8 Property,Plant And
Equipment
Accounting School ·Zhongnan
University of Economics & Law
ntermediate
Accounting
I
中级会计学
Intermediate Accounting 8 Property,Plant And Equipment
I,Classification as property,plant and
equipment
To be included in the property,plant,and equipment
category,an asset must have three characteristics:
? The asset must be held for use and not for
investment.
? The asset must have an expected life of
more than one year.
? The asset must be tangible
in nature.
Intermediate Accounting 8 Property,Plant And Equipment
2,Acquisition of Property,
Plant and Equipment
Determination of Cost
Devon Company purchases a machine with a
contract price of $100,000 on terms of 2/10,n/30,
The company does not take the cash discount and
incurs transportation costs of $2,500,as well as
installation and testing costs of $3,000,Sales taxes
total $5,000 on the purchase,During installation,
uninsured damages of $500 are incurred.
What is the
cost of the
machine?
Intermediate Accounting 8 Property,Plant And Equipment
Valuation at Acquisition
? Contract price
? Costs of closing the
transaction,obtaining
the title,options,legal
fees,title search,
insurance,past due
taxes
Cost of Land
? Cost of surveys
? Clearing and grading
property to get it ready
for its intended use
? Razing old buildings
(net of salvage)
Intermediate Accounting 8 Property,Plant And Equipment
? Landscaping
? Streets
? Sidewalks
? Sewers
Cost of Land Improvements
Valuation at Acquisition
? Contract price
? Remodeling and reconditioning
? Excavating for the specific
building
? Architectural and building
permit costs
? Capitalized interest
? Certain unanticipated costs
Cost of Buildings
Intermediate Accounting 8 Property,Plant And Equipment
Valuation at Acquisition
? Purchase price
? Taxes,freight,and insurance
during shipping and installation
? Special foundations or
reinforcing of floors
? Installation and testing
Cost of Equipment
Intermediate Accounting 8 Property,Plant And Equipment
Valuation at Acquisition
Lump-Sum Purchases, Allocate cash price to
individual assets based on percentage of
appraised or fair market value.
Land,buildings,and
equipment are acquired for
$160,000,The appraisal
values at the acquisition
date are,land,$28,000;
buildings,$60,000;
equipment,$12,000.
Methods of Acquisition
Intermediate Accounting 8 Property,Plant And Equipment
Deferred payment:
Record asset at face
value of note,plus
any cash paid.
Record note at fair
market value of
acquired asset if
note’s value is not
determinable or is
unreasonable.
Land is acquired on
January 2,2002 for
$100,0000; $35,000 is paid
at the time of purchase,and
the balance is to be paid in
semiannual installments of
$5,000 plus interest on the
unpaid principal at an
annual rate of 10%.
Methods of Acquisition
Intermediate Accounting 8 Property,Plant And Equipment
3,Assets Acquired by
Exchange of Other Assets
The general exchange principle is that
the cost of a nonmonetary asset acquired
in exchange for another nonmonetary
asset is the fair value of the asset
surrendered.
Intermediate Accounting 8 Property,Plant And Equipment
Dissimilar
Company A Company B
Cost $100,000
Accum,depr,54,000
Fair value 40,000
Cost $60,000
Accum,depr,32,000
Fair value 40,000
Intermediate Accounting 8 Property,Plant And Equipment
Company A
Equipment 40,000
Accum,depr,54,000
Loss 6,000
Building 100,000Cost $40,000
No boot involved
Intermediate Accounting 8 Property,Plant And Equipment
Dissimilar
Continued
Company B
Building 40,000
Accum,Depr,32,000
Equipment 60,000
Gain 12,000
Cost $40,000
Intermediate Accounting 8 Property,Plant And Equipment
Dissimilar
Intermediate Accounting 8 Property,Plant And Equipment
Dissimilar with Boot
Company A Company B
Cost $100,000
Accum,depr,54,000
Fair value 40,000
Cash received 5,000
Cost $60,000
Accum,depr,32,000
Fair value 35,000
Cash paid 5,000
Intermediate Accounting 8 Property,Plant And Equipment
Company A
Equipment 35,000
Accum,depr,54,000
Cash 5,000
Loss 6,000
Building 100,000Cost $35,000
Dissimilar with Boot
Continued
Company B
Cost $40,000
Dissimilar with Boot
Building 40,000
Accum,Depr,32,000
Equipment 60,000
Cash 5,000
