© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Plant Assets, Natural Resources, and Intangibles Chapter 10.

© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin

Plant Assets, Natural Resources, and Intangibles

Chapter

1010


Called Property, Plant, & EquipmentCalled Property, Plant, & Equipment

Plant AssetsPlant Assets

Expected to Benefit Future PeriodsExpected to Benefit Future Periods

Actively Used in OperationsActively Used in Operations

Tangible in NatureTangible in Nature



Plant Assets as a Percent of Total Assets

5%

51%

59%

78%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

eBay Wal-Mart Anheuser-Busch

McDonald's


Decline in asset value over its useful life

Use2. Allocate cost to periods benefited.3. Account for subsequent expenditures.

Use2. Allocate cost to periods benefited.3. Account for subsequent expenditures.

Disposal 4. Record disposal Disposal 4. Record disposal


Acquisition1. Compute cost. Acquisition1. Compute cost.


AcquisitionCost

AcquisitionCost

Acquisition cost excludes financing charges and

cash discounts.

Acquisition cost excludes financing charges and

cash discounts.

All expenditures

needed to prepare the asset for its intended use

All expenditures

needed to prepare the asset for its intended use

Purchaseprice

Purchaseprice

Cost DeterminationCost Determination


Land is not depreciable.Land is not depreciable.

Purchaseprice

Purchaseprice

Real estatecommissionsReal estate

commissions

Title insurance premiumsTitle insurance premiums

Delinquenttaxes

Delinquenttaxes

Surveyingfees

Surveyingfees

Title search and transfer feesTitle search and transfer fees

LandLand


Land ImprovementsLand Improvements

Parking lots, driveways, fences, walks, shrubs, and lighting systems.

Parking lots, driveways, fences, walks, shrubs, and lighting systems.

Depreciate over useful life of

improvements.


Cost of purchase or construction

Cost of purchase or construction

Brokeragefees

Brokeragefees

TaxesTaxes

Title feesTitle fees

Attorney feesAttorney fees

BuildingsBuildings


Purchaseprice

Purchaseprice

Installing,assembling, and

testing

Installing,assembling, and

testing

Insurance whilein transit

Insurance whilein transit

TaxesTaxes

Transportationcharges

Transportationcharges

Machinery and EquipmentMachinery and Equipment


On January 1, Matrix, Inc. purchased land and building for $200,000 cash. The appraised values

are building, $162,500, and land, $87,500.

How much of the $200,000 purchase price will be charged to the building and land accounts?

On January 1, Matrix, Inc. purchased land and building for $200,000 cash. The appraised values

are building, $162,500, and land, $87,500.

How much of the $200,000 purchase price will be charged to the building and land accounts?

Lump-Sum Asset PurchaseLump-Sum Asset Purchase

The total cost of a combined purchase of land and building is separated on the basis of their relative market values.

The total cost of a combined purchase of land and building is separated on the basis of their relative market values.


Appraised % of Purchase ApportionedAsset Value Value Price Cost

a b* c b × c

Land 87,500$ 35% × 200,000$ = 70,000$ Building 162,500 65% × 200,000 = 130,000 Total 250,000$ 100% 200,000$

* $87,500 ÷ $250,000 = 35%

$162,500 ÷ $250,000 = 65%

Appraised % of Purchase ApportionedAsset Value Value Price Cost

a b* c b × c

Land 87,500$ 35% × 200,000$ = 70,000$ Building 162,500 65% × 200,000 = 130,000 Total 250,000$ 100% 200,000$

* $87,500 ÷ $250,000 = 35%

$162,500 ÷ $250,000 = 65%

Lump-Sum Asset PurchaseLump-Sum Asset Purchase


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

accounting periods benefiting from its use.

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

accounting periods benefiting from its use.

Cost

AllocationAcquisition

CostAcquisition

Cost

(Unused)

Balance Sheet

(Used)

Income Statement

ExpenseExpense

DepreciationDepreciation


The calculation of depreciation requires three amounts for each asset:

Cost.

Salvage Value.

Useful Life.

Factors in Computing DepreciationFactors in Computing Depreciation


Straight-line

Units-of-production

Declining balance

Depreciation MethodsDepreciation Methods


On January 1, 2004, equipment was purchased for $50,000 cash. The

equipment has an estimated useful life of 5 years and an estimated

residual value of $5,000.

