phm_poa1_ch09_stu

Copyright © 2007 Prentice-Hall. All rights reserved 1

Long-Term Assets: Long-Term Assets: Plant Assets and Plant Assets and

IntangiblesIntangiblesChapter 9


Objective 1Objective 1

Define and describe the life cycle of long-term assets


Long-lived AssetsLong-lived Assets

Plant Plant AssetsAssets

Natural Natural ResourcesResources

Intangible Intangible AssetsAssets

DepreciationDepreciation DepletionDepletion AmortizationAmortization


Internal ControlsInternal Controls• All plant assets should be labeled • Maintain a subsidiary ledger• Reconcile the total balance of

subsidiary accounts with the controlling account

• Physically inspect each asset at least once a year



Calculate and record the cost to acquire plant assets


• Assets should be recorded at their historical cost

• Cost of an asset – all costs necessary to acquire the asset and get it ready for its intended use

Cost PrincipleCost Principle


Land and Land Land and Land ImprovementsImprovements

Land• Purchase price• Legal fees• Costs of grading

and clearing• Additional permanent improvements

• Not depreciated

Land Improvements - Improvements with limited life

• Driveways and parking lots

• Sidewalks • Fences• Depreciated


BuildingsBuildings• Purchase price• Legal fees• Repairs and renovations• If self-constructed

– Architectural fees– Building permits– Material– Labor– Overhead– Some interest costs


Machinery and Machinery and EquipmentEquipment

• Purchase price (less any discounts)• Transportation charges• Insurance while in transit• Sales tax• Installation costs• Cost of testing before asset is used


Furniture and FixturesFurniture and Fixtures• Purchase price (less any discounts)• Shipping charges• Costs to assemble


E9-14E9-14LandPurchase price $200,000Property tax 2,100Title insurance 2,500Remove and level 10,400

$215,000

BuildingCost $800,000

Land improvementsFence $51,000Signage 15,000Lighting 6,000

$72,000Building and Land Improvements are the

assets to be depreciated


Lump Sum PurchasesLump Sum Purchases• Assign cost to individual assets

based on relative sales values


E9-16E9-16Bed Appraise

d CostPercent of Value

Cost Allocated Cost

1 $3,000 X $10,0002 5,000 X 10,0003 4,000 X 10,000

$12,000

$2,500

4,170

3,330

$10,000

$3,000/$12,00025.0%

$5,000/$12,00041.7%

$4,000/$12,00033.3%

100%


E9-16E9-16GENERAL JOURNAL

DATE DESCRIPTION REF DEBIT CREDIT

Bed 1 2,500Bed 2 4,170Bed 3 3,330

Cash 5,000Note Payable 5,000


Does the expenditure increase capacityor efficiency or extend useful life?

YES NO

Capital ExpenditureDebit asset

account

ExpenseDebit repairs and

maintenance expense

Capital ExpendituresCapital Expenditures


E9-16E9-16Capital Expenditures

– Purchase price– Lubrication before machine is placed in service– Major overhaul– Sales tax– Transportation and insurance– Installation– Training of personnel

Expenses:– Ordinary recurring repairs– Periodic lubrication– Income tax

Expenditure benefits more than one period.

Debit an asset

Expenditure that maintains the asset in

its current working condition.

Debit an expense



Calculate and record depreciation of plant assets


DepreciationDepreciation• Process of allocating the cost of a

plant asset to expense over its useful life in a rational and systematic way

Matching Principle


Depreciation – Adjusting Depreciation – Adjusting EntryEntry

GENERAL JOURNALDATE DESCRIPTION REF DEBIT CREDIT

Depreciation ExpenseAccumulated Depreciation

Partial balance sheet:Building $120,000Less Accumulated Depreciation (80,000) $40,000

Book Value


Factors in Computing Factors in Computing DepreciationDepreciation

1. Cost2. Estimated Residual Value

• Depreciable cost = Cost – Residual Value

3. Estimated Useful Life• Physical wear and tear• Obsolescence


Depreciation MethodsDepreciation Methods• Straight-line• Units-of-production• Declining balance


Straight-Line MethodStraight-Line Method

Cost - Residual ValueUseful life in years

DepreciationExpense per Year

=

•Allocates an equal amount each year•Depreciation is a function of time•Appropriate for assets that generate revenues evenly over time, like building