Gain 7,000
Intermediate Accounting 8 Property,Plant And Equipment
Similar
Boot Paid by Company Incurring a Gain
Intermediate Accounting 8 Property,Plant And Equipment
Company A
Equipment 35,000
Accum,Depr,54,000
Loss 6,000
Cash 5,000
Equipment 100,000
Cost = $35,000
Continued
Similar
Boot Paid by Company Incurring a Gain
Intermediate Accounting 8 Property,Plant And Equipment
Company B
Equipment 33,000
Accum,Depr,32,000
Equipment 60,000
Cash 5,000
$28,000 + $5,000
Cost = $33,000
Similar
Intermediate Accounting 8 Property,Plant And Equipment
Boot Received by Company Incurring a Gain
Company A Company B
Cost $100,000
Accum,depr,80,000
Fair value 30,000
Cash received 3,000
Cost $60,000
Accum,depr,32,000
Fair value 27,000
Cash paid 3,000
Similar
Intermediate Accounting 8 Property,Plant And Equipment
Boot Received by Company Incurring a Gain
Equipment 18,000
Accum,Depr,80,000
Cash 3,000
Equipment 100,000
Gain 1,000
Company A
Cost = $18,000
Continued
Company B
Equipment 30,000
Accum,Depr,32,000
Loss 1,000
Equipment 60,000
Cash 3,000
Cost = $30,000
Similar
Intermediate Accounting 8 Property,Plant And Equipment
Boot Received by Company Incurring a Gain
Company A Company B
Cost $100,000
Accum,depr,54,000
Fair value 40,000
Cash received 5,000
Cost $60,000
Accum,depr,32,000
Fair value 35,000
Cash paid 5,000
Boot Paid by Company Incurring a Gain
Similar
Intermediate Accounting 8 Property,Plant And Equipment
Summary of Productive Asset Exchanges
Intermediate Accounting 8 Property,Plant And Equipment
Are Similar
Productive
Assets Used in
the Same Line
of Business
Being
Exchange?
Yes
No Account for Assets at
Fair Value,Recognize
Gains and Losses
Is the Boot ? 25% of
the Total Value of the
Exchange?
Yes
No
Next
slide
Summary of Productive Asset Exchanges
Intermediate Accounting 8 Property,Plant And Equipment
Is Boot
Received?
Yes
Is FV? BV?
Yes
Cost = FV - Boot
Received
Loss = FV - BV
No
Cost = BV + Gain -
Boot Received
Gain = Boot
Boot + FV (FV - BV)Continued
Summary of Productive Asset Exchanges
Intermediate Accounting 8 Property,Plant And Equipment
No
Is FV? BV?
Is Boot
Paid?
No
Yes
Cost = FV
Loss = FV -
BV
No Cost = BV
Gain Not
Recognized
Is FV? BV? Cost = BV
+ Boot
Paid
Gain Not
Recognized
No
Yes
Is Boot
Received?
Intermediate Accounting 8 Property,Plant And Equipment
Comparison of the accounting treatments
in China and in U.S.A.
Could you compare the accounting
treatments in China and in U.S.A.?
Intermediate Accounting 8 Property,Plant And Equipment
4,Self-construction
The cost of materials,
labor,and overhead used
in the self-construction
of property,plant,and
equipment intended for a
firm’s production
process are added to the
cost of the asset.
Capitalization of Interest
A company is required to
capitalize interest on assets
that are constructed for its own
use or constructed as discrete
products.
Intermediate Accounting 8 Property,Plant And Equipment
Capitalization of Interest
Intermediate Accounting 8 Property,Plant And Equipment
inventories manufactured or
produced on a repetitive basis.
Assets that are in use or ready for
their intended use.
Assets that are not being used in
the earning activities of the
company and are not undergoing
the activities necessary to get them
ready for use.
Interest should
not be
capitalized for,
Intermediate Accounting 8 Property,Plant And Equipment
Capitalization of Interest
($0 + $1,000,000) ÷
2
Capitalized Interest,2004
$500,000 x 10% = $50,000
During 2004,$1 million was spent on the project and
in 2005,$2.9 million was spent.
Intermediate Accounting 8 Property,Plant And Equipment
Capitalization of Interest
Intermediate Accounting 8 Property,Plant And Equipment
Capitalized Interest,2005
$1,500,000 x 10% = $150,000
$1,000,000 x 12.6% = $126,000
$276,000
(12% x $4,000,000/$10,000,000) + (13% x $6,000,000/$10,000,000)
Amounts borrowed for other purposes,$4 million at
12% and $6 million at 13%
Intermediate Accounting 8 Property,Plant And Equipment
Fixed Overhead Costs
? Allocate a portion of total fixed
overhead to the self-constructed asset.
? Include only incremental fixed
overhead in the cost of the self-
constructed asset.
