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Unformatted text preview: Chapter 10 Chapter 10 Chapter 10 Chapter 10 Plant Assets And Intangible Assets Chapter 10-1 Plant Assets, Natural Resources, Plant Assets, Natural Resources, Plant Plant Intangible Assets IIntangible Assets Intangible ntangible Plant Assets Determining Determining the cost of plant assets plant Depreciation Expenditures Expenditures during useful life life Plant asset Plant disposals disposals Chapter 10-2 Natural Natural Resources Resources Depletion Intangible Intangible Assets Assets Accounting for Accounting intangibles intangibles Research and Research development costs costs and and Statement Statement Presentation and Analysis and Presentation Analysis Section 1 – Plant Assets 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. Long­term in nature and usually depreciated. Possess physical substance. Referred to as property, plant, and equipment; plant and equipment; and fixed assets. Chapter 10-3 Determining the Cost of Plant Assets Determining the Cost of Plant Assets Land Includes all costs to acquire land and ready it for use. Costs typically include: (1) the purchase price; (2) closing costs, such as title and attorney’s fees; (3) real estate brokers’ commissions; (4) costs of grading, filling, draining, and clearing; (5) assumption of any liens, mortgages, or encumbrances on the property. Chapter 10-4 SO 1 Describe how the cost principle applies to plant assets. Determining the Cost of Plant Assets Determining the Cost of Plant Assets E10-3 On March 1, 2008, Penner Company acquired real estate on which it E10-3 planned to construct a small office building. The company paid $80,000 in cash. An old warehouse on the property was razed at a cost of $8,600; the salvaged materials were sold for $1,700. Additional expenditures before construction began included $1,100 attorney’s fee for work concerning the land purchase, $5,000 real estate broker’s fee, $7,800 architect’s fee, and $14,000 to put in driveways and a parking lot. Instructions Determine amount to be reported as the cost of the land. For each cost not used, indicate the account debited. Chapter 10-5 SO 1 Describe how the cost principle applies to plant assets. Determining the Cost of Plant Assets Determining the Cost of Plant Assets Land Improvements Includes all expenditures necessary to make the improvements ready for their intended use. Examples are driveways, parking lots, fences, landscaping, and underground sprinklers. Limited useful lives. Expense (depreciate) the cost of land improvements over their useful lives. Chapter 10-6 SO 1 Describe how the cost principle applies to plant assets. Determining the Cost of Plant Assets Determining the Cost of Plant Assets Buildings Includes all costs related directly to purchase or construction. Purchase costs: Purchase price, closing costs (attorney’s fees, title insurance, etc.) and real estate broker’s commission. Remodeling and replacing or repairing the roof, floors, electrical wiring, and plumbing. Construction costs: Chapter 10-7 Contract price plus payments for architects’ fees, building permits, and excavation costs. SO 1 Describe how the cost principle applies to plant assets. Determining the Cost of Plant Assets Determining the Cost of Plant Assets E10-3 Determine amount to be reported as the cost of the land. E10-3 Land Company paid $80,000 in cash. $80,000 Old warehouse razed at a cost of $8,600 Salvaged materials were sold for $1,700. 8,600 ­ 1,700 Expenditures before construction began: $1,100 attorney’s fee for work on land purchase. 