Chapter 9-1

REPORTING AND ANALYZING LONG-LIVED ASSETS

9

Chapter 9-2

Plant assets are resources that have

have physical substance (a definite size and shape),

intangible assets (no physical substance) start on slide 29

are used in the operations of a business,

are not intended for sale to customers (not inventory),

are expected to provide service to the company for a

number of years, except land which is expected to last

indefinitely (it does not decline in service over time).

Plant Assets – Property, Plant & EquipmentPlant Assets – Property, Plant & EquipmentPlant Assets – Property, Plant & EquipmentPlant Assets – Property, Plant & Equipment

Sometimes referred to as PP&E; Property; Property, Plant, and Equipment; Plant and Equipment; or Fixed Assets.

Chapter 9-3

The Cost Principle - requires that companies record plant

assets at cost (what you paid for it)…. Plus, all the costs

necessary to make it ready for its intended use.

Determining the Determining the CostCost of Plant Assets of Plant AssetsDetermining the Determining the CostCost of Plant Assets of Plant Assets

Revenue expenditures – when the useful life is 1 year or less,

costs are expensed immediately and go on the Income

Statement (e.g., changing the trucks oil, window wipers, etc.)

Capital expenditures – when the useful life is longer than 1

year, costs are added directly into the asset account and

expensed (depreciated) over time. The costs are recorded on

the Balance Sheet (e.g., the total cost to buy a truck).

Chapter 9-4

Debit the land account for all the necessary costs incurred in making land ready for its intended use.

Land (does not get depreciated because it rarely declines in service over its useful life, see slide 13).

Determining the Determining the CostCost of Land of LandDetermining the Determining the CostCost of Land of Land

Costs typically include the cash purchase price, plus

- closing costs such as title and attorney’s fees,

- real estate brokers’ commissions, and

- unpaid (accrued) property taxes, if any, and other

liens assumed by the purchaser.

- costs to remove unwanted buildings/fixtures net of

any proceeds from salvaging, plus any clearing,

draining, filling or grading the land for use.

Chapter 9-5

Assume Papa Ron’s buys land (property, real estate) at a

cash cost of $100,000. The property contains an old house

that’s removed at a cost of $7,500 less $1,500 cash from

selling some salvaged materials for a net cost of $6,000!

Additional costs (expenditures) are a $1,000 attorney’s fee to

clear the title and a $8,000 real estate broker’s commission.

What amount should Papa Ron’s report as the cost of the

land? See the next slide…

Determining the Cost of Determining the Cost of LandLandDetermining the Cost of Determining the Cost of LandLand

Chapter 9-6

What amount should be reported on Papa Ron’s balance sheet as the cost of the land.

Determining the Cost of Determining the Cost of LandLandDetermining the Cost of Determining the Cost of LandLand

Cash price of property

Net removal cost of house (7,500 – 1,500)

Attorney's fees 1,000

6,000

$100,000

$115,000Cost of the Land!

Real estate broker’s commission 8,000

The Net cost of removal is $6,000. $7,500 in removal costs less the $1,500 cash (proceeds) from selling the salvaged materials.

Chapter 9-7

These include all the costs (expenditures) necessary to make

the improvements ready for their intended use. They’re

depreciated over time just like buildings, vehicles, or machinery.

If the useful life is 1 year or less (annual flowers), expense the

cost immediately (revenue expenditures).

If the useful life is longer than 1 year, we depreciate the cost

over its useful life, for example paving parking lots, landscaping,

fences, street lights (capital expenditures).

Land Improvements are depreciated. (Remember the land itself is not depreciated)

Determining the Cost of LandDetermining the Cost of Land ImprovementsImprovementsDetermining the Cost of LandDetermining the Cost of Land ImprovementsImprovements

Chapter 9-8

Equipment includes the all costs related to its purchase

and preparing it for its intended use. Equipment gets

depreciated over its useful life. Costs typically include:

Cash purchase price.

Sales taxes.

Freight charges if FOB Shipping

Insurance during transit if paid by the purchaser

Additional costs if required or necessary to assemble, install, and test the unit

Determining the Cost of Determining the Cost of EquipmentEquipmentDetermining the Cost of Determining the Cost of EquipmentEquipment

Chapter 9-9

Papa Ron’s purchases a truck at a cash price of $22,000. Related

capital expenditures necessary to prepare the truck for its intended

use are sales taxes $1,320, and permanent painting & lettering $500.

