Welcome to Week 11!

Financial Accounting: Chapter 7Ashton Converse

Plant Assets, Natural Resources, and Intangibles

*** OH, LET IT SNOW!

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Welcome Review Long-lived Assets Chapter 7 Statement of Retained Earnings Intangible Assets! Application and Practice

Objectives/Schedule

What is the consistency principle? What does conservatism mean in

accounting terms? The disclosure principle means? Tell me what LCM means? Another name for gross profit is? What is gross profit percentage? What is the inventory turnover? How do we figure out the “goods

available”?

Review

What is a “plant asset”? Long-lived assets, such as land, buildings,

and equipment, used in the operation of the businesses

Also called fixed assets What is an “intangible asset”?

An asset with no physical form, a special right to current and expected future benefits

The cost of land does not include “land improvements”

Types of Long-Lived Assets

Lets say that Chipotle wants to open a store in Xinzheng.

FOREIGNERS SHOUT IN EXCITEMENT! They sign a $300,000 note payable to purchase land for

their new store. In building, McDonalds must also pay $10,000 for real estate commission, $8,000 of property tax, $5,000 for removal of an old building, a $1,000 survey fee.

Now, Chipotle has the big question for Sias Students to help figure out their money situation.

What is Chipotle’s cost of this land?

Example: Lets See

Purchase price of land…………………….$300,000 Add Related Costs:

Real Estate Commission.......... $10,000 Property Tax…......................... 8,000 Removal of Building…………. 5,000 Survey Fee……………………. 1,000 Total Related………………… 24,000

Total Cost of Land……………… $324,000

Answer for Chipotle

Land ………324,000 Note Payable…… 300,000 Cash…… 24,000

Assets = Liabilities +Stockholders’ Equity+324,000 = +300,000 + 0 -24,000

Summary: The purchase increases both assets and liabilities…no impact on equity.

Transaction Accounting Slip

Capital Expenditure: Expense that increases an asset’s capacity or

efficiency or extends its useful life.

Costs that do not add life or value to an asset, but only help make it continue to just work, are just considered expenses

Most firms must make the big decision to capitalize or expense a certain cost for a plant asset

Converse about Concepts

Only land has unlimited life and is not depreciated Usually always true Other plant assets must be

For most plant assets, depreciation is caused by these 2 things:1. Physical Wear and Tear2. Obsolescence

LAND…how is its life?

Must know 3 things before measuring an assets depreciation.1. Cost2. Estimated Useful Life3. Estimated Residual Value

We have discussed cost before and understand its mean to be: “a known amount for something”. The other two parts to measure depreciation

must be “ESTIMATED”.

Measuring Depreciation

Estimated Useful Life: Length of a service that a business expects to

get from an asset. May be life in years, units of output (work),

miles, or other measures.

Estimated Residual Life: Expected cash value of an asset at the end of

its useful life. How much you can sell it for at the end of

its life…market value after use.

Measuring Depreciation

There are 3 Main Depreciation Methods Straight-Line Units-of-Production Double-declining-balance

The Accelerated Depreciation Method Double-Declining-balance method (DDB)

Depreciation Methods

The cost of a plant asset minus its estimated residual value

Depreciable cost = Asset’s cost – Estimated residual value

To Know Before Looking at Methods

Depreciation method in which an equal amount of depreciation expense is given to each year of asset use

Meaning: Depreciable Cost is divided by useful life in years to

determine the annual depreciation expense.

Equation:SL depreciation per year = Cost – Residual Value/Useful life (years)

Straight-line Method (SL)

If DHL, a large shipping and mailing company wants to buy a new truck for $41,000. The estimated residual value is 1,000. DHL plans on the truck lasting 5 years and producing 100,000 units in miles.

First, what is the depreciable cost? 40,000

Second, what is the Straight-Line Method Depreciation Cost? $8,000

The recorded entry will look as follows: Depreciation Expense = 8,000 and Accumulated

Depreciation = 8,000

Straight-Line Method Example

Depreciation method by which a fixed amount of depreciation is assigned to each unit of output produced by the plant asset.

Meaning: The depreciable cost is divided by useful life (in units

of production). We then multiply this number by the number of

units produced each period to figure out depreciation.

Equation: UOP = Cost – Residual Value/Useful life (in units of

production)

Units-of-Production (UOP)

Same information as before for SL, but the useful life is 100,000 miles.

Depreciable Cost remains the same @ 40,000

So what is the equation: $41,000 – $1,000/100,000 miles = ? UOP Depreciation for DHL = $0.40 per mile

Multiply this by the number of units per year and you will get the depreciation expense per year…which can be used to know the book value

UOP Method Example

Accelerated Depreciation Method (fast) Computes the annual depreciation by multiplying the

assets decreasing book value by a constant percentage Which is 2 times the straight-line rate

First Step: Compute the straight-line depreciation rate per year

Second Step: Multiply the straight-line rate by 2 to compute the DDB

rate Third Step:

Multiply the DDB rate by the period’s beginning asset book value (cost – accumulated depreciation)

Double-Declining-Balance Method

Fourth Step: Determine the final year’s depreciation amount

DDB depreciation rate per year = (1/Useful life, in years) *2 DDB = (1 / 5)*2 DDB = 20% * 2 = 40%

Multiply by asset book value to get depreciation expense

.4 * 41,000 = 16,400 Subtract expense from book value to get new

book value for the next year. Now .4 * 24,600 = $9,840 (year 2 depreciation

expense)

DDB Equation

Depletion Expense Portion of a natural resource’s cost that is

used up in a particular period.

Calculated in the same way as Units-of-production depreciation

Accounting for Natural Expenses

Intangible Assets are long-lived assets

Each intangible asset is unique, and the accounting can be different from one intangible to another

Intangibles are very valuable because of their special rights for that company. Examples: patents, copyrights, trademarks,

franchises, leaseholds, and goodwill.

Accounting for Intangibles

Amortization: Cost is expensed through amortization over the

intangible’s estimated useful life unless the asset has a indefinite life.

What is a Patent? Federal government grant giving the holder the

right for 20 years to produce and sell an invention What is a Copyright?

Right to produce and sell a book, musical composition, film, or other work of art and computer programming.

Converse about Intangibles

What is a Trademark, trade name? A specific identification of a product or service

(brand name) What are Franchises and licenses?

Privileges given by a private business or a government to sell a product or service.

What is Goodwill? Extra cost of purchasing another company over

the sum of the market values of its net assets. A purchaser is willing to pay for goodwill when it

buys a company with big earning power.

Intangibles Continued