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After completing this chapter you should be able to: Explain the cost principle for computing the cost of property, plant and equipment; explain depreciation for partial years and changes in estimates; distinguish between revenue and capital expenditures, and account for them; compute total asset turnover and apply it to analyze a company''s use of assets;...
Chapter 10 Long-term Assets PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W Caldwell, D.B.A., CMA Jon A Booker, Ph.D., CPA, CIA Cynthia J Rooney, Ph.D., CPA Winston Kwok, Ph.D., CPA McGrawHill/Irwin Copyright © 2011 by The McGrawHill Companies, Inc. All rights reserved 10 2 C 1 property, plant and equipment Tangible in Nature Actively Used in Operations Expected to Benefit Future Periods Called Property, Plant, & Equipment 10 3 C 1 property, plant and equipment 10 4 C 1 Cost Determination Purchase price Acquisition Acquisition Cost Cost Acquisition cost excludes financing charges and cash discounts All expenditures needed to prepare the asset for its intended use 10 5 C 1 Land Title insurance premiums Purchase price Delinquent taxes Real estate commissions Surveying fees Title search and transfer fees Land is not depreciable 10 6 C 1 Land Improvements Parking lots, driveways, fences, walks, shrubs, and lighting systems Depreciate over useful life of improvements 10 7 C 1 Buildings Cost of purchase or construction Title fees Brokerage fees Attorney fees Taxes 10 8 C 1 Machinery and Equipment Purchase price Taxes Transportation charges Installing, assembling, and testing Insurance while in transit 10 9 P 1 Lump-Sum Asset Purchase The total cost of a combined purchase of land and building is separated on the basis of their relative fair market values arMax paid $90,000 cash to acquire a group of items consisting of land appraised at $30,000, land improvements appraised at $10,000, and a building appraised at $60,000 The $90,000 cost will be allocated on the basis of appraised values as shown: 10 10 P 1 Depreciation Depreciation Depreciation is is the the process process of of allocating allocating the the cost cost of of an an item item of of property, property, plant plant and and equipment equipment to to expense expense in in the the accounting accounting periods periods benefiting benefiting from from its its use use Balance Sheet Acquisition Cost (Unused) Income Statement Cost Allocation Expense (Used) 10 29 P 2 Discarding property, plant and equipment Update depreciation to the date of disposal Journalize disposal by: Recording cash received (debit) or paid (credit) Removing accumulated depreciation (debit) Recording a gain (credit) or loss (debit) Removing the asset cost (credit) 10 30 P 2 Discarding property, plant and equipment A machine costing $9,000, with accumulated depreciation of $9,000 on December 31st of the previous year was discarded on June 5th of the current year The company is depreciating the equipment using the straight-line method over eight years with zero residual value 10 31 P 2 Discarding property, plant and equipment Equipment costing $8,000, with accumulated depreciation of $6,000 on December 31st of the previous year was discarded on July 1st of the current year The company is depreciating the equipment using the straight-line method over eight years with zero residual value Step 1: Bring the depreciation up-to-date Step 2: Record discarding of asset 10 32 P 2 Selling property, plant and equipment On March 31st, BTO sells equipment that originally cost $16,000 and has accumulated depreciation of $12,000 at December 31 st of the prior calendar year-end Annual depreciation on this equipment is $4,000 using straight-line depreciation The equipment is sold for $3,000 cash Step 1: Update depreciation to March 31st Step 2: Record sale of asset at carrying amount ($16,000 - $13,000 = $3,000) 10 33 P 2 Selling property, plant and equipment On March 31st, BTO sells equipment that originally cost $16,000 and has accumulated depreciation of $12,000 at December 31 st of the prior calendar year-end Annual depreciation on this equipment is $4,000 using straight-line depreciation The equipment is sold for $2,500 cash Step 1: Update depreciation to March 31st Step 2: Record sale of asset at a loss (Carrying amount $3,000 - $2,500 cash received) 10 34 P 3 Natural Resources Total cost, including exploration and development, is charged to depletion expense over periods benefited Extracted from the natural environment and reported at cost less accumulated depletion Examples: Examples: oil, oil, coal, coal, gold gold 10 35 P 3 Cost Determination and Depletion Let’s consider a mineral deposit with an estimated 250,000 tons of available ore It is purchased for $500,000, and we expect zero residual value 10 36 P 3 Depletion of Natural Resources Depletion expense in the first year would be: Balance Sheet presentation of natural resources: 10 37 P 3 Property, Plant and Equipment Used in Extracting Specialized Specialized property, property, plant plant and and equipment equipment may may be be required required to to extract extract the the natural natural resource resource These These assets assets are are recorded recorded in in aa separate separate account account and and depreciated depreciated 10 38 P 4 Intangible Assets Often provide exclusive rights or privileges Noncurrent assets without physical substance Intangible Intangible Assets Assets Useful life is often difficult to determine Usually acquired for operational use 10 39 P 4 Cost Determination and Amortization Record at current cash equivalent cost, including purchase price, legal fees, and filing fees o o o o o o Patents Copyrights Franchises and Licenses Goodwill Trademarks and Trade Names Other Intangibles 10 40 A1 Total Asset Turnover Total Asset = Turnover Net Sales Average Total Assets Provides information about a company’s efficiency in using its assets 10 41 P5 10A – EXCHANGING PROPERTY, PLANT AND EQUIPMENT Many property, plant and equipment such as machinery, automobiles, and office equipment are disposed of by exchanging them for newer assets In a typical exchange of property, plant and equipment, a trade-in allowance is received on the old asset and the balance is paid in cash Accounting for the exchange of assets depends on whether the transaction has commercial substance Commercial substance implies the company’s future cash flows will be altered 10 42 P5 Exchange with Commercial Substance: A Loss A A company company acquires acquires $42,000 $42,000 in in new new equipment equipment In In exchange, exchange, the the company company pays pays $33,000 $33,000 cash cash and and trades trades in in old old equipment equipment The The old old equipment equipment originally originally cost cost $36,000 $36,000 and and has has accumulated accumulated depreciation depreciation of of $20,000 $20,000 (carrying (carrying amount amount is is $16,000) $16,000) This This exchange exchange has has commercial commercial substance substance The The old old equipment equipment has has aa trade-in trade-in allowance allowance of of $9,000 $9,000 10 43 End of Chapter 10 ... Depreciation Depreciation Depreciation is is the the process process of of allocating allocating the the cost cost of of an an item item of of property, property, plant plant and and equipment equipment... The calculation of depreciation requires three amounts for each asset: Cost Residual Value Useful Life 10 12 P 1 Depreciation Methods Straight-line Units -of- production Declining-balance Asset... 3,600 $ 6,400 10 15 P 1 Straight-Line Depreciation Schedule 10 16 P 1 Units -of- Production Method Step 1: Depreciation Per Unit = Cost - Residual Value Total Units of Production Step 2: Depreciation