Related revenue expenditures (limited use), include a truck vehicle

license $80, and a 3 year prepaid auto insurance policy $1,500. The

cost of the truck does not include these last two (see next slide):

Determining the Cost of EquipmentDetermining the Cost of Equipment

Cash price (necessary)

Sales taxes (necessary)

Painting and lettering (necessary) 5001,320

$22,000

$23,820Cost of the Truck

Remember - The Sales Taxes and Painting & Lettering are capital expenditures. The others are revenue expenditures.

Chapter 9-10

The entry to record Papa Ron’s truck purchase and all the other

related costs include: the truck cost of $23,820 (from prior slide)

and the additional revenue expenses: the $80 motor vehicle

license, and the $1,500 3-year insurance policy.

Determining the Determining the CostCost of Equipment of EquipmentDetermining the Determining the CostCost of Equipment of Equipment

Equipment – Truck (see prior slide) 23,820

License expense (limited use) 80

Prepaid insurance (limited use) 1,500

Cash 25,400

The $23,820 cost of the Equipment was calculated on the prior slide. Note the license & insurance are not considered part of the truck’s cost

Chapter 9-11

Buildings include all the costs related to its purchase or its construction, preparing it for its intended use. Buildings usually get depreciated over long periods of time (years).

Purchase costs - if you’re buying it:

Purchase price, closing costs, attorney’s fees, title

insurance, and real estate broker’s commission.

Remodeling, replacing or repairing the roof, floors,

electrical wiring, and plumbing.

Construction costs - if you’re building it:

Contract price plus payments for architects’ fees,

permits, and excavation costs.

(Buildings are not on the exam).

Determining the Cost of Determining the Cost of BuildingsBuildingsDetermining the Cost of Determining the Cost of BuildingsBuildings

Chapter 9-12

All leases are classified as either operating leases (you do not own the asset) or capital leases (you will own the asset)!

A lease is a contractual agreement in which the owner of an asset (lessor) allows another party (lessee) to use the asset for a period of time at an agreed price.

Operating leases – you do not own the asset which is

eventually returned and the cost is simply expensed on the

income statement. Some advantages of operating leases

are: reduced risk of obsolescence, little or no down payment,

assets and liabilities are not reported.

Capital leases – lessees will eventually own the asset and

record the asset and the related liability on the balance

sheet. Basically, the seller (the lessor) is financing the

purchase by the buyer (the lessee).

Operating vs. Capital LeasesOperating vs. Capital Leases

Chapter 9-13

Impairments are a permanent decline in the fair value of an

owned asset. In order not to overstate the asset’s value on the

balance sheet, the company adjusts the asset down to its new

fair value in the year the decline occurs by recording a loss.

Using land as an example when a very rare event occurs:

Loss on Impairment $$$

Land (or Equipment or Buildings) $$$

Impairments

Accounting for Impairment of Plant AssetsAccounting for Impairment of Plant Assets

Chapter 9-14

Why? A building with a useful life of 30 years would

distort the I/S if it was all expensed at once. The

accounting principle is that each year of the useful life

should share the expense.

Depreciation is the process of allocating the cost (called cost

allocation) of a plant asset to an expense account over its useful

service life in a rational and systematic manner (instead of

expensing it all in one year). This applies to buildings, equipment,

and land improvements (remember we do not depreciate land).

Accounting for Depreciation of Plant AssetsAccounting for Depreciation of Plant Assets

Chapter 9-15

Factors in Computing Depreciation

Cost Useful Life Salvage Value

Accounting for Accounting for DepreciationDepreciation of Plant Assets of Plant AssetsAccounting for Accounting for DepreciationDepreciation of Plant Assets of Plant Assets

Chapter 9-16

Management selects the method it believes best measures

an asset’s contribution to revenue over its useful life.

Depreciation Methods

Examples include the:

(1) Straight-line method.

(2) Units-of-activity method

(3) Declining-balance method.

SO 3SO 3

Accounting for Plant AssetsAccounting for Plant AssetsAccounting for Plant AssetsAccounting for Plant Assets

Chapter 9-17

Papa Ron’s Pizza purchased a delivery truck on Jan. 1,

2014.