1,100 $5,000 real estate broker’s fee. 5,000 $7,800 architect’s fee. Building 0 $14,000 for driveways and parking lot. Chapter 10-8 Land Improvements 0 Total $93,000 SO 1 Describe how the cost principle applies to plant assets. Determining the Cost of Plant Assets Determining the Cost of Plant Assets Equipment Include all costs incurred in acquiring the equipment and preparing it for use. Costs typically include: purchase price, sales taxes, freight and handling charges, insurance on the equipment while in transit, assembling and installation costs, and costs of conducting trial runs. Chapter 10-9 SO 1 Describe how the cost principle applies to plant assets. Depreciation 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. Applies to land improvements, buildings, and equipment, not land. Depreciable, because the revenue­producing ability of asset will decline over the asset’s useful life. Chapter 10-10 SO 2 Explain the concept of depreciation. Depreciation Depreciation Factors in Computing Depreciation Cost Chapter 10-11 Useful Life Illustration 10­6 Salvage Value SO 2 Explain the concept of depreciation. 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) Straight­line method. (2) Units­of­Activity method. (3) Declining­balance method. Illustration 10-8 Use of depreciation methods in 600 large U.S. companies Chapter 10-12 SO 3 Compute periodic depreciation using different methods. Depreciation Depreciation Exercise (Depreciation Computations—Three Methods) Parish Corporation purchased a new machine for its assembly process on January 2, 2007. The cost of this machine was $117,900. The company estimated that the machine would have a salvage value of $12,900 at the end of its service life. Its life is estimated at 5 years and its working hours are estimated at 1,000 hours. Year­end is December 31. Instructions: Compute the depreciation expense under the following methods. (a) Straight­Line. (b) Units­of­Activity. (c) Double­Declining Balance. Chapter 10-13 SO 3 Compute periodic depreciation using different methods. Depreciation Depreciation Straight-Line Expense is same amount for each year. Depreciable cost is cost of the asset less its salvage value. Illustration 10­10 Straight­line method predominates in practice. Chapter 10-14 SO 3 Compute periodic depreciation using different methods. Depreciation Depreciation Depreciation Exercise (Straight-Line Method) Year 2007 2 008 2 009 2 010 2 011 Depr eciable Base $ 105, 000 105, 000 105, 000 105, 000 105, 000 / / / / / Year s 5 5 5 5 5 = = = = = Annual Expense $ 21, 000 21, 000 21, 000 21, 000 21, 000 $ 1 05, 000 Accum. Depr ec. $ 2 1, 000 4 2, 000 6 3, 000 8 4, 000 1 05, 000 Journal entry 2007 Depreciation expense Accumulated depreciation Chapter 10-15 21,000 21,000 SO 3 Compute periodic depreciation using different methods. Depreciation Depreciation Units-of-Activity Expense varies based on units of activity. Depreciable cost is cost less salvage value. Illustration 10­12 Companies estimate total units of activity to calculate depreciation cost per unit. Chapter 10-16 SO 3 Compute periodic depreciation using different methods. Depreciation Depreciation Depreciation Exercise (Units-of-Activity Method) ($105,000 / 1,000 hours = $105 per hour) Year 2007 2 008 2 009 2 010 2 011 Chapter 10-17 Hour s Used 200 150 250 300 100 1 , 000 x x x x x Rat e per Hour $ 105 = 105 = 105 = 105 = 105 = Annual Expense $ 21, 000 15, 750 26, 250 31, 500 10, 500 $ 105, 000 Accum. Depr ec. $ 2 1, 000 3 6, 750 6 3, 000 9 4, 500 1 05, 000 SO 3 Compute periodic depreciation using different methods. Depreciation Depreciation Double-Declining-Balance Decreasing annual depreciation expense over the asset’s useful life. Declining­balance rate is double the straight­line rate. Illustration 10­14 Rate applied to book value (cost less accumulated depreciation). Chapter 10-18 SO 3 Compute periodic depreciation using different methods. Depreciation Depreciation Depreciation Exercise (Double-Declining Balance Method) Year N et Bookvalue Rat e per Year Annual Expense Accum. Depr ec. 2007 2 008 2 009 $ 117, 900 70, 740 42, 444 x x x 40% 40% 40% = = = $ 47, 160 28, 296 16, 978 $ 4 7, 160 7 5, 456 9 2, 434 2 010 2 011 25, 466 15, 280 x x 40% 40% = = 10, 186 2, 380 $ 1 05, 000 1 02, 620 1 05, 000 Plug Chapter 10-19 SO 3 Compute periodic depreciation using different methods. Illustration 10­16 Depreciation Depreciation Comparison of Depreciation Methods Annual Expense Year SL DDB Act ivit y 2007 4 7, 160 2 1, 000 2 008 21, 000 2 8, 296 1 5, 750 2 009 21, 000 1 6, 978 2 6, 250 2 010 21, 000 1 0, 186 3 1, 500 2 011 21, 000 2 , 