plain background power point slides chapter 7 plant assets natural resources and intangibles 4605

8/9/2019 Plain Background Power Point Slides Chapter 7 Plant Assets Natural Resources and Intangibles 4605

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2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

1

Chapter 7

Plant Assets, IntangibleAssets, and Related

Expenses


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2

Learning Objective 1

Determine the cost of a plantasset.


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3

Types of Assets

Long-lived assets used inoperations

Plant Assets

Intangible Assets


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4

Plant Assets Terminology

Plant Assets - Depreciation

Natural Resources - Depletion

Intangibles - Amortization


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5

Determining the Cost of Land

A business signs a $300,000 notepayable to purchase land for a newstore site. It pays:

$10,000 in back property tax

$8,000 in transfer taxes

$5,000 for removal of an old building

$1,000 survey fee $260,000 to pave the parking lot.

What is the cost of the land?


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7

Determining the Cost of

Buildings: ConstructionArchitectural fees

Building permits

Contractors chargesMaterials

Labor

OverheadCost of interest


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Buildings: PurchasePurchase price

Brokerage commissions

Sales and other taxes

Repairing or renovating building

for its intended purpose


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Machinery and EquipmentPurchase price less discountsTransportation charges

Insurance in transitSales and other taxesPurchase commission

Installation costsExpenditures to test the assetSpecial platforms


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and Leasehold ImprovementsLand improvements

Paving

Fences

Sprinkler systems

Lights in parking lot


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Leasehold Improvement: Costof improvements to leased

assetsDepreciate (amortize) over term

of the lease.


and Leasehold Improvements


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Lump-Sum (or Basket)

Purchases of AssetsXerox Corporation paid $2,800,000for a combined purchase of land

and a building.The land is appraised at $300,000and the building at $2,700,000.

How much of the purchase price isallocated to land and how much tothe building?


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Lump-Sum (or Basket)

Purchases of AssetsTotal appraised value = $3,000,000

Land: $300,000 $3,000,000 = 10%$2,800,000 10% = $280,000

Building: $2,700,000 $3,000,000 = 90%$2,800,000 90% = $2,520,000


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2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren14

Does expenditure

increase capacity or

efficiency or

extend useful life?

Capital

Record an asset ExpensesRecord an expense

YES

Capital Expenditure versus

an Immediate Expense

NO

Does expenditure

increase capacity or

efficiency or

extend useful life?

Capital

Record an asset ExpensesRecord an expense

YES NO


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Account for depreciation.


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Straight-line (SL)

Units-of-production (UOP)

Double-declining balance(DDB)

Depreciation Methods


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Depreciation Methods

Data Items Amount

Cost of truck $41,000Estimated residual value ( 1,000)Depreciable cost $40,000Estimated useful life 5 years

Units of production 100,000 miles


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(Cost Residual value) Years of useful life

($41,000 $1,000) 5 = $8,000

Year 1 depreciation: $ 8,000Year 2 depreciation: 8,000Year 3 depreciation: 8,000

Year 4 depreciation: 8,000Year 5 depreciation: 8,000

Total depreciation: $40,000

Straight-Line Method


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($41,000 $1,000) 100,000 = $.40/mile

Year 1: 20,000 miles $.40 = $ 8,000Year 2: 30,000 miles $.40 = 12,000Year 3: 25,000 miles $.40 = 10,000

Year 4: 15,000 miles $.40 = 6,000Year 5: 10,000 miles $.40 = 4,000$40,000

Units-of-Production Method


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Double-Declining-Balance

MethodStraight-line rate per year: 100% 5 = 20%

Book value of truck at the end of the first year:

$41,000 40% = $16,400$41,000 $16,400 = $24,600

Double-declining balance:

2 times the straight-line rate = 40%


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Comparing Depreciation

Methods

Year

123

45Total

SL

$ 8,0008,0008,000

8,0008,000$40,000

UOP

$ 8,00012,00010,000

6,0004,000$40,000

DDB

$16,4009,8405,904

3,5424,314$40,000

Amount ofDepreciation per Year


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Depreciation Methods Used

by 600 Companies

84% Straight-line

5% Units-of-production

10% Accelerated

1% Other


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Select the best depreciationmethod.


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Relationship Between

Depreciation and Taxes

Cash revenues $400,000 $400,000

Cash operating expenses 300,000 300,000Cash provided by

operations before tax $100,000 $100,000

Depreciation expense 8,000 16,400

Income before income tax $ 92,000 $ 83,600Income tax expense (30%) 27,600 25,080

Net income $ 64,400 $ 58,520

Straight-line Accelerated



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Relationship Between

Depreciation and Taxes

Cash-flow analysis $100,000 $100,000

Income tax expense 27,600 25,080Cash provided by

operations before taxes $ 72,400 $ 74,920

Extra cash available for

investment if DDB is used($74,920 $72,400) $ 2,520

Straight-line Accelerated



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Modified Accelerated Cost

Recovery System (MACRS)Assets are grouped into one of

eight classes identified by asset

life.


