?The McGraw-Hill Companies,Inc.,1999
Slide
9-1
Irwin/McGraw-Hill
Chapter 9
Plant Assets and Depreciation
The McGraw-Hill Companies,Inc.,1999
Slide
9-2
Irwin/McGraw-Hill
Plant Assets
Long-lived assets acquired for use in
business operations.
Similar to long-term prepaid expenses
The cost of plant assets
is the advance purchase
of services.
D a t e D e s c r i pt i on D e bi t C r e di t
As years pass,and the
services are used,the
cost is transferred to
depreciation expense.
The McGraw-Hill Companies,Inc.,1999
Slide
9-3
Irwin/McGraw-Hill
L a n d,b u i l d i n g s,
e q u i p m e n t,
f u r n i t u r e,f i x t u r e s.
L o n g - t e r m
a ss e t s h a v i n g
p h y si ca l su b st a n ce,
T a n g i b l e P l a n t
A s s e t s
P a t e n t s,c o p y r i g h t s,
t r a d e m a r k s,
f r a n c h i s e s,g o o d w i l l,
N o n c u r r e n t a s s e t s
w i t h n o p h y s i c a l
s u b s t a n c e,
I n t a n g i b l e
A s s e t s
Oi l r e s e r v e s,
t i m b e r,o t h e r
m i n e r a l s,
S i t e s a c q u i r e d f o r
e x t r a c t i n g v a l u a b l e
r e s o u r c e s,
N a t u ra l
R e s o u rc e s
Major Categories of Plant Assets
The McGraw-Hill Companies,Inc.,1999
Slide
9-4
Irwin/McGraw-Hill
Accountable Events
?Acquisition.
?Allocation of the
acquisition cost to
expense over the
asset抯 useful life
(depreciation).
?Sale or disposal.
The McGraw-Hill Companies,Inc.,1999
Slide
9-5
Irwin/McGraw-Hill
Acquisition of Plant Assets
Asset
price
Reasonable and
necessary costs,,,
.,, for getting
the asset to the
desired location.
.,, for getting
the asset ready
for use.
Cost
The McGraw-Hill Companies,Inc.,1999
Slide
9-6
Irwin/McGraw-Hill
Determining Cost
Example
On May 4,Heat Co.,an Ohio maker of stoves,
buys a new machine from a Texas company,
The new machine has a price of $52,000,
Sales tax was computed at 8%.
Heat Co,pays $500 shipping cost to get the
machine to Ohio,After the machine arrives,
set-up costs of $1,300 are incurred,along with
$4,000 in testing costs.
Compute the cost of Heat Co.’s new
machine.
The McGraw-Hill Companies,Inc.,1999
Slide
9-7
Irwin/McGraw-Hill
Determining Cost
Example
Li s t pr i c e 5 2,0 0 0$
S a l e s t a x @ 8 % 4,1 6 0
Tr a ns por t a t i on c os t 500
S e t - up 1,3 0 0
Te s t i ng 4,0 0 0
Tot a l c os t t o H e a t C o,6 1,9 6 0$
D a t e D e s c r i pt i on D e bi t C r e di t
Prepare the journal entry.
The McGraw-Hill Companies,Inc.,1999
Slide
9-8
Irwin/McGraw-Hill
Determining Cost
Example
Li s t pr i c e 5 2,0 0 0$
S a l e s t a x @ 8 % 4,1 6 0
Tr a ns por t a t i on c os t 500
S e t - up 1,3 0 0
Te s t i ng 4,0 0 0
Tot a l c os t t o H e a t C o,6 1,9 6 0$
D a t e D e s c r i pt i on D e bi t C r e di t
4 - M a y N e w M a c h i n e 6 1,9 6 0
C a s h 6 1,9 6 0
The McGraw-Hill Companies,Inc.,1999
Slide
9-9
Irwin/McGraw-Hill
Special Considerations
Improvements to land
such as driveways,
fences,and landscaping
are recorded separately.
Land
Improvements
Cost includes real estate
commissions,escrow
fees,legal fees,clearing
and grading the property.
Land
The McGraw-Hill Companies,Inc.,1999
Slide
9-10
Irwin/McGraw-Hill
Special Considerations
Repairs made prior to the
building being put in use
are considered part of the
building抯 cost.
Buildings
The McGraw-Hill Companies,Inc.,1999
Slide
9-11
Irwin/McGraw-Hill
Special Considerations
Equipment
Related interest,
insurance,and property
taxes are treated as
expenses of the current
period.
The McGraw-Hill Companies,Inc.,1999
Slide
9-12
Irwin/McGraw-Hill
Special Considerations
I think I抣 l buy the
whole thing; barn,
land,and animals.
Allocation of a Lump-Sum Purchase
The McGraw-Hill Companies,Inc.,1999
Slide
9-13
Irwin/McGraw-Hill
Special Considerations
The total cost
must be
allocated to
separate
accounts for
each asset.
The allocation
is based on
the relative
Fair Market
Value of each
asset
purchased.
Allocation of a Lump-Sum Purchase
The McGraw-Hill Companies,Inc.,1999
Slide
9-14
Irwin/McGraw-Hill
Capital Expenditures and Revenue
Expenditures
T o c a p i t a l i ze a n
e x p e n d i t u r e m e a n s t o c h a r g e
i t t o a n a s s e t a c c o u n t,
A n y m a t e r i a l e x p e n d i t u r e
t h a t w i l l b e n e f i t s e v e r a l
a c c o u n t i n g p e r i o d s,
Ca p i t a l
E x p e n d i t u r e
T o e x p e n s e a n
e x p e n d i t u r e m e a n s t o c h a r g e
i t t o a n e x pe ns e a c c ou nt,
E x pe nd i t ure s f or ordi na r y
r e p a i r s a n d m a i n t e n a n c e,
R e v e n u e
E x p e n d it u r e
The McGraw-Hill Companies,Inc.,1999
Slide
9-15
Irwin/McGraw-Hill
Depreciation
The allocation of the cost of a plant asset to expense in the
periods in which services are received from the asset.
Cost of
plant
assets
Balance Sheet
Assets:
Plant and
equipment
Income Statement
Revenues:
Expenses:
Depreciation
as the services
are received
The McGraw-Hill Companies,Inc.,1999
Slide
9-16
Irwin/McGraw-Hill
?Book Value
? Cost - Accumulated Depreciation
?Accumulated Depreciation
? Contra-asset
? Represents the portion of an asset
抯 cost that has already been
allocated to expense.
?Causes of Depreciation
? Physical deterioration
? Obsolescence
Depreciation
The McGraw-Hill Companies,Inc.,1999
Slide
9-17
Irwin/McGraw-Hill
Cost - Residual Value
Life in Years
Depreciation
Expense per Year =
Straight-Line Depreciation
The McGraw-Hill Companies,Inc.,1999
Slide
9-18
Irwin/McGraw-Hill
Straight-Line Method
Example
On January 1,1998,Bass Co,buys a new boat,Bass
Co,pays $24,000 for the boat,The boat has an
estimated residual value of $3,000 and an estimated
useful life of 5 years.
Compute depreciation for 1998 using the
straight-line method.
The McGraw-Hill Companies,Inc.,1999
Slide
9-19
Irwin/McGraw-Hill
Straight-Line Method
Example
C o s t R e s i d u a l V a l u e 2 4,0 0 0$ 3,0 0 0$
= 4,2 0 0$ p e r y e a r
Y e a r s o f U s e f u l L i f e
=
5
On January 1,1998,Bass Co,buys a new boat,Bass
Co,pays $24,000 for the boat,The boat has an
estimated residual value of $3,000 and an estimated
useful life of 5 years.