380 1 0, 500 1 05, 000 Chapter 10-20 21, 000 1 05, 000 1 05, 000 SO 3 Compute periodic depreciation using different methods. Depreciation Depreciation Revising Periodic Depreciation Accounted for in the period of change and future periods (Change in Estimate). Not handled retrospectively. Not considered error. Chapter 10-21 SO 4 Describe the procedure for revising periodic depreciation. Depreciation Depreciation Arcadia HS purchased equipment for $510,000 which was estimated to have a useful life of 10 years with a salvage value of $10,000 at the end of that time. Depreciation has been recorded for 7 years on a straight­line basis. In 2008 (year 8), it is determined that the total estimated life should be 15 years with a salvage value of $5,000 at the end of that time. Questions: What is the journal entry to correct the prior years’ depreciation? N No Calculate the depreciation expense for 2008.o Entry Required Required Chapter 10-22 SO 4 Describe the procedure for revising periodic depreciation. Depreciation Depreciation Equipment cost Salvage value Depreciable base Useful life (original) Annual depreciation After 7 years $510,000 First, establish NBV at First, establish NBV at ­ 10,000 date of change in estimate. date of change in estimate. 500,000 10 years $ 50,000 x 7 years = $350,000 Fixed Assets: Balance Sheet (Dec. 31, 2007) Equipment Accumulated depreciation Net book value (NBV) Chapter 10-23 $510,000 350,000 $160,000 SO 4 Describe the procedure for revising periodic depreciation. Depreciation Depreciation Net book value Salvage value (new) Depreciable base Useful life remaining Annual depreciation After 7 years $160,000 5,000 155,000 8 years $ 19,375 Depreciation Expense Depreciation Expense calculation for 2008. calculation for 2008. Journal entry for 2008 Depreciation expense Accumulated depreciation Chapter 10-24 19,375 19,375 SO 4 Describe the procedure for revising periodic depreciation. Expenditures During Useful Life 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 10-25 SO 5 Distinguish between revenue and capital expenditures, SO and explain the entries for each. and Plant Asset Disposals Plant Asset Disposals Companies dispose of plant assets in three ways —Retirement, Sale, or Exchange (appendix). Illustration 10­18 Record depreciation up to the date of disposal. Eliminate asset by (1) debiting Accumulated Depreciation, and (2) crediting the asset account. Chapter 10-26 SO 6 Explain how to account for the disposal of a plant asset. Plant Asset Disposals -- Retirement Plant Asset Disposals Retirement BE10-9 Prepare journal entries to record the following. BE10-9 (a) Gomez Company retires its delivery equipment, which cost $41,000. Accumulated depreciation is also $41,000 on this delivery equipment. No salvage value is received. (b) Assume the same information as (a), except that accumulated depreciation for Gomez Company is $39,000, instead of $41,000. (a) Chapter 10-27 Accumulated depreciation Equipment 41,000 41,000 SO 6 Explain how to account for the disposal of a plant asset. Plant Asset Disposals -- Retirement Plant Asset Disposals Retirement BE10-9 Prepare journal entries to record the following. BE10-9 (a) Gomez Company retires its delivery equipment, which cost $41,000. Accumulated depreciation is also $41,000 on this delivery equipment. No salvage value is received. (b) Assume the same information as (a), except that accumulated depreciation for Gomez Company is $39,000, instead of $41,000. (b) Chapter 10-28 Accumulated depreciation Equipment Loss on disposal 39,000 2,000 41,000 SO 6 Explain how to account for the disposal of a plant asset. Plant Asset Disposals Plant Asset Disposals Sale of Plant Assets Compare the book value of the asset with the proceeds received from the sale. If proceeds exceed the book value, a gain on disposal occurs. If proceeds are less than the book value, a loss on disposal occurs. Chapter 10-29 SO 6 Explain how to account for the disposal of a plant asset. Plant Asset Disposals -- Sale Plant Asset Disposals Sale BE10-10 Chan Company sells office equipment on September 30, 