Description
determine the cost of a plant asset, account for depreciation, select the best depreciation method for income tax purposes, account for the disposal of a plant asset, account for natural resource assets and depletion, account for intangible assets and amortization and report plant asset transactions on the statement of cash flows.
The Home Depot...
– is the world’s largest home improvement retailer.
? The company has experienced major growth in the last
decade.
The Home Depot
? The company has grown rapidly by opening new
stores. ? Much of the growth in assets shows up in plant assets.
Chapter Objectives
1 Determine the cost of a plant asset.
2 Account for depreciation. 3 Select the best depreciation method for income tax
purposes. 4 Account for the disposal of a plant asset.
Chapter Objectives
5 Account for natural resource assets and depletion.
6 Account for intangible assets and amortization. 7 Report plant asset transactions on the statement of
cash flows.
Plant Assets...
– have a useful life of more than one year.
– are acquired for use in the business. – are not intended for resale to customers.
Plant Assets
? Examples are:
– Land and land improvements – Buildings, machinery and equipment
– Furniture and fixtures
– Vehicles – Natural resources
Intangible Assets...
– do not have a physical form.
? They are useful because of the special rights that they
carry. – Patents – Copyrights – Trademarks
Objective 1
Determine the cost of a plant asset.
Cost Principle
? A business must carry an asset on the balance sheet at
the amount paid for the asset.
Land
– Purchase price
– Brokerage commissions – Survey fees – Legal fees – Back property taxes – Grading/clearing – Demolishing/removing buildings
Land Improvements
? All improvements located on the land but subject to
– – – –
decay: Driveways/sidewalks Fences Sprinkler systems Lights in parking lot
Buildings - Construction
– Architectural fees
– Building permits – Contractor’s charges
? Payments for:
– Materials – Labor
– Overhead
Construction in Progress...
– is uncompleted construction on the balance sheet
date. ? Construction costs are assets.
Buildings - Purchasing
– Purchase price
– Brokerage commissions – Sales and other taxes
? Expenditures for:
– repairing or renovating building for its intended
purpose
Machinery & Equipment
– Purchase price less discounts
– Transportation charges – Insurance in transit – Sales and other taxes – Purchase commissions – Installation cost – Expenditures to test asset before it is placed in
service
Capital Leases...
– are lease arrangements similar to installment
purchases. ? Capital leases are reported as assets, even though the company does not own the asset.
Capitalizing the Cost of Interest
? When a company borrows money to construct a plant
asset, it pays interest on the amount borrowed. ? This interest is included as part of the asset’s cost.
Capitalizing the Cost of Interest...
– is an exception to the normal practice of recording
interest as an expense. ? Interest cost to capitalize = the lesser of interest cost based on the average accumulated construction expenditures or actual interest cost on borrowed money during the period.
Capitalizing the Cost of Interest
? Suppose on January 2, 19x7, The Home Depot borrows
$1,000,000 on a one year, 10% note, payable to build a warehouse. ? Total interest for the year is $100,000.
Capitalizing the Cost of Interest
? Assume The Home Depot’s average accumulated
expenditures on the construction project during 19x7 are $600,000. ? How much interest is capitalized? ? $60,000
Capitalizing the Cost of Interest
? Dec. 31, 19x7
Building (600,000 x 10%) 60,000 Interest Expense 40,000 Interest Payable 100,000 To record interest expense
Lump-Sum Purchases
? For a lump-sum purchase of more than one asset, the
relative sales value method is used to allocate the cost. ? Suppose that Mary Pacheco purchased land and a building to open a new beauty shop. ? The building sits on 2 acres of land.
Lump-Sum Purchases
? Mary paid $110,000 for the combined purchase.
? The land is appraised at $90,000 and the building at
$60,000. ? How much of the purchase price is allocated to land and how much to building?
Lump-Sum Purchases
? The total appraised value of the land plus the building
is $150,000. ? The land is appraised at $90,000, so it is worth 60% of the total ($90,000/$150,000). ? The building is appraised at $60,000 so it’s share of the total is 40%.
Lump-Sum Purchases
? Therefore, the breakdown of the actual purchase price
of $110,000 is: ? Land $110,000 x 60% = $66,000 ? Building $110,000 x 40% = $44,000
Distinction Between Capital and Revenue Expenditures
? Capital expenditures extend the life of the asset.
? Revenue expenditures maintain the asset in good
order.
