© The McGraw-Hill Companies, Inc., 2002 Slide 11-1 McGraw-Hill/Irwin 11 Plant Assets, Natural Resources, and Intangibles

© The McGraw-Hill Companies, Inc., 2002 Slide 11-2 McGraw-Hill/Irwin Tangible Expected to Benefit Future Periods Actively Used in Operations Property, Plant, and Equipment Plant Assets

© The McGraw-Hill Companies, Inc., 2002 Slide 11-3 McGraw-Hill/Irwin Exh Plant Assets of Selected Companies As a percent of total assets $44 million $32,839 million $7,965 million $16,325 million

© The McGraw-Hill Companies, Inc., 2002 Slide 11-4 McGraw-Hill/Irwin Acquisition 1. Compute cost. Decline in asset value over its useful life Use 2. Allocate cost to periods benefited. 3. Account for subsequent expenditures. Disposal 4. Record disposal Exh Issues in Accounting for Plant Assets

© The McGraw-Hill Companies, Inc., 2002 Slide 11-5 McGraw-Hill/Irwin Acquisition cost Acquisition cost excludes financing charges and cash discounts. All expenditures needed to prepare the asset for its intended use Purchase price Cost of Plant Assets

© The McGraw-Hill Companies, Inc., 2002 Slide 11-6 McGraw-Hill/Irwin Land is not depreciable. Purchase price Real estate commissions Title insurance premiums Delinquent taxes Surveying fees Title search and transfer fees Land

© The McGraw-Hill Companies, Inc., 2002 Slide 11-7 McGraw-Hill/Irwin Purchase price Architectural fees Cost of permits Excavation and construction costs Installation costs Transportation costs Buildings and Equipment

© The McGraw-Hill Companies, Inc., 2002 Slide 11-8 McGraw-Hill/Irwin Land Improvements Parking lots, driveways, fences, walks, etc. Depreciate over useful life

© The McGraw-Hill Companies, Inc., 2002 Slide 11-9 McGraw-Hill/Irwin On January 1, UpCo purchased land and building for $200,000 cash. The appraised values are building, $162,500, and land, $87,500. How much of the $200,000 purchase price will be charged to the building and land accounts? Lump-Sum Asset Purchase The total cost of a combined purchase of land and building is separated on the basis of their relative market values.

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Lump-Sum Asset Purchase

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Depreciation is a cost allocation process that systematically and rationally matches acquisition costs of plant assets with periods benefited by their use. Cost Allocation Acquisition Cost (Unused) Balance Sheet (Used) Income Statement Expense Depreciation

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Income Statement Depreciation Expense Depreciation for the current year Balance Sheet Accumulated Depreciation Total depreciation to date of balance sheet Depreciation

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin The calculation of depreciation requires three amounts for each asset:  Cost.  Salvage Value.  Useful Life. Factors in Computing Depreciation

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin  Straight-line  Units-of-production  Declining balance Depreciation Methods

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin On December 31, 2001, equipment was purchased for $50,000 cash. The equipment has an estimated useful life of 5 years and an estimated residual value of $5,000. SL Cost - Salvage Value Useful life in years Depreciation Expense per Year = Straight-Line Method

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Depreciation Expense per Year = Depreciation Expense per Year = $9,000 $50,000 - $5,000 5 years Straight-Line Method Cost - Salvage Value Useful life in years Depreciation Expense per Year = SL

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Salvage Value Straight-Line Method SL

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Depreciation Expense Depreciation Expense is reported on the Income Statement. Book Value is reported on the Balance Sheet. SL

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Depreciation Per Unit = Cost - Salvage Value Total Units of Production Step 1: Step 2: Depreciation Expense = Depreciation Per Unit × Number of Units Produced in the Period Units-of-Production Method Exh. 11.9

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin On December 31, 2001, equipment was purchased for $50,000 cash. The equipment is expected to produce 100,000 units during its useful life and has an estimated salvage value of $5,000. If 22,000 units were produced in 2002, what is the amount of depreciation expense? Units-of-Production Method

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Step 2: Depreciation Expense = $.45 per unit × 22,000 units = $9,900 Step 1: Depreciation Per Unit = $50,000 - $5, ,000 units = $.45 per unit Units-of-Production Method

