Ch11 Operational.Assets.Utilization.and.Impairment

equipment has a service life of 5 years and an estimated residual value of $5,000?. What is depreciation for the first two years using double-declining-balance.[r]

WELCOME TO

MY CLASS

Property, Plant, and Equipment and Intangible Assets: Utilization and

Impairment

Chapter 11

Some of the cost is expensed each period.

Cost Allocation – An Overview

(Balance Sheet) (Income Statement)

The matching principle requires that part of the

acquisition cost of property, plant, and equipment and intangible assets be expensed in periods when the

future revenues are earned.

The matching principle requires that part of the

acquisition cost of property, plant, and equipment and intangible assets be expensed in periods when the

future revenues are earned.

Depreciation, depletion, and amortization are cost

allocation processes used to help meet the matching

principle requirements.

Depreciation, depletion, and amortization are cost

allocation processes used to help meet the matching

principle requirements.

*Depreciation of an asset used to produce a product is a product

cost that does not become an expense until the product is sold.

*Depreciation of an asset used to produce a product is a product

cost that does not become an expense until the product is sold.

Type of Operational

Intangible Amortization Intangible Asset

Account Credited

Accumulated Depreciation

Property, Plant, &

Natural Resource Depletion Natural Resource

Asset

Caution!

Depreciation, depletion, and amortization are

processes of cost allocation, not valuation!

Cost Allocation – An Overview

Cost Allocation – An Overview

Depreciation

on the Balance Sheet

Learning Objectives

Determine periodic depreciation using both time-based and activity-based methods.

Activity-based methods

Units-of-production method (UOP).

Depreciation of Operational Assets

The most widely

used and most

easily understood

method.

The most widely

used and most

On January 1, Dell Corp purchase equipment for $50,000 cash The equipment has an estimated service life of

5 years and estimated residual value of

5 years and estimated residual value of

$5,000.

What is the annual straight-line

depreciation?

Straight-Line

Straight-Line

Accumulated Accumulated Undepreciated Depreciation Depreciation Depreciation Balance Year (debit) (credit) Balance (book value)

Note that at the end of the asset’s

useful life, BV = Residual Value

Note that at the end of the asset’s

useful life, BV = Residual Value

Straight-Line

0 1000 2000 3000 4000 5000 6000 7000 8000 9000

Accelerated methods result in more

depreciation in the early years of an asset’s useful life and less depreciation

in later years of an asset’s useful life.

Accelerated methods result in more

depreciation in the early years of an asset’s useful life and less depreciation

in later years of an asset’s useful life.

Accelerated Methods

Note that total depreciation over the asset’s useful life is the same as the Straight-

line Method.

Note that total depreciation over the asset’s useful life is the same as the Straight-

line Method.

SYD depreciation is computed as follows:

Sum-of-the-Years’ Digits (SYD)

On January 1, KFC purchase equipment

for $50,000 cash The equipment has a

service life of 5 years and an estimated

residual value of $5,000.

Using SYD, compute depreciation

for the first two years.

On January 1, KFC purchase equipment

for $50,000 cash The equipment has a

service life of 5 years and an estimated

residual value of $5,000.

Using SYD, compute depreciation

for the first two years.

Sum-of-the-Years’-Digits (SYD)

Use this in your computation of SYD

Depreciation for Years 1 & 2.

Use this in your computation of SYD

Depreciation for Years 1 & 2.

Sum-of-the-Years’ Digits (SYD)

Sum-of-the-Years’ Digits (SYD)

Accumulated Undepreciated Depreciation Depreciation Balance

Fraction (debit) Balance (book value)

50,000

$ 5/15 $ 15,000 $ 15,000 35,000 4/15 12,000 27,000 23,000 3/15 9,000 36,000 14,000 2/15 6,000 42,000 8,000 1/15 3,000 45,000 5,000

45,000

$

Accumulated Undepreciated Depreciation Depreciation Balance

Fraction (debit) Balance (book value)

50,000

$ 5/15 $ 15,000 $ 15,000 35,000 4/15 12,000 27,000 23,000 3/15 9,000 36,000 14,000 2/15 6,000 42,000 8,000 1/15 3,000 45,000 5,000

0 2000 4000 6000 8000 10000 12000 14000 16000

On January 1, Dell Corp purchase equipment for $50,000 cash The equipment has a service life of 5 years and

an estimated residual value of $5,000.

