2. Plant Assets, Natural Resources, & Intangibles
Chapter 7

3. Plant Asset Terminology
Asset Account
(Balance Sheet)
Related Expense Account
(Income Statement)
Plant assets
Land
None
Buildings, Machinery, & Equipment
Depreciation
Furniture & Fixtures
Land Improvements
Natural Resources
Depletion
Intangibles
Amortization

4. Learning Objective One
Measure and account for the cost of plant assets

5. Measuring the Cost of a Plant Asset
Sum of all costs incurred to bring the asset to its intended use

6. Land Purchase price Commissions Survey & legal fees
Back property taxes paid
Grading and removing unwanted buildings

7. Buildings Constructed Purchased
Architectural fees, building permits, and contractors’ charges
Materials, labor, and overhead
Interest on funds borrowed
Purchased
Purchase price
Broker’s commission
Taxes paid
Costs to repair and renovate

8. Equipment Purchase price (after discounts) Transportation
Insurance in transit
Sales and other taxes
Purchase commission
Installation and testing

9. Leasehold Improvements
Land Improvements
Leasehold Improvements
Parking lots
Driveways
Signs
Fences
Sprinkler systems
Improvements to lease property
Depreciated or amortized over lease term

10. Lump-Sum (Basket) Purchases
Several assets purchased in a group at one price
Total cost is allocated based on their market values
Asset
Market value
Total market value
% of total market value
Total cost
Cost of each asset
Land
$100,000
$500,000
20%
$450,000
$90,000
Building
$400,000
80%
$360,000
100% = =

11. Learning Objective Two
Distinguish a capital expenditure from an immediate expense

12. Distinction between the two requires judgment
CAPITAL EXPENDITURES
EXPENSES
Increase capacity or extend useful life
Cost is added to an asset account
Do not extend capacity or useful life
Maintain or restore working order
Cost is recorded as an expense
Distinction between the two requires judgment

13. Learning Objective Three
Measure and record depreciation on plant assets

14. Depreciation Allocation of plant asset’s cost to expense over its life
Supports matching principle
Causes:
Physical wear and tear
Obsolescence
Land is NOT depreciated
Unlimited useful life

15. A fund to replace assets
Depreciation is NOT:
Valuation process
A fund to replace assets

16. Amounts Needed for Depreciation
Cost
Useful life
Residual value

17. Depreciation Methods Straight-line Units-of-production
Double-declining-balance

18. Annual Depreciation expense
Straight-Line (SL)
Cost – Residual value
Annual Depreciation expense
Useful life, in years

19. Accumulated depreciation increases
Book value decreases
Asset’s final book value = Residual value

20. Units-of-Production (UOP)
Cost – Residual value
Depreciation per unit
Useful life in units
Depreciation per unit
Activity for period (units)
Depreciation Expense

21. Double-Declining-Balance (DDB)
DDB rate
Book value
Straight-line rate x 2 (or
2/life in years)
Cost minus accumulated depreciation

22. Residual Value: DDB Ignored until final year Final year depreciation
Book value at the beginning final year
Residual value

23. DDB Differences with other methods
First-year depreciation is based on asset’s full cost
Final year depreciation is a “plug” amount needed to reduce book value to residual value

24. Comparing Depreciation Methods
Straight-line
Best for assets that generate revenue evenly
Best meets matching principle
Units-of-production
Best for assets that wear out because of use
Double-declining-balance
Best for assets that generate revenue early in useful life

26. Depreciation Methods Used

27. $4,025 depreciation expense per year
Exercise 7-19A
Straight-line
Cost – Residual value
Useful life, in years
$4,025 depreciation expense per year
$18,600 - $2,500
4 years

28. Exercise 7-19A Units-of-production $18,600 - $2,500 35,000 miles
Cost – Residual value
Depreciation per unit
Useful life in units
$18,600 - $2,500
$0.46 per mile
35,000 miles

29. Activity for period (units, miles)
Exercise 7-19A
Units-of-production
Depreciation per unit
Activity for period (units, miles)
Miles
Depreciation expense
13,500
$6,210
12,000
$5,520
3,500
$1,610
6,000
$2,760
$0.46 per mile

30. Exercise 7-19A DDB rate 50% Double-declining-balance 2/Life in years
Beginning
Book value
Depr. Exp.
Accum. Depr.
Ending 1
18,600
9,300 2
4,650
13,950 3
4,650
2,150
2,325
16,100
16,275
2,500
2,325
Less than residual value

31. Plant Asset Issues Income taxes affected by depreciation Long lives
Gains and losses incurred when sold
Future impact on adoption of international standards

32. Depreciation for Tax Purposes
Tax savings can be reinvested in business
Tax deductions decrease tax payments
Accelerated deprecation provides fastest tax deductions

