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Chapter 8. Long-Term Assets. Conceptual Learning Objectives. Chapter 8: SELF-STUDY C1: Describe plant assets and issues in accounting for them. C2: Explain depreciation and the factors affecting its computation. C3: Explain depreciation for partial years and changes in estimates.

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Chapter 8 l.jpg

Chapter 8

Long-Term Assets


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Conceptual Learning Objectives

Chapter 8:

SELF-STUDY

C1: Describe plant assets and issues in accounting for them.

C2: Explain depreciation and the factors affecting its computation.

C3: Explain depreciation for partial years and changes in estimates.

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Analytical Learning Objectives

SELF-STUDY

A1: Compare and analyze alternative depreciation methods.

A2: Compute total asset turnover and apply it to analyze a company’s use of assets.

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Procedural Learning Objectives

P1:Apply the cost principle to compute the cost of plant assets.

P2: Compute and record depreciation using the straight-line, units-of-production, and declining- balance methods.

P3: Distinguish between revenue and capital expenditures, and account for them.

P4: Account for asset disposal through discarding or selling an asset.

Self-Study (Quiz)

P5: Account for natural resource assets and their depletion.

P6: Account for intangible assets.

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Actively Used in Operations

Expected to Benefit Future Periods

Called Property, Plant, & Equipment

Plant Assets

C 1

Tangible in Nature

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Decline in asset value over its useful life

Disposal

4. Record disposal.

Acquisition

1. Compute cost.

Plant Assets

C 1

Use

2. Allocate cost to periods

benefited.

3. Account for subsequent

expenditures.

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Land

Land is not a depreciable Asset

Cost includes:

1. The total amount paid for the land.

2. Real estate commissions, title insurance fees, legal fees, and any accrued property taxes paid by the purchaser.

3. Payments for surveying,clearing,grading, and draining, and government assessments (incurred at the time or purchase or later) for public roadways, sewers, and sidewalks.

4. Cost of removal of any existing structures(less proceeds from sale of salvaged material).

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Land Improvements

Land is not a depreciable Asset, butLand Improvements are.

Land Improvements: Costs that increase the usefulness of the land.

Examples: -Parking lot surfaces, -Driveways, -Fences, and -Lighting systems.Land Improvements have limited useful lives:Costs are charged to a separate Land Improvement account so that their costs can be allocated to the periods they benefit.

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Buildings

The cost of buildings include many costs; the purchase price plus the following:

Title fees

Cost of purchase or construction

Attorney fees

Brokeragefees

Taxes

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Machinery and Equipment

Purchaseprice

Taxes

Transportation

charges

Installing,assembling, andtesting

Insurance whilein transit

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Exercise 2

Exercise 1

Quick Study 1


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Lump-Sum Asset Purchase

P1

The total cost of a combined purchase of land and building is separated on the basis of their relative market values.

On January 1, Matrix, Inc. purchased land and building for $200,000 cash. The appraised values (FMV) are building, $162,500, and land, $87,500.

How much of the $200,000 purchase price will be charged to the building and land accounts?

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Balance Sheet

Income Statement

AcquisitionCost

Expense

Cost

Allocation

(Unused)

(Used)

Depreciation

C2

Depreciation is the process of allocating the cost of a plant asset to expense in the accounting periods benefiting from its use.

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Factors in Computing Depreciation

The calculation of depreciation requires three amounts for each asset:

  • Cost $50,000

  • Salvage Value $5,000

  • Useful Life 5 Years

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Depreciation Methods

C 2

  • Straight-line

  • Units-of-production

  • Declining-balance

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Depreciation

Expense for Period

Cost - Salvage ValueUseful life

=

Depreciation

Expense per Year

$50,000 - $5,0005 years

$9,000

=

=

Straight-Line Method

P2

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Salvage Value

DepreciationRate

=

(100% ÷ 5 years)

= 20% per year

Straight-Line Method

P2

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Depreciation

Repair

Expense

Expense

Early Years

High

Low

Later Years

Low

High

Early years’ total expense approximates later years’ total expense.

