Recording and Evaluating Capital Resource Activities: Investing Chapter 16 Recording and Evaluating Capital Resource Activities: Investing

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 Sales Tax 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 if 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 or Trade-in

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

Exchange (Trade-In) 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

Amoritaztion On January 1, 2008, Utica Corporation acquired a patent for $500,000. Utica feels that it will use the patent for its legal life of 20 years. What is the entry to record the amortization of the patent for 2008 and 2009? On what financial statement will the patent be reported and how will its value appear on that statement at the end of 2009?

Ammoritiztions On January 1, 2008, Ithica Corporation acquired a patent for $650,000. Ithica feels that it will use the patent for its legal life of 20 years. What is the entry to record the amortization of the patent for 2008 and 2009? On what financial statement will the patent be reported and how will its value appear on that statement at the end of 2009?

Depletion Depletion uses units-of-production method to calculate depletion expense. In 2010, Dan the hunter owns land in Western Kansas and uses it to hunt pheasants. One day while hunting, he shot his firearm striking the ground and oil shot into the air! Dan contacted a local oil company to survey his land and they estimated that there was over 200,000,000 barrels of oil that will take 10 years to pump out. The oil company paid Dan $3,000,000 for the oil rights on his land. In 2010 no oil was produced from the land but in 2011, 200,000 barrels were produced.   Record the entry of the acquisition of the oil rights. Oil Rights Cash What is the depletion rate? What is the entry for depletion in 2011?

Depletion In 2008 Mary’s Corporation paid $2,000,000 for the oil rights on land in Arkansas. It is estimated that the oil reserves associated with the land are 100,000,000 barrels of oil that will take 20 years to pump out. During 2008 no oil was produced from the land, however, in 2009 1,000,000 barrels of oil are produced. Make the entry to record the acquisition of the oil rights. What is the depletion for 2008 and 2009? Make the entries to record the depletion of the oil for both years.

Depletion In 2008 Collyer Corporation paid $2,500,000 for the oil rights on land in Texas. It is estimated that the oil reserves associated with the land are 100,000,000 barrels of oil that will take 20 years to pump out. During 2008 no oil was produced from the land, however, in 2009 1,000,000 barrels of oil are produced. Make the entry to record the acquisition of the oil rights. What is the depletion for 2008 and 2009? Make the entries to record the depletion of the oil for both years.

Exchange Jackson Corporation has a forklift that it paid $40,000 for and that has a book value today of $10,000. Jackson is going to trade this forklift for a new truck with a market value of $25,000. Jackson is going to give its forklift and $20,000 cash to acquire the new truck. Make the entry to record the acquisition of the new truck.

Disposal of and asset Gfeller Corporation had a machine, which initially cost $25,000 and had accumulated depreciation of $21,000 when it decided to sell the machine for $5,000 cash. Make the entry to record the sale of the machine.

Depreciation Calculate the depreciation for a $56,000 machine with a $2,000 salvage value that can produce 285,000 units over its 10 year life using the following methods. Assume the machine was purchased January 3, 2008. During 2008 the machine produced 3,000 units and in 2009 it produced 18,000 units. Record the amount of depreciation expense for 2008 and 2009 in the spaces below. Make the entry to record the depreciation of this machine using straight-line depreciation for December 31, 2010.

NPV On January 1, 2009, you are considering purchasing a machine that cost $11,500 but that will generate cash payments of $3,000 per year for 5 years starting January 1, 2010. The cost of capital is 12%. A. Use the net present value technique to determine if you should buy the machine?

NPV Continued What would be the answer to the question above if the cash flows were as follows?   January 1, 2010 $8,000 January 1, 2011 $1,000 January 1, 2012 $2,000 January 1, 2013 $3,000 January 1, 2014 $1,000