• Plant Assets -Long-lived assets acquired for
use in business operations.
• Major Categories of Plant Assets
– Tangible Plant Assets
– Intangible Assets
– Natural Resources
• Accountable Events
• Acquisition of Plant Assets
1
• Determining Cost
• Special Considerations
– Land: Cost includes real estate commissions,
escrow fees, legal fees, clearing and grading the
property.
– Land Improvement: Improvements to land such as
driveways, fences, and landscaping are recorded
separately.
– Building : Repairs made prior to the building being
put in use are considered part of the building’s cost.
2
– Equipment: Related interest, insurance, and
property taxes are treated as expenses of the
current period.
• Allocation of a Lump-Sum Purchase
• Capital Expenditures & Revenue Expenditures
• Depreciation
– Straight-Line Depreciation
• Depreciation for Fractional Periods
• Declining-Balance Method
3
•
•
•
•
Financial Statement Disclosures
Revising Depreciation Rates
Impairment of Assets
Disposal of Plant and Equipment
4
Chapter
USED ASSETS MANAGEMENT
9
5
Trading in Used Assets
for New Ones
Accounting depends on whether
assets are similar or dissimilar.
Airplane
for
Airplane
Truck
for
Airplane
Only situations where cash
is paid will be demonstrated.
6
Trading in Used Assets for New Ones
Recognize
Gains?
Recognize
Losses?
Dissimilar
Assets
Similar Assets
and Cash Paid
Yes
No
Yes
Yes
7
Trading in Used Assets
for New Ones – Similar Assets
On May 30, 2003, Essex Company
exchanged a used airplane and $35,000
cash for a new airplane. The old airplane
originally cost $40,000, had up-to-date
accumulated depreciation of $30,000, and
a fair value of $4,000.
SIMILAR
8
Trading in Used Assets
for New Ones – Similar Assets
The exchange resulted in a:
a.
b.
c.
d.
gain of $6,000.
loss of $6,000.
loss of $4,000.
gain of $4,000.
Cost
Accum. Depr.
$ 40,000
30,000
Book Value
Fair Value
Loss
$ 10,000
4,000
$ 6,000
Prepare a journal entry
to record the exchange.
9
Trading in Used Assets
for New Ones – Similar Assets
Prepare the journal entry to record
the trade.
Date
Description
May 30 Airplane (new)
Accumulated Depreciation
Loss on Exchange
Airplane (old)
Cash
Debit
Credit
39,000
30,000
6,000
40,000
35,000
10
Trading in Used Assets
for New Ones – Similar Assets
On June 30, 2004, Rancho Landscape
exchanged a used truck and $11,500 cash
for a new truck. The old airplane
originally cost $10,000, had up-to-date
accumulated depreciation of $8,000, and a
trade in allowance of $3,500 and has a
book value of $2,000
11
Trading in Used Assets
for New Ones – Similar Assets
The exchange resulted in a:
a.
b.
c.
d.
gain of $1,500.
loss of $1,500.
loss of $2,000.
gain of $3,000.
Cost
Accum. Depr.
$ 15,000
8,000
Book Value
Fair Value
Gain
$
$
2,000
3,500
1,500
Prepare a journal entry
to record the exchange.
12
Trading in Used Assets
for New Ones – Similar Assets
Prepare the journal entry to record
the trade.
Date
Date
Description
Description
May
May3030Truck (new)
Accumulated Depreciation
Truck (old)
Cash
Gain on Disposal oof plant asssets
Debit
Debit
Credit
Credit
15,000
8,000
10,000
11,500
1,500
13
Intangible Assets
Often provide
exclusive rights
or privileges.
Noncurrent assets
without physical
substance.
Characteristics
Useful life is
often difficult
to determine.
Usually acquired
for operational
use.
14
Intangible Assets
Record at
current cash
equivalent cost,
including
purchase price,
legal fees, and
filing fees.
•
•
•
•
Patents
Copyrights
Leaseholds
Leasehold
Improvements
• Goodwill
• Trademarks and
Trade Names
15
Intangible Assets
• Amortize over shorter of economic
life or legal life, subject to a maximum
of 40 years.
• Use straight-line method.
• Research and development costs are
normally expensed as incurred.
16
Goodwill
Occurs when one
company buys
another company.
Only purchased
goodwill is an
intangible asset.
The amount by which the
purchase price exceeds the fair
market value of net assets acquired.
