Investments in Property, Plant, and Equipment and in Intangible Assets Investments in Property, Plant, and Equipment and in Intangible Assets C H A P T E R 10

Learning Objective 1 Identify the two major categories of long- term operating assets: property, plant, and equipment and intangible assets.

Define and Provide Examples of Operating Assets

Name and Define the Two Types of Operating Assets

Diagram the Time Line of Business Issues

Learning Objective 2 Understand the factors important in deciding whether to acquire a long-term operating asset.

Define Capital Budgeting

What is the Time Value of Money?

Learning Objective 3 Record the acquisition of property, plant, and equipment through a simple purchase as well as through a lease, self- construction, and as part of the purchase of several assets at once.

Assets Acquired by Purchase Frank’s Fruit Farm purchased a fork lift for use in its wholesale business. Frank’s paid $12,000 cash for the fork lift. Make the necessary journal entry for this purchase.

Assets Acquired by Purchase Frank’s Fruit Farm purchased a fork lift for use in its wholesale business. Frank’s paid $12,000 for the fork lift. What entry is necessary if Frank paid $3,000 cash and borrowed the remaining $9,000? Make the appropriate entry.

What is a Lease?

Match Lease Terms The party that is granted the right to use the property under the terms of a lease. Lessee Lessor Operating Lease Capital Lease The owner of property that is leased (rented) to another party. A simple rental agreement. A leasing transaction that is recorded as a purchase by the lessee.

Operating Lease Frank’s Fruit Farm leases a building with monthly rental payments of $1,000. Make the appropriate entry if rent is paid in cash the first month.

Capital Lease Frank’s Fruit Farm enters into a non-cancelable lease agreement that requires lease payments of $100,000 a year for 20 years. At the end of 20 years, Frank’s will own the property. Make the appropriate entries.

Classifying Leases Transfer of Ownership? Bargain Purchase Option? Term  75% of Useful Life? PV Payment  90% of FMV? Capital Lease Operating Lease Respond YES or NO. If the item below occurs, is the lease a capital lease?

Assets Acquired by Self Construction Self-constructed assets recorded at cost include all expenditures incurred to build the asset and make it ready for its intended use Costs include materials used to build the asset the construction labor capitalized interest some reasonable share of the general company overhead

Acquisition of Several Assets at Once— Define the Terms Below Basket Purchase Relative Fair Market Value Method

Example: Basket Purchase AssetFMV % of Total Value Cost When two or more assets are acquired at a single price, the prices are allocated on the “relative fair market value” method. In this example, Frank’s Fruit Farm purchased land and a new sorting facility at a total cost of $3,600,000. Prepare the entry to record the purchase.

Learning Objective 4 Compute straight-line and units-of- production depreciation expense for plant and equipment.

Define these Depreciation Terms Depreciation Book Value Salvage Value

Methods of Depreciation Straight-Line The cost of the asset is allocated equally over the periods of an asset’s estimated useful life. Units-of-Production The cost of an asset is allocated to each period on the basis of the productive output or use of the asset during the period.

Frank’s Fruit Farm purchased a fork lift on January 1 for transporting fresh produce to and from the warehouse. The following facts apply: Acquisition cost $24,000 Estimated salvage value.....$ 2,000 Estimated life: In years years In miles driven ,000 miles Compute Frank’s annual depreciation expense using both the straight-line and units-of-production methods and determine the appropriate journal entries. Example: Depreciation Methods

What is the Formula for the Straight-Line Method? Annual Depreciation Expense = = = Do the calculation. Make the Journal Entry

What is the Formula for the Units-of-Production Method? Per Unit Depreciation = Expense = Depreciation Expense = = Do the calculation. Make the Journal Entry

Comparison of Methods Year Straight-Line Units-of-Production Total $ 5,500 5,500 $22,000 $ 4,400 6,600 7,700 3,300 $22,000

Partial-Year Depreciation What are the two steps to compute depreciation expense for less than a full year?

More Depreciation Terms Defined. Natural Resources Depletion

Example: Depletion Hard Hat’s mine contains an estimated 200,000 tons of coal. The depletion expense for each ton of coal is $6. Determine the journal entry if 12,000 tons are mined.

Learning Objective 5 Account for repairs and improvements of property, plant, and equipment.