Compute depreciation for 1998 using the
straight-line method.
The McGraw-Hill Companies,Inc.,1999
Slide
9-20
Irwin/McGraw-Hill
Straight-Line Method
Example
Bass Co,will record $4,200 depreciation each year for
five years,Total depreciation over the estimated useful
life of the boat is:
D e pr e c i a t i on A c c um ul a t e d A c c um ul a t e d U nd e pr e c i a t e d
E x pe ns e D e pr e c i a t i on D e pr e c i a t i on B a l a nc e
Y e a r ( de bi t ) ( c r e di t ) B a l a nc e ( bo ok v a l ue )
2 4,0 0 0$
1998 4,2 0 0$ 4,2 0 0$ 4,2 0 0$ 1 9,8 0 0
1999 4,2 0 0 4,2 0 0 8,4 0 0 1 5,6 0 0
2000 4,2 0 0 4,2 0 0 1 2,6 0 0 1 1,4 0 0
2001 4,2 0 0 4,2 0 0 1 6,8 0 0 7,2 0 0
2002 4,2 0 0 4,2 0 0 2 1,0 0 0 3,0 0 0
2 1,0 0 0$ 2 1,0 0 0$
Salvage Value
The McGraw-Hill Companies,Inc.,1999
Slide
9-21
Irwin/McGraw-Hill
Straight-Line Method
Graph of Depreciation Expense $0
$1,000
$2,000
$3,000
$4,000
$5,000
1997 1998 1999 2000 2001 2002
For the y ear ended Dece mber 31
D
e
p
r
e
c
i
a
t
i
o
n
The McGraw-Hill Companies,Inc.,1999
Slide
9-22
Irwin/McGraw-Hill
Depreciation for Fractional Periods
When an asset is acquired during the year,
depreciation in the year of acquisition must be
prorated.
Half-Year Convention
In the year of
acquisition,record six
months of depreciation.
The McGraw-Hill Companies,Inc.,1999
Slide
9-23
Irwin/McGraw-Hill
Using the half-year convention,calculate the
straight-line depreciation on December 31,
1999,for equipment purchased in 1999,The
equipment cost $75,000,has a useful life of
10 years and an estimated salvage value of
$5,000.
Half-Year Convention
Example
The McGraw-Hill Companies,Inc.,1999
Slide
9-24
Irwin/McGraw-Hill
Depreciation = ($75,000 - $5,000)?10
= $7,000 for a full year
Depreciation = $7,000? 1/2 = $3,500
Using the half-year convention,calculate the
straight-line depreciation on December 31,
1999,for equipment purchased in 1999,The
equipment cost $75,000,has a useful life of
10 years and an estimated salvage value of
$5,000.
Half-Year Convention
Example
The McGraw-Hill Companies,Inc.,1999
Slide
9-25
Irwin/McGraw-Hill
Declining-Balance Method
Depreciation in the early years of an asset’s estimated
useful life is higher than in later years.
D e p r e c i a t i o n
E x p e n s e
=
R e m a i n i n g
B o o k V a l u e
×
A c c e l e r a t e d
D e p r e c i a t i o n
R a t e
The double-declining balance accelerated
depreciation rate is 200% of the straight-
line depreciation rate of 1/Useful Life.
The McGraw-Hill Companies,Inc.,1999
Slide
9-26
Irwin/McGraw-Hill
Double-Declining Balance
Example
On January 1,1998,Bass Co,buys a new boat,Bass
Co,pays $24,000 for the boat,The boat has an
estimated residual value of $3,000 and an estimated
useful life of 5 years.
Compute depreciation for 1998 using the
double-declining balance method.
The McGraw-Hill Companies,Inc.,1999
Slide
9-27
Irwin/McGraw-Hill
Double-Declining Balance
Example
On January 1,1998,Bass Co,buys a new boat,Bass
Co,pays $24,000 for the boat,The boat has an
estimated residual value of $3,000 and an estimated
useful life of 5 years.
Compute depreciation for 1998 using the
double-declining balance method.
1 9 9 8 D e p r,
E x p e n s e
=
R e m a i n i n g
B o o k V a l u e
×
A c c e l e r a t e d
D e p r e c i a t i o n R a t e
= 2 4,0 0 0$ × 2?
1
/ 5
= 2 4,0 0 0$ × 40%
= 9,6 0 0$
The McGraw-Hill Companies,Inc.,1999
Slide
9-28
Irwin/McGraw-Hill
Double-Declining Balance
Example
Compute depreciation for the rest of the
boat抯 estimated useful life,Y e a r C o mp u t a t i o n
D e p r,
E x p e n s e
A c c u mu l a t e d
D e p r e c i a t i o n
B o o k
V a l u e
1998 2 4,0 0 0$ × 40% 9,6 0 0$ 9,6 0 0$ 1 4,4 0 0$
1999 1 4,4 0 0$ × 40% 5,7 6 0$ 1 5,3 6 0$ 8,6 4 0$
2000 8,6 4 0$ × 40% 3,4 5 6$ 1 8,8 1 6$ 5,1 8 4$
2001 5,1 8 4$ × 40% 2,0 7 4$ 2 0,8 9 0$ 3,1 1 0$
2002 110$ 2 1,0 0 0$ 3,0 0 0$
T o t a l D e p r e c i a t i o n 2 1,0 0 0$
P l u g y e a r # 5
The McGraw-Hill Companies,Inc.,1999
Slide
9-29
Irwin/McGraw-Hill
Double-Declining Balance
Example
Y e a r C o mp u t a t i o n
D e p r,
E x p e n s e
A c c u mu l a t e d
D e p r e c i a t i o n
B o o k
V a l u e
1998 2 4,0 0 0$ × 40% 9,6 0 0$ 9,6 0 0$ 1 4,4 0 0$
1999 1 4,4 0 0$ × 40% 5,7 6 0$ 1 5,3 6 0$ 8,6 4 0$
2000 8,6 4 0$ × 40% 3,4 5 6$ 1 8,8 1 6$ 5,1 8 4$
2001 5,1 8 4$ × 40% 2,0 7 4$ 2 0,8 9 0$ 3,1 1 0$
2002 110$ 2 1,0 0 0$ 3,0 0 0$
T o t a l D e p r e c i a t i o n 2 1,0 0 0$
P l u g y e a r # 5
Total depreciation over the estimated useful life of an
asset is the same using either the straight-line method or
the declining-balance method.
The McGraw-Hill Companies,Inc.,1999
Slide
9-30
Irwin/McGraw-Hill
Double-Declining Balance
Graph of Depreciation Expense
9600
5760
3456
2074
110$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
$9,000
$10,00 0
1997 1998 1999 2000 2001 2002
For the y ear ended Dece mber 31
D
e
p
r
e
c
i
a
t
i
o
n
The McGraw-Hill Companies,Inc.,1999
Slide
9-31
Irwin/McGraw-Hill
Depreciation Methods in Use for
Financial Reporting
A surv e y of 60 0 P ubli c ly O w ne d Corporat ions
563
44
11
70
53
9
S t ra i ght - l i ne
De c l i ning-ba l a nc e
S um-of - t he - y e a rs '-digi t s
A c c e l e ra t e d m e t hods ( not s pe c i f i e d)
Units - of - out put
O t he r
The McGraw-Hill Companies,Inc.,1999
Slide
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MACRS,The Tax Method
MACRS = Modified Accelerated Cost Recovery System
Based on
Declining-
Balance
Methods
The only accelerated method
allowed by the IRS when
computing depreciation for tax
return purposes.
Asset Cost? MACRS rate
Rates are available from tables
provided by the IRS.