17
• Positive attributes of goodwill are:
– Favorable reputation
– Positive market share
– Positive advertising image
– Reputation of high quality and loyal
employees
– Superior Management
– Manufacturing and other operating
efficiency
18
Eddy Company paid $1,000,000 to
purchase all of James Company’s assets
and assumed liabilities of $200,000. The
acquired assets were appraised at a fair
value of $900,000.
19
What amount of goodwill should be
recorded on Eddy Company books?
a.
b.
c.
d.
$100,000.
$200,000.
$300,000.
$400,000.
FMV of Assets
Debt Assumed
$
FMV of Net Assets
Purchase Price
Goodwill
$
900,000
200,000
700,000
1,000,000
$ 300,000
20
Intangible Assets – Patents
Exclusive right granted
by federal government to sell or
manufacture an invention.
Cost is purchase
price plus legal
cost to defend.
Amortize cost
over the shorter of
useful life or 17 years.
21
Patents
Assume that the patent is purchased from
the inventor at a cost of $100,000 after 5
years of legal life have expired, therefore
the remaining legal life is 12 years. But if
estimated useful life is only four years,
amortization should be based on this
shorter period. The entry to record this
amortization is
22
Patent
Prepare the journal entry to record
the trade.
Description
Amortization expense: Patent
Patents
Debit
Credit
25,000
25,000
23
Intangible Assets –
Trademarks and Trade Names
A symbol, design, or logo
associated with a business.
Internally
developed
trademarks
have no
recorded
asset cost.
Purchased
trademarks
are recorded
at cost, and
amortized over
shorter of legal
or economic life,
or 40 years.
24
Intangible Assets – Franchises
Legally protected right to sell products
or provide services purchased by
franchisee from franchisor.
Purchase price is intangible asset
which is amortized over the shorter of
the protected right or 40 years.
25
Intangible Assets – Copyrights
Exclusive right granted by the
federal government to protect
artistic or intellectual properties.
Legal life is
life of creator
plus 50 years.
Amortize cost
over a period not
to exceed 40 years.
26
Natural Resources
Total cost,
including
exploration and
development,
is charged to
depletion expense
over periods
benefited.
Extracted from
the natural
environment
and reported
at cost less
accumulated
depletion.
Examples: oil, coal, gold
27
Depletion of Natural Resources
Depletion is calculated using the
units-of-production method.
Unit depletion rate is calculated as follows:
Cost – Salvage Value
Total Units of Capacity
28
Depletion of Natural Resources
Total depletion cost for a period is:
Unit Depletion
Rate
Total
depletion
cost
×
Number of Units
Extracted in Period
Cost of
goods sold
Inventory
for sale
Unsold
Inventory
29
Depletion of Natural Resources
Specialized plant assets may be required
to extract the natural resource.
These assets are recorded in a separate
account and depreciated.
30
Natural resources
Assume that rainbow minerals pay $45
million to acquire red valley mine that has
10 million tons of coal. The residual is
estimated to be $5 million. The depletion
over life is of 40 million and rate $4 per
million. Assume that 2 million tons are
mined during first year so prepare journal
entry
31
Natural resources
Prepare the journal entry to record
the trade.
Description
Debit
Inventory
8,000,000
Accumulated Depletion: Red vally
Credit
8,000,000
32
Natural resources
Rainbow Mineral’s Balance sheet
Property plant and equipment
Mining properties: Red vally
Less Accumulated depricition
$45,000,000
8,000,000 $37,000,000
33
The Units-of-Output Method
Cost per Unit
of Output
Depreciation
Expense
=
Cost - Residual Value
Estimated Units of Output
=
Cost per Unit
Number of
×
of Output
Units Produced
34
Unit of Output method
Consider S & G delivery truck which cost
$17,000 and has an estimated salvage
value of $ 2,000 . Assume that S & G plans
to retire this truck after it has been
delivered 100,000 mile. Calculate the
deprecation rate
35
Unit of Output
Cost per Unit
of Output
Cost per Unit
of Output
Cost - Residual Value
Estimated Units of Output
17,000 - 2,000
100,000 miles
$0.15 Depreciation per mile
36
MACRS: The “Tax Method”
MACRS = Modified Accelerated Cost Recovery System
Based on
DecliningBalance
Methods
The only accelerated method
allowed by the IRS when
computing depreciation for tax
return purposes.
Asset Cost × MACRS rate
Rates are available from tables
provided by the IRS.
37
Which Depreciation Methods
Do Most Businesses Use?
A survey of 600 Publicly Owned Corporations
Straight-line
563
Declining-balance
Sum-of-the-years'-digits
44
11
Accelerated methods (not specified)
70
Units-of-output
Other
53
9
End of Chapter 9
39