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©2008 Pearson Prentice Hall. All rights reserved. 7-1 Plant Assets and Intangibles Chapter 7.

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Presentation on theme: "©2008 Pearson Prentice Hall. All rights reserved. 7-1 Plant Assets and Intangibles Chapter 7."— Presentation transcript:

1 ©2008 Pearson Prentice Hall. All rights reserved. 7-1 Plant Assets and Intangibles Chapter 7

2 ©2008 Pearson Prentice Hall. All rights reserved. 7-2 Categories of Long-Lived Assets Plant assets  Tangible  Include land, buildings and equipment Intangible assets  Carry special rights without physical substance  Include patents, copyrights and trademarks

3 ©2008 Pearson Prentice Hall. All rights reserved. 7-3 Asset Accounts Related Expense Account (Balance Sheet)(Income Statement) Plant Assets LandNone Buildings & EquipmentDepreciation Furniture & FixturesDepreciation Land ImprovementsDepreciation Natural ResourcesDepletion IntangiblesAmortization Plant Asset Terminology

4 ©2008 Pearson Prentice Hall. All rights reserved. 7-4 Learning Objective 1 Determine the cost of a plant asset

5 ©2008 Pearson Prentice Hall. All rights reserved. 7-5 Cost of a Plant Asset Sum of all the costs incurred to bring the asset to its intended use Land Purchase price, commissions, survey & legal costs, removal of old buildings Buildings Purchase price, commissions, sales & other taxes, repairs & renovation for intended use Land Improvements Fencing, paving, security systems, lighting Machinery & Equipment Purchase price, Insurance in transit, sales taxes, installation

6 ©2008 Pearson Prentice Hall. All rights reserved. 7-6 Lump-Sum Purchases Companies purchase several assets in a group for one price Cost is allocated to individual assets by on their market values

7 ©2008 Pearson Prentice Hall. All rights reserved. 7-7 Capital Expenditure vs. Immediate Expense Capital Expenditure Increase capacity or extend life Examples:  Major overhaul  Building additions Immediate Expense Maintain or restore to working order Examples:  Minor repairs  Painting NOTE: Most companies set a dollar amount to decide if an expenditure should be capitalized or expensed

8 ©2008 Pearson Prentice Hall. All rights reserved. 7-8 Measuring Depreciation on Plant Assets Plant assets wear out or grow obsolete over time The cost of a plant asset is allocated to an expense over its life Matches expense of using the asset to the revenues the asset helped produce  Land has an unlimited life and is the only plant asset not depreciation

9 ©2008 Pearson Prentice Hall. All rights reserved. 7-9 Depreciation Depreciation is NOT: a process of valuation  based on market value decline a method of setting aside cash to replace assets

10 ©2008 Pearson Prentice Hall. All rights reserved. 7-10 How to Measure Depreciation Three items needed  Cost of the plant asset  Estimated useful life How long the company expects to use the asset  Estimated residual value Expected cash value of asset at the end of its life Can be zero Depreciable Cost = Asset’s cost – Estimated residual value

11 ©2008 Pearson Prentice Hall. All rights reserved. 7-11 Learning Objective 2 Account for depreciation

12 ©2008 Pearson Prentice Hall. All rights reserved. 7-12 Depreciation Methods Straight-line (S/L) Units-of-production (UOP) Double-declining-balance (DDB)

13 ©2008 Pearson Prentice Hall. All rights reserved. 7-13 Straight-Line Depreciation An equal amount of depreciation assigned to each period Cost – residual Useful life in years = Depreciation expense JOURNAL Date Accounts Debit Credit 12-31 Depreciation Expense $$,$$$ Accumulated Depreciation $$,$$$ Contra-asset

14 ©2008 Pearson Prentice Hall. All rights reserved. 7-14 Impact of Depreciation Each year:  Accumulated Depreciation increases  Book value decreases At the end of the asset’s life: Book value = Cost minus accumulated depreciation Book value = residual value

15 ©2008 Pearson Prentice Hall. All rights reserved. 7-15 Units-of-Production Depreciation per unit is computed Depreciation per unit is multiplied by production for the period Cost – residual Useful life, in units = Depreciation expense per unit Depreciation expense per unit x units produced during the period