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin No depreciation expense if the equipment is idle. Salvage Value Units-of-Production Method

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin DepreciationRepair Expense Early YearsHighLow Later YearsLowHigh Early years’ total expense approximates later years’ total expense. Declining Balance Method

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Step 2: Double-declining- balance rate = 2 × Straight-line depreciation rate Exh Step 3: Depreciation expense = Double-declining- balance rate × Beginning period book value Double-Declining-Balance Method Step 1: Straight-line depreciation rate = 100 % Useful life in periods Ignores salvage value

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin On December 31, 2001, equipment was purchased for $50,000 cash. The equipment has an estimated useful life of 5 years and an estimated residual value of $5,000. Calculate the depreciation expense for 2002 and Double-Declining-Balance Method

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Step 1: Step 2: Double-declining- balance rate = 2 × 20% = 40% Step 3: Depreciation expense = 40% × $50,000 = $20,000 (2002) Straight-line depreciation rate = 100 % 5 years = 20% Double-Declining-Balance Method

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin 2002 Depreciation: 40% × $50,000 = $20, Depreciation: 40% × ($50,000 - $20,000) = $12,000 Double-Declining-Balance Method

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin ($50,000 – $43,520) × 40% = $2,592 Below salvage value Double-Declining-Balance Method

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin We usually have to force depreciation expense in the latter years to an amount that brings BV to salvage value. Double-Declining-Balance Method

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Life in Years Annual Depreciation Straight-Line Life in Years Annual Depreciation Units-of-Production Life in Years Annual Depreciation Double-Declining-Balance Comparing Depreciation Methods

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Exh Comparing Depreciation Method

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Most corporations use the Modified Accelerated Cost Recovery System (MACRS) for tax purposes. MACRS depreciation provides for rapid write-off of an asset’s cost in order to stimulate new investment. Depreciation for Tax Reporting

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin When a plant asset is acquired during the year, depreciation is calculated for the fraction of the year the asset is owned. June 30 Partial Year Depreciation

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Calculate the straight-line depreciation on December 31, 2003, for equipment purchased on June 30, The equipment cost $75,000, has a useful life of 10 years and an estimated salvage value of $5,000. Depreciation= ($75,000 - $5,000) ÷ 10 = $7,000 for a full year Depreciation = $7,000 × 6 / 12 = $3,500 Depreciation= ($75,000 - $5,000) ÷ 10 = $7,000 for a full year Depreciation = $7,000 × 6 / 12 = $3,500 Partial Year Depreciation

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin So depreciation is an estimate. Predicted salvage value Predicted useful life Over the life of an asset, new information may come to light that indicates the original estimates were inaccurate. Revising Depreciation Rates

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin On January 1, 2000, equipment was purchased that cost $30,000, has a useful life of 10 years and no salvage value. During 2003, the useful life was revised to 8 years total (5 years remaining). Calculate depreciation expense for the year ended December 31, 2003, using the straight-line method. Revising Depreciation Rates Book value at date of change Salvage value at date of change Remaining useful life at date of change –

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Revising Depreciation Rates

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Net property, plant, and equipment is the undepreciated cost (book value) of the plant assets. Book value  Market value Reporting Depreciation

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin If the amounts involved are not material, most companies expense the item. Revenue and Capital Expenditures

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Revenue and Capital Expenditures

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Recording cash received (debit) or paid (credit). Removing accumulated depreciation (debit). Update depreciation to the date of disposal. Journalize disposal by: Removing the asset cost (credit). Recording a gain (credit) or loss (debit). Discarding Plant Assets

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Update depreciation to the date of disposal. Journalize disposal by: If Cash > BV, record a gain (credit). If Cash < BV, record a loss (debit). If Cash = BV, no gain or loss. Discarding Plant Assets Recording cash received (debit) or paid (credit). Removing accumulated depreciation (debit). Removing the asset cost (credit). Recording a gain (credit) or loss (debit).

