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Accounting for Plant Assets, Intangible Assets, and Related Expenses Chapter 10

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

Plant Assets Land Buildings, Machinery and Equipment, Furniture and Fixtures, and Land Improvements Natural Resources.. Intangibles..
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none

Depreciation Depletion Amortization


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Objective 1

Measure the cost of a plant asset.

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Cost Principle
An asset must be carried on the balance sheet at the amount paid for it. The cost of an asset equals the sum of all of the costs incurred to bring the asset to its intended purpose, net of discounts

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Land and Land Improvements


Purchase price of land Add related costs: Back property taxes $40,000 Transfer taxes 8,000 Removal of buildings 5,000 Survey fees 1,000 Total cost of land
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$500,000

54,000 $554,000
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Land Improvements

All improvements located on the land but subject to decay:


Paving Fences Sprinkler systems Lights in parking lot

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Buildings Construction
Architectural fees Building permits Contractors charges

Materials Labor Overhead


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Buildings Purchasing

Purchase price Brokerage commissions Sales and other taxes Repairing or renovating building for its intended purpose

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Machinery and Equipment


Purchase price less discounts Transportation charges Insurance in transit Sales and other taxes Purchase commissions Installation cost Expenditures to test asset before it is placed in service
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Capital Leases
What are capital leases? They are lease arrangements similar to installment purchases. Capital leases are reported as assets, even though the company does not own the asset. Leasehold improvements are similar to land improvements.

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Capitalizing the Cost of Interest


Suppose on January 2, 2002, The Home Depot borrows $1,000,000 on a one-year, 10% note payable, to build a warehouse. Total interest for the year is $100,000. Assume average accumulated expenditures on the project during 2002 are $700,000. How much interest is capitalized? $70,000

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Capitalizing the Cost of Interest

Dec. 31, 2002 Building (700,000 10%) 70,000 Interest Expense 30,000 Interest Payable 100,000 Accrued interest of construction loan

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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?

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Lump-Sum Purchases Example

Land: $90,000 $150,000 = 60% $110,000 60% = $66,000 Building: $60,000 $150,000 = 40% $110,000 40% = $44,000

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Distinction Between Capital and Revenue Expenditures


Does the expenditure increase capacity or efficiency or extend useful life?

YES
Capital Expenditure Debit Plant Assets accounts
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NO
Revenue Expenditure Debit Repairs and Maintenance account
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Measuring the Depreciation of Plant Assets


Cost or basis
Estimated residual value Estimated useful life

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Objective 2

Account for depreciation.

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Depreciation Methods
Straight-Line (SL)

Units-of-Production (UOP)
Double-Declining-Balance (DDB)

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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 tradein 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.

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Straight-Line Method Example


(Cost Residual value) years of useful life
($22,000 2,000) 4 = $20,000 4 = $5,000 Year 1 Depreciation: Year 2 Depreciation: Year 3 Depreciation: Year 4 Depreciation: Total Depreciation:
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$ 5,000 5,000 5,000 5,000 $20,000


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Units-of-Production Method Example


($22,000 2,000) 100,000 = $.20/mile Year 1: 30,000 miles = $ 6,000 Year 2: 27,000 miles = 5,400 Year 3: 23,000 miles = 4,600 Year 4: 20,000 miles = 4,000 Total: 100,000 miles = $20,000 (Actual mileage in year 4 was 22,000)
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Double-Declining-Balance Method Example


Straight-line rate is 100% 4 = 25% Double-declining-balance = 2 times the straight-line rate = 50% What is the book value of the van at the end of the first year? $22,000 50% = $11,000 $22,000 $11,000 = $11,000

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Double-Declining-Balance Method Example


Dec. 31, 200x Depreciation Expense $11,000 Accumulated Depreciation $11,000 To record depreciation expense for a one-year period

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Depreciation Methods Comparison


Year 1 2 3 4 Totals SL $ 5,000 $ 5,000 $ 5,000 $ 5,000 $20,000 UOP $ 6,000 $ 5,400 $ 4,600 $ 4,000 $20,000 DDB $11,000 $ 5,500 $ 2,750 $ 750 $20,000

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Use of Depreciation Methods


5% 6% 4% 2%

Straight-line Accelerated (not specified) UOP Decliningbalance Other


83%

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Objective 3

Select the best depreciation method for income tax purposes.

