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

2. 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 1 year

3. 6-3 Decline in asset value over its useful life Primary Issues for Noncurrent Assets Acquisition Accounting for acquisition of the asset. Use Accounting for depreciation of the asset. Accounting for maintenance and repair costs. Disposal Accounting for the disposition of the asset.

4. 6-4 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

5. 6-5 Land Assume that a company pays $250,000 to purchase land and get it ready for use in its business on January 01. The following journal entry would be made to capitalize the $250,000: Assume that a company pays $250,000 to purchase land and get it ready for use in its business on January 01. The following journal entry would be made to capitalize the $250,000: L O 1

6. 6-6 Land If 5 years later, on January 01 that same piece of land is sold for $300,000, the entry to record the sale would be: L O 1

7. 6-7 On January 1, UpCo purchased land and building for $200,000 cash. The appraised values are building, $162,500, and land, $87,500. How much of the $200,000 purchase price will be charged to the building and land accounts? Basket Purchase The total cost of a combined purchase of land and a building is allocated to each asset on the basis of relative market values and each asset is recorded separately. L O 1

8. 6-8 Basket Purchase L O 1

9. 6-9 Purchase price Architectural fees Cost of permits Excavation and construction costs Installation costs Transportation costs Buildings and Equipment L O 1 All costs incurred to get an asset ready for use are capitalized.

10. 6-10 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 L O 2 Does not reflect decline in value

11. 6-11 Depreciation expense is recorded in each fiscal period. Contra-asset Depreciation L O 2 Contra-asset accounts are used to segregate depreciation from original cost

12. 6-12 Balance Sheet Presentation Depreciation Net Book Value (NBV) L O 2

13. 6-13 Income Statement Depreciation Expense Depreciation for the current year Balance Sheet Accumulated Depreciation Total depreciation recorded as of balance sheet date Depreciation L O 2

14. 6-14 Depreciation Methods In the early years of an asset’s life, accelerated depreciation methods result in greater depreciation expense and lower net income than straight-line depreciation. L O 3

15. 6-15 Depreciation Methods Straight-Line Methods Straight-line Units of production L O 3 Accelerated Methods Sum-of-the-years’-digits Declining balance

16. 6-16 EXAMPLE On December 31, 2007, equipment was purchased for $50,000 cash. The equipment has an estimated useful life of 5 years and an estimated residual value of $5,000. SL Straight-Line Method Cost - Estimated Salvage Value Estimated Useful Life Annual Depreciation Expense = L O 3 Formula

17. 6-17 Annual Depreciation Expense = Annual Depreciation Expense = $9,000 $50,000 - $5,000 5 years Straight-Line Method SL Cost - Estimated Salvage Value Estimated Useful Life Annual Depreciation Expense = L O 3

18. 6-18 Salvage Value Straight-Line Method SL L O 3 Depreciation stops when NBV=SALVAGE VALUE

19. 6-19 Depreciation Expense Depreciation Expense is reported on the Income Statement. Book Value is reported on the Balance Sheet. SL L O 3 Straight-Line Method

20. 6-20 Step 2: Annual Depreciation Expense = Depreciation Expense Per Unit Produced × Number of Units Produced during the Year Units-of-Production Method Depreciation Expense Per Unit Produced = Cost - Estimated Salvage Value Estimated Total Units to be Made Step 1: L O 3

21. 6-21 On December 31, 2007, equipment was purchased for $50,000 cash. The equipment is expected to produce 100,000 units during its useful life and has an estimated salvage value of $5,000. If 22,000 units were produced in 2008, what is the amount of depreciation expense? Units-of-Production Method L O 3

22. 6-22 = Units-of-Production Method Depreciation Expense Per Unit Produced $50,000 - $5,000 100,000 Step 1: = $.45 per unit L O 3 Step 2: Annual Depreciation Expense = $.45 per unit × 22,000 $9,900 =

23. 6-23 No depreciation expense is recorded if the equipment is idle. Salvage Value Units-of-Production Method L O 3

24. 6-24 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 2 times the straight-line rate, this is called the Double-Declining- Balance Method. L O 3

25. 6-25 On December 31, equipment was purchased for $50,000 cash. The equipment has an estimated useful life of 5 years and an estimated residual value of $5,000. Calculate the depreciation expense for 2008 and 2009. Declining-Balance Method L O 3

26. 6-26 Double the Straight-line Depreciation Rate 2 × 20% = 40% Depreciation Expense for 2008 40% × $50,000 = $20,000 Declining-Balance Method L O 3 Depreciation Expense for 2009 40% × ($50,000 - $20,000) = $12,000 Net Book Value at Beginning of Year

27. 6-27 ($50,000 – $43,520) × 40% = $2,592 Below salvage value Declining-Balance Method L O 3

28. 6-28 In the latter years, depreciation is limited to NBV X 40%, but the asset cannot be depreciated below salvage value. Declining-Balance Method L O 3 $1,480 = 6,480 – 5,000 salvage value

29. 6-29 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 L O 3 Total Depreciation at end of useful life will be the same regardless of Depreciation method

30. 6-30 Depreciation Methods Used by 670 Companies Source: Accounting Trends and Techniques, 2005, AICPA. L O 3

31. 6-31 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. Depreciation for Tax Reporting L O 4 Salvage values are ignored Useful lives are set by the Internal Revenue Service

32. 6-32 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

33. 6-33 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

34. 6-34 Cash > BV, record a gain (credit). Cash < BV, record a loss (debit). Cash = BV, no gain or loss. Disposal of Depreciable Assets Recording a gain (credit) or loss (debit). L O 6 Determining Gain or Loss

