College Accounting Heintz & Parry 20 th Edition

Chapter 18 Accounting for Long-Term Assets

1 Determine the cost of property, plant, and equipment.

LONG-TERM ASSETS Property, plant, and equipment –Tangible and used in the operations of the business –Also called plant assets or fixed assets –Examples: Land, buildings, furniture and equipment Wasting assets –Natural resources consumed in the operation of the business Intangible assets –Long-term assets that have no physical substance –Examples: Patents, copyrights, trademarks

LONG-TERM ASSETS Long-term assets (except land) gradually wear out or are used up as time passes –The portion that has been used up or worn out is recognized as an expense Plant asset – “depreciation” Natural resources – “depletion” Intangible assets – “amortization” –Process of cost allocation Not a process of valuation Not intended to make the assets reflect their market values on the balance sheet

LAND Cost includes: –All amounts spent to purchase the land and prepare it for its intended use, including costs for: Legal and real estate fees Cost of removing old buildings Grading the land Special tax assessments

LAND IMPROVEMENTS Costs related to land that are not permanent in nature –Cost includes: Planting trees and shrubs Installing fences Paving parking areas –Depreciated over their expected useful lives

BUILDINGS Cost includes: –Purchase price If purchase price includes land, the cost of land and building must be determined and accounted for separately –Legal fees and related taxes If the building is constructed, the cost includes material, labor, architectural, and engineering fees –Insurance premiums and interest on loans during construction Interest on loans DURING CONSTRUCTION is debited to the asset account, but interest AFTER the asset is put into service is debited to an expense account.

EQUIPMENT Cost includes: –Purchase price –Transportation charges –Insurance while in transit –Installation costs –Any other costs that are incurred up to the point of placing the asset in service

2 Explain the nature and purpose of depreciation.

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. DATEDESCRIPTIONPRDEBITCREDIT Depr. Expense—Delivery Equip DEPRECIATION Reported on the income statement Dec

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. DATEDESCRIPTIONPRDEBITCREDIT Depr. Expense—Delivery Equip Accum. Depr.—Delivery Equip DEPRECIATION Deducted from the asset account “Delivery Equipment” on the balance sheet Dec

DEPRECIATION Two major types: Physical depreciation –The loss of usefulness because of deterioration Functional depreciation –The loss of usefulness because of inadequacy or obsolescence

3 Compute depreciation using the straight-line, declining-balance, sum-of- the-years’-digits, and units- of-production methods.

DEPRECIATION Cost – The sum of all amounts spent to acquire an asset and prepare it for its intended use The new asset had a cost of $10,000. What did we pay for the new asset?

DEPRECIATION Useful life – The amount of service expected to be obtained from an asset Be careful! We only want to know how long our company will use the asset, not how long the asset could last. How long will the asset be used?

DEPRECIATION Useful life – The amount of service expected to be obtained from an asset We plan on using it for 4 years. How long will the asset be used?

DEPRECIATION Salvage value – The estimated scrap, or market, value for the asset on its expected disposal date We feel we can sell it for $1,000 after using it for 4 years. What can we get for it when we’re through with it?

FOUR COMMON DEPRECIATION METHODS The most commonly used depreciation methods for financial reporting purposes are: –Straight-line method –Declining-balance method –Sum-of-the-years’-digits method –Units-of-production method

STRAIGHT-LINE METHOD Depreciation is recognized evenly over the years of the asset’s life. FORMULA: (Cost – Salvage Value)($10,000 – $1,000) Cost minus salvage value is also called “depreciable cost.”