Capital versus Revenue Expenditures
Does the expenditure Increase capacity or efficiency or extend useful life?
YES
Capital Expenditure Debit Plant Assets Account
NO
Revenue Expenditure Debit Repairs & Maintenance Account
Measuring the Depreciation of Plant Assets
? Depreciation is the periodic allocation
of the cost of a tangible long-lived asset (excluding land or natural resources) over its estimated useful life.
Measuring the Depreciation of Plant Assets
? The primary purpose of depreciation accounting is to
measure income accurately. ? That is, to match expenses with revenues.
Measuring the Depreciation of Plant Assets
? To measure depreciation of a plant asset, the following
must be known: – Cost or basis – Estimated residual value, salvage, scrap or trade-in value – Estimated useful life in years or units
Objective 2
Account for depreciation.
Depreciation Methods
? There are four depreciation methods.
? They all result in the same amount of total
depreciation over the life of the asset.
Depreciation Methods
1 Straight-Line (SL)
2 Units-of-Production (UOP) 3 Double-Declining-Balance (DDB)
4 Sum-of-the-Years’ Digits (SYD)
? The following example relates to the first three
methods.
Depreciation Methods
? Althea and Richard Catering, Inc., purchased a
delivery van on January 1, 19xx for $22,000. ? The company expects the van to have a trade-in value of $2,000 at the end of its useful life. ? The van has an estimated service life of 100,000 miles or 4 years.
Straight-Line Method
? This method assigns an equal amount of depreciation
expense to each year. ? (Cost - Residual value)/Useful life in years = Depreciation ? ($22,000 - $2,000)/4 = $20,000/4 = $5,000
Straight-Line Method
?
Year 1 Depreciation $5,000
Accumulated Depreciation 19xx $5,000 19xx
Straight-Line Method
? Dec. 31, 19xx
Depreciation Expense $5,000 Accumulated Depreciation $5,000 To record depreciation expense for a one-year period
Straight-Line Method
? (Cost - Residual value)/years of useful life ? ($22,000 - 2,000)/4 = $20,000/4 = $5,000 ? Year 1 Depreciation: $ 5,000 Year 2
Depreciation: $ 5,000 Year 3 Depreciation: $ 5,000 Year 4 Depreciation: $ 5,000 Total Depreciation: $20,000
Units-of-Production Method
? This method assigns a fixed amount of depreciation to
each unit of output or service produced by the plant asset.
Units-of-Production Method
? Depreciation per unit
= (Cost - Residual value)/Useful life in units ? ($22,000 - $2,000)/100,000 miles = $20,000/100,000 miles = $.20/mile
Units-of-Production Method
? Assume the van was driven 30,000 miles the first year.
How much is the depreciation expense? ? 30,000 miles x $.20/mile = $6,000
Units-of-Production Method
?
Year 1 Depreciation $6,000 19xx Accumulated Depreciation 19xx $6,000
Units-of-Production Method
? Dec. 31, 19xx
Depreciation Expense $6,000 Accumulated Depreciation $6,000 To record depreciation expense for 30,000 miles of use
Units-of-Production Method
? Depreciation @ $.20/mile: ? Year 1: 30,000 miles = $ 6,000
Year 2: 27,000 miles = $ 5,400 Year 3: 23,000 miles = $ 4,600 Year 4: 20,000 miles = $ 4,000 Total: 100,000 miles = $20,000 ? Actual mileage for the 4th year was 22,000, but depreciation is limited to estimated units.
Double-Declining-Balance Method...
– is an accelerated depreciation method.
? It writes off a relatively larger amount of the asset’s cost
nearer the start of its useful life than the straight-line method does.
Double-Declining-Balance Method
? Straight-line rate ? 100%/4 = 25% ? Double-declining balance = 2 times the straight-line
rate = 50%
Double-Declining-Balance Method
? Book/Carrying Value is the unexpired portion of the
cost of an asset. ? What is the book value of the van at the end of the first year? ? $22,000 x 50% = $11,000 ? $22,000 - $11,000 = $11,000
Double-Declining-Balance Method
?
Year 1 Depreciation $11,000 19xx
Accumulated Depreciation 19xx $11,000
Double-Declining-Balance Method
? Dec. 31, 19xx
Depreciation Expense $11,000 Accumulated Depreciation $11,000 To record depreciation expense for a one-year period
Double-Declining-Balance Method
? Remember that depreciation is limited to the amount
necessary to reduce the book value to the residual value.
