Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Plant and Intangible Assets Chapter 9

Learning objectives: After studying this chapter, you should be able to: Determine the cost of plant assets. Distinguish between capital expenditure and revenue expenditure. Computer depreciation by the straight-line and declining-balance methods. Account for depreciation using methods other than straight-line or declining-balance. Account for the disposal of plant assets. Explain the nature of intangible assets, including goodwill. Account for the depletion of natural resources. Explain cash effects of transactions involving plant assets.

9-3 Major Categories of Plant Assets

9-4 Accountable Events in the Lives of Plant Assets Acquisition. Allocation of the acquisition cost to expense over the asset’s useful life (depreciation). Sale or disposal.

9-5 Asset price... for getting the asset to the desired location.... for getting the asset ready for use. Cost Acquisition of Plant Assets = Reasonable and necessary costs... +

9-6 Acquisition The cost of a plant asset includes all expenditures that are reasonable and necessary for getting the asset to the desired location and ready for use. Special considerations: land improvements should be recorded in a separate account; building repairs prior to placing them in use should be charged to building account, ordinary repairs should be recorded in maintenance expense; Equipment maintenance costs incurred after equipment has been placed in operation should be treated as expense.

9-7 Capital Expenditure Revenue Expenditure Any material expenditure that will benefit several accounting periods. To capitalize an expenditure means to charge it to an asset account. Expenditure for ordinary repairs and maintenance. To expense an expenditure means to charge it to an expense account. Capital Expenditures and Revenue Expenditures

9-8 The allocation of the cost of a tangible 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 Assets: Plant and equipment Income Statement Revenues: Expenses: Depreciation Revenues: Expenses: Depreciation as the services are received Depreciation

9-9 Depreciation Book Value Cost – Accumulated Depreciation Depreciation  Contra-asset  Represents the portion of an asset’s cost that has already been allocated to expense. Causes of Depreciation  Physical deterioration  Obsolescence

9-10 Cost - Residual Value Years of Useful Life Depreciation Expense per Year = Straight-Line Depreciation

9-11 Depreciation in the early years of an asset’s estimated useful life is higher than in later years. The double-declining balance depreciation rate is 200% of the straight-line depreciation rate of (1÷Useful Life). Declining-Balance Method

9-12 Which depreciation method do most businesses use? Straight-line method in financial statements (accepted by majority of publicly owned companies) Accelerated methods in income tax returns ※ Accelerated depreciation methods result in higher charges to depreciation expense early in the asset’s life, therefore, lower reported net income than straight- line method.

9-13 Financial statement disclosures Estimates of useful life and residual value The principle of consistency Revision of estimated useful lives

9-14 So depreciation is an estimate. Predicted salvage value Revising Depreciation Rates Over the life of an asset, new information may come to light that indicates the original estimates need to be revised. Predicted useful life

9-15 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. Impairment of Plant Assets

9-16 Update depreciation to the date of disposal. Recording cash received (debit). Removing accumulated depreciation (debit). Removing the asset cost (credit). Recording a gain (credit) or loss (debit). Recording a gain (credit) or loss (debit). Disposal of Plant and Equipment Journalize disposal by:

9-17 If Cash > BV, record a gain (credit). If Cash < BV, record a loss (debit). If Cash = BV, no gain or loss. 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). Removing accumulated depreciation (debit). Removing the asset cost (credit). Recording a gain (credit) or loss (debit). Recording a gain (credit) or loss (debit).

9-18 Disposal at a price above book value Dr Cash XXX Accumulated depreciation XXX Cr Plant asset XXX Gain on disposal of plant asset XXX

9-19 Disposal at a price below book value Dr Cash XXX Accumulated depreciation XXX Loss on disposal of plant assets XXX Cr Plant asset XXX

9-20 Noncurrent assets without physical substance. Useful life is often difficult to determine. Usually acquired for operational use. Often provide exclusive rights or privileges. Intangible Assets Characteristics

9-21 Intangible Assets Patents Copyrights Leaseholds Leasehold Improvements Goodwill Trademarks and Trade Names Record at current cash equivalent cost, including purchase price, legal fees, and filing fees.

9-22 Goodwill It represents an amount that a company has paid to acquire certain favorable intangible attributes as part of an acquisition of another company. It permits the acquisition company operates at a greater-than-normal level of profitability. Positive attributes in goodwill

9-23 Estimating goodwill Estimated value of the business as a whole – fair market value of net identifiable assets = goodwill

9-24 Depletion is calculated using the units-of-production method. Unit depletion rate is calculated as follows: Total Units of Natural Resource Cost – Residual Value Depletion of Natural Resources