E9-19E9-19Straight-line$30,000 – $6,000 / 4 years = $6,000 per yr

YearDepr Exp for

YearTotal

Accum DeprYear-End

Book Value2006

2007

2008

2009

$6,000 $6,000

6,000 12,0006,000 18,000

6,000 24,000

$24,000

18,00012,000

6,000


Cost - Residual Value Total Units of Production

1: Compute depreciation per unit:

2: Compute depreciation expense:Depreciation

per unit × Number of units producedin the period

Units-of-Production Units-of-Production MethodMethod

Depreciation is a function of useThis is an appropriate method for an asset that depreciates due to wear and tear, like a vehicle


E9-19E9-19Units of Production($30,000 - $6,000) / 1,000 operations =

$24.00 per operation

YearDepr Exp for

YearTotal

Accum DeprYear-End

Book Value

2006

2007

2008

2009

$24 x 100 $2,400

$24 x 300 9,600

19,200

24,000

$27,600

18,000

10,800

6,000

9,600

4,800

$2,400

7,200


Double-Declining Balance Double-Declining Balance MethodMethod

• Accelerated method – writes off a greater amount of the cost of an asset in earlier years of asset’s useful life.

• Amount of depreciation expense recognized declines each yearDepreciation is a function of timeThis method is appropriate for assets that produce more revenues in their early years (match higher depreciation expense with higher revenues)


2: Multiply beginning book value by rateDepreciation

expense = Double-declining-balance rate × Beginning period

book value

Double-Declining-Balance Double-Declining-Balance MethodMethod

1: Compute straight-line rate and multiply it by 2

Ignores residual value

1 Useful life in years

X 2


Switchover to Straight Switchover to Straight LineLine

• A method employed by some companies

• Change from double-declining balance to straight-line during the next-to-last year of asset’s life

• Eliminates the need to use a plug figure for depreciation expense in last year


E9-19E9-19Double declining Balance: Rate = 2/4 or 50%

YearDepr Exp for

YearTotal

Accum DeprYear-End

Book Value

20x6

20x7

20x8

20x9

$30,000 x 50% $15,000

$15,00 x 50% 22,500

23,250

24,000

$15,000

7,500

6,750

6,000

750

750

$15,000

7,500($7,500 – 6,000)/2

Switch to Straight line


Use of Depreciation Use of Depreciation MethodsMethods

84%

10%

5%

1%

Straight-line Accelerated UOP Other


Partial Year DepreciationPartial Year Depreciation• When plant asset is acquired during

the year, compute full year’s depreciation and multiply that by the fraction of the year the asset is owned


Revising DepreciationRevising Depreciation• Depreciation is an estimate

– Estimated residual value– Estimated useful life

Remaining life in years

Book value New residual value–


E9-20E9-20Cost $700,000 Residual value 100,000Depreciable base $600,000

/40 years

Depreciation expense per year $15,000


E9-20E9-20Depreciation expense per year

$15,000X 15 years

Accumulated depreciation after 15 years$225,000


E9-20E9-20Book value after 15 years

Cost $700,000Accumulated depreciation (225,000)

Cost left to depreciate $475,000Residual value (175,000)New depreciable base $300,000Life (30 years – 15 years taken) /15 year

New depreciation per year $20,000




Yr 15 Depreciation Expense 15,000Accumulated Depreciation 15,000

Yr 16 Depreciation Expense 20,000Accumulated Depreciation 20,000


Fully Depreciated AssetsFully Depreciated Assets• If still useful, a company will continue

to use it• Report book value on balance sheet• Record no more depreciation


Depreciation for Tax Depreciation for Tax ReportingReporting

• Modified Accelerated Cost Recovery System (MACRS)

• Assets are classified into categories by asset life

• Depreciation method is specified according to category



Calculate and record the disposal of plant assets


Disposing of a Plant Disposing of a Plant AssetAsset

• Sell• Exchange• Discard


Disposing of a Plant Disposing of a Plant AssetAsset

• Bring depreciation up to date• Compare assets received with book

value of asset being disposed of to determine if there is a gain or loss– Gain increases net income – credit balance– Loss decreases net income – debit balance

• Record entry to remove asset from books


E9-21E9-21Depreciation for 2007:$10,000 / 5 = $2,000Depreciation for 2008 (through Sept 30)($10,000 / 5) x 9/12 = $1,500

Accumulated Depreciation2,0001,500

3,500 balance


E9-21E9-21

Book Value of Fixtures:Cost $10,000Accumulated Depreciation 3,500

$6,500Cash Received

(5,000)Loss on sale of fixtures

$1,500A loss is similar to an expense and appears on the income statement as an “Other revenues and expenses”