The McGraw-Hill Companies,Inc.,1999
Slide
9-33
Irwin/McGraw-Hill
Other Issues
?Estimates of Useful Life and
Residual Value
? May differ from company to
company.
? The reasonableness of
management抯 estimates is
evaluated by external auditors.
?Principle of Consistency
? Companies should avoid switching
depreciation methods from period
to period.
The McGraw-Hill Companies,Inc.,1999
Slide
9-34
Irwin/McGraw-Hill
Revising Depreciation Rates
So depreciation
is an estimate.
Predicted
salvage value
Predicted
useful life
Over the life of an asset,new information
may come to light that indicates the
original estimates need to be revised.
The McGraw-Hill Companies,Inc.,1999
Slide
9-35
Irwin/McGraw-Hill
On January 1,1998,equipment was purchased
that cost $30,000,has a useful life of 10
years and no salvage value,During 2001,the
useful life was revised to 8 years total (5
years remaining),
Calculate depreciation expense for the
year ended December 31,2001,using
the straight-line method.
Revising Depreciation Rates
Example
The McGraw-Hill Companies,Inc.,1999
Slide
9-36
Irwin/McGraw-Hill
Revising Depreciation Rates
Example
Book value at
date of change
Salvage value at
date of change
Remaining useful life at date of change
When our estimates change,
depreciation is:
The McGraw-Hill Companies,Inc.,1999
Slide
9-37
Irwin/McGraw-Hill
Revising Depreciation Rates
Example
A s s e t c o s t 3 0,0 0 0$
A c c u m u l a t e d d e p r e c i a t i o n,1 2 / 3 1 / 2 0 0 0
( $ 3,0 0 0 p e r y e a r? 3 y e a r s ) 9,0 0 0
R e m a i n i n g b o o k v a l u e 2 1,0 0 0$
D i v i d e b y r e m a i n i n g l i f e? 5
R e v i s e d a n n u a l d e p r e c i a t i o n 4,2 0 0$
When our estimates change,
depreciation is:
Book value at
date of change
Salvage value at
date of change
Remaining useful life at date of change
The McGraw-Hill Companies,Inc.,1999
Slide
9-38
Irwin/McGraw-Hill
Impairment of Assets
If the cost of an asset
cannot be recovered
through future use or
sale,the asset should
be written down to its
net realizable value.
The McGraw-Hill Companies,Inc.,1999
Slide
9-39
Irwin/McGraw-Hill
Time to
move on to
a new
topic.
The McGraw-Hill Companies,Inc.,1999
Slide
9-40
Irwin/McGraw-Hill
Update depreciation
to the date of disposal.
Recording cash
received (debit)
or paid (credit).
Removing accumulated
depreciation (debit).
Journalize disposal by:
Removing the
asset cost (credit).
Recording a
gain (credit)
or loss (debit).
Disposal of Plant and Equipment
The McGraw-Hill Companies,Inc.,1999
Slide
9-41
Irwin/McGraw-Hill
If Cash > BV,record a gain (credit).
If Cash < BV,record a loss (debit).
If Cash = BV,no gain or loss.
Disposal of Plant and Equipment
Recording cash
received (debit)
or paid (credit).
Removing accumulated
depreciation (debit).
Removing the
asset cost (credit).
Recording a
gain (credit)
or loss (debit).
The McGraw-Hill Companies,Inc.,1999
Slide
9-42
Irwin/McGraw-Hill
On September 30,1999,Evans Map Company
sells a machine that originally cost $100,000 for
$60,000 cash,The machine was placed in
service on January 1,1994,It has been
depreciated using the straight-line method with
an estimated salvage value of $20,000 and an
estimated useful life of 10 years.
Let抯 answer the following
questions,
Disposal of Plant and Equipment
Example
The McGraw-Hill Companies,Inc.,1999
Slide
9-43
Irwin/McGraw-Hill
The amount of depreciation
recorded on September 30,1999,
to bring depreciation up to date is:
a,$8,000.
b,$6,000.
c,$4,000.
d,$2,000.
Disposal of Plant and Equipment
Example
The McGraw-Hill Companies,Inc.,1999
Slide
9-44
Irwin/McGraw-Hill
The amount of depreciation
recorded on September 30,1999,
to bring depreciation up to date is:
a,$8,000.
b,$6,000.
c,$4,000.
d,$2,000.
Annual Depreciation:
($100,000 - $20,000) ÷ 10 Yrs,= $8,000
Depreciation to Sept,30:
9/12 ?$8,000 = $6,000
Disposal of Plant and Equipment
Example
The McGraw-Hill Companies,Inc.,1999
Slide
9-45
Irwin/McGraw-Hill
After updating the depreciation,the
machine’s book value on
September 30,1999,is:
a,$54,000.
b,$46,000.
c,$40,000.
d,$60,000.
Disposal of Plant and Equipment
Example
The McGraw-Hill Companies,Inc.,1999
Slide
9-46
Irwin/McGraw-Hill
After updating the depreciation,the
machine’s book value on
September 30,1999,is:
a,$54,000.
b,$46,000.
c,$40,000.
d,$60,000.
C os t 1 0 0,0 0 0$
A c c um ul a t e d D e pr e c i a t i on,
( 5 y r s,? $ 8,0 0 0 ) + $ 6,0 0 0 = 4 6,0 0 0
B oo k V a l ue 5 4,0 0 0$
Disposal of Plant and Equipment
Example
The McGraw-Hill Companies,Inc.,1999
Slide
9-47
Irwin/McGraw-Hill
Disposal of Plant and Equipment
Example
The machine’s sale resulted in,
a,a gain of $6,000.
b,a gain of $4,000.
c,a loss of $6,000.
d,a loss of $4,000.
The McGraw-Hill Companies,Inc.,1999
Slide
9-48
Irwin/McGraw-Hill
The machine’s sale resulted in,
a,a gain of $6,000.
b,a gain of $4,000.
c,a loss of $6,000.
d,a loss of $4,000.
C o s t 1 0 0,0 0 0$
A c c u m, D e p r, 4 6,0 0 0
B o o k V a l u e 5 4,0 0 0$
C a s h R e c e i v e d 6 0,0 0 0
G a i n 6,0 0 0$
Disposal of Plant and Equipment
Example
The McGraw-Hill Companies,Inc.,1999
Slide
9-49
Irwin/McGraw-Hill
Trading in Used Assets on New
Accounting depends on whether
assets are similar or dissimilar.
Airplane
for
Airplane
Truck
for
Airplane
Only situations where cash
is paid will be demonstrated.
The McGraw-Hill Companies,Inc.,1999
Slide
9-50
Irwin/McGraw-Hill
D i s s i m i l a r A s s e t s
S i m i l a r A s s e t s
a n d C a s h P a i d
R e c o g n i z e
G a i n s?
Y e s No
R e c o g n i z e
L o s s e s?
Y e s Y e s
Trading in Used Assets on New
The McGraw-Hill Companies,Inc.,1999
Slide
9-51
Irwin/McGraw-Hill
On May 30,1999,Essex Company
exchanged a used airplane and $35,000
cash for a new airplane,The old airplane
originally cost $40,000,had up-to-date
accumulated depreciation of $30,000,and
a fair value of $4,000,
SIMILAR
Trading in Used Assets on New
Similar Exchange Example
The McGraw-Hill Companies,Inc.,1999
Slide
9-52
Irwin/McGraw-Hill
The exchange resulted in a:
a,gain of $6,000.
b,loss of $6,000.
c,loss of $4,000.
d,gain of $4,000.
