Slide 9-1 Plant Assets, Natural Resources, and Intangible Assets Financial Accounting, Seventh Edition Chapter 9.

Plant Assets, Plant Assets, Natural Natural

Resources, and Resources, and Intangible Intangible

AssetsAssets

Financial Accounting,

Seventh Edition

Chapter 9

“Used in operations” and not for resale.

Possess physical substance.

Long-term in nature and usually depreciated.

Plant assets include land, land improvements, buildings, and equipment (machinery, furniture, tools).

Major characteristics include:

Section 1Section 1 – Plant Assets – Plant AssetsSection 1Section 1 – Plant Assets – Plant Assets

Referred to as property, plant, and equipment; plant and equipment; and fixed assets.

Depreciation is the process of allocating the cost of a plant asset to

expense in the accounting periods in a systematic and rational manner

benefiting from its use.

Depreciation is the process of allocating the cost of a plant asset to

expense in the accounting periods in a systematic and rational manner

benefiting from its use.

CostAllocation

AcquisitionCost

(Unused)

Balance Sheet

(Used)

Income Statement

ExpenseExpense

DepreciationDepreciationDepreciationDepreciation

Cost (of an asset) Less Accumulated Depreciation = BOOK VALUE BOOK VALUEBOOK VALUE MARKET VALUEMARKET VALUE

Factors in Computing Depreciation

Actual Cost

Estimated Useful

Estimated Salvage Value

Objective is to select the method that best measures an asset’s contribution to revenue over its useful life. Examples include:

Depreciation Methods

(1) Straight-line method.

(2) Units-of-Activity method.

(3) Declining-balance method.

On January 1, 2012, an equipment On January 1, 2012, an equipment was purchased for $50,000 cash. was purchased for $50,000 cash. The equipment has an estimated The equipment has an estimated

useful life of 5 years and an useful life of 5 years and an estimated salvage value of $5,000. estimated salvage value of $5,000.

Record the journal entry for Record the journal entry for Depreciation on December 31, 2012.Depreciation on December 31, 2012.

Cost - Salvage ValueUseful life in periods

DepreciationExpense for Period

Straight Line Depreciation MethodStraight Line Depreciation MethodStraight Line Depreciation MethodStraight Line Depreciation Method

Cost - Salvage ValueUseful life in periods

DepreciationExpense for Period

December 31, 2010:

Depreciation expense . . . . . . . . . . . . . . . . .9,000

Accumulated Depreciation . . . . . . . . . . . . . . 9,000

Depreciation AccumulatedExpense Depreciation Accumulated Book

Year (debit) (credit) Depreciation Value50,000$

2012 9,000$ 9,000$ 9,000$ 41,000 2013 9,000 9,000 18,000 32,000 2014 9,000 9,000 27,000 23,000 2015 9,000 9,000 36,000 14,000 2016 9,000 9,000 45,000 5,000

45,000$ 45,000$

DepreciationPer Unit

= Cost - Salvage Value

Total Units of Production

Step 1:

Depreciation Expense =

DepreciationPer Unit

×Number of

Units Produced

in the Period

Step 2:

Units-of-Activity Depreciation MethodUnits-of-Activity Depreciation MethodUnits-of-Activity Depreciation MethodUnits-of-Activity Depreciation Method

On January 1, 2012, an equipment was On January 1, 2012, an equipment was purchased for $50,000 cash. The purchased for $50,000 cash. The

equipment is expected to produce 100,000 equipment is expected to produce 100,000 units during its useful life and has an units during its useful life and has an estimated salvage value of $5,000.estimated salvage value of $5,000.

If 22,000 units were produced in 2012, If 22,000 units were produced in 2012, what what

is the amount of depreciation expense? is the amount of depreciation expense?

On January 1, 2012, an equipment was On January 1, 2012, an equipment was purchased for $50,000 cash. The purchased for $50,000 cash. The

equipment is expected to produce 100,000 equipment is expected to produce 100,000 units during its useful life and has an units during its useful life and has an estimated salvage value of $5,000.estimated salvage value of $5,000.