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin On September 30, 2001, Evans Company sells a machine that originally cost $100,000 for $60,000 cash. The machine was placed in service on January 1, It was depreciated using the straight-line method with an estimated salvage value of $20,000 and a useful life of 10 years. Let’s answer the following questions. Selling Plant Assets

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin The amount of depreciation recorded on September 30, 2001, to bring depreciation up to date is: a.$8,000. b.$6,000. c.$4,000. d.$2,000. The amount of depreciation recorded on September 30, 2001, to bring depreciation up to date is: a.$8,000. b.$6,000. c.$4,000. d.$2,000. Selling Plant Assets

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin The amount of depreciation recorded on September 30, 2001, to bring depreciation up to date is: a.$8,000. b.$6,000. c.$4,000. d.$2,000. The amount of depreciation recorded on September 30, 2001, to bring depreciation up to date is: a.$8,000. b.$6,000. c.$4,000. d.$2,000. Annual Depreciation: ($100,000 - $20,000) ÷ 10 Yrs. = $8,000 Depreciation to Sept. 30: 9/12 × $8,000 = $6,000 Selling Plant Assets

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin After updating the depreciation, the machine’s book value on September 30, 2001, is: a.$54,000. b.$46,000. c.$40,000. d.$60,000. After updating the depreciation, the machine’s book value on September 30, 2001, is: a.$54,000. b.$46,000. c.$40,000. d.$60,000. Selling Plant Assets

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin After updating the depreciation, the machine’s book value on September 30, 2001, is: a.$54,000. b.$46,000. c.$40,000. d.$60,000. After updating the depreciation, the machine’s book value on September 30, 2001, is: a.$54,000. b.$46,000. c.$40,000. d.$60,000. Selling Plant Assets

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin The machine’s sale resulted in: a.a gain of $6,000. b.a gain of $4,000. c.a loss of $6,000. d.a loss of $4,000. The machine’s sale resulted in: a.a gain of $6,000. b.a gain of $4,000. c.a loss of $6,000. d.a loss of $4,000. Selling Plant Assets

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin The machine’s sale resulted in: a.a gain of $6,000. b.a gain of $4,000. c.a loss of $6,000. d.a loss of $4,000. The machine’s sale resulted in: a.a gain of $6,000. b.a gain of $4,000. c.a loss of $6,000. d.a loss of $4,000. Selling Plant Assets Now, you are ready to prepare the journal entry to record the sale of the asset.

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Selling Plant Assets

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Accounting for exchanges of similar assets depends on whether the book value of the asset(s) given up is less or more than the market value of the asset(s) received. Exchanging Plant Assets SIMILAR

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Exchanging Plant Assets Accounting for exchanges of similar assets depends on whether the book value of the asset(s) given up is less or more than the market value of the asset(s) received. A loss is recognized when the book value given up is less than the market value received. A gain is not recognized when the book value given up is more than the market value received. SIMILAR

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin On May 30, 2001, Essex Company exchanged a used airplane and $35,000 cash for a new airplane. The old airplane originally cost $40,000, had up-to-date accumulated depreciation of $30,000, and a fair value of $4,000. Exchanging Plant Assets SIMILAR

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin The exchange resulted in a: a.gain of $6,000. b.loss of $6,000. c.loss of $4,000. d. gain of $4,000. The exchange resulted in a: a.gain of $6,000. b.loss of $6,000. c.loss of $4,000. d. gain of $4,000. Exchanging Plant Assets

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin The exchange resulted in a: a.gain of $6,000. b.loss of $6,000. c.loss of $4,000. d. gain of $4,000. The exchange resulted in a: a.gain of $6,000. b.loss of $6,000. c.loss of $4,000. d. gain of $4,000. Exchanging Plant Assets Let’s prepare the journal entry for this exchange.

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Exchanging Plant Assets Remember that losses are always recorded immediately.

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin On May 30, 2001, Essex Company exchanged a used airplane and $35,000 cash for a new airplane. The old airplane originally cost $40,000, had up-to-date accumulated depreciation of $30,000, and a fair value of $14,000. Exchanging Plant Assets SIMILAR

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin The $4,000 gain is not recognized. Exchanging Plant Assets

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Book value of old asset + cash paid $10,000 + $35,000 = $45,000 Exchanging Plant Assets

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Let’s change the subject! Let’s Change the Subject!