Trading in Used Assets on New
Similar Exchange Example
The McGraw-Hill Companies,Inc.,1999
Slide
9-53
Irwin/McGraw-Hill
The exchange resulted in a:
a,gain of $6,000.
b,loss of $6,000.
c,loss of $4,000.
d,gain of $4,000.
C os t 4 0,0 0 0$
A c c um, D e pr, 3 0,0 0 0
B ook V a l ue 1 0,0 0 0$
Fa i r V a l ue 4,0 0 0
Los s 6,0 0 0$
Prepare a journal entry
to record the exchange.
Trading in Used Assets on New
Similar Exchange Example
The McGraw-Hill Companies,Inc.,1999
Slide
9-54
Irwin/McGraw-Hill
Trading in Used Assets on New
Similar Exchange Example
D a t e D e s c r i pt i on D e bi t C r e di t
3 0 - M a y A i r p l a n e ( n e w ) 3 9,0 0 0
A c c u m u l a t e d D e p r e c i a t i o n 3 0,0 0 0
L o s s o n E x c h a n g e 6,0 0 0
A i r p l a n e ( o l d ) 4 0,0 0 0
C a s h 3 5,0 0 0
The McGraw-Hill Companies,Inc.,1999
Slide
9-55
Irwin/McGraw-Hill
Let’s change the subject!
The McGraw-Hill Companies,Inc.,1999
Slide
9-56
Irwin/McGraw-Hill
Intangible Assets
Noncurrent assets
without physical
substance.
Useful life is
often difficult
to determine.
Usually acquired
for operational
use,
Characteristics
Often provide
exclusive rights
or privileges.
The McGraw-Hill Companies,Inc.,1999
Slide
9-57
Irwin/McGraw-Hill
?Patents
?Copyrights
?Leaseholds
?Leasehold
Improvements
?Goodwill
?Trademarks and
Trade Names
Record at
current cash
equivalent cost,
including
purchase price,
legal fees,and
filing fees.
Intangible Assets
The McGraw-Hill Companies,Inc.,1999
Slide
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Irwin/McGraw-Hill
?Amortize over shorter of economic
life or legal life,subject to a maximum
of 40 years.
?Use straight-line method.
?Research and development costs are
normally expensed as incurred.
Intangible Assets
The McGraw-Hill Companies,Inc.,1999
Slide
9-59
Irwin/McGraw-Hill
Occurs when one
company buys
another company.
The amount by which the
purchase price exceeds the fair
market value of net assets acquired.
Goodwill
Only purchased
goodwill is an
intangible asset.
Goodwill
The McGraw-Hill Companies,Inc.,1999
Slide
9-60
Irwin/McGraw-Hill
Goodwill
Example
Eddy Company paid $1,000,000 to
purchase all of James Company’s assets
and assumed liabilities of $200,000,The
acquired assets were appraised at a fair
value of $900,000,
The McGraw-Hill Companies,Inc.,1999
Slide
9-61
Irwin/McGraw-Hill
What amount of goodwill should be
recorded on Eddy Company books?
a,$100,000.
b,$200,000.
c,$300,000.
d,$400,000.
Goodwill
Example
The McGraw-Hill Companies,Inc.,1999
Slide
9-62
Irwin/McGraw-Hill
What amount of goodwill should be
recorded on Eddy Company books?
a,$100,000.
b,$200,000.
c,$300,000.
d,$400,000.
F MV o f A s s e t s 9 0 0,0 0 0$
D e b t A s s u m e d 2 0 0,0 0 0
F MV o f N e t A s s e t s 7 0 0,0 0 0$
P u r c h a s e P r i c e 1,0 0 0,0 0 0
G o o d w i l l 3 0 0,0 0 0$
Goodwill
Example
The McGraw-Hill Companies,Inc.,1999
Slide
9-63
Irwin/McGraw-Hill
Intangible Assets
Patents
Exclusive right granted
by federal government to sell
or manufacture an invention,
Cost is purchase
price plus legal
cost to defend.
Amortize cost
over the shorter of
useful life or 17 years.
The McGraw-Hill Companies,Inc.,1999
Slide
9-64
Irwin/McGraw-Hill
A symbol,design,or logo
associated with a business.
Purchased
trademarks
are recorded
at cost,and
amortized over
shorter of legal
or economic life,
or 40 years.
Internally
developed
trademarks
have no
recorded
asset cost.
Intangible Assets
Trademarks and Trade Names
The McGraw-Hill Companies,Inc.,1999
Slide
9-65
Irwin/McGraw-Hill
Legally protected right to sell products
or provide services purchased by
franchisee from franchisor.
Purchase price is intangible asset
which is amortized over the shorter of
the protected right or 40 years.
Intangible Assets
Franchises
The McGraw-Hill Companies,Inc.,1999
Slide
9-66
Irwin/McGraw-Hill
Intangible Assets
Copyrights
Exclusive right granted by the
federal government to protect
artistic or intellectual properties.
Amortize cost
over a period not
to exceed 40 years.
Legal life is
life of creator
plus 50 years.
The McGraw-Hill Companies,Inc.,1999
Slide
9-67
Irwin/McGraw-Hill
Let’s Change the Subject Again!
The McGraw-Hill Companies,Inc.,1999
Slide
9-68
Irwin/McGraw-Hill
Total cost,
including
exploration and
development,
is charged to
depletion expense
over periods
benefited.
Natural Resources
Examples,oil,coal,gold
Extracted from
the natural
environment
and reported
at cost less
accumulated
depletion.
The McGraw-Hill Companies,Inc.,1999
Slide
9-69
Irwin/McGraw-Hill
Depletion of Natural Resources
Depletion is calculated using the
units-of-production method.
Unit depletion rate is calculated as follows:
Total Units of Capacity
Cost Salvage Value
The McGraw-Hill Companies,Inc.,1999
Slide
9-70
Irwin/McGraw-Hill
Total depletion cost for a period is:
Unit Depletion
Rate
Number of Units
Extracted in Period
Depletion of Natural Resources
Total
depletion
cost
Inventory
for sale
Unsold
Inventory
Cost of
goods sold
The McGraw-Hill Companies,Inc.,1999
Slide
9-71
Irwin/McGraw-Hill
ABC Mining acquired a tract of land
containing ore deposits,Total costs of
acquisition and development were
$1,000,000 and ABC estimated the land
contained 40,000 tons of ore,
Depletion of Natural Resources
Example
The McGraw-Hill Companies,Inc.,1999
Slide
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Depletion of Natural Resources
Example
What is ABC’s depletion rate?
a,$40 per ton,
b,$50 per ton.
c,$25 per ton.
d,$20 per ton.
The McGraw-Hill Companies,Inc.,1999
Slide
9-73
Irwin/McGraw-Hill
What is ABC’s depletion rate?
a,$40 per ton,
b,$50 per ton.
c,$25 per ton.
d,$20 per ton.
Cost?Units
$1,000,000 ÷ 40,000 Tons
= $25 Per Ton
Depletion of Natural Resources
Example
The McGraw-Hill Companies,Inc.,1999
Slide
9-74
Irwin/McGraw-Hill
For the year ABC mined and sold 13,000
tons,What is the total depletion cost for
the year?
a,$300,000,
b,$325,000.
c,$225,000.
d,$275,000.
Depletion of Natural Resources
Example
The McGraw-Hill Companies,Inc.,1999
Slide
9-75
Irwin/McGraw-Hill
For the year ABC mined and sold 13,000
tons,What is the total depletion cost for
the year?
a,$300,000,
b,$325,000.
c,$225,000.
d,$275,000.
Depletion cost = 13,000 x $25
= $325,000
Depletion of Natural Resources
Example
The McGraw-Hill Companies,Inc.,1999
Slide
9-76
Irwin/McGraw-Hill
Specialized plant assets may be required
to extract the natural resource.
