Acquisition Cost of P,P&E All costs necessary to acquire asset and prepare for intended use Examples: Purchase price Taxes paid at time of purchase Transportation charges Installation Costs Purchase Price + Taxes LO 2 © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Group Asset Purchases Allocated Cost % of Fair Market Cost Market Allocate cost of lump-sum purchase based on fair market values $75,000 $25,000 Allocated Cost Land = $30,000 Building = $90,000 Fair Market Value 75% X 25% X % of Market Value Cost $100,000 = © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. LO 3

Capitalization of Interest Interest can be included as part of the cost of an asset if: company constructs asset over time, and borrows money to finance construction © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Land Improvements Land improvements with a limited life should be kept separate from the land since: Land improvements that have a limited life would be subject to depreciation over the useful life of the improvement Land has an unlimited life and therefore is not subject to depreciation © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Depreciation of P,P & E via Match costs of assets With periods benefited via Straight-Line Accelerated Methods Units of Production © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. LO 5

Straight-Line Method Allocates cost of asset evenly over its useful life $9,000 3-year life $3,000 Year 1 Year 2 Year 3 © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Units-of-Production Method Allocate asset cost based on number of units produced over its useful life Depreciation = $ per unit © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Double-Declining-Balance Method Double the straight-line rate on a declining balance (book value) Accelerated method - higher amount of depreciation in early years Straight-line Rate © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

$20,000 cost – $2,000 residual value = $18,000 to be depreciated Depreciation Example Calculate ExerCo’s depreciation of the machine for 2012–2016 using the units-of-production and double-declining- balance depreciation methods. $20,000 cost – $2,000 residual value = $18,000 to be depreciated © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Straight-Line Depreciation Depreciation = Cost – Residual Value Life = $20,000 – $2,000 5 years = $3,600/year $18,000 5-year life $3,600 2012 $3,600 2013 $3,600 2014 $3,600 2015 $3,600 2016 © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Units-of-Production Depreciation Depreciation = Cost – Residual Value per unit Life in Units = $20,000 – $2,000 18,000 = $ 1.00 per unit © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Units-of-Production Depreciation ExerCo’s depreciation in 2012: 4,000 units x $1/unit = $ 4,000 © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Double-Declining-Balance Depreciation DDB rate = (100% / useful life) x 2 = (100% / 5 years) x 2 = 40% Initially ignore residual value © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Double Declining-Balance Depreciation Beginning Ending Year Rate Book Value Depreciation Book Value 2012 40% $20,000 $8,000 $12,000 2013 40% 12,000 4,800 7,200 2014 40% 7,200 2,880 4,320 2015 40% 4,320 1,728 2,592 2016 40% 2,592 592 2,000 $18,000 Final year’s depreciation = amount needed to equate book value with salvage value = Residual Value © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Reasons for Choosing Straight-Line Depreciation Simplicity Reporting to stockholders Comparability Bonus plans © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Reasons for Choosing Accelerated Methods Technological rate of change and competitiveness Minimize taxable income Comparability © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Changes in Depreciation Estimates Recompute depreciation schedule using new estimates Record prospectively (i.e., change should affect current and future years only) © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. LO 6

Change in Estimate Example: $20,000 machine originally expected to be depreciated over 5 years. After 2 years, useful life is increased to 7 years. planned $3,600 $3,600 $3,600 2012 2013 2014 2015 2016 Depreciation revise estimate © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Change in Estimate Example: $10,800 ($12,800 remaining book value – $2,000 salvage) allocated over remaining life $3,600 $2,160 $2,160 $2,160 2012 2013 2014 2015 2016 2017 2018 revise estimate Depreciation © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Capital vs. Revenue Expenditures Balance Sheet Capital Expenditure Treat as asset addition to be depreciated over a period of time Income Statement Revenue Expenditure Expense immediately © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. LO 7

Capital vs. Revenue Expenditures Category Example Asset or Expense Normal maintenance Repainting Expense Minor repair Replace spark plugs Expense Major repair Replace a vehicle’s engine Asset* Addition Add a wing to a building Asset *if life or productivity is enhanced © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Capital Expenditures Example: $12,800 remaining book value + $3,000 capital expenditure depreciated prospectively over remaining life $3,600 $2,300 $2,300 $2,300 2012 2013 2014 2015 2016 2017 2018 replace engine © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Disposal of Operating Assets Record depreciation up to date of disposal Compute gain or loss on disposal Proceeds > Book Value = Gain Proceeds < Book Value = Loss © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. LO 8

Disposal of Operating Assets Example: Sell truck (cost $20,000; accumulated depreciation $9,000) for $12,400 Sale price $ 12,400 Less book value: Asset cost $20,000 Less: accumulated depreciation 9,000 ( 11,000) Gain on sale $ 1,400 © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Disposal of Operating Assets Example: Sell truck (cost $20,000; accumulated depreciation $9,000) for $10,000 Sale price $ 10,000 Less book value: Asset cost $20,000 Less: accumulated depreciation 9,000 ( 11,000) Loss on sale $ 1,000 © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Gain/Loss on Sale of Operating Asset Gain or Loss on Sale of Operating Asset appears on the Income Statement Gain or Loss on Sale of Operating Asset is reported as Other Income/Expense since it does not constitute the company’s ongoing or central activity © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

IFRS and Property, Plant, and Equipment There are two important differences between U.S. GAAP and International Accounting Standards(IFRS): IFRS requires estimates of residual value and the life of the asset be reviewed at least annually. FASB standards does not require the annual review International Standards allow (but do not require) companies to revalue these assets to reflect their fair market values. FASB does not allow this revaluing to fair market value. © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Long-term assets with no physical properties Intangible Assets Long-term assets with no physical properties Patents Copyrights Trademarks Goodwill LO 9 © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Acquisition Cost (ie. legal fees, registration fees, etc.) Intangible Assets Includes cost to acquire and prepare for intended use Acquisition Cost (ie. legal fees, registration fees, etc.) Purchase Price + + © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Research & Development Must be expensed in period incurred Difficult to identify future benefits © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Amortization of Intangibles Normally recorded using straight-line method Reported net of accumulated amortization Amortized over legal or useful life, whichever is shorter © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. LO 10

Amortization of Intangibles Journal entry: Patent Amortization Expense 2,000 Accumulated Amortization—Patent 2,000 To record amortization of patent for one year. Nike’s annual amortization: Patent approval costs $10,000 Divided by: Lesser of legal or useful life 5 years Annual amortization $ 2,000 © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Intangibles with Indefinite Life Amortization is not recognized on an asset with an indefinite life eg. Trademarks, goodwill and broadcast licenses For intangibles with indefinite lives, impairment of these assets must be considered. If an impairment has occurred, a loss should be recognized © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

IFRS and Intangible Assets International Standards are more flexible in allowing the use of market values for intangible assets for those assets with an “active market” FASB requires all research and development costs be treated as an expense while International Standards require research cost be expensed and development costs can be capitalized if certain criteria are met © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Long-term Assets and the Statement of Cash Flows Operating Activities Net income xxx Depreciation and amortization + Gain on sale of asset - Loss on sale of asset + Investing Activities Purchase of asset - Sale of asset + Financing Activities © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. LO 11

Analyzing Long-term Assets Average Life = Property, Plant & Equipment Depreciation Expense What is the average depreciable period (or life) of the company’s assets? © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. LO 12

Analyzing Long-term Assets Average Age = Accumulated Depreciation Depreciation Expense Are assets old or new? © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Analyzing Long-term Assets Asset Turnover = Net Sales Average Total Assets How productive are the company’s assets? © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

End of Chapter 8