2008, BE10-10 for $20,000 cash. The office equipment originally cost $72,000 and as of January 1, 2008, had accumulated depreciation of $42,000. Depreciation for the first 9 months of 2008 is $5,250. Prepare the journal entries to (a) update depreciation to September 30, 2008, and (b) record the sale of the equipment. Chapter 10-30 SO 6 Explain how to account for the disposal of a plant asset. Plant Asset Disposals -- Sale Plant Asset Disposals Sale BE10-10 Prepare the journal entries to (a) update depreciation to BE10-10 September 30, 2008, and (b) record the sale of the equipment. (a) (b) Chapter 10-31 Depreciation expense Accumulated depreciation Cash Accumulated depreciation Office equipment Loss on disposal 5,250 20,000 47,250 4,750 5,250 72,000 SO 6 Explain how to account for the disposal of a plant asset. Section 3 – IIntangible Assets Section 3 – ntangible Assets Intangible assets are rights, privileges, and competitive advantages that do not possess physical substance. Normally classified as long­term asset. Common types of intangibles: Patents Trademarks or trade names Copyrights Goodwill Franchises or licenses Chapter 10-32 Accounting for Intangible Assets Accounting for Intangible Assets Valuation Purchased Intangibles: Recorded at cost. Includes all costs necessary to make the intangible asset ready for its intended use. Internally Created Intangibles: Generally expensed. Only capitalize direct costs incurred in perfecting title to the intangible, such as legal costs. Chapter 10-33 SO 8 Explain the basic issues related to accounting for intangible assets. Accounting for Intangible Assets Accounting for Intangible Assets Amortization of Intangibles Limited-Life Intangibles: Amortize to expense. Credit asset account or accumulated amortization. Indefinite-Life Intangibles: No foreseeable limit on time the asset is expected to provide cash flows. No amortization. Chapter 10-34 SO 8 Explain the basic issues related to accounting for intangible assets. Accounting for Intangible Assets Accounting for Intangible Assets Patents Exclusive right to manufacture, sell, or otherwise control an invention for a period of 20 years from the date of the grant. Capitalize costs of purchasing a patent and amortize over its 20­year life or its useful life, whichever is shorter. Expense any R&D costs in developing a patent. Legal fees incurred successfully defending a patent are capitalized to Patent account. Chapter 10-35 SO 8 Explain the basic issues related to accounting for intangible assets. Accounting for Intangible Assets Accounting for Intangible Assets BE10-12 Galena Company purchases a patent for $120,000 on January 2, BE10-12 2008. Its estimated useful life is 10 years. (a) Prepare the journal entry to record patent expense for the first year. (b) Show how this patent is reported on the balance sheet at the end of the first year. (a) Amortization expense Patent (b) 12,000 Intangibles: Patent Chapter 10-36 12,000 108,000 SO 8 Explain the basic issues related to accounting for intangible assets. Accounting for Intangible Assets Accounting for Intangible Assets Copyrights Give the owner the exclusive right to reproduce and sell an artistic or published work. plays, literary works, musical works, pictures, photographs, and video and audiovisual material. Copyright is granted for the life of the creator plus 70 years. Capitalize acquisition costs. Amortized to expense over useful life. Chapter 10-37 SO 8 Explain the basic issues related to accounting for intangible assets. Accounting for Intangible Assets Accounting for Intangible Assets Trademarks and Trade Names Word, phrase, jingle, or symbol that identifies a particular enterprise or product. Wheaties, Game Boy, Frappuccino, Kleenex, Windows, Coca­ Cola, and Jeep. Trademark or trade name has legal protection for indefinite number of 10 year renewal periods. Capitalize acquisition costs. No amortization. Chapter 10-38 SO 8 Explain the basic issues related to accounting for intangible assets. Accounting for Intangible Assets Accounting for Intangible Assets Franchises and Licenses Contractual