These assets are recorded in a separate
account and depreciated.
Depletion of Natural Resources
The McGraw-Hill Companies,Inc.,1999
Slide
9-77
Irwin/McGraw-Hill
End of Chapter 9
Slide
9-1
Irwin/McGraw-Hill
Chapter 9
Plant Assets and Depreciation
The McGraw-Hill Companies,Inc.,1999
Slide
9-2
Irwin/McGraw-Hill
Plant Assets
Long-lived assets acquired for use in
business operations.
Similar to long-term prepaid expenses
The cost of plant assets
is the advance purchase
of services.
D a t e D e s c r i pt i on D e bi t C r e di t
As years pass,and the
services are used,the
cost is transferred to
depreciation expense.
The McGraw-Hill Companies,Inc.,1999
Slide
9-3
Irwin/McGraw-Hill
L a n d,b u i l d i n g s,
e q u i p m e n t,
f u r n i t u r e,f i x t u r e s.
L o n g - t e r m
a ss e t s h a v i n g
p h y si ca l su b st a n ce,
T a n g i b l e P l a n t
A s s e t s
P a t e n t s,c o p y r i g h t s,
t r a d e m a r k s,
f r a n c h i s e s,g o o d w i l l,
N o n c u r r e n t a s s e t s
w i t h n o p h y s i c a l
s u b s t a n c e,
I n t a n g i b l e
A s s e t s
Oi l r e s e r v e s,
t i m b e r,o t h e r
m i n e r a l s,
S i t e s a c q u i r e d f o r
e x t r a c t i n g v a l u a b l e
r e s o u r c e s,
N a t u ra l
R e s o u rc e s
Major Categories of Plant Assets
The McGraw-Hill Companies,Inc.,1999
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9-4
Irwin/McGraw-Hill
Accountable Events
?Acquisition.
?Allocation of the
acquisition cost to
expense over the
asset抯 useful life
(depreciation).
?Sale or disposal.
The McGraw-Hill Companies,Inc.,1999
Slide
9-5
Irwin/McGraw-Hill
Acquisition of Plant Assets
Asset
price
Reasonable and
necessary costs,,,
.,, for getting
the asset to the
desired location.
.,, for getting
the asset ready
for use.
Cost
The McGraw-Hill Companies,Inc.,1999
Slide
9-6
Irwin/McGraw-Hill
Determining Cost
Example
On May 4,Heat Co.,an Ohio maker of stoves,
buys a new machine from a Texas company,
The new machine has a price of $52,000,
Sales tax was computed at 8%.
Heat Co,pays $500 shipping cost to get the
machine to Ohio,After the machine arrives,
set-up costs of $1,300 are incurred,along with
$4,000 in testing costs.
Compute the cost of Heat Co.’s new
machine.
The McGraw-Hill Companies,Inc.,1999
Slide
9-7
Irwin/McGraw-Hill
Determining Cost
Example
Li s t pr i c e 5 2,0 0 0$
S a l e s t a x @ 8 % 4,1 6 0
Tr a ns por t a t i on c os t 500
S e t - up 1,3 0 0
Te s t i ng 4,0 0 0
Tot a l c os t t o H e a t C o,6 1,9 6 0$
D a t e D e s c r i pt i on D e bi t C r e di t
Prepare the journal entry.
The McGraw-Hill Companies,Inc.,1999
Slide
9-8
Irwin/McGraw-Hill
Determining Cost
Example
Li s t pr i c e 5 2,0 0 0$
S a l e s t a x @ 8 % 4,1 6 0
Tr a ns por t a t i on c os t 500
S e t - up 1,3 0 0
Te s t i ng 4,0 0 0
Tot a l c os t t o H e a t C o,6 1,9 6 0$
D a t e D e s c r i pt i on D e bi t C r e di t
4 - M a y N e w M a c h i n e 6 1,9 6 0
C a s h 6 1,9 6 0
The McGraw-Hill Companies,Inc.,1999
Slide
9-9
Irwin/McGraw-Hill
Special Considerations
Improvements to land
such as driveways,
fences,and landscaping
are recorded separately.
Land
Improvements
Cost includes real estate
commissions,escrow
fees,legal fees,clearing
and grading the property.
Land
The McGraw-Hill Companies,Inc.,1999
Slide
9-10
Irwin/McGraw-Hill
Special Considerations
Repairs made prior to the
building being put in use
are considered part of the
building抯 cost.
Buildings
The McGraw-Hill Companies,Inc.,1999
Slide
9-11
Irwin/McGraw-Hill
Special Considerations
Equipment
Related interest,
insurance,and property
taxes are treated as
expenses of the current
period.
The McGraw-Hill Companies,Inc.,1999
Slide
9-12
Irwin/McGraw-Hill
Special Considerations
I think I抣 l buy the
whole thing; barn,
land,and animals.
Allocation of a Lump-Sum Purchase
The McGraw-Hill Companies,Inc.,1999
Slide
9-13
Irwin/McGraw-Hill
Special Considerations
The total cost
must be
allocated to
separate
accounts for
each asset.
The allocation
is based on
the relative
Fair Market
Value of each
asset
purchased.
Allocation of a Lump-Sum Purchase
The McGraw-Hill Companies,Inc.,1999
Slide
9-14
Irwin/McGraw-Hill
Capital Expenditures and Revenue
Expenditures
T o c a p i t a l i ze a n
e x p e n d i t u r e m e a n s t o c h a r g e
i t t o a n a s s e t a c c o u n t,
A n y m a t e r i a l e x p e n d i t u r e
t h a t w i l l b e n e f i t s e v e r a l
a c c o u n t i n g p e r i o d s,
Ca p i t a l
E x p e n d i t u r e
T o e x p e n s e a n
e x p e n d i t u r e m e a n s t o c h a r g e
i t t o a n e x pe ns e a c c ou nt,
E x pe nd i t ure s f or ordi na r y
r e p a i r s a n d m a i n t e n a n c e,
R e v e n u e
E x p e n d it u r e
The McGraw-Hill Companies,Inc.,1999
Slide
9-15
Irwin/McGraw-Hill
Depreciation
The allocation of the cost of a plant asset to expense in the
periods in which services are received from the asset.
Cost of
plant
assets
Balance Sheet
Assets:
Plant and
equipment
Income Statement
Revenues:
Expenses:
Depreciation
as the services
are received
The McGraw-Hill Companies,Inc.,1999
Slide
9-16
Irwin/McGraw-Hill
?Book Value
? Cost - Accumulated Depreciation
?Accumulated Depreciation
? Contra-asset
? Represents the portion of an asset
抯 cost that has already been
allocated to expense.
?Causes of Depreciation
? Physical deterioration
? Obsolescence
Depreciation
The McGraw-Hill Companies,Inc.,1999
Slide
9-17
Irwin/McGraw-Hill
Cost - Residual Value
Life in Years
Depreciation
Expense per Year =
Straight-Line Depreciation
The McGraw-Hill Companies,Inc.,1999
Slide
9-18
Irwin/McGraw-Hill
Straight-Line Method
Example
On January 1,1998,Bass Co,buys a new boat,Bass
Co,pays $24,000 for the boat,The boat has an
estimated residual value of $3,000 and an estimated
useful life of 5 years.
Compute depreciation for 1998 using the
straight-line method.
