1. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-1 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 6-1 © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc., All Rights Reserved. Chapter 6 Accounting for and Presentation of Property, Plant, and Equipment, and Other Noncurrent Assets

2. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-2 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 6-2 Noncurrent Assets Lan d Equipment Buildings Intangible Assets Natural Resources 1) Classified as assets because they are owned by the organization. 2)Have the ability to generate revenue beyond one year.

3. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-3 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 6-3 Land is a non- depreciable asset. Purchase price Real estate commissions Title insurance premiumsDelinquent taxes Razing costs of building on the land Title and legal fees Land All costs incurred to get land ready for use are capitalized. L O 1

4. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-4 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 6-4 Purchase price Architectural fees Cost of permits Excavation and construction costs Installation costs Transportation costs Buildings and Equipment All costs incurred to get an asset ready for use are capitalized. L O 1

5. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-5 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 6-5 Depreciation is the allocation of the cost of an asset to the years in which the benefits of the asset are expected to be received. It is an application of the matching concept. Cost Allocation Acquisition Cost (Unused) Balance Sheet (Used) Income Statement Expense Depreciation Does not reflect decline in value. L O 2

6. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-6 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 6-6 Depreciation Methods Straight-Line Methods Straight-line Units of production Accelerated Methods Sum-of-the-years’-digits Declining balance L O 3

7. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-7 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 6-7 Annual Depreciation Expense = Double the Straight-line Depreciation Rate × Book Value at Beginning of Year Declining-Balance Method 1 Life in Years × 2 Since we are using two times the straight-line rate, this is called the Double-Declining- Balance Method. L O 3

8. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-8 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 6-8 Life in Years Annual Depreciation Straight-Line Life in Years Annual Depreciation Units-of-Production Life in Years Annual Depreciation Double-Declining- Balance Comparing Depreciation Methods Total depreciation at end of useful life will be the same regardless of depreciation method L O 3

9. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-9 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 6-9 Most corporations use the Modified Accelerated Cost Recovery System (MACRS) for tax purposes. Most corporations use the Modified Accelerated Cost Recovery System (MACRS) for tax purposes. MACRS depreciation provides for rapid write-off of an asset’s cost in order to stimulate new investment. MACRS depreciation provides for rapid write-off of an asset’s cost in order to stimulate new investment. Depreciation for Tax Reporting Salvage values are ignored Useful lives are set by the Internal Revenue Service L O 4

10. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-10 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 6-10 Maintenance and Repair Expense Preventative maintenance expenditures and routine repair costs are clearly expenses of the period in which they are incurred. L O 5

11. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-11 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 6-11 Recording cash received (debit). Removing accumulated depreciation (debit). Update depreciation to the date of disposal. Journalize disposal by: Removing the asset cost (credit). Recording a gain (credit) or loss (debit). Disposal of Depreciable Assets L O 6

12. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-12 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 6-12 An operating lease is an ordinary lease for the use of an asset that does not involve any attributes of ownership. A capital lease results in the lessee (renter) assuming virtually all of the benefits and risks of ownership for the leased asset. Assets Acquired by Capital Lease L O 7

13. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-13 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 6-13 Buy or Lease an Asset? Buy Lease Leasing the computer is essentially the same as buying it. Both methods of acquiring the asset yield the same economic impact and the same effect on the financial statements. L O 8

14. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-14 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 6-14 Intangible Assets Noncurrent assets without physical substance. Often provide exclusive rights or privileges. Useful life is often difficult to determine. Usually acquired for operational use. L O 9

15. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-15 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 6-15 Occurs when one company buys another company. The amount by which the purchase price exceeds the fair market value of net assets acquired. Goodwill Only ‘purchased’ goodwill is an intangible asset. Goodwill L O 9

16. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-16 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 6-16 Time Value of Money Present Value: the value now of an amount to be received or paid at some future date. Future Value: the value at some future date of an investment made today. Today 1 year 2 years 3 years 4 years $ 1,000Invested at 10% has a future value of $ 1,464 Today 1 year 2 years 3 years 4 years $ 1,000 Is the present value at 10% of $ 1,464 L O 10