1. John Wiley & Sons, Inc. Financial A ccounting, 5e Prepared by Kurt M. Hull, MBA CPA California State University, Los Angeles Weygandt, Kieso, & Kimmel

2. CHAPTER 10 PLANT ASSETS CHAPTER 10 PLANT ASSETS STUDY OBJECTIVES After studying this chapter, you should understand: The cost of plant assets Revising periodic depreciation Depletion of natural resources The concept of depreciation Expenditures during useful life Intangible assets Depreciation methods Disposal of plant assets Reporting & analysis

3. Plant assets are recorded at cost (cost principle). Cost includes all expenditures necessary to acquire the asset and make it ready for use. An asset’s cost includes purchase price, freight costs, and installation costs. STUDY OBJECTIVE 1 THE COST OF PLANT ASSETS STUDY OBJECTIVE 1 THE COST OF PLANT ASSETS Plant asset categories: Land Land improvements Buildings Equipment

4. Land Cash price of property $ 100,000 Net removal cost of warehouse 6,000 Attorney’s fee 1,000 Real estate broker’s commission 8,000 Cost of land $ 115,000 COST OF LAND Costs debited to land account Purchase price Closing costs, broker commissions, accrued taxes, assumed liens, etc. Other costs necessary to make land ready for use.

5. Land improvements are structural additions made to land, such as: 1 parking lots, 2 fencing, 3 lighting 4 sprinklers, etc. Lighting Parking Lot COST OF LAND IMPROVEMENTS

6. COST OF BUILDINGS PurchasedConstructed Purchase priceContract price Closing costsArchitects fees Brokers commissionsPermits & excavation Liens assumedInterest The cost of a building depends on whether it is purchased or constructed.

7. COST OF EQUIPMENT Purchase price Sales tax Freight charges Transit insurance Assembly Installation Testing Other ongoing expenses are expensed as incurred

8. Entry to record the cost of machinery & related expenditures: Factory Machinery 54,500 Cash 54,500 COST OF MACHINERY & JOURNAL ENTRY COST OF MACHINERY & JOURNAL ENTRY

9. Delivery Truck Cash price $ 22,000 Sales taxes 1,320 Painting and lettering 500 Cost of delivery truck $ 23,820 The company also paid an $80 license fee, which is expensed. Account Titles and Explanation Debit Credit Delivery Truck License Expense Prepaid Insurance Cash (To record purchase of delivery truck and related expenditures) 23,820 80 1600 25,500 COST OF TRUCK & JOURNAL ENTRY COST OF TRUCK & JOURNAL ENTRY

10. Erin Danielle Co. purchased equipment and incurred these costs: 1.Cash price$24,000 2.Sales taxes 1,200 3.Insurance during transit 200 4.Installation and testing 400 What amount should be recorded as the cost of this equipment? REVIEW QUESTION COST OF EQUIPMENT REVIEW QUESTION COST OF EQUIPMENT Answer $25,800

11. The allocation of an asset’s cost to expense over its useful life. Matches expenses with revenues. Does not result in an accumulation of cash to replace the asset. Land is not depreciated. STUDY OBJECTIVE 2 THE CONCEPT OF DEPRECIATION STUDY OBJECTIVE 2 THE CONCEPT OF DEPRECIATION Factors affecting depreciation Cost Salvage value Useful life

12. Let’s use the data below in the following examples. The truck was purchased on January 1, 2006. STUDY OBJECTIVE 3 DEPRECIATION METHODS STUDY OBJECTIVE 3 DEPRECIATION METHODS

13. Depreciation is the same for each year of the asset’s useful life. It is measured solely by the passage of time. Cost of asset - salvage value = depreciable cost STRAIGHT-LINE METHOD