? Include no fixed overhead in the cost
of the self-constructed asset.
Intermediate Accounting 8 Property,Plant And Equipment
5,Costs subsequent to acquisition
Expenditures to keep plant
and equipment in good
operating condition are
referred to as maintenance.
Expense as
incurred
? Extending the life of the asset.
? Improving the productivity.
? Producing the same product
at lower cost.
? Increasing the quality of the
product.
The future economic benefits of a productive asset
or product can be increased by--
Intermediate Accounting 8 Property,Plant And Equipment
Intermediate Accounting 8 Property,Plant And Equipment
The cost of an addition
represents a new asset and
therefore is capitalized.
Additions
Improvements and Replacements
A company decides to replace its oil furnace with a
gas furnace,The oil furnace is carried on the books
at a cost of $50,000 with an accumulated depreciation
of $30,000,The scrap value of the old furnace is
$5,000,and the new furnace costs $70,000.
Furnace 70,000
Accumulated Depreciation,Furnace 30,000
Loss on Disposal of Furnace 15,000
Furnace 50,000
Cash 65,000
Substitution Method
Intermediate Accounting 8 Property,Plant And Equipment
Improvements and Replacements
Intermediate Accounting 8 Property,Plant And Equipment
A capital expenditure of $50,000 is incurred in
replacing a roof on a factory building.
Accumulated Depreciation 50,000
Cash 50,000
Reduce Accumulated Depreciation
Improvements and Replacements
Intermediate Accounting 8 Property,Plant And Equipment
A capital expenditure of $50,000 is
incurred to enlarge a factory.
Factory 50,000
Cash 50,000
Increase the Asset Account
Intermediate Accounting 8 Property,Plant And Equipment
6,Disposal of Property,Plant
and Equipment
A company has a machine that originally cost
$10,000,has accumulated depreciation of $8,000 at
the beginning of the current year,and is being
depreciation at $1,000 per year,On December 30,
the company sells the machine for $600.
Depreciation 1,000
Accumulated Depreciation 1,000
To bring depreciation to point of sale.
A company has a machine that originally cost
$10,000,has accumulated depreciation of $8,000 at
the beginning of the current year,and is being
depreciation at $1,000 per year,On December 30,
the company sells the machine for $600.
Cash 600
Accumulated Depreciation 9,000
Loss on Disposal 400
Machine 10,000
To record disposal of machine for $600.
Intermediate Accounting 8 Property,Plant And Equipment
Intermediate Accounting 8 Property,Plant And Equipment
7,Depreciation and depletion
? Asset cost
? Residual or salvage
value
? Useful life
? Method of cost
allocation
Factors involved in depreciation
Intermediate Accounting 8 Property,Plant And Equipment
Service life is the measure of the
number of units of service expected
from the asset before its disposal.
Service Life
Limited by:
? Physical causes
? Functional causes
Intermediate Accounting 8 Property,Plant And Equipment
Residual,or salvage value,is the net
amount that can be expected to be
obtained when the asset is disposed at
the end of its service life.
Residual Value
Intermediate Accounting 8 Property,Plant And Equipment
Methods of Cost Allocation
? Activity (or use) methods
? Time-based methods
a,Straight-line
b,Accelerated (declining charge)
(1) Sum-of-the-years’-digits
(2) Declining balance
Intermediate Accounting 8 Property,Plant And Equipment
Schuss Boom Ski Manufacturing
acquired a polyurethane plastic-
molding machine at the
beginning of 2002 for $100,000,
It has an estimated life of five
years,20,000 hours,or 25,000
units,The estimated residual
value is $5,000,In 2002,the
equipment was used 3,000 hours
to produce 3,500 units.
Intermediate Accounting 8 Property,Plant And Equipment
Depreciation = Cost - Residual ValueNumber of Years
Depreciation = $100,000 - $5,0005
Depreciation = $19,000
Straight-Line Method
$35,000
$28,000
$21,000
$14,000
$7,000
$0
Depreciation Expense
2002 2003 2004 2005 2006
SYD = [n (n + 1)]
2[5 (5 + 1)]
2
SYD = 15
Intermediate Accounting 8 Property,Plant And Equipment
Sum-of-the-Years’-Digits Method
tDepreciation =
SYD x (Cost - Residual Value)
Depreciation (2002) = $31,667
$35,000
$28,000
$21,000
$14,000
$7,000
$0
2002 2003 2004 2005 2006
Depreciation Expense
Note:
? Do not depreciate below salvage value.
? Optional,Switch to straight-line when it
yields higher depreciation.
Depreciation = F x (Cost - Accum,Depr.)
