Accounting principles 9e willey kieso chapter 10

Natural ResourcesIntangible Assets Intangible Assets Statement Presentation and Analysis Statement Presentation and Analysis Presentation Analysis Accounting for intangibles Research a

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Chapter 10-1

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Chapter 10

Plant Assets, Natural

Resources, and Intangible Assets

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Chapter

10-3

explain the entries for each.

assets.

assets are reported.

Study Objectives

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Natural Resources

Intangible Assets

Statement Presentation and

Analysis

Statement Presentation and

Analysis

Presentation Analysis

Accounting for intangibles Research and development costs

Plant Assets, Natural Resources, and

Depletion

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Chapter

10-5

“Used in operations” and not for resale.

Long-term in nature and usually depreciated.

Possess physical substance.

Plant assets include land, land improvements,

buildings, and equipment (machinery, furniture, tools) Major characteristics include:

Section 1 – Plant Assets

Referred to as property, plant, and equipment; plant and

equipment; and fixed assets

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Includes all costs to acquire land and ready it for use Costs typically include:

Land

Determining the Cost of Plant Assets

(1) the purchase price;

(2) closing costs, such as title and attorney’s fees;

(3) real estate brokers’ commissions;

(4) costs of grading, filling, draining, and clearing;

(5) assumption of any liens, mortgages, or

encumbrances on the property.

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Chapter

10-7

Illustration: Assume that Hayes Manufacturing Company

acquires real estate at a cash cost of $100,000 The

property contains an old warehouse that is razed at a net

cost of $6,000 ($7,500 in costs less $1,500 proceeds from

salvaged materials) Additional expenditures are the

attorney’s fee, $1,000, and the real estate broker’s

commission, $8,000 The cost of the land is $115,000,

computed as follows

Required: Determine amount to be reported as the cost of

the land

SO 1 Describe how the cost principle applies to plant assets.

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Required: Determine amount to be reported as the cost of the land

Cash price of property of $100,000

Old warehouse razed at a cost of $6,000

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Chapter

10-9

Includes all expenditures necessary to make the

improvements ready for their intended use.

Land Improvements

Examples are driveways, parking lots, fences, landscaping, and underground sprinklers.

Limited useful lives.

Expense (depreciate) the cost of land improvements over their useful lives.

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Includes all costs related directly to purchase or

Contract price plus payments for architects’ fees,

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freight and handling charges,insurance on the equipment while in transit, assembling and installation costs, and

costs of conducting trial runs

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Illustration: Assume Merten Company purchases factory

machinery at a cash price of $50,000 Related expenditures are for sales taxes $3,000, insurance during shipping $500, and installation and testing $1,000 Determine amount to be reported as the cost of the machinery

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Chapter 10-13

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Process of cost allocation, not asset valuation.

Applies to land improvements, buildings, and equipment, not land.

Depreciable, because the revenue-producing ability of asset will decline over the asset’s useful life.

tangible assets to expense in a systematic and rational manner to those periods expected to benefit from the use of the asset.

Depreciation

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SO 2 Explain the concept of depreciation.

Useful Life Salvage Value

Illustration 10-6

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Objective is to select the method that best measures

an asset’s contribution to revenue over its useful life Examples include:

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Depreciation

Expense is same amount for each year.

Depreciable cost is cost of the asset less its salvage value. Illustration 10-9

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Chapter

10-19

Depreciation

SO 3 Compute periodic depreciation using different methods.

Illustration: (Straight-Line Method)

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Companies estimate total units of activity to calculate depreciation cost per unit.

Expense varies based on units of activity

Depreciable cost is cost less salvage

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Decreasing annual depreciation expense over the asset’s useful life.

Declining-balance rate is double the straight-line rate

Rate applied to book value

Declining-Balance

Depreciation

Illustration 10-13

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Comparison of Depreciation Methods

Depreciation

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Chapter

10-25

The following five slides are included to

illustrate the calculation of partial-year

depreciation expense.

The amounts are consistent with the previous

slides illustrating the calculation of depreciation expense.

Depreciation for Partial Year

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Illustration: Barb’s Florists purchased a small delivery

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Chapter

10-27

Illustration: (Straight-line Method)

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Illustration: (Units-of-Activity Method)

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Chapter

10-29

Illustration: (Declining-Balance Method)

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IRS does not require taxpayer to use the same

depreciation method on the tax return that is used in preparing financial statements.

IRS requires the straight-line method or a special

accelerated-depreciation method called the Modified Accelerated Cost Recovery System (MACRS)

MACRS is NOT acceptable under GAAP

Depreciation and Income Taxes

Depreciation

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Chapter

10-31

Revising Periodic Depreciation

Accounted for in the period of change and future periods (Change in Estimate)

Not handled retrospectively.

Not considered error.

Depreciation

SO 4 Describe the procedure for revising periodic depreciation.

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Illustration: Assume that Barb’s Florists decides on

January 1, 2013, to extend the useful life of the truck one

year because of its excellent condition The company has

used the straight-line method to depreciate the asset to

date, and book value is $5,800 ($13,000 - $7,200)

Questions:

1. What is the journal entry to correct

the prior years’ depreciation?

2. Calculate the depreciation expense

for 2013

No Entry Required

Depreciation

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SO 4 Describe the procedure for revising periodic depreciation.

at the date

of change in estimate

First, establish Book Value

at the date

of change in estimate

- 1,0004,800

3 years

$ 1,600

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Ordinary Repairs - expenditures to maintain the

operating efficiency and productive life of the unit

Debit - Repair (or Maintenance) Expense

Referred to as revenue expenditures

Expenditures During Useful Life

increase the operating efficiency, productive capacity, or

useful life of a plant asset

Debit - the plant asset affected

Referred to as capital expenditures

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Chapter

10-35

Companies dispose of plant assets in three ways —

Retirement, Sale, or Exchange (appendix).