STRAIGHT-LINE METHOD Depreciation is recognized evenly over the years of the asset’s life. FORMULA: (Cost – Salvage Value) Est. Useful Life ($10,000 – $1,000) 4 Years $2,250 per year

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. STRAIGHT-LINE METHOD YEAR DEPR. EXPENSE ACCUM. DEPR. BOOK VALUE Book Value = Cost – Accumulated Depreciation

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. STRAIGHT-LINE METHOD YEAR DEPR. EXPENSE ACCUM. DEPR. BOOK VALUE $10,000 BOOK VALUE = COST at time of purchase

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. STRAIGHT-LINE METHOD YEAR DEPR. EXPENSE ACCUM. DEPR. BOOK VALUE $10,000 Same depreciation each year 1$2,250 7, ,250

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. STRAIGHT-LINE METHOD YEAR DEPR. EXPENSE ACCUM. DEPR. BOOK VALUE $10,000 First year’s depreciation + Second year’s depreciation ($2,250 + $2,250) 1$2,250 7, ,250 4,500

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. STRAIGHT-LINE METHOD YEAR DEPR. EXPENSE ACCUM. DEPR. BOOK VALUE $10,000 Cost – Accumulated Depreciation ($10,000 – $4,500) 1$2,250 7, ,250 4,500 5,500

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. STRAIGHT-LINE METHOD YEAR DEPR. EXPENSE ACCUM. DEPR. BOOK VALUE $10,000 First year’s depreciation + Second year’s depreciation + Third year’s depreciation ($2,250 + $2,250 + $2,250) 1$2,250 7, ,250 4,500 5, ,250 6,750

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. STRAIGHT-LINE METHOD YEAR DEPR. EXPENSE ACCUM. DEPR. BOOK VALUE $10,000 1$2,250 7, ,250 4,500 5, ,250 6,750 3, ,250 9,000 The entire depreciable cost has been expensed by the end of the fourth year.

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. STRAIGHT-LINE METHOD YEAR DEPR. EXPENSE ACCUM. DEPR. BOOK VALUE $10,000 1$2,250 7, ,250 4,500 5, ,250 6,750 3, ,250 9,000 1,000 Book value is now equal to the salvage value.

DECLINING-BALANCE METHOD Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years. FORMULA: Depreciation Rate

DEPRECIATION RATE Commonly, the depreciation rate is twice the straight-line rate. STRAIGHT-LINE RATE FORMULA: 100% Useful Life 100% 4 Years Straight-line rate is 25%

DECLINING-BALANCE METHOD Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years. FORMULA: Twice the straight-line rate 2  25% Depreciation Rate 50%

DECLINING-BALANCE METHOD Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years. FORMULA: In year 1, Book Value = Cost Depreciation Rate Book Value at Beg. of Year  50%  $10,000

DECLINING-BALANCE METHOD Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years. $5,000 First year’s depreciation = FORMULA: Depreciation Rate Book Value at Beg. of Year  50%  $10,000

DECLINING-BALANCE METHOD Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years. Let’s compute the second year’s depreciation. FORMULA: Depreciation Rate Book Value at Beg. of Year 

DECLINING-BALANCE METHOD Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years. The rate stays the same. FORMULA: Depreciation Rate Book Value at Beg. of Year  50% 

DECLINING-BALANCE METHOD Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years. Cost Accumulated Depreciation – $10,000– $5,000 FORMULA: Depreciation Rate Book Value at Beg. of Year  50%  $5,000

DECLINING-BALANCE METHOD Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years. Second year’s depreciation = $2,500 Let’s look at the third year’s depreciation. FORMULA: Depreciation Rate Book Value at Beg. of Year  50%  $5,000

DECLINING-BALANCE METHOD Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years. $2,500 Cost–Accumulated Depreciation $10,000 – ($5,000 + $2,500) FORMULA: Depreciation Rate Book Value at Beg. of Year  50% 

DECLINING-BALANCE METHOD Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years. $2,500 Third year’s depreciation = $1,250 Let’s look at the fourth and final year. FORMULA: Depreciation Rate Book Value at Beg. of Year  50% 

DECLINING-BALANCE METHOD Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years. $1,250 Book value is down to $1,250. The goal is to reduce it to the salvage value by the end of fourth year. That means only $250 of depreciation to go! FORMULA: Depreciation Rate Book Value at Beg. of Year  50% 

DECLINING-BALANCE METHOD Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years. FORMULA: Depreciation Rate Book Value at Beg. of Year   50%$1,250 $625 is too much! Book value would fall below the salvage value. The fourth year’s depreciation is limited to $250. $625

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. DECLINING-BALANCE METHOD YEAR DEPR. EXPENSE ACCUM. DEPR. BOOK VALUE $10,000 1$5,000 5, ,500 7,500 2, ,250 8,750 1, ,000 1,000 Just like the straight-line method, total depreciation is $9,000.