If 22,000 units were produced in 2012, If 22,000 units were produced in 2012, what what

is the amount of depreciation expense? is the amount of depreciation expense?

Depreciation Accumulated BookYear Units Expense Depreciation Value

50,000$ 2012 22,000 9,900$ 9,900$ 40,100 2013 28,000 12,600 22,500 27,500 2014 - - 22,500 27,500 2015 32,000 14,400 36,900 13,100 2016 18,000 8,100 45,000 5,000

100,000 45,000$

Depreciation RepairExpense Expense

Early Years High Low

Later Years Low High

Early years’ total expense approximates later years’ total expense.

Declining Balance Depreciation Declining Balance Depreciation MethodMethod

On January 1, 2012, equipment was purchased for $50,000 cash. The equipment has an estimated useful

life of 5 years, and a salvage value of $5,000.

On January 1, 2012, equipment was purchased for $50,000 cash. The equipment has an estimated useful

life of 5 years, and a salvage value of $5,000.

Double Declining Balance Depreciation Double Declining Balance Depreciation MethodMethod

Depreciation Accumulated BookYear Expense Depreciation Value

50,000$ 2012 20,000$ 20,000$ 30,000 2013 12,000 32,000 18,000 2014 7,200 39,200 10,800 2015 4,320 43,520 6,480 2016 2,592 46,112 3,888

46,112$

Double Declining Balance Depreciation Double Declining Balance Depreciation MethodMethod

What would happen if Salvage Value is $15,000?

Knowledge Check: Knowledge Check: A company purchased a cash register A company purchased a cash register on January 1 for $5,400. This register on January 1 for $5,400. This register has a useful life of 10 years and a has a useful life of 10 years and a salvage value of $400. What would salvage value of $400. What would be the depreciation expense for the be the depreciation expense for the second-year of its useful life using second-year of its useful life using the double-declining-balance the double-declining-balance

method?method? 1.1. $ 800. $ 800. 2.2. $ 864. $ 864. 3.3. $1,000. $1,000. 4.4. $1,080. $1,080.

Comparing Depreciation MethodsComparing Depreciation Methods

Life in Years

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

1 2 3 4 5

Life in Years

$2,000

$4,000

$6,000

$8,000

$10,000

1 2 3 4 5

Life in Years

$5,000

$10,000

$15,000

$20,000

1 2 3 4 5

Str. Line DDBDepreciation Depreciation

Year Expense Expense

2012 9,000$ 20,000$ 2013 9,000 12,000 2014 9,000 7,200 2015 9,000 4,320 2016 9,000 1,480

45,000$ 45,000$

Which method of Depreciation should a company Which method of Depreciation should a company choose?choose?

Knowledge Check:Knowledge Check:The straight-line The straight-line depreciation method and the depreciation method and the double-declining-balance double-declining-balance depreciation method: depreciation method:

1.1. Yield the same depreciation expense each Yield the same depreciation expense each year. year.

2.2. Yield the same book value each yearYield the same book value each year3.3. Yield the same total depreciation over an Yield the same total depreciation over an

asset's useful life. asset's useful life. 4.4. Are the only acceptable methods of Are the only acceptable methods of

depreciation for financial reporting. depreciation for financial reporting.

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.

Depreciation and Income Taxes

Depreciation and Income TaxesDepreciation and Income TaxesDepreciation and Income TaxesDepreciation and Income Taxes

So depreciationis an estimate.

Predicted salvage value

Predicteduseful life

Over the life of an asset, new information may Over the life of an asset, new information may come to light that indicates thecome to light that indicates the

original estimates were inaccurate.original estimates were inaccurate.

Over the life of an asset, new information may Over the life of an asset, new information may come to light that indicates thecome to light that indicates the

original estimates were inaccurate.original estimates were inaccurate.