The McGraw-Hill Companies,Inc.,1999
Slide
9-19
Irwin/McGraw-Hill
Straight-Line Method
Example
C o s t R e s i d u a l V a l u e 2 4,0 0 0$ 3,0 0 0$
= 4,2 0 0$ p e r y e a r
Y e a r s o f U s e f u l L i f e
=
5
On January 1,1998,Bass Co,buys a new boat,Bass
Co,pays $24,000 for the boat,The boat has an
estimated residual value of $3,000 and an estimated
useful life of 5 years.
Compute depreciation for 1998 using the
straight-line method.
The McGraw-Hill Companies,Inc.,1999
Slide
9-20
Irwin/McGraw-Hill
Straight-Line Method
Example
Bass Co,will record $4,200 depreciation each year for
five years,Total depreciation over the estimated useful
life of the boat is:
D e pr e c i a t i on A c c um ul a t e d A c c um ul a t e d U nd e pr e c i a t e d
E x pe ns e D e pr e c i a t i on D e pr e c i a t i on B a l a nc e
Y e a r ( de bi t ) ( c r e di t ) B a l a nc e ( bo ok v a l ue )
2 4,0 0 0$
1998 4,2 0 0$ 4,2 0 0$ 4,2 0 0$ 1 9,8 0 0
1999 4,2 0 0 4,2 0 0 8,4 0 0 1 5,6 0 0
2000 4,2 0 0 4,2 0 0 1 2,6 0 0 1 1,4 0 0
2001 4,2 0 0 4,2 0 0 1 6,8 0 0 7,2 0 0
2002 4,2 0 0 4,2 0 0 2 1,0 0 0 3,0 0 0
2 1,0 0 0$ 2 1,0 0 0$
Salvage Value
The McGraw-Hill Companies,Inc.,1999
Slide
9-21
Irwin/McGraw-Hill
Straight-Line Method
Graph of Depreciation Expense $0
$1,000
$2,000
$3,000
$4,000
$5,000
1997 1998 1999 2000 2001 2002
For the y ear ended Dece mber 31
D
e
p
r
e
c
i
a
t
i
o
n
The McGraw-Hill Companies,Inc.,1999
Slide
9-22
Irwin/McGraw-Hill
Depreciation for Fractional Periods
When an asset is acquired during the year,
depreciation in the year of acquisition must be
prorated.
Half-Year Convention
In the year of
acquisition,record six
months of depreciation.
The McGraw-Hill Companies,Inc.,1999
Slide
9-23
Irwin/McGraw-Hill
Using the half-year convention,calculate the
straight-line depreciation on December 31,
1999,for equipment purchased in 1999,The
equipment cost $75,000,has a useful life of
10 years and an estimated salvage value of
$5,000.
Half-Year Convention
Example
The McGraw-Hill Companies,Inc.,1999
Slide
9-24
Irwin/McGraw-Hill
Depreciation = ($75,000 - $5,000)?10
= $7,000 for a full year
Depreciation = $7,000? 1/2 = $3,500
Using the half-year convention,calculate the
straight-line depreciation on December 31,
1999,for equipment purchased in 1999,The
equipment cost $75,000,has a useful life of
10 years and an estimated salvage value of
$5,000.
Half-Year Convention
Example
The McGraw-Hill Companies,Inc.,1999
Slide
9-25
Irwin/McGraw-Hill
Declining-Balance Method
Depreciation in the early years of an asset’s estimated
useful life is higher than in later years.
D e p r e c i a t i o n
E x p e n s e
=
R e m a i n i n g
B o o k V a l u e
×
A c c e l e r a t e d
D e p r e c i a t i o n
R a t e
The double-declining balance accelerated
depreciation rate is 200% of the straight-
line depreciation rate of 1/Useful Life.
The McGraw-Hill Companies,Inc.,1999
Slide
9-26
Irwin/McGraw-Hill
Double-Declining Balance
Example
On January 1,1998,Bass Co,buys a new boat,Bass
Co,pays $24,000 for the boat,The boat has an
estimated residual value of $3,000 and an estimated
useful life of 5 years.
Compute depreciation for 1998 using the
double-declining balance method.
The McGraw-Hill Companies,Inc.,1999
Slide
9-27
Irwin/McGraw-Hill
Double-Declining Balance
Example
On January 1,1998,Bass Co,buys a new boat,Bass
Co,pays $24,000 for the boat,The boat has an
estimated residual value of $3,000 and an estimated
useful life of 5 years.
Compute depreciation for 1998 using the
double-declining balance method.
1 9 9 8 D e p r,
E x p e n s e
=
R e m a i n i n g
B o o k V a l u e
×
A c c e l e r a t e d
D e p r e c i a t i o n R a t e
= 2 4,0 0 0$ × 2?
1
/ 5
= 2 4,0 0 0$ × 40%
= 9,6 0 0$
The McGraw-Hill Companies,Inc.,1999
Slide
9-28
Irwin/McGraw-Hill
Double-Declining Balance
Example
Compute depreciation for the rest of the
boat抯 estimated useful life,Y e a r C o mp u t a t i o n
D e p r,
E x p e n s e
A c c u mu l a t e d
D e p r e c i a t i o n
B o o k
V a l u e
1998 2 4,0 0 0$ × 40% 9,6 0 0$ 9,6 0 0$ 1 4,4 0 0$
1999 1 4,4 0 0$ × 40% 5,7 6 0$ 1 5,3 6 0$ 8,6 4 0$
2000 8,6 4 0$ × 40% 3,4 5 6$ 1 8,8 1 6$ 5,1 8 4$
2001 5,1 8 4$ × 40% 2,0 7 4$ 2 0,8 9 0$ 3,1 1 0$
2002 110$ 2 1,0 0 0$ 3,0 0 0$
T o t a l D e p r e c i a t i o n 2 1,0 0 0$
P l u g y e a r # 5
The McGraw-Hill Companies,Inc.,1999
Slide
9-29
Irwin/McGraw-Hill
Double-Declining Balance
Example
Y e a r C o mp u t a t i o n
D e p r,
E x p e n s e
A c c u mu l a t e d
D e p r e c i a t i o n
B o o k
V a l u e
1998 2 4,0 0 0$ × 40% 9,6 0 0$ 9,6 0 0$ 1 4,4 0 0$
1999 1 4,4 0 0$ × 40% 5,7 6 0$ 1 5,3 6 0$ 8,6 4 0$
2000 8,6 4 0$ × 40% 3,4 5 6$ 1 8,8 1 6$ 5,1 8 4$
2001 5,1 8 4$ × 40% 2,0 7 4$ 2 0,8 9 0$ 3,1 1 0$
2002 110$ 2 1,0 0 0$ 3,0 0 0$
T o t a l D e p r e c i a t i o n 2 1,0 0 0$
P l u g y e a r # 5
Total depreciation over the estimated useful life of an
asset is the same using either the straight-line method or
the declining-balance method.
The McGraw-Hill Companies,Inc.,1999
Slide
9-30
Irwin/McGraw-Hill
Double-Declining Balance
Graph of Depreciation Expense
9600
5760
3456
2074
110$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
$9,000
$10,00 0
1997 1998 1999 2000 2001 2002
For the y ear ended Dece mber 31
D
e
p
r
e
c
i
a
t
i
o
n
The McGraw-Hill Companies,Inc.,1999
Slide
9-31
Irwin/McGraw-Hill
Depreciation Methods in Use for
Financial Reporting
A surv e y of 60 0 P ubli c ly O w ne d Corporat ions
563
44
11
70
53
9
S t ra i ght - l i ne
De c l i ning-ba l a nc e
S um-of - t he - y e a rs '-digi t s
A c c e l e ra t e d m e t hods ( not s pe c i f i e d)
Units - of - out put
O t he r
The McGraw-Hill Companies,Inc.,1999
Slide
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Irwin/McGraw-Hill
MACRS,The Tax Method
MACRS = Modified Accelerated Cost Recovery System
Based on
Declining-
Balance
Methods
The only accelerated method
allowed by the IRS when
computing depreciation for tax
return purposes.