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Depreciation for Partial Years

Suppose a calendar-year businesspurchases a building on April 1 for$500,000 with an estimated life of20 years and an estimated residualvalue of $80,000.

What is the current yearsdepreciation using the straight-linemethod?


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Partial-year depreciation:

$21,000

9/12 = $15,750

Depreciation for Partial Years

Full-year depreciation:

($500,000 $80,000) 20 = $21,000


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Assume an asset cost of $50,000,an ten-year useful life with no

residual value, and the straight-linemethod.

$50,000 10 = $5,000 depreciation per year

Changing the Useful Life

of a Depreciable Asset

What is the book

value after fo

ur years?$50,000 $20,000 = $30,000


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Changing the Useful Life

of a Depreciable AssetManagement determines that the

asset will be useful for an additional

ten years. How much depreciationexpense would be recognized eachyear starting in year five?

$30,000 / 10 years = $3,000


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Analyze the effect of a plantasset disposal.


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Accounting for Disposal

of Plant Assets: ExampleFixtures cost: $4,000Accumulated depreciation: $3,000

Book value $1,000

General Journal

Date Accounts and Explanations PR Debit Credit

Accumulated Depreciation 3,000Loss ofDisposal ofAsset 1,000

Store Fixtures 4,000

To dispose of store fixtures

General Journal

Date Accounts and Explanations PR Debit Credit

Accumulated Depreciation 3,000Loss ofDisposal ofAsset 1,000

Store Fixtures 4,000

To dispose of store fixtures



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Selling a Plant Asset: Example

Equipment which cost $10,000on 1/1/2002 is sold on

9/30/2005 for $5,000. It hasbeen depreciated on a straight-line basis over its 10 years

estimated useful life. There isno residual value.


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What is the accumulateddepreciation on September 30,

2005?$10,000 10 = $1,000/year$1,000 3 years = $3,000$1,000 9/12 = $750$3,000 + $750 = $3,750


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G r l r l

D t A t l ti R D it Cr it

S 30 C h 5,000

A m l t D r i ti 3,750

Lo ofS l of q i m t 1,250

q i m t 10,000

To record sale of equipment.



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Exchanging Plant Assets

Assume than an old delivery carwith a cost of $9,000 and a

book value of $1,000 isexchanged for a new car. Cashpayment is $10,000. What is

the cost of the new car?

$10,000 +$1,000 = $11,000


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Exchanging Plant Assets

G r l o r l

D t A o t l tio R D it Cr it

D liv ry A to(new) 11,000

A m l ted Depreci tion(old) 8,000

Delivery A to(old) 9,000

C h 10,000

To record exchange of auto.



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Account for natural resourcesand depletion.


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Natural gas and oil

Precious metals and gems

Timber, coal, and iron ore

(Cost Residual value)

Estimated units of natural resource=

Depletion per unit

Accounting for NaturalResources and Depletion


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Accounting for NaturalResources and Depletion

Assume an oil lease cost $100,000 andcontains an estimated 10,000 barrels ofoil.

If 3,000 barrels are extracted during the

year,depletion expense is $30,000.Accumulated Depletion is a contra account

similar to Accumulated Depreciation

Depletion rate:$100,000 10,000 = $10 per barrel.


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Account for intangible assets andamortization


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Intangible Assets

Have no physical form

Patents

CopyrightsTrademarks

Franchises

Leaseholds

Goodwill


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Intangible Assets

Amortization expense - can bewritten off directly against asset

accountAssets with an indefinite useful

life are not amortized.

All intangible assets are subjectto impairment


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Intangible Assets: Patents

Federal government grants givingholder the right to produce and sellan invention.

Suppose a company pays$170,000 to acquire a patent onJanuary 1. The company believes

that its expected useful life is 5years.


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Intangible Assets: Patets

General Journal

Date A ounts and Explanations PR Debit Credit

Jan 1 Patents 170,000

Cash 170,000

To record acquisition of patent.

Dec 31 Amortization Expense 34,000

Patents 34,000

To amortize cost of patent



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Literary compositions (novels)

Musical compositions

Films (movies)Software

Other works of art

Extend 50 years beyond authorslife.

Intangible Assets: Copyrights


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Trademarks, Trade Names, orBrand Names - assets that

represent distinctiveidentifications of a product orservice

Intangible Assets: Trademarks


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Intangible Assets: Franchises

Privileges granted by privatebusiness or government to sell

a product or service


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Purchase price paid forMexana Company $10 million

Assets at market value $9 million

Less: Mexanas liabilities $1 millionMarket value of Mexanas

net assets 8 millionGoodwill $ 2 million

Intangible Assets: Goodwill


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Research and Development

Expensed as it is incurred


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Report plant asset transactionson the statement of cash flows.


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Reporting Plant Asset Transactions:Statement of Cash Flows

Acquisitions (an investingactivity)

SalesDepreciation (including

amortization and depletion)


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End of Chapter 7

plain background power point slides chapter 7 plant assets natural resources and intangibles 4605

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