14. The formula for computing annual depreciation expense is: Depreciable Cost / Useful Life (in years) = Depreciation Expense Cost Salvage Value Depreciable Cost Useful Life (in Years) Annual Depreciation Expense Depreciable Cost $13,000 - $1,000 = $12,000 $12,000 ÷ 5 = $2,400 STRAIGHT-LINE METHOD

15. Useful life is expressed in terms of the total units of production expected. Total activity is a rough estimate. If productivity varies significantly from one period to another, this method is best at matching of expenses with revenues. UNITS OF ACTIVITY

16. Depreciable Cost Total Units of Activity Depreciable Cost per Unit $12,000 ÷ 100,000 miles = $0.12 Units of Activity during the Year Annual Depreciation Expense Depreciable Cost per Unit $0.12 x 15,000 miles = $1,800 UNITS OF ACTIVITY To use the units-of-activity method, apply the formula below:

17. Produces a decreasing annual depreciation expense over the asset’s useful life. Constant depreciation rate applied to a declining book value. Salvage value ignored in computing depreciation expense. Higher depreciation in early years is matched with higher benefits received in these years. DECLINING BALANCE Book Value Beg of Year DB Rate Annual Depreciation Expense x =

18. Formula for the double declining-balance method. DB Rate Annual Depreciation Expense Book Value $13,000 x 40% = $5,200 DECLINING BALANCE DDB rate is 2X the straight-line rate.

19. This is a change in accounting estimate. No correction of previously recorded depreciation expense. Depreciation expense for current and future is revised. STUDY OBJECTIVE 4 REVISING PERIODIC DEPRECIATION STUDY OBJECTIVE 4 REVISING PERIODIC DEPRECIATION New annual Depreciation expense Remaining Useful life Remaining depreciable cost =

20. Barb’s Florists decides on 1/1/09 to extend the useful life of the truck by one year. Book value is $5,800 ($13,000 - $7,200). Straight-line method used to date. The new annual depreciation is $1,600, calculated as follows: Book value, 1/1/09$ 5,800 Less: Salvage value1,000 Depreciable cost$ 4,800 Remaining useful life3 years(2009-2011) Revised annual depreciation ($4,800 ÷ 3)$ 1,600 REVISING PERIODIC DEPRECIATION

21. STUDY OBJECTIVE 5 EXPENDITURES DURING USEFUL LIFE STUDY OBJECTIVE 5 EXPENDITURES DURING USEFUL LIFE REVENUE EXPENDITURES Ordinary repairs and maintenance Immaterial in amount No effect on useful life of asset Expensed immediately CAPITAL EXPENDITURES Additions and Improvements to assets Material in amount Extend asset’s useful life

22. STUDY OBJECTIVE 6 PLANT ASSET DISPOSALS STUDY OBJECTIVE 6 PLANT ASSET DISPOSALS Asset Retirements Fully depreciated—no gain or loss Not fully depreciated—loss on retirement recorded Asset Sales ProceedsBook ValueGain or loss - =

23. GAIN ON DISPOSAL On July 1, 2006, Wright Company sells office furniture for $16,000 cash. Original cost was $60,000. Accumulated depreciation 12-31-05 is $41,000. Depreciation for the first 6 months of 2006 is $8,000. STEP 1 Record depreciation expense up to date of sale

24. Cash16,000 Accumulated Depr-Office Furniture49,000 Office Furniture60,000 Gain on Disposal5,000 GAIN ON DISPOSAL STEP 2 Compute gain on disposal STEP 3 Record entry

25. Assume Wright sells the office furniture for $9,000. The entry to record the sale and loss is: Cash9,000 Accumulated Depr-Office Furniture49,000 Loss on Disposal2,000 Office Furniture60,000 LOSS ON DISPOSAL

26. Standing timber and underground deposits of oil, gas, and minerals. Distinguishing characteristics: 1 They are physically extracted in operations. 2 They are replaceable only by an act of nature. STUDY OBJECTIVE 7 NATURAL RESOURCES STUDY OBJECTIVE 7 NATURAL RESOURCES