Compute depreciation using the following methods:

(a) Straight-Line (b) Units-of-Activity (c) Declining Balance

Accounting for Accounting for DepreciationDepreciation of Plant Assets of Plant AssetsAccounting for Accounting for DepreciationDepreciation of Plant Assets of Plant Assets

Remember: The salvage value is simply an estimate

of what you’ll get for selling the asset or trading it in

after you’re done using it.

R

RWhose your

daddy?

Papa Ron!

Chapter 9-18

The Straight-Line Method

Expense is same amount for each year.

Depreciable cost = Cost less salvage value.

Accounting for Plant AssetsAccounting for Plant AssetsAccounting for Plant AssetsAccounting for Plant Assets

If the total useful life = 100%, then each year equals 20%

(100% / 5 years) or 1/5 which equals $2,400 per year.

Chapter 9-19

Depreciable Annual Accum. Book

Year Cost x Rate = Expense Deprec. Value

The Straight-Line Method

2014 $ 12,000 20% or 1/5 $ 2,400 $ 2,400 $ 10,600

2015 12,000 20 2,400 4,800 8,200

2016 12,000 20 2,400 7,200 5,800

2017 12,000 20 2,400 9,600 3,400

2018 12,000 20 2,400 12,000 1,000

2014 Journal Entry

Depreciation expense 2,400

Accumulated depreciation2,400

Accounting for Plant AssetsAccounting for Plant AssetsAccounting for Plant AssetsAccounting for Plant Assets

The book value is the original $13,000 cost less the Accumulated Depreciation at any given point in time.

Chapter 9-20

Accounting for Plant AssetsAccounting for Plant AssetsAccounting for Plant AssetsAccounting for Plant Assets

CurrentDepreciable Annual Partial Year Accum.

Year Cost Rate Expense Year Expense Deprec.

2014 12,000$ x 20% = 2,400$ x 9/12 = 1,800$ 1,800$

2015 12,000 x 20% = 2,400 2,400 4,200

2016 12,000 x 20% = 2,400 2,400 6,600

2017 12,000 x 20% = 2,400 2,400 9,000

2018 12,000 x 20% = 2,400 2,400 11,400

2019 12,000 x 20% = 2,400 x 3/12 = 600 12,000

12,000$

Journal entry:

2014 Depreciation expense 1,800

Accumulated depreciation 1,800

If the truck was purchased on April 1, 2014, only 9 months are depreciated in the 1st year with 3 months left for the last year!

The Straight-Line Method for a Partial Year!

Chapter 9-21

Units of Activity Method (not on exam)

Acct. for Plant Assets – Units of ActivityAcct. for Plant Assets – Units of ActivityAcct. for Plant Assets – Units of ActivityAcct. for Plant Assets – Units of Activity

Depreciation expense may depend on usage. Remember the

depreciable cost is only $12,000 – not $13,000 ($1,000 salvage).

A truck driven 15,000 miles in year 1 would have $1,800 of depreciation

expense (15,000/100,000 = 15% and 15% of $12,000 = $1,800).

If driven 30,000 miles in year 2 the expense would be $3,600 (30,000/100,000

= 30% and 30% of $12,000 is $3,600. Repeated until accumulation

depreciation reaches $12,000 and only the $1,000 of salvage value remains.

Chapter 9-22

Declining Balance Method (not on the exam)

Acct. for Plant Assets – Declining BalanceAcct. for Plant Assets – Declining BalanceAcct. for Plant Assets – Declining BalanceAcct. for Plant Assets – Declining Balance

This is an accelerated method. It expenses a greater

amount in the early years and smaller amounts in

succeeding years over the asset’s useful life. Why?

Because in many cases, the revenue-producing ability of

the asset usually declines over its useful life.

A double declining-balance rate (DDB) is double the

straight-line rate. So a useful life of 5 years would have a

20% straight line rate per year while the DDB rate would

be a 40% rate per year. Each year, the DBB rate is

applied to the remaining book value.

Chapter 9-23

Comparison of Depreciation

Methods

Accounting for Plant AssetsAccounting for Plant AssetsAccounting for Plant AssetsAccounting for Plant Assets

Each method is acceptable because each recognizes the

decline in service potential of the asset

in a rational and systematic manner.

Chapter 9-24

Companies can dispose of plant assets in three ways:

Sale, Retirement, or Exchange (Trading it in)

First: Record depreciation up to the date of disposal.