16 ©2008 Pearson Prentice Hall. All rights reserved. 7-16 Double-Declining-Balance An accelerated method  Larger expense amounts early in asset’s life 2 Useful life x Book value = Depreciation expense DDB rate (%) x (Cost – Accumulated Depreciation) Accumulated Depreciation increases each year Book value decreases each year

17 ©2008 Pearson Prentice Hall. All rights reserved. 7-17 E7-19 Straight-Line Cost – residual Useful life in years = Depreciation expense $15,000 - $3,000 4 years = $3,000 annual depreciation expense

18 ©2008 Pearson Prentice Hall. All rights reserved. 7-18 E7-19 Units-of-Production Cost – residual Useful life, in miles = Depreciation expense per mile $15,000 - $3,000 100,000 miles = $0.12 depreciation per mile YearMilesDepreciation 1 34,000 $0.12 $ 4,080 2 28,000 $0.12 $ 3,360 3 18,000 $0.12 $ 2,160

19 ©2008 Pearson Prentice Hall. All rights reserved. 7-19 E7-19 Double-Declining-Balance Yr Beginning Book Value DDB rate Depr. Exp. Accum. Depr. Ending Book Value 1 $ 15,00050% $ 7,500 2 50% $ 3,750 $ 11,250 $ 3,750 3 ** $ 750 $ 12,000 $ 3,000 How is the DDB rate computed? Why wasn’t the DDB rate used in year three? How was the $750 computed?

20 ©2008 Pearson Prentice Hall. All rights reserved. 7-20 E7-19 YrS/LUOPDDB 1 $3,000 $4,080 $7,500 2 $3,000 $3,360 $3,750 3 $3,000 $2,160 $ 750 Which method would provide larger expense amounts in year one? Which method reflects usage of the asset? Which method would be easiest for companies to use?

21 ©2008 Pearson Prentice Hall. All rights reserved. 7-21 E7-19

22 ©2008 Pearson Prentice Hall. All rights reserved. 7-22 ©2009 Prentice Hall 5-22 Learning Objective 3 Select the best depreciation method

23 ©2008 Pearson Prentice Hall. All rights reserved. 7-23 Depreciation for Tax Purposes Most companies use straight-line for external reporting Most companies use accelerated depreciation for tax purposes  Modified Accelerated Cost Recovery System (MACRS)  Larger deductions early in assets’ lives helps reduce taxes and increase cash flow

24 ©2008 Pearson Prentice Hall. All rights reserved. 7-24 Partial Year Depreciation Companies purchase plant assets when needed–not just at beginning of year To compute depreciation for a partial year 1. Compute depreciation for a full year 2. Multiply by fraction of the year the asset is owned Not applicable to units-of-production  Life is not based on years If an asset was purchased May 1, what fraction would be used?

25 ©2008 Pearson Prentice Hall. All rights reserved. 7-25 Changing Useful Life of Asset A company may change useful based on new information or experience Called a change in estimate Depreciation formula needs to be revised Book value at time of change Remaining useful life

26 ©2008 Pearson Prentice Hall. All rights reserved. 7-26 Learning Objective 4 Analyze the effect of a plant asset disposal

27 ©2008 Pearson Prentice Hall. All rights reserved. 7-27 Disposal of Plant Assets When a company is finished using an asset, the asset can be:  Discarded  Sold  Exchanged Before accounting for the disposal:  Depreciation is updated  Final book value is determined

28 ©2008 Pearson Prentice Hall. All rights reserved. 7-28 Discarding Plant Asset Accumulated depreciation and cost of asset removed from records Loss recorded (unless asset is fully depreciated and no residual value) JOURNAL Date Accounts Debit Credit Accumulated depreciation Loss on disposal of plant asset Plant asset (equipment, bldg)

29 ©2008 Pearson Prentice Hall. All rights reserved. 7-29 Selling a Plant Asset If cash received > Book valueGAIN If cash received < Book value LOSS Book value = _________________________ Income Statement account Similar to revenue; increases net income Income Statement account Similar to an expense; decreases net income How is book value computed?