Depreciation Methods Comparison
Year 1 2 3 4 Totals SL $ 5,000 $ 5,000 $ 5,000 $ 5,000 $20,000 UOP $ 6,000 $ 5,400 $ 4,600 $ 4,000 $20,000 DDP $11,000 $ 5,500 $ 2,750 $ 750 $20,000
Objective 3
Select the best depreciation method for income tax purposes.
Relationship Between Depreciation and Taxes
? ? – ? –
What method do most companies use? For financial purposes: Straight-line For tax purposes: Modified Accelerated Cost Recovery System
Relationship Between Depreciation and Taxes
? MACRS was created by the Tax Reform Act of 1986. ? It is an accelerated method used for depreciating
equipment.
Depreciation for Partial Years
? The matching solution is to pro-rate by months
owned. ? Assume that Althea and Richard Catering, Inc., owned the van for 3 months. ? How much is the van’s depreciation?
Depreciation for Partial Years
? ? ? ?
Straight-line method: $5,000 x 3/12 = $1,250 Double-declining-balance method: $11,000 x 3/12 = $2,750
Revising Depreciation Rates
? Original cost
– Depreciation taken to date – Residual value = Depreciable cost left
Revising Depreciation Rates
? Depreciable cost left
÷ Remaining useful life = Revised depreciation amount
Objective 4
Account for the disposal of a plant asset.
Disposal of Plant Assets
? In general, a company disposes of a plant asset by:
– Selling – Exchanging
– Discarding (scrapping it)
Disposal of Plant Assets
? Gain/Loss is reported on the income statement...
? and closed to Income Summary.
Disposal by Discarding
? On September 1st, Dennis, manager of Dennis’
? ? ? ?
Landscaping, is contemplating the disposal of an old piece of equipment: Equipment cost $36,000 Residual value $6,000 Accumulated depreciation $20,000 Estimated useful life at acquisition 10 years.
Disposal by Discarding
? Assume the equipment is discarded on November
30th. ? Compute accumulated depreciation as of November 30th.
Disposal by Discarding
? ($36,000 - $6,000)/10 = $3,000
? $3,000/12 = $250 ? $250 x 3 = $750 ? Accumulated depreciation: ? $20,000 + $750 = $20,750
Disposal by Discarding
Equipment Sep 1 36,000 Accumulated Depreciation 20,000 Sep 1 750 Nov 30 Depreciation Expense Nov 30 750
Disposal by Discarding
? What is the book value or carrying value of the
equipment? ? $36,000 - $20,750 = $15,250 ? What is the gain or loss? ? $15,250 loss (book value)
Disposal by Discarding
? Update depreciation.
? November 30, 19xx
Accumulated Depreciation 20,750 Loss on disposal 15,250 Equipment 36,000 To record discarding of equipment
Selling a Plant Asset
? Equipment is sold for $10,000.
? What is the gain or loss? ? Book value $15,250 - $10,000 = $5,250 loss
Selling a Plant Asset
? Nov. 30, 19xx
Cash 10,000 Accumulated Depreciation 20,750 Loss on Sale of Equipment 5,250 Equipment 36,000 To record sale of equipment for $10,000
Selling a Plant Asset
? Equipment is sold for $20,000. ? What is the Gain or Loss? ? $4,750 Gain ? $20,000 - $15,250 = $4,750
Selling a Plant Asset
? Nov. 30, 19xx
Cash 20,000 Accumulated Depreciation 20,750 Gain on Sale of Equipment 4,750 Equipment 36,000 To record sale of equipment for $20,000
Exchanging Plant Assets
? Businesses often trade in their old plant assets for
similar assets that are newer and more efficient.
Exchanging Plant Assets
? Update Depreciation. ? Remove balance in Asset Account. ? Remove related Accumulated Depreciation
Account. ? Record gain/loss on disposal. ? Record acquisition of new asset.
Exchanging Plant Assets
? In many cases, the business carries forward the book
value of the old asset plus any cash payment as the cost of the new asset.
Exchanging Plant Assets
? Assume equipment with a cost of $36,000 and a book
value of $15,250 is exchanged for new similar equipment having a cost of $42,000 with a trade-in of $18,000 allowed. ? Cash payment is $24,000. ? Cost of new asset is $24,000 + $15,250 = $39,250.