Second: remove the asset by (1) debiting Accumulated Depreciation, and (2) crediting the asset account.

Third: Debit any cash received (or credit any cash paid out) See next slide to calculate possible Gains or Losses!

Plant Asset Disposals

Accounting for Plant Assets - DisposalsAccounting for Plant Assets - Disposals

Chapter 9-25

1st calculate the Book Value! This equals the asset’s

cost less its updated accumulated depreciation at the

time of the sale.

2nd compare the book value with the proceeds (if any).

This is the cash received from the sale.

If the proceeds (the cash) exceed the book value,

a gain on disposal occurs.

If the proceeds (the cash) are less than the book

value, a loss on disposal occurs.

Plant Asset Disposals – Plant Asset Disposals – Gains Gains andand Losses LossesPlant Asset Disposals – Plant Asset Disposals – Gains Gains andand Losses Losses

Chapter 9-26

On July 1, 2014, Papa Ron’s sells office furniture for $16,000

cash. The furniture originally cost $60,000. As of January 1,

2014, it had accumulated depreciation of $41,000. Depreciation

for the first six months of 2014 is $8,000. The 1st thing to do is

prepare the journal entry to record depreciation expense and

update the accumulated depreciation to the date of the sale.

Depreciation expense 8,000

Accumulated depreciation 8,000

July 1

Plant Asset Disposals – Updating DepreciationPlant Asset Disposals – Updating Depreciation

Total accumulated depreciation after the above J/E is now $49,000 (41,000 + 8,000)

Chapter 9-27

Papa Ron’s records the disposal/sale as follows.

Cash 16,000

Accumulated depreciation 49,000

Equipment60,000Gain on disposal

5,000

July 1

Plant Asset Disposals - Plant Asset Disposals - GainGainPlant Asset Disposals - Plant Asset Disposals - GainGain

If proceeds were only $9,000, a “Loss on Disposal” would be debited for $2,000, see next slide

Chapter 9-28

If proceeds were only $9,000? A “Loss on Disposal” would then be debited for $2,000!

Cash 9,000

Accumulated depreciation 49,000

Equipment60,000

July 1

Plant Asset Disposals - Plant Asset Disposals - LossLossPlant Asset Disposals - Plant Asset Disposals - LossLoss

Loss on disposal 2,000

Loss on disposal $ 2,000

Proceeds from sale 9,000

Chapter 9-29

Intangible assets are rights, privileges, and competitive

advantages that result from ownership of long-lived

assets that do not possess physical substance!

Intangible AssetsIntangible AssetsIntangible AssetsIntangible Assets

Patents

Copyrights

Franchises or licenses

Trademarks

Trade names

Goodwill

They can have limited life or an indefinite life

(lasts forever). Common types of intangibles:

Whooo… you

gonna call?

Papa Ron of

course!

Chapter 9-30

Research expenses that

may or may not lead to

patents,

copyrights,

new processes, and

new products.

All R & D costs are expensed when incurred!

WHY? We don’t know if the patent or copyright will ever be granted

Research and Development (R&D) Costs

Intangible Assets – Research & DevelopmentIntangible Assets – Research & Development

Chapter 9-31

Amortization of Intangibles (it’s like depreciation)

Limited-Life Intangibles:

Debit Amortization Expense and credit the

Intangible Asset account (e.g., credit “Patents”).

Accounting for Intangible AssetsAccounting for Intangible AssetsAccounting for Intangible AssetsAccounting for Intangible Assets

Indefinite-Life Intangibles:

If the asset is expected to provide benefits forever,

(like land) then no amortization is taken; it stays on

the books forever or until a impairment (a

permanent decline in value) adjustment is made.

Chapter 9-32

Exclusive right to manufacture, sell, or otherwise control an

invention for a period of 20 years from the date of the grant

(light bulbs, computers, cookware, drugs)

The costs of purchasing a patent are amortized over 20

years or its useful life, whichever is shorter.

Any legal fees incurred to successfully obtain and defend a

patent are added (capitalized) to the patent account.

Note: All R&D costs in developing the patent are expensed!