Asset Cost? MACRS rate
Rates are available from tables
provided by the IRS.
The McGraw-Hill Companies,Inc.,1999
Slide
9-33
Irwin/McGraw-Hill
Other Issues
?Estimates of Useful Life and
Residual Value
? May differ from company to
company.
? The reasonableness of
management抯 estimates is
evaluated by external auditors.
?Principle of Consistency
? Companies should avoid switching
depreciation methods from period
to period.
The McGraw-Hill Companies,Inc.,1999
Slide
9-34
Irwin/McGraw-Hill
Revising Depreciation Rates
So depreciation
is an estimate.
Predicted
salvage value
Predicted
useful life
Over the life of an asset,new information
may come to light that indicates the
original estimates need to be revised.
The McGraw-Hill Companies,Inc.,1999
Slide
9-35
Irwin/McGraw-Hill
On January 1,1998,equipment was purchased
that cost $30,000,has a useful life of 10
years and no salvage value,During 2001,the
useful life was revised to 8 years total (5
years remaining),
Calculate depreciation expense for the
year ended December 31,2001,using
the straight-line method.
Revising Depreciation Rates
Example
The McGraw-Hill Companies,Inc.,1999
Slide
9-36
Irwin/McGraw-Hill
Revising Depreciation Rates
Example
Book value at
date of change
Salvage value at
date of change
Remaining useful life at date of change
When our estimates change,
depreciation is:
The McGraw-Hill Companies,Inc.,1999
Slide
9-37
Irwin/McGraw-Hill
Revising Depreciation Rates
Example
A s s e t c o s t 3 0,0 0 0$
A c c u m u l a t e d d e p r e c i a t i o n,1 2 / 3 1 / 2 0 0 0
( $ 3,0 0 0 p e r y e a r? 3 y e a r s ) 9,0 0 0
R e m a i n i n g b o o k v a l u e 2 1,0 0 0$
D i v i d e b y r e m a i n i n g l i f e? 5
R e v i s e d a n n u a l d e p r e c i a t i o n 4,2 0 0$
When our estimates change,
depreciation is:
Book value at
date of change
Salvage value at
date of change
Remaining useful life at date of change
The McGraw-Hill Companies,Inc.,1999
Slide
9-38
Irwin/McGraw-Hill
Impairment of Assets
If the cost of an asset
cannot be recovered
through future use or
sale,the asset should
be written down to its
net realizable value.
The McGraw-Hill Companies,Inc.,1999
Slide
9-39
Irwin/McGraw-Hill
Time to
move on to
a new
topic.
The McGraw-Hill Companies,Inc.,1999
Slide
9-40
Irwin/McGraw-Hill
Update depreciation
to the date of disposal.
Recording cash
received (debit)
or paid (credit).
Removing accumulated
depreciation (debit).
Journalize disposal by:
Removing the
asset cost (credit).
Recording a
gain (credit)
or loss (debit).
Disposal of Plant and Equipment
The McGraw-Hill Companies,Inc.,1999
Slide
9-41
Irwin/McGraw-Hill
If Cash > BV,record a gain (credit).
If Cash < BV,record a loss (debit).
If Cash = BV,no gain or loss.
Disposal of Plant and Equipment
Recording cash
received (debit)
or paid (credit).
Removing accumulated
depreciation (debit).
Removing the
asset cost (credit).
Recording a
gain (credit)
or loss (debit).
The McGraw-Hill Companies,Inc.,1999
Slide
9-42
Irwin/McGraw-Hill
On September 30,1999,Evans Map Company
sells a machine that originally cost $100,000 for
$60,000 cash,The machine was placed in
service on January 1,1994,It has been
depreciated using the straight-line method with
an estimated salvage value of $20,000 and an
estimated useful life of 10 years.
Let抯 answer the following
questions,
Disposal of Plant and Equipment
Example
The McGraw-Hill Companies,Inc.,1999
Slide
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Irwin/McGraw-Hill
The amount of depreciation
recorded on September 30,1999,
to bring depreciation up to date is:
a,$8,000.
b,$6,000.
c,$4,000.
d,$2,000.
Disposal of Plant and Equipment
Example
The McGraw-Hill Companies,Inc.,1999
Slide
9-44
Irwin/McGraw-Hill
The amount of depreciation
recorded on September 30,1999,
to bring depreciation up to date is:
a,$8,000.
b,$6,000.
c,$4,000.
d,$2,000.
Annual Depreciation:
($100,000 - $20,000) ÷ 10 Yrs,= $8,000
Depreciation to Sept,30:
9/12 ?$8,000 = $6,000
Disposal of Plant and Equipment
Example
The McGraw-Hill Companies,Inc.,1999
Slide
9-45
Irwin/McGraw-Hill
After updating the depreciation,the
machine’s book value on
September 30,1999,is:
a,$54,000.
b,$46,000.
c,$40,000.
d,$60,000.
Disposal of Plant and Equipment
Example
The McGraw-Hill Companies,Inc.,1999
Slide
9-46
Irwin/McGraw-Hill
After updating the depreciation,the
machine’s book value on
September 30,1999,is:
a,$54,000.
b,$46,000.
c,$40,000.
d,$60,000.
C os t 1 0 0,0 0 0$
A c c um ul a t e d D e pr e c i a t i on,
( 5 y r s,? $ 8,0 0 0 ) + $ 6,0 0 0 = 4 6,0 0 0
B oo k V a l ue 5 4,0 0 0$
Disposal of Plant and Equipment
Example
The McGraw-Hill Companies,Inc.,1999
Slide
9-47
Irwin/McGraw-Hill
Disposal of Plant and Equipment
Example
The machine’s sale resulted in,
a,a gain of $6,000.
b,a gain of $4,000.
c,a loss of $6,000.
d,a loss of $4,000.
The McGraw-Hill Companies,Inc.,1999
Slide
9-48
Irwin/McGraw-Hill
The machine’s sale resulted in,
a,a gain of $6,000.
b,a gain of $4,000.
c,a loss of $6,000.
d,a loss of $4,000.
C o s t 1 0 0,0 0 0$
A c c u m, D e p r, 4 6,0 0 0
B o o k V a l u e 5 4,0 0 0$
C a s h R e c e i v e d 6 0,0 0 0
G a i n 6,0 0 0$
Disposal of Plant and Equipment
Example
The McGraw-Hill Companies,Inc.,1999
Slide
9-49
Irwin/McGraw-Hill
Trading in Used Assets on New
Accounting depends on whether
assets are similar or dissimilar.
Airplane
for
Airplane
Truck
for
Airplane
Only situations where cash
is paid will be demonstrated.
The McGraw-Hill Companies,Inc.,1999
Slide
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Irwin/McGraw-Hill
D i s s i m i l a r A s s e t s
S i m i l a r A s s e t s
a n d C a s h P a i d
R e c o g n i z e
G a i n s?
Y e s No
R e c o g n i z e
L o s s e s?
Y e s Y e s
Trading in Used Assets on New
The McGraw-Hill Companies,Inc.,1999
Slide
9-51
Irwin/McGraw-Hill
On May 30,1999,Essex Company
exchanged a used airplane and $35,000
cash for a new airplane,The old airplane
originally cost $40,000,had up-to-date
accumulated depreciation of $30,000,and
a fair value of $4,000,
SIMILAR
Trading in Used Assets on New
Similar Exchange Example
The McGraw-Hill Companies,Inc.,1999
Slide
9-52
Irwin/McGraw-Hill
The exchange resulted in a:
a,gain of $6,000.
b,loss of $6,000.
c,loss of $4,000.
d,gain of $4,000.