Change in Estimates for DepreciationChange in Estimates for DepreciationChange in Estimates for DepreciationChange in Estimates for Depreciation

On January 1, On January 1, 20092009, equipment was purchased that , equipment was purchased that cost $30,000, has a useful life of 10 years and no cost $30,000, has a useful life of 10 years and no salvage value. On January 1, salvage value. On January 1, 20122012, the useful life , the useful life was revised to 8 years total (5 years remaining). was revised to 8 years total (5 years remaining).

Calculate depreciation expense for the yearCalculate depreciation expense for the yearended December 31, 2012, using theended December 31, 2012, using the

straight-line method.straight-line method.

On January 1, On January 1, 20092009, equipment was purchased that , equipment was purchased that cost $30,000, has a useful life of 10 years and no cost $30,000, has a useful life of 10 years and no salvage value. On January 1, salvage value. On January 1, 20122012, the useful life , the useful life was revised to 8 years total (5 years remaining). was revised to 8 years total (5 years remaining).

Calculate depreciation expense for the yearCalculate depreciation expense for the yearended December 31, 2012, using theended December 31, 2012, using the

straight-line method.straight-line method.

Book value at date of change

Salvage value at date of change

Remaining useful life at date of change

Change in Estimates for DepreciationChange in Estimates for DepreciationChange in Estimates for DepreciationChange in Estimates for Depreciation

Knowledge Check Question:Knowledge Check Question:When originally purchased, a vehicle had an When originally purchased, a vehicle had an estimated useful life of 8 years. The vehicle estimated useful life of 8 years. The vehicle cost $23,000 and its estimated salvage cost $23,000 and its estimated salvage value was $1,500. After 4 years of straight-value was $1,500. After 4 years of straight-line depreciation, the asset's total line depreciation, the asset's total estimated useful life was revised from 8 estimated useful life was revised from 8 years to 6 years and there was no change years to 6 years and there was no change in the estimated salvage value. The in the estimated salvage value. The depreciation expense in year 5 equals: depreciation expense in year 5 equals:

1.1. $ 5,375.00. $ 5,375.00.

2.2. $ 2,687.50. $ 2,687.50.

3.3. $ 5,543.75. $ 5,543.75.

4.4. $10,750.00. $10,750.00.

Compare the partial balance sheets of the following 3 companies and rank them in order of their asset’s average age? (All amounts

are in millions of dollars)

Company A Company B Company C

Total Property, Plant and Equipment

19,231 8,130 3,273

Less: Accumulated Depreciation

(10,962) (3,285) (882)

Net Prop. Plant & Equipment

$8,269 $4,845 $2,391

Let us analyze Financial Statements!Let us analyze Financial Statements!

Companies dispose of plant assets in three ways —Retirement, Sale, or Exchange (appendix).

Disposal of Plant AssetsDisposal of Plant AssetsDisposal of Plant AssetsDisposal of Plant Assets

Record depreciation up to the date of disposal.

Eliminate asset by (1) debiting Accumulated Depreciation, and (2) crediting the asset account.

Recording cashreceived (debit)or paid (credit).

Removing accumulateddepreciation (debit).

Update depreciation to the date of disposal.

Journalize disposal by: Journalize disposal by:

Removing the asset cost (credit).

Recording again (credit)

or loss (debit).

Update depreciation to the date of disposal.

Journalize disposal by:

If Cash > BV, record a gain (credit).

If Cash < BV, record a loss (debit).

If Cash = BV, no gain or loss.Recording cashreceived (debit)or paid (credit).

Recording cashreceived (debit)or paid (credit).

Removing accumulateddepreciation (debit).

Removing the asset cost (credit).

or loss (debit).

Evans Company placed a machine in service on January 1, 2008. The machine cost $100,000, and was

depreciated using the straight-line method with an estimated salvage value of $20,000 and a useful life

of 10 years. The company’s accounting period ends on

December 31. On September 30, 2012, the machine was sold for

$60,000 cash.

Update Depreciation to the Date of Update Depreciation to the Date of Disposal Disposal

Determine Book Value of AssetDetermine Book Value of AssetDetermine Book Value of AssetDetermine Book Value of Asset

If Cash > BV, record a gain (credit).