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. DECLINING-BALANCE METHOD YEAR DEPR. EXPENSE ACCUM. DEPR. BOOK VALUE $10, What if the asset had been bought on April 1 of year 1?

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. DECLINING-BALANCE METHOD YEAR DEPR. EXPENSE ACCUM. DEPR. BOOK VALUE $10, Year 1: $10,000  50% = $5,000; $5,000  9/12 = $3,750 $3,750 6,250

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. DECLINING-BALANCE METHOD YEAR DEPR. EXPENSE ACCUM. DEPR. BOOK VALUE $10, Year 2: $6,250  50% = $3,125 $3,750 6,250 3,125 6,875 3,125

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. DECLINING-BALANCE METHOD YEAR DEPR. EXPENSE ACCUM. DEPR. BOOK VALUE $10, Year 3: $3,125  50% = $1,563 $3,750 6,250 3,125 6,875 3,125 1,563 8,438 1,562

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. DECLINING-BALANCE METHOD YEAR DEPR. EXPENSE ACCUM. DEPR. BOOK VALUE $10, Only $562 of depreciation to go before book value reaches the salvage value. $3,750 6,250 3,125 6,875 3,125 1,563 8,438 1,562

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1,562 8,438 3,125 6,875 1,0009, DECLINING-BALANCE METHOD YEAR DEPR. EXPENSE ACCUM. DEPR. BOOK VALUE $10, $3,750 6,250 3,125 1,563 Year 4: $1,562 × 50% = $781 Too much! Limited to only $562

SUM-OF-THE-YEARS’ DIGITS METHOD Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years. An accelerated depreciation method, but not as accelerated as declining- balance method. FORMULA: (Cost – Salvage Value)  Remaining Useful Life ($10,000 – $1,000)  4 Year 1 = 4 years remaining

FORMULA: (Cost – Salvage Value)  Remaining Useful Life Sum-of-the-Years’ Digits ($10,000 – $1,000)  = SUM-OF-THE-YEARS’ DIGITS METHOD Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years. An accelerated depreciation method, but not as accelerated as declining- balance method.

SUM-OF-THE-YEARS’ DIGITS METHOD Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years. An accelerated depreciation method, but not as accelerated as declining- balance method. FORMULA: (Cost – Salvage Value)  Remaining Useful Life Sum-of-the-Years’ Digits ($10,000 – $1,000)  Year 1 depreciation is $3,

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. SUM-OF-THE-YEARS’-DIGITS METHOD Year Depreciable Cost Rate Annual Depr. $10,000 Accum. Depr. Book Value 1 $9, Cost – Salvage Value

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. SUM-OF-THE-YEARS’-DIGITS METHOD Year Depreciable Cost Rate Annual Depr. $10,000 Accum. Depr. Book Value 1 $9, /10$3,600 6,400 9,000 Depreciable cost does not change.

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. SUM-OF-THE-YEARS’-DIGITS METHOD Year Depreciable Cost Rate Annual Depr. $10,000 Accum. Depr. Book Value 1 $9, /10$3,600 6,400 9,000 3/10 It is the rate that decreases over time.

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. SUM-OF-THE-YEARS’-DIGITS METHOD Year Depreciable Cost Rate Annual Depr. $10,000 Accum. Depr. Book Value 1 $9, /10$3,600 6,400 9,000 3/ ,000 1/10 2/10 9,000 8,100 6,300 3,700 1,900 1,000 9,000 2,700 1,800 No adjustment is needed in the fourth year.

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. SUM-OF-THE-YEARS’-DIGITS METHOD Year Depreciable Cost Rate Annual Depr. $10,000 Accum. Depr. Book Value ,000 $9, ,000 What if this asset had been bought April 1st?

