1. Chapter 16
Recording and Evaluating Capital Resource Process Activities: Investing
McGraw-Hill/Irwin
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Three Things to Remember Regarding Long-term Assets
Record an asset at it’s initial cost.
Report the asset at it’s carrying value.
Recognize gains/losses when assets are discarded, exchanged (two exceptions), or sold.
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3. What is the Cost of Property, Plant, and Equipment?
PPE is recorded as the total amount required to obtain and get the asset ready for its intended use
Purchase price
Costs incurred to obtain (freight, etc.)
Cost incurred to setup (installation, etc.)

4. What are the Factors Affecting Depreciation Calculations?
Cost
Useful life
Salvage value
Depreciation method

5. How is Depreciation Expense Calculated Using the Different Methods?
Straight-line
(Cost – salvage value)/Useful life (time) = annual depreciation expense
Units-of-production
(Cost – salvage value)/Useful life (units) = depreciation rate
Depreciation rate * annual usage = annual depreciation expense

6. Depreciation Expense Calculated Using the Different Methods Continued
Double-declining balance
2 * straight-line rate = DDB rate
DDB * carrying value = annual depreciation expense

7. What is the Company Doesn’t Purchase (or sell) the Asset at the Beginning (or end) of the Year?
Units-of-production
Multiple the depreciation rate by the actual usage
Straight-line or double-declining balance
Use the mid-year convention or count the time that the asset was in use

8. How Can a Company Dispose of an Asset Before its Useful Life is Over?
Discard
Sell
Exchange
Trade-in

9. What is the Process Involved in Asset Disposals?
Record depreciation to date of disposal
Remove the cost of the asset and the accumulated depreciation from the records
Record the assets received if applicable
Record the cash paid if applicable
Record the loss incurred if applicable
Record the gain if applicable

10. Exchange Example
We have a computer that originally cost $6,000 and has accumulated depreciation of $4,500. We will trade-in this computer for a new computer with a list price of $10,000. The computer company will give us a trade-in allowance of $2,000.
Book value = $6,000 - $4,500 = $1,500.
Cash payment required = $10,000 - $2,000 = $8,000

11. Trade-in Example Continued
Computer received = $10,000
Less assets given up = $9,500
Gain = $500
Entry:
Computer (new) 10,000
Accumulated depreciation ,500
Computer (old) ,000
Cash ,000
Gain

12. What are Depletion and Amortization?
The cost of a natural resource is allocated to expense
Typically, units-of-production method used
Amortization
The cost of an intangible asset is allocated to expense
Typically, straight-line method is used

13. What are Nonoperational Investments?
Debt securities
Trading
Available-for-sale
Held-to-maturity
Equity securities (<20%)
Equity securities (20 – 50%)—equity method
Equity securities (>50%)--consolidation
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