If Cash < BV, record a loss (debit).

If Cash = BV, no gain or loss.

Determine Gain or Loss on DisposalDetermine Gain or Loss on DisposalDetermine Gain or Loss on DisposalDetermine Gain or Loss on Disposal

Evans Company placed a machine in service on January 1, 2008. The machine

cost $100,000, and was depreciated using the straight-line method with an

estimated salvage value of $20,000 and a useful life of 10 years. The company’s

accounting period ends on December 31. On September 30, 2012, the

machine was sold for $65,000 cash.

Knowledge Check Question:Knowledge Check Question:Bronco Company sold an equipment Bronco Company sold an equipment for cash of $40,500. Accumulated for cash of $40,500. Accumulated depreciation on the sale date was depreciation on the sale date was $34,000 and a loss of $1,800 was $34,000 and a loss of $1,800 was recognized on the sale. What was recognized on the sale. What was the original cost of the asset?the original cost of the asset?

1.1. $72,700$72,700

2.2. $75,900$75,900

3.3. $76,300$76,300

4.4. $42,300$42,300

Physically extracted in operations.

Replaceable only by an act of nature.

Natural resources consist of standing timber and underground deposits of oil, gas, and minerals.

Distinguishing characteristics:

Section 2Section 2 – Natural Resources – Natural ResourcesSection 2Section 2 – Natural Resources – Natural Resources

Depletion is to natural resources as

depreciation is to plant assets.

Companies generally use units-of-activity method.

Depletion generally is a function of the units

extracted.

Cost - price needed to acquire the resource and prepare it for its intended use.

Depletion - allocation of the cost to expense in a rational and systematic manner over the resource’s useful life.

Section 2Section 2 – Natural Resources – Natural ResourcesSection 2Section 2 – Natural Resources – Natural Resources

Total cost,including

exploration anddevelopment,is charged to

depletion expenseover periodsbenefited.

Extracted fromthe natural

environmentand reportedat cost less

accumulateddepletion.

Examples: oil, coal, goldExamples: oil, coal, gold

Natural ResourcesNatural ResourcesNatural ResourcesNatural Resources

DepletionPer Unit

= Cost - Salvage Value Total Units of Capacity

Step 1:

DepletionExpense =

DepletionPer Unit

×Units

Extracted and Sold in

Period

Step 2:

Cost of Depletion of Natural Cost of Depletion of Natural ResourcesResources

Chevy Oil and Gas Company acquired a tract of Chevy Oil and Gas Company acquired a tract of land containing crude oil deposits. Total costs of land containing crude oil deposits. Total costs of acquisition and development were $100,000,000. acquisition and development were $100,000,000.

The company estimates the land contains The company estimates the land contains 800,000 barrels of oil, and that the land will have a 800,000 barrels of oil, and that the land will have a

salvage value of $20,000,000 when the mine is salvage value of $20,000,000 when the mine is stripped . During the first year of operations, they stripped . During the first year of operations, they

extracted and sold 13,000 barrels of crude. extracted and sold 13,000 barrels of crude.

Chevy Oil and Gas Company acquired a tract of Chevy Oil and Gas Company acquired a tract of land containing crude oil deposits. Total costs of land containing crude oil deposits. Total costs of acquisition and development were $100,000,000. acquisition and development were $100,000,000.

The company estimates the land contains The company estimates the land contains 800,000 barrels of oil, and that the land will have a 800,000 barrels of oil, and that the land will have a

salvage value of $20,000,000 when the mine is salvage value of $20,000,000 when the mine is stripped . During the first year of operations, they stripped . During the first year of operations, they

extracted and sold 13,000 barrels of crude. extracted and sold 13,000 barrels of crude.

Cost of Depletion of Natural Cost of Depletion of Natural ResourcesResources

Intangible assets are rights, privileges, and competitive advantages that do not possess physical substance.

Section 3Section 3 – Intangible Assets – Intangible AssetsSection 3Section 3 – Intangible Assets – Intangible Assets

Patents

Copyrights

Franchises or licenses

Intangible assets are categorized as having either a limited life or an indefinite life.