What is depreciation for the first two years using double-declining-balance?

On January 1, Dell Corp purchase

equipment for $50,000 cash The equipment has a service life of 5 years and

an estimated residual value of $5,000.

What is depreciation for the first two years using double-declining-balance?

Double-Declining-Balance (DDB)

Double-Declining-Balance (DDB)

0 2000 4000 6000 8000 10000 12000 14000 16000 18000 20000

 Depreciation is not taken

for idle assets.

 Depreciation can also be

based on measures of

input or output like:

 Service hours, or

 Units-of-Production

 Depreciation is not taken

for idle assets.

This approach looks different.

Units-of-Production

On January 1, Dell Corp purchased equipment for $50,000 cash The equipment is expected to produce 100,000 units during its life and has an estimated

residual value of $5,000.

If 22,000 units were produced this year,

what is the amount of depreciation?

On January 1, Dell Corp purchased

equipment for $50,000 cash The equipment is expected to produce 100,000 units during its life and has an estimated

residual value of $5,000.

If 22,000 units were produced this year,

what is the amount of depreciation?

Units-of-Production

Units-of-Production

Recent Survey of Large Public Companies (Sample of 684)

580

22 7

41 30 4

Straight Line Declining Balance Sum-of-the-years' digits Other Accelerated

Units of Production Other

Use of Various Depreciation Methods

Learning Objectives

Calculate the periodic depletion of a natural

resource.

The approach is based on the units- of-production method.

The approach is based on the units- of-production method.

As natural resources

are “used up”, or

depleted, the cost of

the natural resources

must be allocated to

the units extracted.

As natural resources

are “used up”, or

depleted, the cost of

the natural resources

must be allocated to

the units extracted.

Depletion of Natural Resources

Depletion of Natural Resources

ABC Mining acquired a tract of

land containing ore deposits

Total costs of acquisition and

development were $1,100,000

ABC estimated the land contained 40,000 tons of ore, and

that the land will be sold for

$100,000 after the coal is mined

Depletion of Natural Resources

What is ABC’s unit depletion rate?

What is ABC’s unit depletion rate?

For the year ABC mined 13,000 tons and sold 9,000 tons What is the total depletion and the depletion expense?

For the year ABC mined 13,000 tons and sold 9,000 tons What is the total depletion?

Depletion = 13,000 x $25 = $325,000

Learning Objectives

Calculate the periodic amortization of an

intangible asset.

Amortization of Intangible Assets

The amortization process uses the straight-line method, but assumes

or

Amortization of Intangible Assets

The amortization entry is:

Note that the amortization process does

not use a contra-asset account.

Torch, Inc has developed a new device

Patent registration costs consisted of

$2,000 in attorney fees and $1,000 in federal registration fees The device has a

useful life of 5 years The legal life is 20

years.

At the end of year 1, what is Torch’s

amortization expense?

Torch, Inc has developed a new device

Patent registration costs consisted of

$2,000 in attorney fees and $1,000 in federal registration fees The device has a

useful life of 5 years The legal life is 20

Record the amortization entry.

Amortization of Intangible Assets

Note that the patent will have a book value of

$2,400 after this amortization entry is posted.

Amortization of Intangible Assets

Learning Objectives

Discuss the accounting treatment of repairs and maintenance, additions, improvements, and rearrangements to operational assets.

Normally we debit an expense account for amounts spent on:

Expenditures Subsequent to Acquisition

Normally we debit the asset account for amounts spent

on:

Expenditures Subsequent to Acquisition

Normally we debit the asset account for amounts

spent on:

Expenditures Subsequent to Acquisition

Normally, we debit an asset account for

amounts spent on:

Expenditures Subsequent to Acquisition

End of Chapter 11

Homework

 Read the textbook

 Do all examples in text book