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10. C H A P T E R . Investments in Property, Plant, and Equipment and in Intangible Assets. Learning Objective 1. Identify the two major categories of long-term operating assets: property, plant, and equipment and intangible assets. Define and Provide Examples of Operating Assets.

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10

  • C H A P T E R

Investments in Property,

Plant, and Equipment

and in Intangible Assets


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Learning Objective 1

  • Identify the two major categories of long-term operating assets: property, plant, and equipment and intangible assets.




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Diagram the Time Line ofBusiness Issues


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Learning Objective 2

  • Understand the factors important in deciding whether to acquire a long-term operating asset.




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Learning Objective 3

  • Record the acquisition of property, plant, and equipment through a simple purchase as well as through a lease, self-construction, and as part of the purchase of several assets at once.


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Assets Acquired by Purchase

Frank’s Fruit Farm purchased a fork lift for use in its wholesale business. Frank’s paid $12,000 cash for the fork lift.Make the necessary journal entry for this purchase.


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Assets Acquired by Purchase

Frank’s Fruit Farm purchased a fork lift for use in its wholesale business. Frank’s paid $12,000 for the fork lift. What entry is necessary if Frank paid $3,000 cash and borrowed the remaining $9,000?Make the appropriate entry.



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Match Lease Terms

Capital Lease

  • The party that is granted the right to use the property under the terms of a lease.

The owner of property that is leased (rented) to another party.

Lessor

A simple rental agreement.

Operating Lease

A leasing transaction that is recorded as a purchase by the lessee.

Lessee


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Operating Lease

Frank’s Fruit Farm leases a building with monthly rental payments of $1,000.Make the appropriate entry if rent is paid in cash the first month.


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Capital Lease

Frank’s Fruit Farm enters into a non-cancelable lease agreement that requires lease payments of $100,000 a year for 20 years. At the end of 20 years, Frank’s will own the property.Make the appropriate entries.


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Transfer of Ownership?

Bargain Purchase

Option?

Term ³ 75% of

Useful Life?

Capital

Lease

Operating

Lease

PV Payment ³ 90%

of FMV?

Classifying Leases

Respond YES or NO. If the item below occurs, is the lease a capital lease?


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Assets Acquired bySelf Construction

  • Self-constructed assets

    recorded at cost

    include all expenditures incurred to build the asset and make it ready for its intended use

  • Costs include

    materials used to build the asset

    the construction labor

    capitalized interest

    some reasonable share of the general company overhead


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Acquisition of SeveralAssets at Once— Define the Terms Below

  • Basket Purchase

Relative Fair Market Value Method


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Example: Basket Purchase

When two or more assets are acquired at a single price, the prices are allocated on the “relative fair market value” method. In this example, Frank’s Fruit Farm purchased land and a new sorting facility at a total cost of $3,600,000.Prepare the entry to record the purchase.

% of Total

Asset

FMV

Cost

Value


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Learning Objective 4

  • Compute straight-line and units-of-production depreciation expense for plant and equipment.


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Define these Depreciation Terms

  • Depreciation

  • Book Value

  • Salvage Value


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Methods of Depreciation

  • Straight-Line

  • The cost of the asset is allocated equally over the periods of an asset’s estimated useful life.

  • Units-of-Production

  • The cost of an asset is allocated to each period on the basis of the productive output or use of the asset during the period.


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Example: Depreciation Methods

  • Frank’s Fruit Farm purchased a fork lift on January 1 for transporting fresh produce to and from the warehouse. The following facts apply:

  • Acquisition cost. . . . . . . . . . . . $24,000

    • Estimated salvage value. . . . . $ 2,000

    • Estimated life:

      • In years. . . . . . . . . . . . . . . . 4 years

      • In miles driven. . . . . . . . . . . 60,000 miles

  • Compute Frank’s annual depreciation expense using both the straight-line and units-of-production methods and determine the appropriate journal entries.


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Annual Depreciation

Expense

=

Make the Journal Entry

Do the calculation.

=

=

What is the Formula for theStraight-Line Method?


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Per Unit

Depreciation

=

Make the Journal Entry

Depreciation

Expense

=

Do the calculation.

Depreciation

Expense

=

=

What is the Formula for theUnits-of-Production Method?


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Year Straight-Line Units-of-Production

2000

2001

2002

2003

Total

$ 5,500

5,500

5,500

5,500

$22,000

$ 4,400

6,600

7,700

3,300

$22,000

Comparison of Methods


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What are the two steps to compute depreciation expense for less than a full year?

Partial-Year Depreciation


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More Depreciation Terms less than a full year?Defined.

  • Natural Resources

  • Depletion


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Example: Depletion less than a full year?

Hard Hat’s mine contains an estimated 200,000 tons of coal. The depletion expense for each ton of coal is $6.Determine the journal entry if 12,000 tons are mined.


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Learning Objective 5 less than a full year?

  • Account for repairs and improvements of property, plant, and equipment.


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Expenditures on Existing Assets less than a full year?

  • Ordinary expenditures

  • Capitalized expenditures


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Learning Objective 6 less than a full year?

  • Identify whether a long-term operating asset has suffered a decline in value and record the decline.