Exchanging Plant Assets
? The GAAP requires that losses (but not gains) be
recognized on exchanges of similar assets. ? Why? ? Conservatism!
Internal Control of Plant Assets
– Assigning responsibility for custody
– Setting up security measures – Separating duties
– Protecting assets from the elements
Objective 5
Account for natural resource assets and depletion.
Accounting for Natural Resources
? Natural resources are plant assets of a special type.
– – – – –
Examples are: Natural gas, oil Precious metals and gems Timber Coal Iron ore
Accounting for Natural Resources
? Natural resources are expensed through depletion
expense. ? Depletion expense is that portion of the cost of natural resources that is used up in a particular period. ? Debit Depletion Expense. ? Credit Accumulated Depletion.
Accounting for Natural Resources
? Depletion is computed in the same way as units of
production depreciation.
Objective 6
Account for intangible assets and amortization.
Intangible Assets
? What are intangible assets?
? Something that is NOT concrete.
Intangible Assets
– Patents
– Copyrights
– Trademarks – Franchises
– Leaseholds
– Goodwill
Intangible Assets: Patents...
– are issued by the Federal Government. – give the holder the right to produce and sell an invention. – are good for 17 years.
Intangible Assets: Copyrights
– Literary compositions (novels)
– Musical compositions – Films (movies)
– Software
– Other works of art
Intangible Assets: Franchises
? Franchises are privileges granted by private business or
government to sell a product or service.
Intangible Assets: Leasehold
? A leasehold is a prepayment a renter makes to secure
the use of an asset from a landlord. ? Prepaid rent is an example. ? Leaseholds are amortized over the life of the lease.
Intangible Assets: Goodwill
– Good location
– Superior product – Outstanding reputation
– Good employee relations
– Efficient operations – Advantage of holding a monopoly
Amortization...
– is the way intangible assets are expensed.
? Amortization is applied to intangible assets the same
way as straight-line depreciation.
Objective 7
Report plant asset transactions on the statement of cash flows.
Statement of Cash Flows
? Two main types of plant asset transactions appear on
the statement of cash flows: 1 Acquisitions 2 Sales
Statement of Cash Flows
? Cash payments for plant and equipment are investing
activities. ? Cash receipts from the sale of plant assets are also investing activities.
doc_208418657.pptx
determine the cost of a plant asset, account for depreciation, select the best depreciation method for income tax purposes, account for the disposal of a plant asset, account for natural resource assets and depletion, account for intangible assets and amortization and report plant asset transactions on the statement of cash flows.
The Home Depot...
– is the world’s largest home improvement retailer.
? The company has experienced major growth in the last
decade.
The Home Depot
? The company has grown rapidly by opening new
stores. ? Much of the growth in assets shows up in plant assets.
Chapter Objectives
1 Determine the cost of a plant asset.
2 Account for depreciation. 3 Select the best depreciation method for income tax
purposes. 4 Account for the disposal of a plant asset.
Chapter Objectives
5 Account for natural resource assets and depletion.
6 Account for intangible assets and amortization. 7 Report plant asset transactions on the statement of
cash flows.
Plant Assets...
– have a useful life of more than one year.
– are acquired for use in the business. – are not intended for resale to customers.
Plant Assets
? Examples are:
– Land and land improvements – Buildings, machinery and equipment
– Furniture and fixtures
– Vehicles – Natural resources
Intangible Assets...
– do not have a physical form.
? They are useful because of the special rights that they
carry. – Patents – Copyrights – Trademarks
Objective 1
Determine the cost of a plant asset.
Cost Principle
? A business must carry an asset on the balance sheet at
the amount paid for the asset.
Land
– Purchase price
– Brokerage commissions – Survey fees – Legal fees – Back property taxes – Grading/clearing – Demolishing/removing buildings
Land Improvements
? All improvements located on the land but subject to
– – – –
decay: Driveways/sidewalks Fences Sprinkler systems Lights in parking lot
Buildings - Construction
– Architectural fees
– Building permits – Contractor’s charges
? Payments for:
– Materials – Labor
– Overhead
Construction in Progress...
– is uncompleted construction on the balance sheet
date. ? Construction costs are assets.
Buildings - Purchasing
– Purchase price
– Brokerage commissions – Sales and other taxes
? Expenditures for:
– repairing or renovating building for its intended
purpose
Machinery & Equipment
– Purchase price less discounts
– Transportation charges – Insurance in transit – Sales and other taxes – Purchase commissions – Installation cost – Expenditures to test asset before it is placed in
service
Capital Leases...