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. SUM-OF-THE-YEARS’-DIGITS METHOD Year Depreciable Cost Rate Annual Depr. $10,000 Accum. Depr. Book Value ,000 $9, ,000 4/10 $2,700 7,300 $9,000  4/10  9/12

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. SUM-OF-THE-YEARS’-DIGITS METHOD Year Depreciable Cost Rate Annual Depr. $10,000 Accum. Depr. Book Value ,000 $9, ,000 $2,700 7,300 4/10 3/10 2,925 5,625 4,375 $9,000  4/10  3/12 = $900; $9,000  3/10  9/12 = $2,025; $900 + $2,025 = $2,925 4/10

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. SUM-OF-THE-YEARS’-DIGITS METHOD Year Depreciable Cost Rate Annual Depr. $10,000 Accum. Depr. Book Value ,000 $9, ,000 4/10 $2,700 7,300 4/10 3/10 2,925 5,625 4,375 3/10 2/10 2,025 7,650 2,350 The remaining years are computed in the same manner: 3 months at one rate and 9 months at another.

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. SUM-OF-THE-YEARS’-DIGITS METHOD Year Depreciable Cost Rate Annual Depr. $10,000 Accum. Depr. Book Value ,000 $9, ,000 4/10 $2,700 7,300 4/10 3/10 2,925 5,625 4,375 3/10 2/10 2,025 7,650 2,350 2/10 1/10 1,125 8,775 1, ,000 1,000 Year 5 is only 3 months.

UNITS-OF-PRODUCTION METHOD Depreciation is based on the extent to which the asset was used during the year. FORMULA: (Cost – Salvage Value) ($10,000 – $1,000) The asset (a vehicle) is expected to be driven 90,000 miles in its useful life. Step #1 Compute depreciation per unit. Estimated Useful Life in Units 90,000 =

UNITS-OF-PRODUCTION METHOD Depreciation is based on the extent to which the asset was used during the year. FORMULA: (Cost – Salvage Value) ($10,000 – $1,000) Step #1 Compute depreciation per unit. Estimated Useful Life in Units 90,000 Depreciation per Mile = $.10 =

UNITS-OF-PRODUCTION METHOD Depreciation is based on the extent to which the asset was used during the year. FORMULA: Step #2 Multiply depreciation per unit by the number of units produced or consumed this year. 24,000 miles $.10/mile  Year 1 depreciation is $2,400.

UNITS-OF-PRODUCTION METHOD Depreciation is based on the extent to which the asset was used during the year. FORMULA: Step #2 Multiply depreciation per unit by the number of units produced or consumed this year. 24,000 miles $.10/mile  All years are computed in the same manner.

DEPRECIATION METHODS FOR FEDERAL INCOME TAX The method used depends on when the asset was purchased: –Before 1981 Straight-line, declining-balance, sum-of-the- years’-digits, or units-of-production methods –1981–1986 Accelerated cost recovery system (ACRS) –After 1986 Modified accelerated cost recovery (MACRS)

4 Account for repairs, maintenance, additions, improvements, and replacements to plant and equipment.

REPAIRS AND MAINTENANCE If the repairs do not extend the life of the asset or improve its usefulness: –Record as an expense –Examples: Replacement of minor parts Lubrication Cleaning

ADDITIONS AND IMPROVEMENTS Accounted for in two ways: –If it increases the usefulness of the asset and will provide benefits in future periods: Debit the asset account, increasing book value Depreciate over the remaining life of the asset –If it extends the useful life of the asset, but does not increase its usefulness or efficiency: Debit Accumulated Depreciation, increasing book value

ADDITIONS AND IMPROVEMENTS If at the beginning of 20-2, the company replaced a disk drive on computer A at a cost of $400. EXAMPLE: A business purchased two computers on January 1, Both computers were purchased for $6,500, are estimated to be used for 3 years, and have salvage values of $500. The business uses the straight-line method in computing depreciation. The replacement extends the life of the computer but doesn’t increase its usefulness.

ADDITIONS AND IMPROVEMENTS Computer A 6,500 Accum. Depr.— Computer A 2,000 12/31/ /1/-2 1,600 The replacement is debited to Accumulated Depreciation.

ADDITIONS AND IMPROVEMENTS Computer A 6,500 Accum. Depr.— Computer A 2,000 12/31/ /1/-2 1,600 Book value is now $4,900 ($6,500 – $1,600).