Intangible Assets - Intangible Assets - PatentsPatentsIntangible Assets - Intangible Assets - PatentsPatents

Chapter 9-33

NBC Labs purchased a patent at a cost of $60,000 on June 30,

It estimates the useful life of the patent to be 8 years (which is

shorter than 20 years). The entry to record the straight-line

amortization for the 6 month period ended December 31:

Amortization expense (1/2 year) 3,750

Patent 3,750

Cost $60,000Useful life divide by 8

Annual expense $ 7,5006 months x 6/12

Amortization $ 3,750

Dec. 31

Amortization Expense - PatentsAmortization Expense - Patents

A full year’s expense would be the $7,500

Chapter 9-34

Gives the owner the exclusive right to reproduce & sell an

artistic or published work: musical compositions &

recordings, movies, software, paintings, performances, etc.

Granted for the creator's life, plus an additional 70 years.

Capitalize the total costs of acquiring and defending it and

amortize to expense over its useful life (like Patents).

Intangible Assets - Intangible Assets - CopyrightsCopyrightsIntangible Assets - Intangible Assets - CopyrightsCopyrights

Don’t

Chapter 9-35

A word, phrase, jingle, or symbol that identifies a

particular enterprise or product.

► Wheaties, Coca-Cola, Disney, Monopoly, Sunkist,

Kleenex, Pepsi, McDonalds, etc.

Legal protection for an indefinite number of 20 year

renewal periods – no amortization!

Capitalize the acquisition costs.

Intangible Assets – Trademarks & Trade NamesIntangible Assets – Trademarks & Trade Names

Chapter 9-36

Contractual arrangement between a franchisor and a

franchisee - Toyota, Subway and Marriott have

franchises.

Franchises (or licenses) with a limited life should be

amortized to expense over the life of the franchise.

Franchises with an indefinite life should be carried at cost

and not amortized.

Intangible Assets – Franchises and LicensesIntangible Assets – Franchises and Licenses

Chapter 9-37

Goodwill is recorded as the excess of the purchase price over

the fair market value of the net assets acquired (assets less

liabilities). For example, if you pay $100,000 for the net assets

(Assets less Liabilities) of a business that are $85,000, then

$15,000 is for Goodwill!

Why would anyone pay more than the fair value for the net

assets of a business? The reasons include exceptional

management, desirable location, good customer relations, skilled

employees, high-quality products, remove competition, etc.

Intangible Assets - Intangible Assets - GoodwillGoodwillIntangible Assets - Intangible Assets - GoodwillGoodwill

Chapter 9-38

Papa Ron’s Pizza purchased an oven for $130,000 June 1, 2014. The expected salvage value is $10,000, the expected useful life is 10 years. Required: Use the straight line method to record J/E for first 2 years.

Calculate: The depreciable cost is $120,000. Divide that by 10 years and you get depreciation of $12,000 per year. Year 1 is a partial year; Papa Ron will have the oven for only 7 months (June to December). So year 1 is $12,000 x 7/12 or $7000. Year 2 is a full year or $12,000.

Year 1: Dep. Exp. 7000 Year 2: Dep. Exp. 12,000

Accu. Dep. 7000 Accum. Dep. 12,000

Accumulated Depreciation at the end of Year 2 is $19,000. The book value would be $130,000 less $19,000 or $111,000.

If asset is sold after year 2 and the proceeds were $115,000 the gain would be $4,000. If proceeds were $91,000 the loss would be $20,000!

Equipment Depreciation & Sale – See BE 9-8Equipment Depreciation & Sale – See BE 9-8Equipment Depreciation & Sale – See BE 9-8Equipment Depreciation & Sale – See BE 9-8

Chapter 9-39

Match the term most directly associated with each

statement.

Copyright Amortization

Intangible assets Franchise

Research and development costs

1. The allocation to expense of the cost of an intangible

asset over the asset’s useful life.

2. Rights, privileges, and competitive advantages that

result from the ownership of long-lived assets that do

not possess physical substance.

3. An exclusive right granted by the federal government

to reproduce and sell an artistic or published work.

Amortization

Intangible assets

Copyrights

LO 7 Identify the basic issues related to reporting intangible assets.

Chapter 9-40

Match the term most directly associated with each

statement.

Copyright Amortization

Intangible assets Franchise

Research and development costs

4. A right to sell certain products or services or to use

certain trademarks or trade names within a

designated geographic area.

5. Costs incurred by a company that often lead to

patents or new products. These costs must be

expensed as incurred.

Franchise

Research and development

costs

LO 7 Identify the basic issues related to reporting intangible assets.