Cost - Salvage Value

Useful life in periods

Depreciation

Expense for Period=

Straight-Line MethodStraight-Line Method



Cost - Salvage Value

Useful life in periods

Depreciation

Expense for Period=

$9,000 Depreciation

Expense per Year=

$50,000 - $5,000

5 years=

Dec. 31 Depreciation Expense 9,000 Accumulated Depreciation - Equipment 9,000

To record annual depreciation


Depreciation AccumulatedExpense Depreciation Accumulated Book

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

2004 9,000$ 9,000$ 9,000$ 41,000 2005 9,000 9,000 18,000 32,000 2006 9,000 9,000 27,000 23,000 2007 9,000 9,000 36,000 14,000 2008 9,000 9,000 45,000 5,000

45,000$ 45,000$

Salvage ValueSalvage Value


DepreciationRate

= (100% ÷ 5 years) = 20% per year


Dep

reci

atio

n

Exp

ense Depreciation Expense reported on the

Income Statement.

$0$1,000

$3,000

$5,000

$7,000

$9,000

2004 2005 2006 2007 2008

For the year ended December 31

Book Valuereported on theBalance Sheet.

$41,000

$32,000

$23,000

$14,000

$5,000

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

$45,000

2004 2005 2006 2007 2008

As of December 31

Bo

ok

Val

ue


Step 2:Depreciation Expense =

DepreciationPer Unit

×Number of

Units Producedin the Period

Units-of-Production MethodUnits-of-Production Method

DepreciationPer Unit

= Cost - Salvage Value Total Units of Production

Step 1:


On December 31, 2001, equipment was purchased for $50,000 cash. The equipment is expected to produce 100,000 units during its

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

If 22,000 units were produced in 2002, what is the amount of depreciation expense?

On December 31, 2001, equipment was purchased for $50,000 cash. The equipment is expected to produce 100,000 units during its

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

If 22,000 units were produced in 2002, what is the amount of depreciation expense?



Step 2:Depreciation Expense = $.45 per unit × 22,000 units = $9,900

Step 1:Depreciation

Per Unit= $50,000 - $5,000

100,000 units = $.45 per unit



Depreciation Accumulated BookYear Units Expense Depreciation Value

50,000$ 2004 22,000 9,900$ 9,900$ 40,100 2005 28,000 12,600 22,500 27,500 2006 - - 22,500 27,500 2007 32,000 14,400 36,900 13,100 2008 18,000 8,100 45,000 5,000

100,000 45,000$

No depreciation expense if the equipment is idle.



Depreciation RepairExpense Expense

Early Years High Low

Later Years Low High

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

Declining Balance MethodDeclining Balance Method


Double-Declining-Balance MethodDouble-Declining-Balance Method

Step 2:Double-declining-

balance rate= 2 × Straight-line rate = 2 × 20% = 40%

Step 1:Straight-line

rate= 100 % ÷ Useful life = 100% ÷ 5 = 20%

Step 3:Depreciation

expense =Double-declining-

balance rate ×Beginning period

book value

40% × $50,000 = $20,000 for 2004


2004 Depreciation: 40% × $50,000 = $20,000


2005 Depreciation: 40% × ($50,000 - $20,000) = $12,000


Depreciation Accumulated BookYear Expense Depreciation Value

50,000$ 2004 20,000$ 20,000$ 30,000 2005 12,000 32,000 18,000 2006 7,200 39,200 10,800 2007 4,320 43,520 6,480 2008 2,592 46,112 3,888

46,112$ Below salvage value



Depreciation Accumulated BookYear Expense Depreciation Value

50,000$ 2004 20,000$ 20,000$ 30,000 2005 12,000 32,000 18,000 2006 7,200 39,200 10,800 2007 4,320 43,520 6,480 2008 1,480 45,000 5,000

45,000$

We usually must force depreciation expense in thelast year so that book value equals salvage value.We usually must force depreciation expense in thelast year so that book value equals salvage value.


© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin Life in Years

An

nu

al D

DB

Dep

reci

atio

n

$0

$5,000

$10,000

$15,000

$20,000

1 2 3 4 5

Comparing Depreciation MethodsComparing Depreciation Methods

An

nu

al P

rod

uct

ion

Dep

reci

atio

n

Life in Years

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

1 2 3 4 5Life in Years

An

nu

al S

LD

epre

ciat

ion

$0

$2,000

$4,000

$6,000

$8,000

$10,000

1 2 3 4 5


Most corporations use the Modified Accelerated Cost Recovery System

(MACRS) for tax purposes.