30 ©2008 Pearson Prentice Hall. All rights reserved. 7-30 JOURNAL DateAccountsDebitCredit Cash Accumulated Depreciation Loss on sale of equipment Equipment Record loss on sale of equipment Cash Accumulated Depreciation Equipment Gain on sale of equipment Record gain on sale of equipment

31 ©2008 Pearson Prentice Hall. All rights reserved. 7-31 E7-23 Book value at time of sale: Cost $ 8,700 Accumulated depreciation 2004 ($8,700 x 2/5) $ 3,480 2005 ($8700 - 3480) x 2/5 $ 2,088 January - September x 9 /12 $1,566 $5,046 Book value September 30 $3,654 Cash received $2,500 Loss on sale $1,154

32 ©2008 Pearson Prentice Hall. All rights reserved. 7-32 JOURNAL DateAccountsDebitCredit Cash$2,500 Accumulated Depreciation$5,046 Loss on sale of equipment$1,154 Equipment $8,700 Record loss on sale of equipment E7-23

33 ©2008 Pearson Prentice Hall. All rights reserved. 7-33 Learning Objective 5 Account for natural resources and depletion

34 ©2008 Pearson Prentice Hall. All rights reserved. 7-34 Natural Resources Come from the earth  Oil, minerals, coal and timber Depletion records the expense related to extracting the natural resource  Similar to units-of-production depreciation JOURNAL Date Accounts Debit Credit 12-31 Depletion Expense $$,$$$ Accumulated Depletion $$,$$$

35 ©2008 Pearson Prentice Hall. All rights reserved. 7-35 Learning Objective 6 Account for intangible assets and amortization

36 ©2008 Pearson Prentice Hall. All rights reserved. 7-36 Intangible Assets Represent special rights and benefits  Have no physical form  Very valuable in today’s information-driven society  Examples include patents and copyrights

37 ©2008 Pearson Prentice Hall. All rights reserved. 7-37 Categories of Intangibles Finite lives that can be measured  Amortized using the straight-line method  Intangible asset is reduced by amortization No Accumulated Amortization account Indefinite Lives  Not amortized  Tested annually for loss in value

38 ©2008 Pearson Prentice Hall. All rights reserved. 7-38 Specific Intangibles Patents Federal grants that give holder exclusive right to produce and sell an invention for 20 years Trademarks & Trade Names Distinctive identification of product or service; a logo or catch phrase Copyrights Exclusive right to sell a book, music, file or other work of art; lasts for the life of the author + 70 years Franchises & Licenses Right to sell a product or service with specific Conditions, such as chain restaurants

39 ©2008 Pearson Prentice Hall. All rights reserved. 7-39 Goodwill Very specific meaning in accounting Only recorded when an entire business is purchased  Purchase price exceeds fair value of net assets of business Represents earning power of purchased business Not amortized

40 ©2008 Pearson Prentice Hall. All rights reserved. 7-40 E7-27 Purchase price of MySpace$18 Fair value of net assets Current assets$10 Long-term assets$15 Total liabilities($24)$1 Goodwill$17

41 ©2008 Pearson Prentice Hall. All rights reserved. 7-41 E7-27 JOURNAL DateAccountsDebitCredit Current assets$10 Long-term assets$15 Goodwill$17 Total liabilities $24 Cash $18

42 ©2008 Pearson Prentice Hall. All rights reserved. 7-42 Research & Development Costs Not an intangible asset Required to be expensed as incurred  No guarantee expenditures will result in a successful project

43 ©2008 Pearson Prentice Hall. All rights reserved. 7-43 Learning Objective 7 Report plant asset transactions on the statement of cash flows

44 ©2008 Pearson Prentice Hall. All rights reserved. 7-44 Plant Assets and Cash Flow Statement Operating section  Depreciation, amortization and depletion are noncash expense  Added back to net income to determine operating cash flows Investing section  Purchases of plant assets and intangibles result in an outflow of cash  Sales results in inflow of cash

45 ©2008 Pearson Prentice Hall. All rights reserved. 7-45 End of Chapter Seven ©2009 Prentice Hall 7-45

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