Plant Assets and Intangibles doc

Measure the cost of a plant asset... Capital Expenditure Debit Plant Assets Revenue Expenditure Debit Repairs and Distinction Between Capital and Revenue Expenditures... Cost or basis E

Plant Assets and Intangibles

Chapter 10

Asset Account on Related Expense Account the Balance Sheet on the Income Statement

Measure the

cost

of a plant asset.

Objective 1

An asset must be carried on thebalance sheet at the amount paid for it.

The cost of an asset equals the sum ofall of the costs incurred to bring the asset

to its intended purpose, net of discounts

Cost Principle

Land and Land Improvements

Purchase price of land $500,000Add related costs:

Back property taxes $40,000

Transfer taxes 8,000

Removal of buildings 5,000

Survey fees 1,000 54,000Total cost of land $554,000

PavingFencesSprinkler systemsLights in parking lot

Land Improvements

• All improvements located on the land but subject to decay:

Buildings – Construction

Architectural feesBuilding permitsContractor’s charges

MaterialsLaborOverhead

Buildings – Purchasing

Purchase priceBrokerage commissionsSales and other taxesRepairing or renovating building

for its intended purpose

Machinery and Equipment

Purchase price less discounts

Transportation chargesInsurance in transitSales and other taxesPurchase commissions

Installation costExpenditures to test assetbefore it is placed in service

Lump-Sum Purchases Example

• Andrea Ortiz paid $110,000 for a

combined purchase of land and a building

• The land is appraised at $90,000 and the building at $60,000

• How much of the purchase price is

allocated to land and how much to the

building?

Lump-Sum Purchases Example

Does the expenditure increase capacity

or efficiency or extend useful life?

Capital Expenditure

Debit Plant Assets

Revenue Expenditure

Debit Repairs and

Distinction Between Capital and

Revenue Expenditures

Cost or basis Estimated residual valueEstimated useful life

Measuring the Depreciation

of Plant Assets

Objective 2

Account for depreciation.

Straight-Line (SL)Units-of-Production (UOP)Double-Declining-Balance (DDB)

Depreciation Methods

Depreciation Methods Example

• Donishia and Richard Catering, Inc.,

purchased a delivery van on January 1, 200x, for $22,000

• The company expects the van to have a trade-in value of $2,000 at the end of its useful life

• The van has an estimated service life of 100,000 miles or 4 years

(Cost – Residual value) ÷ years of useful life($22,000 – 2,000) ÷ 4 = $20,000 ÷ 4 = $5,000

Year 1 Depreciation: $ 5,000Year 2 Depreciation: 5,000Year 3 Depreciation: 5,000Year 4 Depreciation: 5,000Total Depreciation: $20,000

Straight-Line Method Example

($22,000 – 2,000) ÷ 100,000 = $.20/mile

Year 1: 30,000 miles = $ 6,000Year 2: 27,000 miles = 5,400Year 3: 23,000 miles = 4,600Year 4: 20,000 miles = 4,000 Total: 100,000 miles = $20,000

(Actual mileage in year 4 was 22,000)

Units-of-Production Method Example

Use of Depreciation Methods

balance Other

Declining-Objective 3

Select the best

depreciation method for tax purposes.

Relationship Between Depreciation and Taxes

• MACRS was created by the Tax Reform Act of 1986

• It is an accelerated method used for

depreciating equipment

Straight-line method:

$5,000 × 3/12 = $1,250

Double-declining-balance method:

$11,000 × 3/12 = $2,750

Depreciation for Partial Years

• Assume that Donishia and Richard

Catering, Inc., owned the van for 3

months

• How much is the van’s depreciation?

Revised SL depreciation

=Cost – Accumulated depreciation

–New residual value

÷

Revising Depreciation Rates

Objective 4

Account for the

disposal

of a plant asset.

Disposing of Plant Assets

– selling

– exchanging

– discarding (scrapping it)

• Gain/loss is reported on the income statement

– and closed to Income Summary

Disposing by Discarding

Example

• On September 1, Joe, manager of Joe’s

Landscaping, is contemplating the disposal

of an old piece of equipment:

To record discarding of equipment

Selling a Plant Asset Example

• Assume the equipment is sold for $10,000

• What is the gain or loss on disposal?

Cash 10,000

Accumulated Depreciation 20,750 Loss on Sale of Equipment 5,250 Equipment 36,000

To record sale of equipment for $10,000

Selling a Plant Asset Example

• Equipment is sold for $20,000.

• What is the gain or loss on disposal?

Exchanging Plant Assets

• Assume equipment with a cost of $36,000 and a book value of $15,250 is exchanged for new, similar equipment having a cost

Exchanging Plant Assets

Equipment (new) $39,250

Accumulated Depreciation (old) $20,750

Equipment (old) $36,000

Objective 5

Account for natural

resources

Natural gas and oilPrecious metals and gemsTimber, coal, and iron ore

Cost – Residual value) ÷ Estimated units

of natural resources = Depletion per unit

Accounting for Natural

Resources

Objective 6

Account for intangible

assets

PatentsCopyrightsTrademarksFranchisesLeaseholdsGoodwillNot physical in nature

Intangible Assets

Intangible Assets: Patents

• Patents are federal government grants

• They give the holder the right to produce and sell an invention

• Suppose a company pays $170,000 to

acquire a patent on January 1

• The company believes that its expected useful life is 5 years

• What are the entries?

To amortize the cost of a patent

Intangible Assets: Patents

Literary compositions (novels)Musical compositions

Films (movies)Software

Other works of art

Intangible Assets: Copyrights

Trademarks, Trade Names,

or Brand Names are assets that representdistinctive identifications of a product or

service

Intangible Assets: Trademarks

Intangible Assets: Franchises

• Franchises are privileges granted by

private business or government to sell a product or service

Intangible Assets: Goodwill

• Goodwill is defined as the excess of

purchase price over the fair value of the net assets acquired

• Goodwill can only be recorded in the

purchase of another company

• Goodwill is no longer amortized

• Goodwill is now subject to an

“impairment” test

Purchase price paid for

Mexana Company $10 millionAssets at market value 9 million

Less Mexana’s liabilities 1 million

International accounting for goodwill

Research and development

Capitalize or expense a cost

Special Issues

End of Chapter 10