– are lease arrangements similar to installment
purchases. ? Capital leases are reported as assets, even though the company does not own the asset.
Capitalizing the Cost of Interest
? When a company borrows money to construct a plant
asset, it pays interest on the amount borrowed. ? This interest is included as part of the asset’s cost.
Capitalizing the Cost of Interest...
– is an exception to the normal practice of recording
interest as an expense. ? Interest cost to capitalize = the lesser of interest cost based on the average accumulated construction expenditures or actual interest cost on borrowed money during the period.
Capitalizing the Cost of Interest
? Suppose on January 2, 19x7, The Home Depot borrows
$1,000,000 on a one year, 10% note, payable to build a warehouse. ? Total interest for the year is $100,000.
Capitalizing the Cost of Interest
? Assume The Home Depot’s average accumulated
expenditures on the construction project during 19x7 are $600,000. ? How much interest is capitalized? ? $60,000
Capitalizing the Cost of Interest
? Dec. 31, 19x7
Building (600,000 x 10%) 60,000 Interest Expense 40,000 Interest Payable 100,000 To record interest expense
Lump-Sum Purchases
? For a lump-sum purchase of more than one asset, the
relative sales value method is used to allocate the cost. ? Suppose that Mary Pacheco purchased land and a building to open a new beauty shop. ? The building sits on 2 acres of land.
Lump-Sum Purchases
? Mary paid $110,000 for the combined purchase.
? The land is appraised at $90,000 and the building at
$60,000. ? How much of the purchase price is allocated to land and how much to building?
Lump-Sum Purchases
? The total appraised value of the land plus the building
is $150,000. ? The land is appraised at $90,000, so it is worth 60% of the total ($90,000/$150,000). ? The building is appraised at $60,000 so it’s share of the total is 40%.
Lump-Sum Purchases
? Therefore, the breakdown of the actual purchase price
of $110,000 is: ? Land $110,000 x 60% = $66,000 ? Building $110,000 x 40% = $44,000
Distinction Between Capital and Revenue Expenditures
? Capital expenditures extend the life of the asset.
? Revenue expenditures maintain the asset in good
order.
Capital versus Revenue Expenditures
Does the expenditure Increase capacity or efficiency or extend useful life?
YES
Capital Expenditure Debit Plant Assets Account
NO
Revenue Expenditure Debit Repairs & Maintenance Account
Measuring the Depreciation of Plant Assets
? Depreciation is the periodic allocation
of the cost of a tangible long-lived asset (excluding land or natural resources) over its estimated useful life.
Measuring the Depreciation of Plant Assets
? The primary purpose of depreciation accounting is to
measure income accurately. ? That is, to match expenses with revenues.
Measuring the Depreciation of Plant Assets
? To measure depreciation of a plant asset, the following
must be known: – Cost or basis – Estimated residual value, salvage, scrap or trade-in value – Estimated useful life in years or units
Objective 2
Account for depreciation.
Depreciation Methods
? There are four depreciation methods.
? They all result in the same amount of total
depreciation over the life of the asset.
Depreciation Methods
1 Straight-Line (SL)
2 Units-of-Production (UOP) 3 Double-Declining-Balance (DDB)
4 Sum-of-the-Years’ Digits (SYD)
? The following example relates to the first three
methods.
Depreciation Methods
? Althea and Richard Catering, Inc., purchased a
delivery van on January 1, 19xx for $22,000. ? The company expects the van to have a trade-in value of $2,000 at the end of its useful life. ? The van has an estimated service life of 100,000 miles or 4 years.
Straight-Line Method
? This method assigns an equal amount of depreciation
expense to each year. ? (Cost - Residual value)/Useful life in years = Depreciation ? ($22,000 - $2,000)/4 = $20,000/4 = $5,000
Straight-Line Method
?
Year 1 Depreciation $5,000
Accumulated Depreciation 19xx $5,000 19xx
Straight-Line Method
? Dec. 31, 19xx
Depreciation Expense $5,000 Accumulated Depreciation $5,000 To record depreciation expense for a one-year period
Straight-Line Method
? (Cost - Residual value)/years of useful life ? ($22,000 - 2,000)/4 = $20,000/4 = $5,000 ? Year 1 Depreciation: $ 5,000 Year 2
Depreciation: $ 5,000 Year 3 Depreciation: $ 5,000 Year 4 Depreciation: $ 5,000 Total Depreciation: $20,000
Units-of-Production Method
? This method assigns a fixed amount of depreciation to
each unit of output or service produced by the plant asset.