Depreciation (2002) = 0.40 x $100,000
Depreciation (2002) = $40,000
Declining-Balance Method
Intermediate Accounting 8 Property,Plant And Equipment
F = declining balance factor
(e.g.,150% or 200%)
Declining-Balance Method
Intermediate Accounting 8 Property,Plant And Equipment
$42,000
$35,000
$28,000
$21,000
$14,000
$7,000
$0
Depreciation Expense
2002 2003 2004 2005 2006
Intermediate Accounting 8 Property,Plant And Equipment
Recording Depreciation
The credit to depreciation is
usually called Accumulated
Depreciation or Allowance for
Depreciation.
The account title Reserve for
Depreciation is considered
undesirable because of the
uncertain meaning of,reserve.”
Intermediate Accounting 8 Property,Plant And Equipment
Conceptual Evaluation of Depreciation Methods
…a similar total cost each period can
be achieve through straight-line
depreciation and the similar repair and
maintenance costs.
If the company expects that benefits of
having the asset will decline each year
for the life of the asset,...
and repairs and maintenance costs
are constant each period,a declining
total cost will be achieved by using
accelerated depreciation.
Intermediate Accounting 8 Property,Plant And Equipment
Depreciation for partial
periods
Year Annual Depreciation
1 3/6 x $6,000 = $3,000 x 4/12 = $1,000
2 $3,000 x 8/12
2/6 x $6,000 = $2,000 x 4/12 = 2,667
3 $2,000 x 8/12
1/6 x $6,000 = $1,000 x 4/12 = 1,667
4 $1,000 x 8/12 = 666
$6,000
A company purchases a $6,000 asset with a 3-year
life and no residual value on August 18,The firm
uses the sums-of-the-years’-digits method.
Intermediate Accounting 8 Property,Plant And Equipment
Depreciation for partial
periods
OR
….The firm uses the double -declining-balance method.
Year Annual Depreciation
1 2/3 x $6,000 = $4,000 x 4/12 = $1,333
2 $4,000 x 8/12
2/3 x $2,000 = $1,333 x 4/12 = 3,111
3 $1,333 x 8/12
$667 x 4/12 = 1,111
4 $667 x 8/12 = 445
$6,000
Annual
Year Depreciation
1 4/12 x $4,000 = $1,333
2 0.667 x ($6,000 – $1,333) = 3,113
3 0.667 x ($4,667 – $3,113) = 1,037
4 Remaining balance = 517
$6,000
Declining-Balance-Method
Intermediate Accounting 8 Property,Plant And Equipment
Depreciation for partial
periods
OR
Intermediate Accounting 8 Property,Plant And Equipment
? Depreciation expense for the period.
? Balances of major classes of depreciable
assets,by nature or function,at the
balance sheet date.
? Accumulated depreciation,either by
major classes of depreciable assets or in total,
at the balance sheet date.
? A general description of the method or methods
used in computing depreciation with respect to
major classes of depreciable assets.
APB Opinion No,12 requires the following disclosure:
Disclosure requirements
Intermediate Accounting 8 Property,Plant And Equipment
Depletion
Land containing mineral deposits
is purchased at a cost of
$5,500,000,The cost to restore
the land to its original state after
removal of the resources is
estimated to be $200,000 (then it
can be sold for $450,000),In
2002,80,000 tons of the
estimated 2,000,000 tons are
removed.
Depletion
charge per ton
$5,500,000 - $250,000
1,000,000 tons=
Depletion
charge per ton = $5.25
Depletion for 2002 = $5.25 x 80,000 tons
Depletion for 2002 = $420,000
$450,000 -
$200,000
Intermediate Accounting 8 Property,Plant And Equipment
Depletion
Intermediate Accounting 8 Property,Plant And Equipment
8,Impairment of Noncurrent Assets
Before the end of an asset’s useful
life,events occur that impair its
value,This requires an immediate
write-down of the asset.
Impairment occurs whenever events
or changes in circumstances indicate
that the book value of a noncurrent
asset may not be recoverable.
An impairment loss involves the following steps:
Events or Changes in Circumstances Occurs
Impairment Test
(Undiscounted Cash Flows < Book Value of Asset)
Measurement of Loss
(Loss = Fair Value – Book Value)
Intermediate Accounting 8 Property,Plant And Equipment
Conceptual Evaluation of Asset Impairment
Although FASB Statement No,121 has been
replaced by FASB Statement No,144,the principles
it established have only changed slightly.
Although the Statement narrows GAAP,it still
allows for significant management flexibility.