Common types of intangibles:

Trademarks and trade names

Goodwill

Purchased Intangibles:

Recorded at cost.

Includes all costs necessary to make the intangible asset ready for its intended use.

Valuation

Internally Created Intangibles:

Generally expensed.

Only capitalize direct costs incurred in perfecting title to the intangible, such as legal costs.

Accounting for Intangible AssetsAccounting for Intangible AssetsAccounting for Intangible AssetsAccounting for Intangible Assets

Illustration: Assume that National Labs purchases a patent at a cost of $60,000. National estimates the useful life of the patent to be eight years. National records the annualamortization as follows.

GoodwillIncludes 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 overover the FMV of the identifiable net assets acquired.

Internally created goodwill should not be capitalized.

Goodwill is NOT amortized, but tested for impairment at the end of every year.

Excerpted from Form 10-K for MICROSOFT, Inc.

For the Fiscal Year Ended June 30, 2012

Goodwill ExampleGoodwill ExampleGoodwill ExampleGoodwill Example

NOTE 9 — BUSINESS COMBINATIONSOn October 13, 2011, we acquired all of the issued and outstanding shares of Skype Global S.á r.l. (“Skype”), a leading global provider of software applications and related Internet communications products based in Luxembourg, for $8.6 billion, primarily in cash. The major classes of assets and liabilities to which we allocated the purchase price were goodwill of $7.1 billion, identifiable intangible assets of $1.6 billion, and unearned revenue of $222 million. The goodwill recognized in connection with the acquisition is primarily attributable to our expectation of extending Skype’s brand and the reach of its networked platform, while enhancing Microsoft’s existing portfolio of real-time communications products and services.

Knowledge Check Question:Knowledge Check Question:In 2006, YOUTUBE Company’s Net In 2006, YOUTUBE Company’s Net Assets had a market value of $60 Assets had a market value of $60 million, but Google Inc paid $1,200 million, but Google Inc paid $1,200 million to purchase YOUTUBE. At the million to purchase YOUTUBE. At the end of 2012, Google makes end of 2012, Google makes assessment of the market value of assessment of the market value of YOUTUBE to be $3,000 million. In YOUTUBE to be $3,000 million. In 2012, Google must record an 2012, Google must record an impairment expense of:impairment expense of:1.1. $2,940 million$2,940 million

2.2. $1,800 million$1,800 million

3.3. $1,140 million$1,140 million

4.4. $0$0

Statement Presentation and AnalysisStatement Presentation and AnalysisStatement Presentation and AnalysisStatement Presentation and Analysis

Net Sales

Illustration: In its 2012 Balance Sheet, Microsoft Corporation reported a beginning balance of total assets of $108,704 million, and ending balance of $121,271 million. Microsoft’s net sales revenue for the year was $73,723 million. Determine the Asset Turnover Ratio for Microsoft Corporation.

÷Average Total

Assets Asset

Turnover Ratio

The following data was reported by MICROSOFT, APPLE and WALMART.

Sales Revenue $ 73,723 $108,249 $446,950

Total Assets, Ending Balance

$108,704

$75,183 $180,702

Total Assets, Beg. Balance

$121,271

$116,371 $193,406

Asset Turnover Ratio

0.64 1.13 2.39

The following data was reported by MICROSOFT, APPLE and WALMART.

Sales Revenue $ 73,723 $108,249 $446,950

Property, Plant and Equipment, Ending Balance

$8,269

$7,777 $112,324

Property, Plant and Equipment, Beg. Balance

$8,162

$4,768 $107,878

PPE Turnover Ratio

8.97 17.26 4.06

End of Chapter 9End of Chapter 9End of Chapter 9End of Chapter 9

Slide 9-1 Plant Assets, Natural Resources, and Intangible Assets Financial Accounting, Seventh Edition Chapter 9.

depreciationdepreciation

activity depreciation

periods depreciation

accumulated depreciation

depreciation methods

activity method

equipment plant

estimated useful life

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