33. Partial Year Depreciation
Months from date of purchase to end of year
Annual depreciation 12

34. Changing Useful Life Remaining depreciable book value
(New) Annual Depreciation
(New) Estimated remaining useful life

35. Learning Objective Four
Analyze the effect of a plant asset disposal

36. Disposal of Plant Assets
Bring depreciation up to date to:
Measure asset’s final book value
Record expense up to date of sale
Remove asset and related accumulated depreciation account from books

37. Disposing of Asset for No Proceeds
JOURNAL
Date
Accounts and explanation
Debit
Credit
Accumulated depreciation
Equipment
Disposed of fully depreciated asset

38. Selling a Plant Asset GAIN LOSS
If cash received is greater than book value
GAIN
If cash received is less than book value
LOSS

39. Exercise 7-22A < Loss = $1,054 Cash received: $2,600
2/5-year life = 40% DDB Rate
Year
Beginning
Book value
Depr. Exp.
Accum. Depr.
Ending
2012
8,700
3,480
5,220
2013
1,566
5,046
3,654
$5,220 x 40% x 9/12
Loss = $1,054
Cash received: $2,600
Book value: $3,654
<

40. Exercise 7-22A Depreciation expense 1,566 Accumulated depreciation
JOURNAL
Date
Accounts
Debit
Credit
Sep 30
Depreciation expense
1,566
Accumulated depreciation
Cash
2,600
5,046
Loss on sale of plant assets
1,054
Fixtures
8,700

41. Exchanging Plant Assets
Old assets traded in for new assets
Nonmonetary exchange
Cost of plant asset received is equal to the fair values of assets given up
Old asset and any cash paid
Difference between fair value of old asset and its book value is a gain or loss

42. Learning Objective Five
Apply GAAP for natural resources and intangible assets

43. Natural Resources Include iron ore, oil, and timber
Assets are physically used – depletion
Distinct from depreciation
Computed like units-of-production
If all of extracted resource is sold
Amount depleted is recorded as an expense
If portion of extracted resource is not immediately sold
Amount becomes inventory

44. Accounting for Depletion
JOURNAL
Accounts
Debit
Credit
Oil Reserve
X,XXX
Cash
Oil Inventory
Cost of Oil Sold

45. Intangible Assets No physical form Two categories Carry special rights
Include patents, copyrights, and franchises
Two categories
Finite lives
Amortization recorded
Straight-line method
Intangible asset reduced directly
Indefinite lives
Tested for loss in value (impairment)

46. Accounting for Specific Intangibles
Patents
Copyrights
Trademarks and trade names
Franchises and licenses
Goodwill

47. Patents Granted by federal government
Give holder exclusive right to produce and sell an invention
Last 20 years

48. © Copyrights Granted by the federal government
Give holder exclusive rights to reproduce and sell a book, musical composition, film, or other work of art
Extend 70 years after creator’s life
Useful life is usually very short

49. Trademarks and Trade Names
Distinctive identification of a product or service
Also include advertising slogans
Useful life may be set by contract
Or indefinite life
Indicated by TM or ®

50. Franchises and Licenses
Granted by private business or government
Give purchase right to sell a product or service with specified conditions
Include restaurant chains and sports organizations
Have indefinite life

51. Goodwill Only recorded when an entire company is purchased
Defined as the excess of the purchase price of the company over the market value of its net assets
Represents earning power of company purchased
Not amortized

52. Learning Objective Six
Explain the effect of an asset impairment on the financial statements

53. Asset Impairment
Both tangible and intangible assets must be tested yearly for impairment
Occurs when expected future cash flows less than asset’s book value
Carrying value adjusted to fair value

54. Impairment Steps > Net book value Estimated future cash flows1.
Net book value
Estimated future cash flows
>
If yes, asset is impaired and proceed to step 2 2.
Net book value
Fair value
Impairment loss

55. Recording Impairment Loss
JOURNAL
Date
Account
Debit
Credit
Impairment Loss on Long-term asset
X,XXX
Long-term asset

56. Learning Objective Seven
Analyze rate of return on assets

57. (Beginning total assets + Ending total assets)/2
Return on Assets (ROA)
Net income
Average total assets
(Beginning total assets + Ending total assets)/2

58. DuPont Analysis Net income Net profit margin Net sales Net sales
Total asset turnover
Average total assets

59. ROA Using DuPont Analysis
Net profit margin
Total asset turnover
Return on assets

60. Learning Objective Eight
Analyze the cash flow impact of long-lived asset transactions

61. Long-Lived Asset Transactions on the Cash Flow Statement
Item
Section
Description
Depreciation
Operating
Added to net income as a reconciling item
Sales of long-lived assets
Investing
Cash proceeds from sales of plant assets (inflow)
Purchase of long-lived assets
Cash purchases (outflow)

62. End of Chapter Seven