27. DEPLETION Allocation of the cost of natural resources to expense in a rational and systematic manner over the resource’s useful life. Depletion expense is a function of units extracted during the period. Very similar to units of activity method

28. Total Estimated Units Depletion Cost per Unit Total Cost minus Salvage Value Depletion Cost per Unit Number of Units Extracted and Sold Annual Depletion Expense DEPLETION FORMULA Very similar to units of activity method

29. Depletion Expense400,000 Accumulated Depletion400,000 COMPUTING AND RECORDING DEPLETION COMPUTING AND RECORDING DEPLETION The Lane Coal Company invests $5 million in a mine estimated to have 10 million tons of coal and no salvage value. In the first year, 800,000 tons of coal are extracted and sold. $5,000,000 ÷ 10,000,000 = $.50 depletion cost per ton $.50 X 800,000 = $400,000 depletion expense

30. Lane Coal Company Balance Sheet (partial) Coal mine$5,000,000 Less: Accumulated depletion 400,000$4,600,000 FINANCIAL STATEMENT PRESENTATION FINANCIAL STATEMENT PRESENTATION Accumulated depletion is a CONTRA ASSET Similar to accumulated depreciation.

31. Rights, privileges, and competitive advantages that result from the ownership of long lived assets that do not possess physical substance. Intangibles may arise from government grants, acquisition of another business, and private monopolistic arrangements. STUDY OBJECTIVE 8 INTANGIBLE ASSETS STUDY OBJECTIVE 8 INTANGIBLE ASSETS

32. ACCOUNTING FOR INTANGIBLE ASSETS ACCOUNTING FOR INTANGIBLE ASSETS TYPES OF INTANGIBLES Patents Copyrights Trademarks Franchises Goodwill

33. Exclusive right to manufacture, sell, or control an invention for 20 years from the date of grant. Initial cost is the cash or cash equivalent price paid. Legal costs incurred in successfully defending a patent are added to patent account and amortized. Amortization period is shorter of legal/useful life. PATENTS

34. Patent Expense7,500 Patents7,500 REVIEW QUESTION PATENTS REVIEW QUESTION PATENTS National Labs purchases a patent at a cost of $60,000. If the useful life of the patent is 8 years, What is the annual amortization expense? $60,000 / 8 = $7,500

35. COPYRIGHTS Exclusive right to reproduce & sell and artistic or Published work Good for life of creator + 70 years.

36. Word, phrase, jingle, or symbol that ID’s a particular enterprise or product. If purchased, the cost is the purchase price. If developed by a company, cost includes attorney’s fees, registration fees, design costs and successful legal defense fees. TRADEMARKS & TRADENAMES TRADEMARKS & TRADENAMES

37. FRANCHISES & LICENSES FRANCHISES & LICENSES A contractual agreement whereby a FRANCHISOR grants a FRANCHISE the right to sell a product, provide a service, or use certain trademarks or tradenames in a certain geographical area.

38. Excess of cost over the fair market value of the net assets acquired. Not amortized. Periodically reviewed for value impairment. GOODWILL

39. Expenditures incurred to develop new products and processes. These costs are not intangible costs, but are usually recorded as an expense when incurred. R&D COSTS

40. OWENS-ILLINOIS, INC. Balance Sheet - Partial (In millions of dollars) Property, plant, and equipment Timberlands, at cost, less accumulated depletion$ 95.4 Buildings and equipment, at cost$ 2,207.1 Less: Accumulated depreciation1,229.0978.1 Total property, plant, and equipment$ 1,073.5 Intangibles Patents410.0 Total$ 1,483.5 STUDY OBJECTIVE 9 PRESENTATION & ANALYSIS STUDY OBJECTIVE 9 PRESENTATION & ANALYSIS

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42. CHAPTER 10 PLANT ASSETS, NATURAL RESOURCES, AND INTANGIBLE ASSETS