MACRS depreciation provides for rapid write-off of an asset’s cost in order to

stimulate new investment.

Most corporations use the Modified Accelerated Cost Recovery System

(MACRS) for tax purposes.

MACRS depreciation provides for rapid write-off of an asset’s cost in order to

stimulate new investment.

Depreciation for Tax ReportingDepreciation for Tax Reporting


When a plant asset is acquired during the year, depreciation is calculated for the fraction of the

year the asset is owned.

When a plant asset is acquired during the year, depreciation is calculated for the fraction of the

year the asset is owned.

June 30

Partial-Year DepreciationPartial-Year Depreciation


Calculate the straight-line depreciation on December 31, 2004, for equipment purchased

on June 30, 2004. The equipment cost $75,000, has a useful life of 10 years and an

estimated salvage value of $5,000.

Calculate the straight-line depreciation on December 31, 2004, for equipment purchased

on June 30, 2004. The equipment cost $75,000, has a useful life of 10 years and an

estimated salvage value of $5,000.

Depreciation = ($75,000 - $5,000) ÷ 10

= $7,000 for all 2004

Depreciation = $7,000 × 6/12 = $3,500

Depreciation = ($75,000 - $5,000) ÷ 10

= $7,000 for all 2004

Depreciation = $7,000 × 6/12 = $3,500

Partial Year DepreciationPartial Year Depreciation


So depreciationis an estimate.

Predicted salvage value

Predicteduseful life

Over the life of an asset, new information may come to light that indicates theoriginal estimates were inaccurate.

Over the life of an asset, new information may come to light that indicates theoriginal estimates were inaccurate.

Change in Estimates for DepreciationChange in Estimates for Depreciation


On January 1, 2004, equipment was purchased that cost $30,000, has a useful life of 10 years and no salvage value. During 2007, the useful life was

revised to 8 years total (5 years remaining).

Calculate depreciation expense for the yearended December 31, 2004, using the

straight-line method.

On January 1, 2004, equipment was purchased that cost $30,000, has a useful life of 10 years and no salvage value. During 2007, the useful life was

revised to 8 years total (5 years remaining).

Calculate depreciation expense for the yearended December 31, 2004, using the

straight-line method.


Book value at date of change

Salvage value at date of change

Remaining useful life at date of change

–



Asset cost 30,000$ Accumulated depreciation, 12/31/2006 ($3,000 per year × 3 years) 9,000 Remaining book value 21,000$ Divide by remaining life ÷ 5Revised annual depreciation 4,200$

Dec. 31 Depreciation Expense 4,200 Accumulated Depreciation - Equipment 4,200

To record depreciation for 2007


Reporting DepreciationReporting Depreciation

Property, plant, and equipment: Land and buildings 150,000$ Machinery and equipment 200,000 Office furniture and equipment 175,000 Land improvements 50,000 Total 575,000$ Less Accumulated depreciation (122,000) Net property, plant, and equipment 453,000$


Additional ExpendituresAdditional Expenditures

If the amounts involved are not material, most companies expense the item.

If the amounts involved are not material, most companies expense the item.

Financial Statement EffectCurrent Current

Treatment Statement Expense Income Taxes

Capital Balance sheetExpenditure account debited Deferred Higher Higher

Revenue Income statement CurrentlyExpenditure account debited recognized Lower Lower


Revenue and Capital ExpendituresRevenue and Capital Expenditures

Type of Capital orExpenditure Revenue Identifying Characteristics

Ordinary Revenue 1. Maintains normal operating condition.Repairs 2. Does not increase productivity.

3. Does not extend life beyond original estimate.

Capital 1. Major overhauls or partial replacements.2. Extends life beyond original estimate.

Betterments and

Extraordinary Repairs


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).


or loss (debit).

Disposals of Plant AssetsDisposals of Plant Assets


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.

Discarding Plant AssetsDiscarding Plant Assets








or loss (debit).


or loss (debit).


On September 30, 2004, Evans Company sells a machine that originally cost

$100,000 for $60,000 cash. The machine was placed in service on January 1, 2000. It was depreciated using the straight-line method with an estimated salvage value of $20,000 and a useful life of 10 years.