ADDITIONS AND IMPROVEMENTS Computer A 6,500 Accum. Depr.— Computer A 2,000 12/31/ /1/-2 1,600 Depreciation for the remaining two years: (Book value – Salvage value)/Remaining life ($4,900 – $500)/2 years = $2,200 per year

ADDITIONS AND IMPROVEMENTS On January 1, 20-2, the company added a new tape drive backup unit to computer B at a cost of $400. Example: A business purchased two computers on January 1, Both computers were purchased for $6,500, are estimated to be used for 3 years, and have salvage values of $500. The business uses the straight-line method in computing depreciation. Adding new components increases the usefulness of the computer.

ADDITIONS AND IMPROVEMENTS Computer B 6,500 Accum. Depr.— Computer B 2,000 1/1/-2 Debited directly to the asset account 400

ADDITIONS AND IMPROVEMENTS Computer B 6,500 Accum. Depr.— Computer B 2,000 1/1/-2 Book value is now $4,900 ($6,900 – $2,000) ,900

ADDITIONS AND IMPROVEMENTS Computer B 6,500 Accum. Depr.— Computer B 2,000 1/1/ ,900 Depreciation for the remaining two years: (Book value – Salvage value)/Remaining life ($4,900 – $500)/2 years = $2,200 per year

5 Account for the disposition of property, plant, and equipment.

PLANT ASSET DISPOSALS A plant asset can be disposed of in several ways: –Discarded or retired –Sold –Exchanged or traded in for another asset

DISCARDING OR RETIRING PLANT ASSETS EXAMPLE: A printer with a cost of $800 and accumulated depreciation of $800 is discarded. There is no gain or loss since the book value is $0.

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. DATEDESCRIPTIONPRDEBITCREDIT Accum. Depr.—Office Equip DISCARDING OR RETIRING PLANT ASSETS Since the company no longer has the printer, its cost and related depreciation are removed from the books. Office Equipment Discarded printer

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. DATEDESCRIPTIONPRDEBITCREDIT DISCARDING OR RETIRING PLANT ASSETS What if the accumulated depreciation had been $720 instead?

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. DATEDESCRIPTIONPRDEBITCREDIT Accum. Depr.—Office Equip DISCARDING OR RETIRING PLANT ASSETS Loss of $80 Office Equipment Discarded printer Loss on Discarded Office Equip

SELLING PLANT ASSETS EXAMPLE: A printer with a cost of $800 and accumulated depreciation of $720 is sold for $80. We’re giving up an asset with a value of $80 to get $80 cash.

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. DATEDESCRIPTIONPRDEBITCREDIT Accum. Depr.—Office Equip SELLING PLANT ASSETS No gain or loss Office Equipment Sold printer Cash

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. DATEDESCRIPTIONPRDEBITCREDIT Accum. Depr.—Office Equip SELLING PLANT ASSETS If we sold the printer for $120: Gain of $40 ($120 cash – $80 book value) Office Equipment Sold printer Cash Gain on Sale of Printer 40 00

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. DATEDESCRIPTIONPRDEBITCREDIT Accum. Depr.—Office Equip SELLING PLANT ASSETS If we sold the printer for $50: Loss of $30 ($80 book value – $50 cash) Office Equipment Sold printer Cash Loss on Sale of Printer

EXCHANGE OR TRADE-IN OF PLANT ASSETS Book value of $1,100 ($8,000 – $6,900) Old Delivery Truck 8,000 Cost Accum. Depr.— Old Truck 6,900 EXAMPLE: An old delivery truck is traded-in for a new delivery truck with a fair market value of $30,000.

EXCHANGE OR TRADE-IN OF PLANT ASSETS Example: An old delivery truck is traded-in for a new delivery truck with a fair market value of $30,000. Old Delivery Truck 8,000 Cost Accum. Depr.— Old Truck 6,900 If a $1,000 trade-in is granted on the old truck: $100 loss

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. DATEDESCRIPTIONPRDEBITCREDIT EXCHANGE OR TRADE-IN OF PLANT ASSETS The new delivery truck is entered on the books at its market value. 30, Delivery Equipment (New)