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Total cost, including exploration and development, is charged to depletion expense over periods benefited. Examples: oil, coal, gold Extracted from the natural environment and reported at cost less accumulated depletion. Natural Resources

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Depletion is calculated using the units-of-production method. Unit depletion rate is calculated as follows: Total Units of Capacity Cost – Salvage Value Depletion of Natural Resources

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Total depletion cost for a period is: Unit Depletion Rate Number of Units Extracted in Period × Total depletion cost Inventory for sale Unsold Inventory Cost of goods sold Depletion of Natural Resources

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin ABC Mining acquired a tract of land containing ore deposits. Total costs of acquisition and development were $1,000,000 and ABC estimated the land contained 40,000 tons of ore. Depletion of Natural Resources

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin What is ABC’s depletion rate? a.$40 per ton b.$50 per ton c.$25 per ton d.$20 per ton What is ABC’s depletion rate? a.$40 per ton b.$50 per ton c.$25 per ton d.$20 per ton Depletion of Natural Resources

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin What is ABC’s depletion rate? a.$40 per ton b.$50 per ton c.$25 per ton d.$20 per ton What is ABC’s depletion rate? a.$40 per ton b.$50 per ton c.$25 per ton d.$20 per ton Cost ÷ Units $1,000,000 ÷ 40,000 Tons = $25 Per Ton Depletion of Natural Resources

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin For the year ABC mined and sold 13,000 tons. What is the total depletion cost for the year? a.$300,000 b.$325,000 c.$225,000 d.$275,000 For the year ABC mined and sold 13,000 tons. What is the total depletion cost for the year? a.$300,000 b.$325,000 c.$225,000 d.$275,000 Depletion of Natural Resources

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin For the year ABC mined and sold 13,000 tons. What is the total depletion cost for the year? a.$300,000 b.$325,000 c.$225,000 d.$275,000 For the year ABC mined and sold 13,000 tons. What is the total depletion cost for the year? a.$300,000 b.$325,000 c.$225,000 d.$275,000 Depletion cost = 13,000 x $25 = $325,000 Depletion of Natural Resources

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Plant Assets Used in Extracting Natural Resources Specialized plant assets may be required to extract the natural resource. These assets are recorded in a separate account and depreciated.

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Let’s change the subject! Let’s Change the Subject Again!

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Noncurrent assets without physical substance. Useful life is often difficult to determine. Usually acquired for operational use. Intangible Assets Often provide exclusive rights or privileges. Intangible Assets

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin  Patents  Copyrights  Leaseholds  Leasehold Improvements  Franchises and Licenses  Goodwill  Trademarks and Trade Names Record at current cash equivalent cost, including purchase price, legal fees, and filing fees. Accounting for Intangible Assets

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin  Amortize over shorter of economic life or legal life, subject to a maximum of 40 years.  Use straight-line method.  Research and development costs are normally expensed as incurred. Accounting for Intangible Assets

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Occurs when one company buys another company. The amount by which the purchase price exceeds the fair market value of net assets acquired. Goodwill Only purchased goodwill is an intangible asset. Goodwill

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Eddy Company paid $1,000,000 to purchase all of James Company’s assets and assumed liabilities of $200,000. The acquired assets were appraised at a fair value of $900,000. Goodwill

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin What amount of goodwill should be recorded on Eddy Company books? a.$100,000 b.$200,000 c.$300,000 d.$400,000 What amount of goodwill should be recorded on Eddy Company books? a.$100,000 b.$200,000 c.$300,000 d.$400,000 Goodwill

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin What amount of goodwill should be recorded on Eddy Company books? a.$100,000 b.$200,000 c.$300,000 d.$400,000 What amount of goodwill should be recorded on Eddy Company books? a.$100,000 b.$200,000 c.$300,000 d.$400,000 Goodwill

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Exh Goodwill Amortization Period

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Cash Flow Impacts of Long-Term Assets Investing Cash Inflow: Sale of Long-term Assets Investing Cash Outflow: Purchase of Long-term Assets

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Provides information about a company’s efficiency in using its assets. Total Asset Turnover = Net Sales Average Total Assets Total Asset Turnover

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin End of Chapter 11