Units-of-Production Method
? Depreciation per unit
= (Cost - Residual value)/Useful life in units ? ($22,000 - $2,000)/100,000 miles = $20,000/100,000 miles = $.20/mile
Units-of-Production Method
? Assume the van was driven 30,000 miles the first year.
How much is the depreciation expense? ? 30,000 miles x $.20/mile = $6,000
Units-of-Production Method
?
Year 1 Depreciation $6,000 19xx Accumulated Depreciation 19xx $6,000
Units-of-Production Method
? Dec. 31, 19xx
Depreciation Expense $6,000 Accumulated Depreciation $6,000 To record depreciation expense for 30,000 miles of use
Units-of-Production Method
? Depreciation @ $.20/mile: ? Year 1: 30,000 miles = $ 6,000
Year 2: 27,000 miles = $ 5,400 Year 3: 23,000 miles = $ 4,600 Year 4: 20,000 miles = $ 4,000 Total: 100,000 miles = $20,000 ? Actual mileage for the 4th year was 22,000, but depreciation is limited to estimated units.
Double-Declining-Balance Method...
– is an accelerated depreciation method.
? It writes off a relatively larger amount of the asset’s cost
nearer the start of its useful life than the straight-line method does.
Double-Declining-Balance Method
? Straight-line rate ? 100%/4 = 25% ? Double-declining balance = 2 times the straight-line
rate = 50%
Double-Declining-Balance Method
? Book/Carrying Value is the unexpired portion of the
cost of an asset. ? What is the book value of the van at the end of the first year? ? $22,000 x 50% = $11,000 ? $22,000 - $11,000 = $11,000
Double-Declining-Balance Method
?
Year 1 Depreciation $11,000 19xx
Accumulated Depreciation 19xx $11,000
Double-Declining-Balance Method
? Dec. 31, 19xx
Depreciation Expense $11,000 Accumulated Depreciation $11,000 To record depreciation expense for a one-year period
Double-Declining-Balance Method
? Remember that depreciation is limited to the amount
necessary to reduce the book value to the residual value.
Depreciation Methods Comparison
Year 1 2 3 4 Totals SL $ 5,000 $ 5,000 $ 5,000 $ 5,000 $20,000 UOP $ 6,000 $ 5,400 $ 4,600 $ 4,000 $20,000 DDP $11,000 $ 5,500 $ 2,750 $ 750 $20,000
Objective 3
Select the best depreciation method for income tax purposes.
Relationship Between Depreciation and Taxes
? ? – ? –
What method do most companies use? For financial purposes: Straight-line For tax purposes: Modified Accelerated Cost Recovery System
Relationship Between Depreciation and Taxes
? MACRS was created by the Tax Reform Act of 1986. ? It is an accelerated method used for depreciating
equipment.
Depreciation for Partial Years
? The matching solution is to pro-rate by months
owned. ? Assume that Althea and Richard Catering, Inc., owned the van for 3 months. ? How much is the van’s depreciation?
Depreciation for Partial Years
? ? ? ?
Straight-line method: $5,000 x 3/12 = $1,250 Double-declining-balance method: $11,000 x 3/12 = $2,750
Revising Depreciation Rates
? Original cost
– Depreciation taken to date – Residual value = Depreciable cost left
Revising Depreciation Rates
? Depreciable cost left
÷ Remaining useful life = Revised depreciation amount
Objective 4
Account for the disposal of a plant asset.
Disposal of Plant Assets
? In general, a company disposes of a plant asset by:
– Selling – Exchanging
– Discarding (scrapping it)
Disposal of Plant Assets
? Gain/Loss is reported on the income statement...
? and closed to Income Summary.
Disposal by Discarding
? On September 1st, Dennis, manager of Dennis’
? ? ? ?
Landscaping, is contemplating the disposal of an old piece of equipment: Equipment cost $36,000 Residual value $6,000 Accumulated depreciation $20,000 Estimated useful life at acquisition 10 years.
Disposal by Discarding
? Assume the equipment is discarded on November
30th. ? Compute accumulated depreciation as of November 30th.