Plant Asset Disposals

SO 6 Explain how to account for the disposal of a plant asset.

Illustration 10-18

Record depreciation up to the date of disposal

Eliminate asset by (1) debiting Accumulated Depreciation, and (2) crediting the asset account

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Illustration: Assume that Hobart Enterprises retires

its computer printers, which cost $32,000 The accumulated depreciation on these printers is $32,000 The journal entry

to record this retirement is?

Plant Asset Disposals - Retirement

Accumulated depreciation 32,000

Question: What happens if a fully depreciated plant asset is still

useful to the company?

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Chapter

10-37

Illustration: Assume that Sunset Company discards delivery equipment that cost $18,000 and has accumulated

depreciation of $14,000 The journal entry is?

Plant Asset Disposals - Retirement

Accumulated depreciation 14,000

Companies report a loss on disposal in the “Other expenses and

losses” section of the income statement.

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Sale of Plant Assets

Compare the book value of the asset with the

proceeds received from the sale

If proceeds exceed the book value, a gain on disposal occurs

If proceeds are less than the book value, a loss

on disposal occurs.

Plant Asset Disposals

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Chapter

10-39

Illustration: Assume that on July 1, 2010, Wright Company

sells office furniture for $16,000 cash The office furniture originally cost $60,000 As of January 1, 2010, it had

accumulated depreciation of $41,000 Depreciation for the

first six months of 2010 is $8,000 Prepare the journal entry

to record depreciation expense up to the date of sale

Plant Asset Disposals - Sale

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Illustration: Wright records the sale as follows.

Plant Asset Disposals - Sale

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Chapter

10-41

Physically extracted in operations

Replaceable only by an act of nature.

Natural resources consist of standing timber and underground deposits of oil, gas, and minerals.

Distinguishing characteristics:

Section 2 – Natural Resources

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Depletion is to natural resources as depreciation

is to plant assets

Companies generally use units-of-activity method

Depletion generally is a function of the units extracted.

prepare it for its intended use.

and systematic manner over the resource’s useful life.

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Chapter

10-43

Illustration: Assume that Lane Coal Company invests $5

million in a mine estimated to have 10 million tons of coal and

no salvage value In the first year, Lane extracts and sells

800,000 tons of coal Lane computes the depletion expense

as follows:

SO 7 Compute periodic depletion of natural resources.

$5,000,000 ÷ 10,000,000 = $.50 depletion cost per ton

$.50 x 800,000 = $400,000 depletion expense

Journal entry:

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Statement presentation of accumulated depletion

Extracted resources that have not been sold are reported

as inventory in the current assets section

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Chapter

10-45

Intangible assets are rights, privileges, and

competitive advantages that do not possess physical substance.

Section 3 – Intangible Assets

PatentsCopyrightsFranchises or licenses

Trademarks or trade namesGoodwill

Intangible assets are categorized as having either a

limited life or an indefinite life.

Common types of intangibles:

SO 8 Explain the basic issues related to accounting for intangible assets.

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Only capitalize direct costs incurred in perfecting title

to the intangible, such as legal costs

Accounting for Intangible Assets

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Exclusive right to manufacture, sell, or otherwise control an invention for a period of 20 years from the date of the grant

Capitalize costs of purchasing a patent and amortize over its 20-year life or its useful life, whichever is shorter

Expense any R&D costs in developing a patent

Legal fees incurred successfully defending a patent are capitalized to Patent account

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Chapter

10-49

Illustration: Assume that National Labs purchases a patent

at a cost of $60,000 National estimates the useful life of

the patent to be eight years National records the annual

amortization as follows

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Capitalize acquisition costs

Amortized to expense over useful life

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Chapter

10-51

Trademarks and Trade Names

Word, phrase, jingle, or symbol that identifies a particular enterprise or product

 Wheaties, Game Boy, Frappuccino, Kleenex, Windows, Coca-Cola, and Jeep

Trademark or trade name has legal protection for indefinite number of 20 year renewal periods

Capitalize acquisition costs

No amortization

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Franchises and Licenses

Contractual arrangement between a franchisor and a franchisee

 Shell, Taco Bell, or Rent-A-Wreck are franchises

Franchise (or license) with a limited life should be amortized to expense over the life of the franchise

Franchise with an indefinite life should be carried at cost and not amortized

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Chapter

10-53

Goodwill

Includes exceptional management, desirable location,

good customer relations, skilled employees, high-quality

products, etc

Only recorded when an entire business is purchased

Goodwill is recorded as the excess of

purchase price overover the FMV of the identifiable net assets acquired

Internally created goodwill should not be capitalized

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Chapter

10-55

Research and Development Costs

Frequently results in something that a company

patents or copyrights such as:

new product, process,

idea,

formula, composition, or literary work.

All R & D costs are expensed when incurred

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Companies usually include natural resources under “Property, plant, and equipment” and show intangibles separately.

Statement Presentation and Analysis

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Chapter

10-57

Analysis

Each dollar invested in assets produced $0.56 in sales

If a company is using its assets efficiently, each dollar

of assets will create a high amount of sales.

Statement Presentation and Analysis

SO 9 Indicate how plant assets, natural resources,

and intangible assets are reported.

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Ordinarily, companies record a gain or loss on the exchange of plant assets.

The rationale for recognizing a gain or loss is that most exchanges have commercial

An exchange has commercial substance if the future cash flows change as a result of the exchange.

Exchange of Plant Assets

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