Sep 30 Depreciation Expense 1,500Accumulated Depreciation 1,500

30 Cash 5,000Accumulated Depreciation 3,500Loss on Sale of Fixtures 1,500

Fixtures 10,000

E9-21E9-21


Exchanging Plant AssetsExchanging Plant Assets

“Cost” of the new asset =

Market value of new asset

Book value of old asset + cash given

>>


Exchanging Plant AssetsExchanging Plant Assets

“Cost” of the new asset =

Market value of new asset

Book value of old asset + cash given

<<

Recognize a loss for the difference


E9-23E9-23Depreciation Rate: ($350,000 - $100,000) / 1,000,000 miles =

$0.25 per mileDepreciation Expense:2006: $0.25 x 80,000 miles = $20,0002007: $0.25 x 120,000 miles = 30,0002008: $0.25 x 160,000 miles = 40,0002009: $0.25 x 40,000 miles = 10,000Total accumulated depreciation $100,000


E9-23E9-23Book value of old truck:Cost $350,000Accumulated depreciation (100,000)

$250,000Cash paid 50,000 Cost of new truck $300,000



Calculate and record depletion of natural resources


Natural ResourcesNatural Resources• Plant assets extracted from the

natural environment• Expensed through depletion using

the units of production method• Reported on balance sheet at cost

less accumulated depletion


DepletionDepletion• Compute depletion rate per unit:

• Compute depletion expense:

Estimated total units of natural resource

Cost – Residual Value

Depletion rate per unit

Number of units extracted this

period×


E9-24E9-24Mine: $398,500Filing fee 500License 1,000Survey 60,000Total cost $460,000

Divided by200,000 tons = $2.30 per ton

Depletion: 40,000 tons @ $2.30/ton = $92,000




a) Mineral Asset 398,500Cash 398,500

b) Mineral Asset 1,500Cash 1,500

To record filing and licensefees




b) Mineral Asset 60,000Cash 60,000

Paid for geological survey

c) Depletion Expense, MineralAsset 92,000

Accumulated Depletion,Mineral Asset 92,000



Account for intangible assets


Intangible AssetsIntangible Assets• Noncurrent assets with no physical

form• Provide exclusive rights or privileges• Acquired to help generate revenues• Expensed through amortization using

the straight-line method over the asset’s useful life

• Written off the asset directly


PatentsPatents• Exclusive 20-year right to produce

and sell an invention• Granted by federal government


CopyrightsCopyrights• Exclusive right to reproduce and sell

artistic works or intellectual property• Issued by federal government• Legal life – 70 years beyond life of

the creator


• Represent distinctive identifications of a product or service

Trademarks, Brand Trademarks, Brand NamesNames


Franchises, LicensesFranchises, Licenses• Franchises - privileges granted by

private business or government to sell goods or services

• Acquisition cost is capitalized and amortized




a) Patent 1,000,000Cash 1,000,000

b) Amortization Expense,

Patent 125,000Patent 125,000

($1,000,000 / 8 years)


E9-25E9-25


Yr 5 Amortization Expense, Patent 250,000

Patent 250,000($500,000 / 2 years)

Cost $1,000,000Less amortization for 4 years

(125,000 x 4) 500,000Carrying value of patent $500,000


GoodwillGoodwill• Excess of purchase price of a company

over market value of net assets acquired

• Only recorded in the purchase of another company

• Not amortized• Measure value of each year

– If value has increased – record nothing– If value has decreased – recognize loss and

decrease carrying value


E9-26E9-26Goodwill Purchase price $11,000,000Market value of net assets:

Assets $15,000,000Liabilities (10,000,000) 5,000,000

Cost of goodwill purchased$6,000,000




(in millions)Other Assets 15Goodwill 6

Liabilities 10Cash 11



Report long-term assets on the balance sheet


Balance Sheet Balance Sheet PresentationPresentation

Total Current Assets $880,000Property, Plant, and Equipment Land 120,000 Buildings $800,000 Equipment 160,000

960,000 Less: Accumulated Depreciation, Buildings

and Equipment(410,000) 550,000

Oil $380,000 Less: Accumulated Depletion, Oil (80,000) 300,000 Property, Plant, and Equipment, net 970,000Goodwill 350,000


End of Chapter 9End of Chapter 9

phm_poa1_ch09_stu

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