Intermediate Accounting 8 Property,Plant And Equipment
The End
Equipment
Accounting School ·Zhongnan
University of Economics & Law
ntermediate
Accounting
I
中级会计学
Intermediate Accounting 8 Property,Plant And Equipment
I,Classification as property,plant and
equipment
To be included in the property,plant,and equipment
category,an asset must have three characteristics:
? The asset must be held for use and not for
investment.
? The asset must have an expected life of
more than one year.
? The asset must be tangible
in nature.
Intermediate Accounting 8 Property,Plant And Equipment
2,Acquisition of Property,
Plant and Equipment
Determination of Cost
Devon Company purchases a machine with a
contract price of $100,000 on terms of 2/10,n/30,
The company does not take the cash discount and
incurs transportation costs of $2,500,as well as
installation and testing costs of $3,000,Sales taxes
total $5,000 on the purchase,During installation,
uninsured damages of $500 are incurred.
What is the
cost of the
machine?
Intermediate Accounting 8 Property,Plant And Equipment
Valuation at Acquisition
? Contract price
? Costs of closing the
transaction,obtaining
the title,options,legal
fees,title search,
insurance,past due
taxes
Cost of Land
? Cost of surveys
? Clearing and grading
property to get it ready
for its intended use
? Razing old buildings
(net of salvage)
Intermediate Accounting 8 Property,Plant And Equipment
? Landscaping
? Streets
? Sidewalks
? Sewers
Cost of Land Improvements
Valuation at Acquisition
? Contract price
? Remodeling and reconditioning
? Excavating for the specific
building
? Architectural and building
permit costs
? Capitalized interest
? Certain unanticipated costs
Cost of Buildings
Intermediate Accounting 8 Property,Plant And Equipment
Valuation at Acquisition
? Purchase price
? Taxes,freight,and insurance
during shipping and installation
? Special foundations or
reinforcing of floors
? Installation and testing
Cost of Equipment
Intermediate Accounting 8 Property,Plant And Equipment
Valuation at Acquisition
Lump-Sum Purchases, Allocate cash price to
individual assets based on percentage of
appraised or fair market value.
Land,buildings,and
equipment are acquired for
$160,000,The appraisal
values at the acquisition
date are,land,$28,000;
buildings,$60,000;
equipment,$12,000.
Methods of Acquisition
Intermediate Accounting 8 Property,Plant And Equipment
Deferred payment:
Record asset at face
value of note,plus
any cash paid.
Record note at fair
market value of
acquired asset if
note’s value is not
determinable or is
unreasonable.
Land is acquired on
January 2,2002 for
$100,0000; $35,000 is paid
at the time of purchase,and
the balance is to be paid in
semiannual installments of
$5,000 plus interest on the
unpaid principal at an
annual rate of 10%.
Methods of Acquisition
Intermediate Accounting 8 Property,Plant And Equipment
3,Assets Acquired by
Exchange of Other Assets
The general exchange principle is that
the cost of a nonmonetary asset acquired
in exchange for another nonmonetary
asset is the fair value of the asset
surrendered.
Intermediate Accounting 8 Property,Plant And Equipment
Dissimilar
Company A Company B
Cost $100,000
Accum,depr,54,000
Fair value 40,000
Cost $60,000
Accum,depr,32,000
Fair value 40,000
Intermediate Accounting 8 Property,Plant And Equipment
Company A
Equipment 40,000
Accum,depr,54,000
Loss 6,000
Building 100,000Cost $40,000
No boot involved
Intermediate Accounting 8 Property,Plant And Equipment
Dissimilar
Continued
Company B
Building 40,000
Accum,Depr,32,000
Equipment 60,000
Gain 12,000
Cost $40,000
Intermediate Accounting 8 Property,Plant And Equipment
Dissimilar
Intermediate Accounting 8 Property,Plant And Equipment
Dissimilar with Boot
Company A Company B
Cost $100,000
Accum,depr,54,000
Fair value 40,000
Cash received 5,000
Cost $60,000
Accum,depr,32,000
Fair value 35,000
Cash paid 5,000
Intermediate Accounting 8 Property,Plant And Equipment
Company A
Equipment 35,000
Accum,depr,54,000
Cash 5,000
Loss 6,000
Building 100,000Cost $35,000
Dissimilar with Boot
Continued
Company B
Cost $40,000
Dissimilar with Boot
Building 40,000
Accum,Depr,32,000