Disposal by Discarding
? ($36,000 - $6,000)/10 = $3,000
? $3,000/12 = $250 ? $250 x 3 = $750 ? Accumulated depreciation: ? $20,000 + $750 = $20,750
Disposal by Discarding
Equipment Sep 1 36,000 Accumulated Depreciation 20,000 Sep 1 750 Nov 30 Depreciation Expense Nov 30 750
Disposal by Discarding
? What is the book value or carrying value of the
equipment? ? $36,000 - $20,750 = $15,250 ? What is the gain or loss? ? $15,250 loss (book value)
Disposal by Discarding
? Update depreciation.
? November 30, 19xx
Accumulated Depreciation 20,750 Loss on disposal 15,250 Equipment 36,000 To record discarding of equipment
Selling a Plant Asset
? Equipment is sold for $10,000.
? What is the gain or loss? ? Book value $15,250 - $10,000 = $5,250 loss
Selling a Plant Asset
? Nov. 30, 19xx
Cash 10,000 Accumulated Depreciation 20,750 Loss on Sale of Equipment 5,250 Equipment 36,000 To record sale of equipment for $10,000
Selling a Plant Asset
? Equipment is sold for $20,000. ? What is the Gain or Loss? ? $4,750 Gain ? $20,000 - $15,250 = $4,750
Selling a Plant Asset
? Nov. 30, 19xx
Cash 20,000 Accumulated Depreciation 20,750 Gain on Sale of Equipment 4,750 Equipment 36,000 To record sale of equipment for $20,000
Exchanging Plant Assets
? Businesses often trade in their old plant assets for
similar assets that are newer and more efficient.
Exchanging Plant Assets
? Update Depreciation. ? Remove balance in Asset Account. ? Remove related Accumulated Depreciation
Account. ? Record gain/loss on disposal. ? Record acquisition of new asset.
Exchanging Plant Assets
? In many cases, the business carries forward the book
value of the old asset plus any cash payment as the cost of the new asset.
Exchanging Plant Assets
? Assume equipment with a cost of $36,000 and a book
value of $15,250 is exchanged for new similar equipment having a cost of $42,000 with a trade-in of $18,000 allowed. ? Cash payment is $24,000. ? Cost of new asset is $24,000 + $15,250 = $39,250.
Exchanging Plant Assets
? The GAAP requires that losses (but not gains) be
recognized on exchanges of similar assets. ? Why? ? Conservatism!
Internal Control of Plant Assets
– Assigning responsibility for custody
– Setting up security measures – Separating duties
– Protecting assets from the elements
Objective 5
Account for natural resource assets and depletion.
Accounting for Natural Resources
? Natural resources are plant assets of a special type.
– – – – –
Examples are: Natural gas, oil Precious metals and gems Timber Coal Iron ore
Accounting for Natural Resources
? Natural resources are expensed through depletion
expense. ? Depletion expense is that portion of the cost of natural resources that is used up in a particular period. ? Debit Depletion Expense. ? Credit Accumulated Depletion.
Accounting for Natural Resources
? Depletion is computed in the same way as units of
production depreciation.
Objective 6
Account for intangible assets and amortization.
Intangible Assets
? What are intangible assets?
? Something that is NOT concrete.
Intangible Assets
– Patents
– Copyrights
– Trademarks – Franchises
– Leaseholds
– Goodwill
Intangible Assets: Patents...
– are issued by the Federal Government. – give the holder the right to produce and sell an invention. – are good for 17 years.
Intangible Assets: Copyrights
– Literary compositions (novels)
– Musical compositions – Films (movies)
– Software
– Other works of art
Intangible Assets: Franchises
? Franchises are privileges granted by private business or
government to sell a product or service.
Intangible Assets: Leasehold
? A leasehold is a prepayment a renter makes to secure
the use of an asset from a landlord. ? Prepaid rent is an example. ? Leaseholds are amortized over the life of the lease.
Intangible Assets: Goodwill
– Good location
– Superior product – Outstanding reputation
– Good employee relations
– Efficient operations – Advantage of holding a monopoly
Amortization...
– is the way intangible assets are expensed.
? Amortization is applied to intangible assets the same
way as straight-line depreciation.
Objective 7
Report plant asset transactions on the statement of cash flows.
Statement of Cash Flows
? Two main types of plant asset transactions appear on
the statement of cash flows: 1 Acquisitions 2 Sales
Statement of Cash Flows
? Cash payments for plant and equipment are investing
activities. ? Cash receipts from the sale of plant assets are also investing activities.
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