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Book value less than a full year?

(of asset)

Sum of future cash flows

(from asset)

IMPAIRMENT

Record asset at its

fair value

Sum of future cash flows

less than book value

NO IMPAIRMENT

Asset continues to be

reported at book value

What is the Impairment Test?


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Learning Objective 7 less than a full year?

  • Record the discarding and selling of property, plant, and equipment.


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Discarding less than a full year?Property, Plant, and Equipment

Frank’s Fruit Farm purchased a conveyor system for $15,000. It has a 5-year life, no salvage value, and is depreciated on a straight-line basis.If Frank’s scraps the conveyor after 5 full years, what is the appropriate entry?


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Discarding Property, Plant, and Equipment less than a full year?

Frank’s Fruit Farm purchased a conveyor system for $15,000. It has a 5-year life, no salvage value, and is depreciated on a straight-line basis. If Frank pays $300 to have the conveyor dismantled and removed, what is the appropriate entry?


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Selling Property, Plant, and Equipment less than a full year?

Frank’s Fruit Farm purchased a conveyor system for $15,000. It has a 5-year life, no salvage value, and is depreciated on a straight-line basis. If Frank scraps the conveyor after only 4 years of service, there will be a loss of $3,300. What is the appropriate journal entry?


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Selling Property, Plant, and Equipment less than a full year?

Frank’s Fruit Farm purchased a conveyor system for $15,000. It has a 5-year life, no salvage value, and is depreciated on a straight-line basis. If the conveyor is sold for $600 after 5 full years of service, what is the appropriate journal entry?


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Selling Property, Plant, and Equipment less than a full year?

Frank’s Fruit Farm purchased a conveyor system for $15,000. It has a 5-year life, no salvage value, and is depreciated on a straight-line basis. If the conveyor is sold for $600 after only four years of service, Frank’s will experience a loss of $2,400. Make the appropriate entry.


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Learning Objective 8 less than a full year?

  • Account for the acquisition and amortization of intangible assets and understand the special difficulties associated with accounting for intangibles.


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What are Intangible Assets? less than a full year?

  • Rights and privileges that are

  • Amortization


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Define Each of These Intangible Assets. less than a full year?

  • Patent

  • Franchise

  • License


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Calculate the amortization for each of the eight years. less than a full year?

Benefit

Amortizing a Patent

$200,000 Patent with useful life of 8 years:

PATENT


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Goodwill less than a full year?

An intangible asset that exists when a business is valued at more than the fair market value of its net assets, usually due to:

strategic location

reputation

good customer relations

similar factors

Equal to the excess of the purchase price

over the fair market value of the net assets purchased.


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Inventory $750,000 less than a full year?

Long-term operating assets 220,000

Other assets 25,000

Liabilities (18,000)

Total Net Assets $977,000

Example: Goodwill

Frank’s Fruit Farm purchased Farmers’ Market for $1,200,000. At the time of the purchase, Farmers’ recorded the following market values of its assets and liabilities:


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Inventory. . . . . . . . . . . . . . . . . . . . . . 750,000

Long-Term Operating Assets . . . . 220,000

Other Assets. . . . . . . . . . . . . . . . . . 25,000 Goodwill . . . . . . . . . . . . . . . . . . . . . 223,000 Liabilities. . . . . . . . . . . . . . . . . . 18,000 Cash . . . . . . . . . . . . . . . . . . . . . . 1,200,000

Purchased Farmers’ Market for $1,200,000.

Example: Goodwill

Frank’s Fruit Farm purchased Farmers’ Market for $1,200,000. Make the journal entry in Frank’s books to appropriately recognize goodwill.


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Learning Objective 9 750,000

  • Use the fixed asset turnover ratio as a measure of how efficiently a company is using its property, plant, and equipment.



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Expanded Material 750,000Learning Objective 10

  • Compute declining-balance and sum-of-the-years’-digits depreciation expense for plant and equipment.


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Accelerated Depreciation 750,000Define each term.

  • Declining-Balance Method

  • Sum-of-the-Years’-Digits Method (SYD)


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Double-Declining Balance 750,000

Book Value

Asset’s Life

in Years

Depreciation Expense

X 2 =

Book Value = Cost – Accumulated Depreciation

Sum-of-the-Year’s-Digits

(Cost – Salvage Value)

Sum of the

years of the

asset’s life

Current Year / (4+3+2+1)

Accelerated Depreciation Methods

Frank’s Fruit Farm purchased a fork lift for $12,000. The fork lift has a salvage value of $2,000 and a useful life of 4 years. Compute depreciation using both the DDB and SYD depreciation methods.


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Expanded Material 750,000Learning Objective 11

  • Account for changes in depreciation estimates.


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Change in Estimates 750,000

Frank’s purchased a fork lift for $12,000 with a $2,000 salvage value Fruit Farm a 4-year useful life. After 3 years, better information reveals the fork lift has a 6-year useful life and a $3,000 salvage value. Calculate a new depreciation expense for the next three years.


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This completes Chapter 10 750,000

You Can't Talk Yourself Out of

A Problem You Behaved

Yourself Into.

Dr. Stephen Covey


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