Trading in Used Assets on New
Similar Exchange Example
The McGraw-Hill Companies,Inc.,1999
Slide
9-53
Irwin/McGraw-Hill
The exchange resulted in a:
a,gain of $6,000.
b,loss of $6,000.
c,loss of $4,000.
d,gain of $4,000.
C os t 4 0,0 0 0$
A c c um, D e pr, 3 0,0 0 0
B ook V a l ue 1 0,0 0 0$
Fa i r V a l ue 4,0 0 0
Los s 6,0 0 0$
Prepare a journal entry
to record the exchange.
Trading in Used Assets on New
Similar Exchange Example
The McGraw-Hill Companies,Inc.,1999
Slide
9-54
Irwin/McGraw-Hill
Trading in Used Assets on New
Similar Exchange Example
D a t e D e s c r i pt i on D e bi t C r e di t
3 0 - M a y A i r p l a n e ( n e w ) 3 9,0 0 0
A c c u m u l a t e d D e p r e c i a t i o n 3 0,0 0 0
L o s s o n E x c h a n g e 6,0 0 0
A i r p l a n e ( o l d ) 4 0,0 0 0
C a s h 3 5,0 0 0
The McGraw-Hill Companies,Inc.,1999
Slide
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Let’s change the subject!
The McGraw-Hill Companies,Inc.,1999
Slide
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Intangible Assets
Noncurrent assets
without physical
substance.
Useful life is
often difficult
to determine.
Usually acquired
for operational
use,
Characteristics
Often provide
exclusive rights
or privileges.
The McGraw-Hill Companies,Inc.,1999
Slide
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Irwin/McGraw-Hill
?Patents
?Copyrights
?Leaseholds
?Leasehold
Improvements
?Goodwill
?Trademarks and
Trade Names
Record at
current cash
equivalent cost,
including
purchase price,
legal fees,and
filing fees.
Intangible Assets
The McGraw-Hill Companies,Inc.,1999
Slide
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Irwin/McGraw-Hill
?Amortize over shorter of economic
life or legal life,subject to a maximum
of 40 years.
?Use straight-line method.
?Research and development costs are
normally expensed as incurred.
Intangible Assets
The McGraw-Hill Companies,Inc.,1999
Slide
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Irwin/McGraw-Hill
Occurs when one
company buys
another company.
The amount by which the
purchase price exceeds the fair
market value of net assets acquired.
Goodwill
Only purchased
goodwill is an
intangible asset.
Goodwill
The McGraw-Hill Companies,Inc.,1999
Slide
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Goodwill
Example
Eddy Company paid $1,000,000 to
purchase all of James Company’s assets
and assumed liabilities of $200,000,The
acquired assets were appraised at a fair
value of $900,000,
The McGraw-Hill Companies,Inc.,1999
Slide
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What amount of goodwill should be
recorded on Eddy Company books?
a,$100,000.
b,$200,000.
c,$300,000.
d,$400,000.
Goodwill
Example
The McGraw-Hill Companies,Inc.,1999
Slide
9-62
Irwin/McGraw-Hill
What amount of goodwill should be
recorded on Eddy Company books?
a,$100,000.
b,$200,000.
c,$300,000.
d,$400,000.
F MV o f A s s e t s 9 0 0,0 0 0$
D e b t A s s u m e d 2 0 0,0 0 0
F MV o f N e t A s s e t s 7 0 0,0 0 0$
P u r c h a s e P r i c e 1,0 0 0,0 0 0
G o o d w i l l 3 0 0,0 0 0$
Goodwill
Example
The McGraw-Hill Companies,Inc.,1999
Slide
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Irwin/McGraw-Hill
Intangible Assets
Patents
Exclusive right granted
by federal government to sell
or manufacture an invention,
Cost is purchase
price plus legal
cost to defend.
Amortize cost
over the shorter of
useful life or 17 years.
The McGraw-Hill Companies,Inc.,1999
Slide
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Irwin/McGraw-Hill
A symbol,design,or logo
associated with a business.
Purchased
trademarks
are recorded
at cost,and
amortized over
shorter of legal
or economic life,
or 40 years.
Internally
developed
trademarks
have no
recorded
asset cost.
Intangible Assets
Trademarks and Trade Names
The McGraw-Hill Companies,Inc.,1999
Slide
9-65
Irwin/McGraw-Hill
Legally protected right to sell products
or provide services purchased by
franchisee from franchisor.
Purchase price is intangible asset
which is amortized over the shorter of
the protected right or 40 years.
Intangible Assets
Franchises
The McGraw-Hill Companies,Inc.,1999
Slide
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Irwin/McGraw-Hill
Intangible Assets
Copyrights
Exclusive right granted by the
federal government to protect
artistic or intellectual properties.
Amortize cost
over a period not
to exceed 40 years.
Legal life is
life of creator
plus 50 years.
The McGraw-Hill Companies,Inc.,1999
Slide
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Let’s Change the Subject Again!
The McGraw-Hill Companies,Inc.,1999
Slide
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Total cost,
including
exploration and
development,
is charged to
depletion expense
over periods
benefited.
Natural Resources
Examples,oil,coal,gold
Extracted from
the natural
environment
and reported
at cost less
accumulated
depletion.
The McGraw-Hill Companies,Inc.,1999
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Depletion of Natural Resources
Depletion is calculated using the
units-of-production method.
Unit depletion rate is calculated as follows:
Total Units of Capacity
Cost Salvage Value
The McGraw-Hill Companies,Inc.,1999
Slide
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Total depletion cost for a period is:
Unit Depletion
Rate
Number of Units
Extracted in Period
Depletion of Natural Resources
Total
depletion
cost
Inventory
for sale
Unsold
Inventory
Cost of
goods sold
The McGraw-Hill Companies,Inc.,1999
Slide
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ABC Mining acquired a tract of land
containing ore deposits,Total costs of
acquisition and development were
$1,000,000 and ABC estimated the land
contained 40,000 tons of ore,
Depletion of Natural Resources
Example
The McGraw-Hill Companies,Inc.,1999
Slide
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Depletion of Natural Resources
Example
What is ABC’s depletion rate?
a,$40 per ton,
b,$50 per ton.
c,$25 per ton.
d,$20 per ton.
The McGraw-Hill Companies,Inc.,1999
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What is ABC’s depletion rate?
a,$40 per ton,
b,$50 per ton.
c,$25 per ton.
d,$20 per ton.
Cost?Units
$1,000,000 ÷ 40,000 Tons
= $25 Per Ton
Depletion of Natural Resources
Example
The McGraw-Hill Companies,Inc.,1999
Slide
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Irwin/McGraw-Hill
For the year ABC mined and sold 13,000
tons,What is the total depletion cost for
the year?
a,$300,000,
b,$325,000.
c,$225,000.
d,$275,000.
Depletion of Natural Resources
Example
The McGraw-Hill Companies,Inc.,1999
Slide
9-75
Irwin/McGraw-Hill
For the year ABC mined and sold 13,000
tons,What is the total depletion cost for
the year?
a,$300,000,
b,$325,000.
c,$225,000.
d,$275,000.
Depletion cost = 13,000 x $25
= $325,000
Depletion of Natural Resources
Example
The McGraw-Hill Companies,Inc.,1999
Slide
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Specialized plant assets may be required
to extract the natural resource.
These assets are recorded in a separate
account and depreciated.
Depletion of Natural Resources
The McGraw-Hill Companies,Inc.,1999
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End of Chapter 9