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. DATEDESCRIPTIONPRDEBITCREDIT Accum. Depr.—Delivery Equip , EXCHANGE OR TRADE-IN OF PLANT ASSETS Accumulated Depreciation on the old truck is removed from the books. 30, Delivery Equipment (New)

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. DATEDESCRIPTIONPRDEBITCREDIT Accum. Depr.—Delivery Equip , EXCHANGE OR TRADE-IN OF PLANT ASSETS The loss is recognized. It will be shown on the income statement. Loss on Exchange of Equipment 30, Delivery Equipment (New)

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. DATEDESCRIPTIONPRDEBITCREDIT Accum. Depr.—Delivery Equip , EXCHANGE OR TRADE-IN OF PLANT ASSETS The cost of the old delivery truck is removed from the books. Loss on Exchange of Equipment 30, Delivery Equipment (New) Delivery Equipment (Old) 8,000 00

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. DATEDESCRIPTIONPRDEBITCREDIT Accum. Depr.—Delivery Equip , EXCHANGE OR TRADE-IN OF PLANT ASSETS Cash is credited for the amount paid, $29,000 ($30,000 price – $1,000 trade-in). Loss on Exchange of Equipment 30, Delivery Equipment (New) Delivery Equipment (Old) 8, Cash 29,000 00

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. DATEDESCRIPTIONPRDEBITCREDIT Accum. Depr.—Delivery Equip , EXCHANGE OR TRADE-IN OF PLANT ASSETS What if the trade-in had been $1,500 instead? Loss on Exchange of Equipment 30, Purchased a new truck Delivery Equipment (New) Delivery Equipment (Old) 8, Cash 29,000 00

EXCHANGE OR TRADE-IN OF PLANT ASSETS $1,500 trade-in – $1,100 book value $400 gain

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. DATEDESCRIPTIONPRDEBITCREDIT Accum. Depr.—Delivery Equip , EXCHANGE OR TRADE-IN OF PLANT ASSETS Note that for TAX purposes, the new equipment would be valued at $29,600 and NO gain would be recognized on the exchange. Purchased a new truck Delivery Equipment (New) Delivery Equipment (Old) 8, Cash 28, , Gain on Exchange

6 Explain the nature of, purpose of, and accounting for depletion.

NATURAL RESOURCES EXAMPLE: A coal mine is acquired at a cost of $1,000,000. No salvage value. Approximately 1,000,000 tons of coal are expected to be mined. Natural resources are “depleted” over time using units-of-production method.

NATURAL RESOURCES EXAMPLE: A coal mine is acquired at a cost of $1,000,000. No salvage value. Approximately 1,000,000 tons of coal are expected to be mined. (Cost – Salvage Value)/Tons $1,000,000 1,000,000 tons Depletion is $1.00/ton

NATURAL RESOURCES EXAMPLE: During the current year, 180,000 tons of coal were mined and sold. 180,000  $1.00 tons per ton $180,000 depletion

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. DATEDESCRIPTIONPRDEBITCREDIT NATURAL RESOURCES 180,000 Depletion Expense—Mine Accum. Depletion—Mine 180,000 Very similar to depreciation adjusting entries

7 Explain the nature of and accounting for intangible assets.

INTANGIBLE ASSETS Patents –Give the inventor the exclusive right to produce, use, and sell an invention for a period of 20 years If a company purchases a patent, the amount paid equals the cost of the patent If it develops its own patent, only the fees paid to the government and patent attorneys equals the cost Cost is “amortized” over the patent’s useful life using the straight-line method

INTANGIBLE ASSETS Copyrights –Give the exclusive right to the reproduction and sale of a literary, artistic, or musical composition for the life of the holder plus 50 years If a company purchases a copyright, the amount paid equals the cost of the copyright If it develops its own copyrighted content, the cost of obtaining the copyright, itself, is an ordinary expense Cost is “amortized” over a copyright’s useful life using the straight-line method or in proportion of actual sales

INTANGIBLE ASSETS Trademarks –Trade names to identify a firm’s merchandise are protected by registering them with the United States Patent Office If a company purchases a trademark, the amount paid equals the cost of the trademark If it develops its own trademark, only the cost to register it is recorded as an asset. Cost is then “amortized” over the trademark’s useful life using the straight-line method