Selling Plant AssetsSelling Plant Assets


Selling Plant AssetsUpdate Depreciation to Date of DisposalUpdate Depreciation to Date of Disposal

Annual Depreciation:($100,000 - $20,000) ÷ 10 Yrs. = $8,000

Depreciation to September 30, 2004:9/12 × $8,000 = $6,000

Annual Depreciation:($100,000 - $20,000) ÷ 10 Yrs. = $8,000

Depreciation to September 30, 2004:9/12 × $8,000 = $6,000

Sep. 30 Depreciation expense 6,000 Accumulated Depreciation - Machine 6,000

To update depreciation to date of disposal


Selling Plant AssetsDetermine Book Value of AssetDetermine Book Value of Asset

Cost 100,000$ Accumulated Depreciation: ( yrs. × $8,000) + $6,000 = 38,000

Book Value 62,000$


Selling Plant AssetsDetermine Gain or Loss on DisposalDetermine Gain or Loss on Disposal

Cost 100,000$ Accumulated depreciation 38,000

Book Value 62,000 Cash Received 60,000

Loss on disposal (2,000)$

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

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

If Cash = BV, no gain or loss.


Selling Plant AssetsRecord the Disposal in the JournalRecord the Disposal in the Journal

Sep. 30 Cash 60,000 Accumulated Depreciation - Machine 38,000 Loss on Disposal of Asset 2,000

Machine 100,000 To record disposal of equipment


Accounting for exchanges of similar assets depends on

whether the book value of the asset(s) given up is less or

more than the market value of the asset(s) received.

Accounting for exchanges of similar assets depends on

whether the book value of the asset(s) given up is less or

more than the market value of the asset(s) received.

Exchanging Plant AssetsExchanging Plant Assets

SIMILAR



Accounting for exchanges of similar assets depends on whether the book value of the asset(s) given up is less or more than the market value of

the asset(s) received.

Accounting for exchanges of similar assets depends on whether the book value of the asset(s) given up is less or more than the market value of

the asset(s) received.

A loss is recognized when the book value given up is less than

the market value received.

A loss is recognized when the book value given up is less than

the market value received.

A gain is not recognized when the

book value given up is more than the market

value received.

A gain is not recognized when the

book value given up is more than the market

value received.

SIMILAR


On May 30, 2004, Matrix, Inc. exchanged a used bus and $35,000 cash for a new European-style

bus. The old bus originally cost $40,000, had up-to-date accumulated depreciation of $30,000. The

new bus had a market value of $39,000.

On May 30, 2004, Matrix, Inc. exchanged a used bus and $35,000 cash for a new European-style

bus. The old bus originally cost $40,000, had up-to-date accumulated depreciation of $30,000. The

new bus had a market value of $39,000.


SIMILAR


Market value of asset received 39,000$ Cost of old bus 40,000$ Accumulated depreciation 30,000

Book value of old bus 10,000 Cash 35,000 45,000

Loss on exchange 6,000$


May 30 Bus (new) 39,000 Accumulated Depreciation - Bus 30,000 Loss on Exchange 6,000

Bus (old) 40,000 Cash 35,000

Remember -- Losses are always recorded immediately.

Remember -- Losses are always recorded immediately.


On May 30, 2004, Matrix, Inc. exchanged a used bus and $35,000 cash for a new

European-style bus. The old bus originally cost $40,000, had up-to-date accumulated

depreciation of $30,000. The new bus had a market value of $49,000.

On May 30, 2004, Matrix, Inc. exchanged a used bus and $35,000 cash for a new

European-style bus. The old bus originally cost $40,000, had up-to-date accumulated

depreciation of $30,000. The new bus had a market value of $49,000.

SIMILAR



Market value of asset received 49,000$ Cost of old bus 40,000$ Accumulated depreciation 30,000

Book value of old bus 10,000 Cash 35,000 45,000

Gain on exchange 4,000$


May 30 Bus (new) 45,000 Accumulated Depreciation - Bus 30,000

Bus (old) 40,000 Cash 35,000

Market value of new bus – gain not recognized$49,000 - $4,000 = $45,000

Market value of new bus – gain not recognized$49,000 - $4,000 = $45,000



Comparison of Treatment of Gains and Losses

The $4,000 gain in not recognizedThe $4,000 gain in not recognized


Let’s change the subject!Let’s Talk About Natural Resources!Let’s Talk About Natural Resources!


Total cost,including

exploration anddevelopment,is charged to

depletion expenseover periods

benefited.

