses and
losses” section of the income statement.
Chapter
10-32
SO 6 Explain how to account for the disposal of a plant asset.
Plant Asset Disposals - Sale
Illustration: Assume that on July 1, 2010, Wright Company
sells office furniture for $16,000 cash. The office furniture
originally cost $60,000. As of January 1, 2010, it had
accumulated depreciation of $41,000. Depreciation for the
first six months of 2010 is $8,000. Prepare the journal entry
to record depreciation expense up to the date of sale.
Depreciation expense
Accumulated depreciation
Chapter
10-33
8,000
8,000
SO 6 Explain how to account for the disposal of a plant asset.
Revaluations under IAS16
IAS16 gives option of revaluation of fixed assets. The
skeleton entries for revaluation are:
Upon Upward revaluation:
Assets Dr.
Revaluation Reserve Cr.
Upon reversal:
Revaluation Reserve Dr.
Assets Cr.
Upon further reversal or first impairment:
Loss on revaluation Dr.
Assets Cr.
Note that new depreciation have to be worked out on
revalued amount. Further technicalities involved for periodic
adjustment of revaluation surplus
Chapter
10-34
SO 6 Explain how to account for the disposal of a plant asset.
Revaluations under IAS16
Imagine the impact of revaluation on balance sheet and
income statement
Chapter
10-35
SO 6 Explain how to account for the disposal of a plant asset.
Plant Asset Disposals - Sale
Illustration 10-19
Computation of gain on
disposal
Illustration: Wright records the sale as follows.
July 1
Cash
16,000
Accumulated depreciation
49,000
Office equipment
Gain on disposal
Chapter
10-36
60,000
5,000
SO 6 Explain how to account for the disposal of a plant asset.
Section 2 – Natural Resources
Natural resources consist of standing timber and
underground deposits of oil, gas, and minerals.
Distinguishing characteristics:
Physically extracted in operations.
Replaceable only by an act of nature.
Chapter
10-37
Depletion is recorded as an expense on periodic
basis keeping in view the estimate of the
mineral treasures, usually on units extracted
basis
Section 3 – Intangible Assets
Intangible assets are rights, privileges, and
competitive advantages that do not possess physical
substance.
Intangible assets are categorized as having either a limited life
or an indefinite life.
Common types of intangibles:
Amortization is allowed usually on straight line method
Patents
Trademarks or trade names
Copyrights
Goodwill
Franchises or licenses
Chapter
10-38
SO 8 Explain the basic issues related to accounting for intangible assets.
Accounting for Intangible Assets
Goodwill
Includes exceptional management, desirable location,
good customer relations, skilled employees, high-quality
products, etc.
Only recorded when an entire business is purchased.
Goodwill is recorded as the excess of ...
purchase price over the FMV of the identifiable net
assets acquired.
Internally created goodwill should not be capitalized
Goodwill is checked for impairment, not amortized
Chapter
10-39
SO 8 Explain the basic issues related to accounting for intangible assets.
Statement Presentation and Analysis
Presentation
Illustration 10-24
Companies usually include natural resources under “Property, plant,
and equipment” and show intangibles separately.
Chapter
10-40
SO 9 Indicate how plant assets, natural resources,
and intangible assets are reported.
Statement Presentation and Analysis
Analysis
Illustration 10-25
Each dollar invested in assets produced $0.56 in sales.
If a company is using its assets efficiently, each dollar
of assets will create a high amount of sales.
Chapter
10-41
SO 9 Indicate how plant assets, natural resources,
and intangible assets are reported.
Explore Annual Report
-Searle Pakistan Revaluation Surplus Page 37 and Page 46.
-Extract following information from the Searle Annual report
-Cost, Accumulated depreciation and book value of fixed assets
-Depreciation Rates in use
-Depreciation Methods in use
Chapter
10-42
Explore Annual Report
Chapter
10-43