Equipment 60,000
Cash 5,000
Gain 7,000
Intermediate Accounting 8 Property,Plant And Equipment
Similar
Boot Paid by Company Incurring a Gain
Intermediate Accounting 8 Property,Plant And Equipment
Company A
Equipment 35,000
Accum,Depr,54,000
Loss 6,000
Cash 5,000
Equipment 100,000
Cost = $35,000
Continued
Similar
Boot Paid by Company Incurring a Gain
Intermediate Accounting 8 Property,Plant And Equipment
Company B
Equipment 33,000
Accum,Depr,32,000
Equipment 60,000
Cash 5,000
$28,000 + $5,000
Cost = $33,000
Similar
Intermediate Accounting 8 Property,Plant And Equipment
Boot Received by Company Incurring a Gain
Company A Company B
Cost $100,000
Accum,depr,80,000
Fair value 30,000
Cash received 3,000
Cost $60,000
Accum,depr,32,000
Fair value 27,000
Cash paid 3,000
Similar
Intermediate Accounting 8 Property,Plant And Equipment
Boot Received by Company Incurring a Gain
Equipment 18,000
Accum,Depr,80,000
Cash 3,000
Equipment 100,000
Gain 1,000
Company A
Cost = $18,000
Continued
Company B
Equipment 30,000
Accum,Depr,32,000
Loss 1,000
Equipment 60,000
Cash 3,000
Cost = $30,000
Similar
Intermediate Accounting 8 Property,Plant And Equipment
Boot Received by Company Incurring a Gain
Company A Company B
Cost $100,000
Accum,depr,54,000
Fair value 40,000
Cash received 5,000
Cost $60,000
Accum,depr,32,000
Fair value 35,000
Cash paid 5,000
Boot Paid by Company Incurring a Gain
Similar
Intermediate Accounting 8 Property,Plant And Equipment
Summary of Productive Asset Exchanges
Intermediate Accounting 8 Property,Plant And Equipment
Are Similar
Productive
Assets Used in
the Same Line
of Business
Being
Exchange?
Yes
No Account for Assets at
Fair Value,Recognize
Gains and Losses
Is the Boot ? 25% of
the Total Value of the
Exchange?
Yes
No
Next
slide
Summary of Productive Asset Exchanges
Intermediate Accounting 8 Property,Plant And Equipment
Is Boot
Received?
Yes
Is FV? BV?
Yes
Cost = FV - Boot
Received
Loss = FV - BV
No
Cost = BV + Gain -
Boot Received
Gain = Boot
Boot + FV (FV - BV)Continued
Summary of Productive Asset Exchanges
Intermediate Accounting 8 Property,Plant And Equipment
No
Is FV? BV?
Is Boot
Paid?
No
Yes
Cost = FV
Loss = FV -
BV
No Cost = BV
Gain Not
Recognized
Is FV? BV? Cost = BV
+ Boot
Paid
Gain Not
Recognized
No
Yes
Is Boot
Received?
Intermediate Accounting 8 Property,Plant And Equipment
Comparison of the accounting treatments
in China and in U.S.A.
Could you compare the accounting
treatments in China and in U.S.A.?
Intermediate Accounting 8 Property,Plant And Equipment
4,Self-construction
The cost of materials,
labor,and overhead used
in the self-construction
of property,plant,and
equipment intended for a
firm’s production
process are added to the
cost of the asset.
Capitalization of Interest
A company is required to
capitalize interest on assets
that are constructed for its own
use or constructed as discrete
products.
Intermediate Accounting 8 Property,Plant And Equipment
Capitalization of Interest
Intermediate Accounting 8 Property,Plant And Equipment
inventories manufactured or
produced on a repetitive basis.
Assets that are in use or ready for
their intended use.
Assets that are not being used in
the earning activities of the
company and are not undergoing
the activities necessary to get them
ready for use.
Interest should
not be
capitalized for,
Intermediate Accounting 8 Property,Plant And Equipment
Capitalization of Interest
($0 + $1,000,000) ÷
2
Capitalized Interest,2004
$500,000 x 10% = $50,000
During 2004,$1 million was spent on the project and
in 2005,$2.9 million was spent.
Intermediate Accounting 8 Property,Plant And Equipment
Capitalization of Interest
Intermediate Accounting 8 Property,Plant And Equipment
Capitalized Interest,2005
$1,500,000 x 10% = $150,000
$1,000,000 x 12.6% = $126,000
$276,000
(12% x $4,000,000/$10,000,000) + (13% x $6,000,000/$10,000,000)
Amounts borrowed for other purposes,$4 million at
12% and $6 million at 13%
Intermediate Accounting 8 Property,Plant And Equipment
Fixed Overhead Costs
? Allocate a portion of total fixed
overhead to the self-constructed asset.
? Include only incremental fixed
overhead in the cost of the self-
constructed asset.