Expenditures on Existing Assets Ordinary expenditures Capitalized expenditures

Learning Objective 6 Identify whether a long-term operating asset has suffered a decline in value and record the decline.

What is the Impairment Test? Sum of future cash flows (from asset) Book value (of asset) IMPAIRMENT Record asset at its fair value NO IMPAIRMENT Asset continues to be reported at book value Sum of future cash flows less than book value

Learning Objective 7 Record the discarding and selling of property, plant, and equipment.

Discarding Property, Plant, and Equipment Frank’s Fruit Farm purchased a conveyor system for $15,000. It has a 5-year life, no salvage value, and is depreciated on a straight-line basis. If Frank’s scraps the conveyor after 5 full years, what is the appropriate entry?

Discarding Property, Plant, and Equipment Frank’s Fruit Farm purchased a conveyor system for $15,000. It has a 5-year life, no salvage value, and is depreciated on a straight-line basis. If Frank pays $300 to have the conveyor dismantled and removed, what is the appropriate entry?

Selling Property, Plant, and Equipment Frank’s Fruit Farm purchased a conveyor system for $15,000. It has a 5-year life, no salvage value, and is depreciated on a straight-line basis. If Frank scraps the conveyor after only 4 years of service, there will be a loss of $3,300. What is the appropriate journal entry?

Selling Property, Plant, and Equipment Frank’s Fruit Farm purchased a conveyor system for $15,000. It has a 5-year life, no salvage value, and is depreciated on a straight-line basis. If the conveyor is sold for $600 after 5 full years of service, what is the appropriate journal entry?

Selling Property, Plant, and Equipment Frank’s Fruit Farm purchased a conveyor system for $15,000. It has a 5-year life, no salvage value, and is depreciated on a straight-line basis. If the conveyor is sold for $600 after only four years of service, Frank’s will experience a loss of $2,400. Make the appropriate entry.

Learning Objective 8 Account for the acquisition and amortization of intangible assets and understand the special difficulties associated with accounting for intangibles.

What are Intangible Assets? Rights and privileges that are Amortization

Define Each of These Intangible Assets. Patent Franchise License

Amortizing a Patent PATENT Benefit $200,000 Patent with useful life of 8 years: Calculate the amortization for each of the eight years.

Goodwill An intangible asset that exists when a business is valued at more than the fair market value of its net assets, usually due to: strategic location reputation good customer relations similar factors Equal to the excess of the purchase price over the fair market value of the net assets purchased.

Inventory$750,000 Long-term operating assets220,000 Other assets25,000 Liabilities (18,000) Total Net Assets$977,000 Example: Goodwill Frank’s Fruit Farm purchased Farmers’ Market for $1,200,000. At the time of the purchase, Farmers’ recorded the following market values of its assets and liabilities:

Example : Goodwill Frank’s Fruit Farm purchased Farmers’ Market for $1,200,000. Make the journal entry in Frank’s books to appropriately recognize goodwill. Inventory ,000 Long-Term Operating Assets ,000 Other Assets ,000 Goodwill ,000 Liabilities ,000 Cash ,200,000 Purchased Farmers’ Market for $1,200,000.

Learning Objective 9 Use the fixed asset turnover ratio as a measure of how efficiently a company is using its property, plant, and equipment.

Define Fixed Asset Turnover

Expanded Material Learning Objective 10 Compute declining- balance and sum-of- the-years’-digits depreciation expense for plant and equipment.

Accelerated Depreciation Define each term. Declining-Balance Method Sum-of-the-Years’-Digits Method (SYD)

Accelerated Depreciation Methods Frank’s Fruit Farm purchased a fork lift for $12,000. The fork lift has a salvage value of $2,000 and a useful life of 4 years. Compute depreciation using both the DDB and SYD depreciation methods. X 2 = Double- Declining Balance Depreciation Expense Book Value Asset’s Life in Years Book Value = Cost – Accumulated Depreciation Sum of the years of the asset’s life Sum-of- the-Year’s- Digits (Cost – Salvage Value) Current Year / ( )

Expanded Material Learning Objective 11 Account for changes in depreciation estimates.

Change in Estimates Frank’s purchased a fork lift for $12,000 with a $2,000 salvage value Fruit Farm a 4-year useful life. After 3 years, better information reveals the fork lift has a 6-year useful life and a $3,000 salvage value. Calculate a new depreciation expense for the next three years.

This completes Chapter 10