35. 6-35 Selling Plant Assets On 9/30/2008, Evans Company sells a machine Date purchased1/1/2003 Cost$100,000 Depreciation MethodStraight Line Salvage Value$20,000 Estimated Useful Life10 years Selling price$60,000 L O 6

36. 6-36 The amount of depreciation recorded on September 30, 2008, to bring depreciation up to date is: a.$8,000. b.$6,000. c.$4,000. d.$2,000. The amount of depreciation recorded on September 30, 2008, to bring depreciation up to date is: a.$8,000. b.$6,000. c.$4,000. d.$2,000. Selling Plant Assets L O 6

37. 6-37 The amount of depreciation recorded on September 30, 2008, to bring depreciation up to date is: a.$8,000. b.$6,000. c.$4,000. d.$2,000. The amount of depreciation recorded on September 30, 2008, to bring depreciation up to date is: a.$8,000. b.$6,000. c.$4,000. d.$2,000. Annual Depreciation: ($100,000 - $20,000) ÷ 10 Yrs. = $8,000 Depreciation to Sept. 30: 9 / 12 × $8,000 = $6,000 Selling Plant Assets L O 6

38. 6-38 After updating the depreciation, the machine’s net book value on September 30, 2008, is: a.$54,000. b.$46,000. c.$40,000. d.$60,000. After updating the depreciation, the machine’s net book value on September 30, 2008, is: a.$54,000. b.$46,000. c.$40,000. d.$60,000. Selling Plant Assets L O 6

39. 6-39 After updating the depreciation, the machine’s book value on September 30, 2008, is: a.$54,000. b.$46,000. c.$40,000. d.$60,000. After updating the depreciation, the machine’s book value on September 30, 2008, is: a.$54,000. b.$46,000. c.$40,000. d.$60,000. Selling Plant Assets L O 6

40. 6-40 The machine’s sale resulted in: a.a gain of $6,000. b.a gain of $4,000. c.a loss of $6,000. d.a loss of $4,000. The machine’s sale resulted in: a.a gain of $6,000. b.a gain of $4,000. c.a loss of $6,000. d.a loss of $4,000. Selling Plant Assets L O 6

41. 6-41 The machine’s sale resulted in: a.a gain of $6,000. b.a gain of $4,000. c.a loss of $6,000. d.a loss of $4,000. The machine’s sale resulted in: a.a gain of $6,000. b.a gain of $4,000. c.a loss of $6,000. d.a loss of $4,000. Now, you are ready to prepare the journal entry to record the sale of the asset. Selling Plant Assets L O 6

42. 6-42 Selling Plant Assets L O 6

43. 6-43 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

44. 6-44 *Capital Lease Characteristics: 1.Transfers ownership to lessee. 2.Includes nominal purchase price. 3.Lease term is  75% of life of asset. 4.Present value of lease payments is  90% of fair value of asset. Assets Acquired by Capital Lease L O 7 Only 1 criteria needs to be met!

45. 6-45 Computer equipment Cost: $217,765 Issue a 10%, 6 year Note Payable Annual payment: $50,000. Computer Equipment Annual payment: $50,000. Present Value of Lease Payments: $50,000 @ 10%, 6 years = $217,765 Buy or Lease ? Buy or Lease an Asset? Lease Buy L O 8

46. 6-46 Buy or Lease an Asset? Buy Lease L O 8 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.

47. 6-47 Intangible Assets L O 9 Noncurrent assets without physical substance. Often provide exclusive rights or privileges. Useful life is often difficult to determine. Usually acquired for operational use.

48. 6-48  Patents  Copyrights  Leaseholds  Leasehold Improvements  Franchises and Licenses  Trademarks and Trade Names  Goodwill Record at current cash equivalent cost, including purchase price, legal fees, and filing fees. Intangible Assets L O 9

49. 6-49  Amortization for these intangibles:  Patent = 20 years  Registered Trademark = Unlimited life  Copyright = Life of artist + 70 years  Use straight-line method.  Amortize over legal life or useful life, whichever is less Intangible Assets Amortization is the term used to refer to the allocation of the cost of an intangible asset over its useful life. The process is similar to straight-line depreciation. L O 9

50. 6-50 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

51. 6-51 Eddy Company paid $1,000,000 to purchase all of James Company’s assets and assumed liabilities of $200,000. The acquired assets were appraised at a fair value of $900,000. Goodwill L O 9

52. 6-52 What amount of goodwill should be recorded on Eddy Company’s books? a.$100,000. b.$200,000. c.$300,000. d.$400,000. What amount of goodwill should be recorded on Eddy Company’s books? a.$100,000. b.$200,000. c.$300,000. d.$400,000. Goodwill L O 9

53. 6-53 What amount of goodwill should be recorded on Eddy Company’s books? a.$100,000 b.$200,000 c.$300,000 d.$400,000 What amount of goodwill should be recorded on Eddy Company’s books? a.$100,000 b.$200,000 c.$300,000 d.$400,000 Goodwill L O 9

54. 6-54 Goodwill Recently, the FASB issued a non- amortization approach to account for purchased goodwill. Under the impairment approach, goodwill will only be amortized when the initial recorded value of the asset has deteriorated. L O 9

55. 6-55 Total cost, including exploration and development, is charged to depletion expense over periods benefited. Examples: oil, coal, gold Extracted from the natural environment and reported at cost less accumulated depletion. Natural Resources L O 9

56. 6-56 Natural Resources Depletion is the term used to refer to the allocation of the cost of a natural resource over its useful life. The process is similar to units-of-production depreciation. L O 9

57. 6-57 Other Noncurrent Assets Long-term Investments Notes Receivables (with maturities more than a year after the balance sheet date) Long-term Deferred Income Tax Assets When these assets become current, they will be reclassified to current assets. L O 9

58. 6-58 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. L O 10 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

59. 6-59 End of Chapter 6