? Include no fixed overhead in the cost
of the self-constructed asset.
Intermediate Accounting 8 Property,Plant And Equipment
5,Costs subsequent to acquisition
Expenditures to keep plant
and equipment in good
operating condition are
referred to as maintenance.
Expense as
incurred
? Extending the life of the asset.
? Improving the productivity.
? Producing the same product
at lower cost.
? Increasing the quality of the
product.
The future economic benefits of a productive asset
or product can be increased by--
Intermediate Accounting 8 Property,Plant And Equipment
Intermediate Accounting 8 Property,Plant And Equipment
The cost of an addition
represents a new asset and
therefore is capitalized.
Additions
Improvements and Replacements
A company decides to replace its oil furnace with a
gas furnace,The oil furnace is carried on the books
at a cost of $50,000 with an accumulated depreciation
of $30,000,The scrap value of the old furnace is
$5,000,and the new furnace costs $70,000.
Furnace 70,000
Accumulated Depreciation,Furnace 30,000
Loss on Disposal of Furnace 15,000
Furnace 50,000
Cash 65,000
Substitution Method
Intermediate Accounting 8 Property,Plant And Equipment
Improvements and Replacements
Intermediate Accounting 8 Property,Plant And Equipment
A capital expenditure of $50,000 is incurred in
replacing a roof on a factory building.
Accumulated Depreciation 50,000
Cash 50,000
Reduce Accumulated Depreciation
Improvements and Replacements
Intermediate Accounting 8 Property,Plant And Equipment
A capital expenditure of $50,000 is
incurred to enlarge a factory.
Factory 50,000
Cash 50,000
Increase the Asset Account
Intermediate Accounting 8 Property,Plant And Equipment
6,Disposal of Property,Plant
and Equipment
A company has a machine that originally cost
$10,000,has accumulated depreciation of $8,000 at
the beginning of the current year,and is being
depreciation at $1,000 per year,On December 30,
the company sells the machine for $600.
Depreciation 1,000
Accumulated Depreciation 1,000
To bring depreciation to point of sale.
A company has a machine that originally cost
$10,000,has accumulated depreciation of $8,000 at
the beginning of the current year,and is being
depreciation at $1,000 per year,On December 30,
the company sells the machine for $600.
Cash 600
Accumulated Depreciation 9,000
Loss on Disposal 400
Machine 10,000
To record disposal of machine for $600.
Intermediate Accounting 8 Property,Plant And Equipment
Intermediate Accounting 8 Property,Plant And Equipment
7,Depreciation and depletion
? Asset cost
? Residual or salvage
value
? Useful life
? Method of cost
allocation
Factors involved in depreciation
Intermediate Accounting 8 Property,Plant And Equipment
Service life is the measure of the
number of units of service expected
from the asset before its disposal.
Service Life
Limited by:
? Physical causes
? Functional causes
Intermediate Accounting 8 Property,Plant And Equipment
Residual,or salvage value,is the net
amount that can be expected to be
obtained when the asset is disposed at
the end of its service life.
Residual Value
Intermediate Accounting 8 Property,Plant And Equipment
Methods of Cost Allocation
? Activity (or use) methods
? Time-based methods
a,Straight-line
b,Accelerated (declining charge)
(1) Sum-of-the-years’-digits
(2) Declining balance
Intermediate Accounting 8 Property,Plant And Equipment
Schuss Boom Ski Manufacturing
acquired a polyurethane plastic-
molding machine at the
beginning of 2002 for $100,000,
It has an estimated life of five
years,20,000 hours,or 25,000
units,The estimated residual
value is $5,000,In 2002,the
equipment was used 3,000 hours
to produce 3,500 units.
Intermediate Accounting 8 Property,Plant And Equipment
Depreciation = Cost - Residual ValueNumber of Years
Depreciation = $100,000 - $5,0005
Depreciation = $19,000
Straight-Line Method
$35,000
$28,000
$21,000
$14,000
$7,000
$0
Depreciation Expense
2002 2003 2004 2005 2006
SYD = [n (n + 1)]
2[5 (5 + 1)]
2
SYD = 15
Intermediate Accounting 8 Property,Plant And Equipment
Sum-of-the-Years’-Digits Method
tDepreciation =
SYD x (Cost - Residual Value)
Depreciation (2002) = $31,667
$35,000
$28,000
$21,000
$14,000
$7,000
$0
2002 2003 2004 2005 2006
Depreciation Expense
Note:
? Do not depreciate below salvage value.
? Optional,Switch to straight-line when it
yields higher depreciation.
Depreciation = F x (Cost - Accum,Depr.)
