Chapter 16 Recording and Evaluating Capital Resource Process Activities: Investing McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Three Things to Remember Regarding Long-term Assets Record an asset at it’s initial cost. Report the asset at it’s carrying value. Recognize gains/losses when assets are discarded, exchanged (two exceptions), or sold. 16-2

What is the Cost of Property, Plant, and Equipment? PPE is recorded as the total amount required to obtain and get the asset ready for its intended use Purchase price Costs incurred to obtain (freight, etc.) Cost incurred to setup (installation, etc.)

What are the Factors Affecting Depreciation Calculations? Cost Useful life Salvage value Depreciation method

How is Depreciation Expense Calculated Using the Different Methods? Straight-line (Cost – salvage value)/Useful life (time) = annual depreciation expense Units-of-production (Cost – salvage value)/Useful life (units) = depreciation rate Depreciation rate * annual usage = annual depreciation expense

Depreciation Expense Calculated Using the Different Methods Continued Double-declining balance 2 * straight-line rate = DDB rate DDB * carrying value = annual depreciation expense

What is the Company Doesn’t Purchase (or sell) the Asset at the Beginning (or end) of the Year? Units-of-production Multiple the depreciation rate by the actual usage Straight-line or double-declining balance Use the mid-year convention or count the time that the asset was in use

How Can a Company Dispose of an Asset Before its Useful Life is Over? Discard Sell Exchange Trade-in

What is the Process Involved in Asset Disposals? Record depreciation to date of disposal Remove the cost of the asset and the accumulated depreciation from the records Record the assets received if applicable Record the cash paid if applicable Record the loss incurred if applicable Record the gain if applicable

Exchange Example We have a computer that originally cost $6,000 and has accumulated depreciation of $4,500. We will trade-in this computer for a new computer with a list price of $10,000. The computer company will give us a trade-in allowance of $2,000. Book value = $6,000 - $4,500 = $1,500. Cash payment required = $10,000 - $2,000 = $8,000

Trade-in Example Continued Computer received = $10,000 Less assets given up = $9,500 Gain = $500 Entry: Computer (new) 10,000 Accumulated depreciation 4,500 Computer (old) 6,000 Cash 8,000 Gain 500

What are Depletion and Amortization? The cost of a natural resource is allocated to expense Typically, units-of-production method used Amortization The cost of an intangible asset is allocated to expense Typically, straight-line method is used

What are Nonoperational Investments? Debt securities Trading Available-for-sale Held-to-maturity Equity securities (<20%) Equity securities (20 – 50%)—equity method Equity securities (>50%)--consolidation 16-13