Extracted fromthe natural

environmentand reportedat cost less

accumulateddepletion.

Natural ResourcesNatural Resources

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


Step 2:DepletionExpense =

DepletionPer Unit

×Units Extracted

and Sold in Period

Cost Determination and DepletionCost Determination and Depletion

DepletionPer Unit

= Cost - Salvage Value Total Units of Capacity

Step 1:


Apex Mining acquired a tract of land containing ore deposits. Total costs of

acquisition and development were $1,000,000 and Apex estimates the land contained 40,000 tons of ore. During the

first year of operations Apex extracted and sold 13,000 tons of ore.

Apex Mining acquired a tract of land containing ore deposits. Total costs of

acquisition and development were $1,000,000 and Apex estimates the land contained 40,000 tons of ore. During the

first year of operations Apex extracted and sold 13,000 tons of ore.

Depletion of Natural ResourcesDepletion of Natural Resources


Step 2: Depletion Expense = $25 per ton × 13,000 units = $325,000

Step 1:DepletionPer Unit

= $1,000,000 - $0 40,000 tons

= $25 per ton



Plant Assets Used in Extracting Natural ResourcesPlant Assets Used in Extracting Natural Resources

Specialized plant assets may be required to extract the natural resource.

These assets are recorded in a separate account and depreciated.

Specialized plant assets may be required to extract the natural resource.

These assets are recorded in a separate account and depreciated.


Let’s change the subject!Now Let’s Look at Intangible Assets!Now Let’s Look at Intangible Assets!


Noncurrent assetswithout physical

substance.

Noncurrent assetswithout physical

substance.

Useful life isoften difficultto determine.

Useful life isoften difficultto determine.

Usually acquired for operational

use.

Usually acquired for operational

use.

IntangibleAssets

IntangibleAssets

Often provideexclusive rights

or privileges.

Often provideexclusive rights

or privileges.

Intangible AssetsIntangible Assets


o Patentso Copyrightso Leaseholdso Leasehold Improvementso Franchises & Licenseso Goodwillo Trademarks & Trade Names

Record at current cash

equivalent cost, including

purchase price, legal fees, and

filing fees.

Cost Determination and AmortizationCost Determination and Amortization


Types of IntangiblesTypes of Intangibles

PatentsThe exclusive right granted to its owner to

manufacture and sell a patented item or use a process for 17 years. Patents are generally

amortized, using the straight-line method, over its useful life not to exceed 17 years.



PatentsMatrix, Inc. purchased a patent for $10,000. The

patent is expected to have a useful life of 10 years.

Dec. 31 Amortization Expense - Patents 1,000 Accumulated Amortization - Patents 1,000

To amortize patent costs


Type’ of IntangiblesType’ of Intangibles

CopyrightsThe exclusive right to publish and sell a musical,

literary, or artistic work during the life of the creator plus 70 years.

LeaseholdsThe rights the lessor grants to the lessee under

the terms of a lease. Most leases have a determinable life.



Leasehold ImprovementsA lessee may pay for alternations or

improvements to the leased property such as partitions, painting, and storefronts. These costs are usually amortized over the term of the lease.

Franchises and LicensesThe right granted by a company or the

government to deliver a product or service under specified conditions.



Trademarks and Trade NamesA symbol, name, phrase, or jingle identified with a

company, product, or service.


Occurs when onecompany buys

another company.

Occurs when onecompany buys

another company.

Goodwill is not amortized. It is testedeach year to determine if there has been

any impairment in carrying value.

Goodwill is not amortized. It is testedeach year to determine if there has been

any impairment in carrying value.

GoodwillGoodwill

Only purchased goodwill is an

intangible asset.

Only purchased goodwill is an

intangible asset.

GoodwillGoodwill


Provides information about a company’s efficiency in using its assets.

Provides information about a company’s efficiency in using its assets.

Total AssetTurnover =

Net SalesAverage Total Assets

Total Asset TurnoverTotal Asset Turnover

2002 2001 2000 1999Coors 1.25 1.44 1.52 1.49 Anheuser-Busch 0.97 0.95 0.97 0.94

Total Asset Turnover


End of Chapter 10End of Chapter 10

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Plant Assets, Natural Resources, and Intangibles Chapter 10.

Documents

mcgrawhill companies

mcgrawhillirwin step

mcgrawhillirwin decline

computing depreciation

year slide

book value slide

nature slide

periods depreciation