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Relationship Between Depreciation and Taxes


MACRS was created by the Tax Reform Act of 1986. It is an accelerated method used for depreciating equipment.

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Depreciation for Partial Years


Assume that Donishia and Richard Catering, Inc., owned the van for 3 months. How much is the vans depreciation?

Straight-line method: $5,000 3/12 = $1,250 Double-declining-balance method: $11,000 3/12 = $2,750
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Revising Depreciation Rates


Revised SL depreciation
= Cost Accumulated depreciation New residual value

Remaining useful life


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Objective 4
Account for the disposal of a plant asset.

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Disposing of Plant Assets


selling exchanging discarding (scrapping it) Gain/loss is reported on the income statement... and closed to Income Summary.

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Disposing by Discarding Example


On September 1, Joe, manager of Joes Landscaping, is contemplating the disposal of an old piece of equipment: Equipment cost: $36,000 Residual value: $ 6,000 Accumulated depreciation: $20,000 Estimated useful life at acquisition: 10 years

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Disposing by Discarding Example


Assume the equipment is discarded on November 30. What is the accumulated depreciation on November 30?

($36,000 $6,000) 10 = $3,000 $3,000 12 = $250 $250 3 = $750 $20,000 + $750 = $20,750
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Disposing by Discarding Example


November 30, 20xx Accumulated Depreciation 20,750 Loss on disposal 15,250 Equipment 36,000 To record discarding of equipment

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Selling a Plant Asset Example


Assume the equipment is sold for $10,000. What is the gain or loss? Nov. 30, 20xx 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

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Selling a Plant Asset Example


Equipment is sold for $20,000. What is the gain or loss? Nov. 30, 20xx Cash 20,000 Accumulated Depreciation 20,750 Gain on Sale of Equipment 4,750 Equipment 36,000 To record sale of equipment for $20,000

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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 of $42,000 with a trade-in of $18,000 allowed. Cash payment is $24,000. What is the cost of the new asset? $24,000 + $15,250 = $39,250

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Exchanging Plant Assets

Equipment (new) $39,250 Accumulated Depreciation (old) $20,750 Equipment (old) Cash

$36,000 $24,000

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Objective 5

Account for natural resource assets and depletion.

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Accounting for Natural Resources


Natural gas and oil Precious metals and gems Timber, coal, and iron ore Cost Residual value) Estimated units of natural resources = Depletion per unit

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Objective 6

Account for intangible assets and amortization.

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Intangible Assets
Not physical in nature Patents Copyrights Trademarks Franchises Leaseholds Goodwill
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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?

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Intangible Assets: Patents


Jan. 1 Patents Cash To acquire a patent

170,000
170,000

Dec. 31 Amortization Expense 34,000 Patents To amortize the cost of a patent


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34,000
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Intangible Assets: Copyrights

Literary compositions (novels) Musical compositions Films (movies) Software Other works of art
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Intangible Assets: Trademarks

Trademarks, Trade Names, or Brand Names are assets that represent distinctive identifications of a product or service.

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Intangible Assets: Franchises

Franchises are privileges granted by private business or government to sell a product or service.

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Intangible Assets: Goodwill


Goodwill Example Purchase price paid for Mexana Company Assets at market value Less Mexanas liabilities Market value of Mexanas net assets Goodwill
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$10 million 9 million 1 million 8 million $ 2 million


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Accounting, 5/E

Special Issues

International accounting for goodwill Research and development

Capitalize or expense a cost


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End of Chapter 10

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