Depreciation (2002) = 0.40 x $100,000
Depreciation (2002) = $40,000
Declining-Balance Method
Intermediate Accounting 8 Property,Plant And Equipment
F = declining balance factor
(e.g.,150% or 200%)
Declining-Balance Method
Intermediate Accounting 8 Property,Plant And Equipment
$42,000
$35,000
$28,000
$21,000
$14,000
$7,000
$0
Depreciation Expense
2002 2003 2004 2005 2006
Intermediate Accounting 8 Property,Plant And Equipment
Recording Depreciation
The credit to depreciation is
usually called Accumulated
Depreciation or Allowance for
Depreciation.
The account title Reserve for
Depreciation is considered
undesirable because of the
uncertain meaning of,reserve.”
Intermediate Accounting 8 Property,Plant And Equipment
Conceptual Evaluation of Depreciation Methods
…a similar total cost each period can
be achieve through straight-line
depreciation and the similar repair and
maintenance costs.
If the company expects that benefits of
having the asset will decline each year
for the life of the asset,...
and repairs and maintenance costs
are constant each period,a declining
total cost will be achieved by using
accelerated depreciation.
Intermediate Accounting 8 Property,Plant And Equipment
Depreciation for partial
periods
Year Annual Depreciation
1 3/6 x $6,000 = $3,000 x 4/12 = $1,000
2 $3,000 x 8/12
2/6 x $6,000 = $2,000 x 4/12 = 2,667
3 $2,000 x 8/12
1/6 x $6,000 = $1,000 x 4/12 = 1,667
4 $1,000 x 8/12 = 666
$6,000
A company purchases a $6,000 asset with a 3-year
life and no residual value on August 18,The firm
uses the sums-of-the-years’-digits method.
Intermediate Accounting 8 Property,Plant And Equipment
Depreciation for partial
periods
OR
….The firm uses the double -declining-balance method.
Year Annual Depreciation
1 2/3 x $6,000 = $4,000 x 4/12 = $1,333
2 $4,000 x 8/12
2/3 x $2,000 = $1,333 x 4/12 = 3,111
3 $1,333 x 8/12
$667 x 4/12 = 1,111
4 $667 x 8/12 = 445
$6,000
Annual
Year Depreciation
1 4/12 x $4,000 = $1,333
2 0.667 x ($6,000 – $1,333) = 3,113
3 0.667 x ($4,667 – $3,113) = 1,037
4 Remaining balance = 517
$6,000
Declining-Balance-Method
Intermediate Accounting 8 Property,Plant And Equipment
Depreciation for partial
periods
OR
Intermediate Accounting 8 Property,Plant And Equipment
? Depreciation expense for the period.
? Balances of major classes of depreciable
assets,by nature or function,at the
balance sheet date.
? Accumulated depreciation,either by
major classes of depreciable assets or in total,
at the balance sheet date.
? A general description of the method or methods
used in computing depreciation with respect to
major classes of depreciable assets.
APB Opinion No,12 requires the following disclosure:
Disclosure requirements
Intermediate Accounting 8 Property,Plant And Equipment
Depletion
Land containing mineral deposits
is purchased at a cost of
$5,500,000,The cost to restore
the land to its original state after
removal of the resources is
estimated to be $200,000 (then it
can be sold for $450,000),In
2002,80,000 tons of the
estimated 2,000,000 tons are
removed.
Depletion
charge per ton
$5,500,000 - $250,000
1,000,000 tons=
Depletion
charge per ton = $5.25
Depletion for 2002 = $5.25 x 80,000 tons
Depletion for 2002 = $420,000
$450,000 -
$200,000
Intermediate Accounting 8 Property,Plant And Equipment
Depletion
Intermediate Accounting 8 Property,Plant And Equipment
8,Impairment of Noncurrent Assets
Before the end of an asset’s useful
life,events occur that impair its
value,This requires an immediate
write-down of the asset.
Impairment occurs whenever events
or changes in circumstances indicate
that the book value of a noncurrent
asset may not be recoverable.
An impairment loss involves the following steps:
Events or Changes in Circumstances Occurs
Impairment Test
(Undiscounted Cash Flows < Book Value of Asset)
Measurement of Loss
(Loss = Fair Value – Book Value)
Intermediate Accounting 8 Property,Plant And Equipment
Conceptual Evaluation of Asset Impairment
Although FASB Statement No,121 has been
replaced by FASB Statement No,144,the principles
it established have only changed slightly.
Although the Statement narrows GAAP,it still
allows for significant management flexibility.
Intermediate Accounting 8 Property,Plant And Equipment
The End
