Chapter 6 Property, Plant & Equipment ; Intangible Assets

Chapter 62 Chapter 6: Objectives Determine the acquisition cost of property, plant and equipment assets. Compute depreciation expense using three depreciation methods. Account for disposals of property, plant and equipment. Identify major types of intangible assets and the key accounting issues related to these assets. Identify the key information needs of decision makers regarding property, plant and equipment.

Chapter 63 Acquisition Costs The acquisition cost of a PP&E asset includes all reasonable and necessary expenditures incurred to obtain the asset and to prepare it for use.

Chapter 64 Relative Market Valuation MarketProportion ofTotalAllocated ValueTotal Market ValueCostCost Land$160, /800 = 20%$600,000 $120,000 Building 400,000400/800 = 50%$600, ,000 Equipment 240,000240/800 = 30%$600, ,000 $800,000$600,000

Chapter 65 Depreciation Salvage value is the estimated value of an asset at the end of its useful life. When computing depreciation, the term depreciable cost is often used, which refers to the asset's acquisition cost less its salvage value. Thus, depreciable cost is the amount of asset cost that is expected to be consumed or "used up" over its useful life.

Chapter 66 Depreciation Methods Straight-line Units-of-production Double-declining-balance

Chapter 67 Depreciation Example Assume that Riverside Construction Company acquired a drill press on January 1, The following data are used to illustrate the three depreciation methods. Equipment: Drill Press (Asset #14-27B) Acquisition Date: January 1, 2002 Acquisition Cost: $68,000 Useful Life: 4 years or 30,000 units Salvage Value: $8,000 Depreciable Cost: $68,000 - $8,000 = $60,000

Chapter 68 Straight-line Method Under the straight-line method, a business allocates an equal amount of depreciation expense to each year of an asset's estimated useful life. Depreciation Expense = Depreciable Cost/ Useful Life in Years Depreciation Expense15,000 Accumulated Depreciation - #1427B15,000 Record annual depreciation on drill press.

Chapter 69 Units of Production Method Under the units of production method, a business allocates an equal amount of depreciation expense to each unit produced by the asset. Depreciation Expense = Depreciable amount / # of expected units*units produced during the period Dec. 31 Depreciation Expense22,000 Accumulated Depreciation - #1427B 22,000 Record annual depreciation on drill press. Assume 11,000 units were produced during year 1.

Chapter 610 Double Declining Balance Under the double-declining-balance method (DDB) of depreciation, annual depreciation expense is computed by multiplying an asset's book value at the beginning of a year by twice the straight-line rate of depreciation. Dec. 31 Depreciation Expense34,000 Accumulated Depreciation - #1427B34,000 Record annual depreciation on drill press.

Chapter 611 Disposal of Assets ¥Depreciate to the date of the disposal or sale. ¥Record any cash or other assets at FMV ¥Reduce the asset and its related accumulated depreciation to zero ¥Record the gain or loss

Chapter 612 Natural Resources Natural resources include long-term assets that are extracted or harvested from or beneath the earth's surface.

Chapter 613 Intangible Assets Long-term assets that do not have a physical form or substance are called intangible assets. Patents Copyrights Trademarks Goodwill

Chapter 614 The general rule is that most intangible assets should be amortized over the shorter of their legal life, their useful life, or forty years (which is an arbitrary period established for financial accounting purposes). Goodwill Goodwill, however, should be analyzed annually to determine any decreases in it value.