arrangement between a franchisor and a franchisee. Shell, Taco Bell, or Rent­A­Wreck are franchises. Franchise (or license) with a limited life should be amortized to expense over the life of the franchise. Franchise with an indefinite life should be carried at cost and not amortized. Chapter 10-39 SO 8 Explain the basic issues related to accounting for intangible assets. Accounting for Intangible Assets Accounting for Intangible Assets Goodwill Includes exceptional management, desirable location, good customer relations, skilled employees, high­quality 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. Chapter 10-40 SO 8 Explain the basic issues related to accounting for intangible assets. Research and Development Costs Research and Development Costs Frequently results in something that a company patents or copyrights such as: new product, process, idea, formula, composition, or literary work. All R & D costs are expensed when incurred. Chapter 10-41 SO 8 Explain the basic issues related to accounting for intangible assets. Statement Presentation and Analysis Statement Presentation and Analysis Presentation Illustration 10­24 Companies usually include natural resources under “Property, plant, and equipment” and show intangibles separately. Chapter 10-42 SO 9 Indicate how plant assets, natural resources, SO and intangible assets are reported. and Statement Presentation and Analysis Statement Presentation and Analysis Analysis Illustration 10­25 Each dollar invested in assets produced $0.96 in sales. If a company is using its assets efficiently, each dollar of assets will create a high amount of sales. Chapter 10-43 SO 9 Indicate how plant assets, natural resources, SO and intangible assets are reported. and Depreciation Depreciation The following additional slides are included to illustrate the calculation of partial­year depreciation expense. The amounts are consistent with the previous slides illustrating the calculation of depreciation expense. Chapter 10-44 SO 3 Compute periodic depreciation using different methods. Depreciation Depreciation Depreciation Exercise (Straight­line Method) Year 2007 2 008 / / 2 009 2 010 105, 000 105, 000 / / 5 5 = = 21, 000 21, 000 2 1, 000 2 1, 000 4 7, 250 6 8, 250 2 011 2 012 105, 000 105, 000 / / 5 5 = = 21, 000 21, 000 2 1, 000 15, 750 $ 1 05, 000 8 9, 250 1 05, 000 x x Par t ial Year 3/ 12 Accum. Depr ec. $ 5 , 250 2 6, 250 Depr eciable Base $ 105, 000 105, 000 Year s 5 = 5 = Annual Expense $ 21, 000 21, 000 Cur r ent Year Expense $ 5, 250 2 1, 000 9/ 12 = = J our nal ent r y: 2007 Depr eciat ion expense Accumult at ed depr eciat ion Chapter 10-45 5, 250 5, 250 SO 3 Compute periodic depreciation using different methods. Depreciation Depreciation Depreciation Exercise (Units­of­Activity Method) ($ 105, 000 / 1, 000 hours = $ 105 per hour) Year (Given) Hours Used Rat e per Hours Annual Expense 2007 160 x $ 105 = 150 x 105 = 2 009 250 x 105 2 010 300 x 2 011 100 2 012 40 Part ial Year $ 16, 800 2 008 Current Year Expense $ Accum. Deprec. 1 6, 800 $ 1 6, 800 15, 750 1 5, 750 3 2, 550 = 26, 250 2 6, 250 5 8, 800 105 = 31, 500 3 1, 500 9 0, 300 x 105 = 10, 500 1 0, 500 1 00, 800 x 105 = 4, 200 4 , 200 1 05, 000 1 , 000 $ 1 05, 000 J ournal ent ry: 2007 Depreciat ion expense Accumult at ed depreciat ion Chapter 10-46 16, 800 16, 800 SO 3 Compute periodic depreciation using different methods. Depreciation Depreciation Depreciation Exercise (Double­Declining Balance Method) Year Depreciable Base Rat e per Year Annual Expense 2007 $ 117, 900 x 40% = 2 008 106, 110 x 40% = 2 009 72, 509 x 40% 2 010 54, 381 x 2 011 44, 411 2 012 39, 230 $ 47, 160 x Current Year Expense Part ial Year 3/ 12 11, 790 $ 1 1, 790 33, 602 3 3, 602 4 5, 392 = 18, 127 1 8, 127 6 3, 519 40% = 9, 970 9 , 970 7 3, 489 x 40% = 5, 181 5 , 181 7 8, 670 x 40% = 1, 962 26, 330 1 05, 000 Plug =$ Accum. Deprec. $ 1 05, 000 J our nal ent r y: 2007 Depr eciat ion expense Accumult at ed depr eciat ion Chapter 10-47 11, 790 11, 790 SO 3 Compute periodic depreciation using different methods. ...
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