Declining Balance Method

P2

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Step 1:

Straight-line rate

100 % ÷ Useful life = 100% ÷ 5 = 20%

=

Step 2:

Double-decliningbalance rate

= 2 × Straight-line rate = 2 × 20% = 40%

Step 3:

Depreciationexpense

Beginning periodbook value

Double-decliningbalance rate

=

×

$20,000 for 2009 = 40%× $50,000

Double-Declining-Balance Method

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Double-Declining-Balance Method

P2

2009 Depreciation:

40% × $50,000 = $20,000

2010 Depreciation:

40% × ($50,000 - $20,000) = $12,000

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Below salvage value

Double-Declining-Balance Method

P2

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We usually must force depreciation expense in the

last year so that book value equals salvage value.

Double-Declining-Balance Method

P2

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Exercise 5

Exercise 8


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Step 1:

Depreciation

Per Unit

Cost - Salvage Value

Total Units of Production

=

Step 2:

Number of Units Producedin the Period

Depreciation

Expense

Depreciation

Per Unit

×

=

Units-of-Production Method

P2

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Units-of-Production Method

P2

On December 31, 2008, equipment was purchased for $50,000 cash. The equipment is expected to produce 100,000 units during its useful life and has an estimated salvage value of $5,000.If 22,000 units were produced in 2009, whatis the amount of depreciation expense?

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Depreciation

Per Unit

$50,000 - $5,000

100,000 units

=

= $.45 per unit

Step 2:

Depreciation

Expense

=

$.45 per unit × 22,000 units = $9,900

Units-of-Production Method

P2

Step 1:

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Units-of-Production Method

P2

No depreciation expense if the equipment is idle.

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Annual SLDepreciation

Annual ProductionDepreciation

Annual DDBDepreciation

Life in Years

Life in Years

Life in Years

Comparing Depreciation Methods

A1

P2

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Depreciation for Tax Reporting

A1

Most corporations use the Modified Accelerated Cost Recovery System (MACRS) for tax purposes.

MACRS depreciation provides for rapid write-off of an asset’s cost in order to stimulate new investment.

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Partial-Year Depreciation: SLD

Calculate the straight-line depreciation on December 31, 2009, for equipment purchased on June 30, 2009. The equipment cost $75,000, has a useful life of 10 years, and an estimated salvage value of $5,000.

Depreciation = ($75,000 - $5,000) ÷ 10

= $7,000 for all 2009

Depreciation = $7,000 × 6/12 = $3,500

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Partial-Year Depreciation: DDB

Calculate the double-declining balance depreciation on December 31, 2009, for equipment purchased on June 30, 2009. The equipment cost $75,000, has a useful life of 10 years, and an estimated salvage value of $5,000.

Depreciation = $75,000 x 20%; => (1/10) * 2

= $15,000 for all 2009

Depreciation = $15,000 × 6/12 = $7,500

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Partial-Year Depreciation: DDB

Calculate the double-declining balance depreciation on December 31, 2009, for equipment purchased on June 30, 2009. The equipment cost $75,000, has a useful life of 10 years, and an estimated salvage value of $5,000. Compute 2nd year (2010) depreciation??

1st Year Depreciation = $15,000 × 6/12 = $7,500;

2nd Year Depreciation = $(75,000 – 7,500) x 20%;

= $13,500 for all 2010

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Exercise 9

Exercise 10


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Book value at date of change

Salvage value at date of change

Remaining useful life at date of change

Change in Estimates for Depreciation

On January 1, 2009, equipment was purchased that cost $30,000, has a useful life of 10 years, and no salvage value. During 2012, the useful life was revised to eight years (five years remaining).

Calculate depreciation expense for the year ended December 31, 2012, using the straight-line method.

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Exercise 11:-Calculate BV at the end of 2nd year;

-Subtract NEW Salvage Value;

-Depreciate using NEW Useful Life.




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If the amounts involved are not material, most companies expense the item.

Additional Expenditures

P3

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Exercise 14 expense the item.

#1: Age = AD / Annual Depreciation; Depr. =(Cost / UL);

#2: JE = Capitalize Major Expenditure (Structural Repairs);

#3: New Book Value = Old BV + Major Expenditure;#4: Current Year’s Depreciation

=New Book value / New useful Life


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Disposals of Plant Assets expense the item.

1. Update depreciation to the date of disposal.

2. Calculate BV @ date of Disposal

4. Record (Journalize) disposal by:

Recording cashreceived (debit)or paid (credit).

3. Recording again (credit)

or loss (debit).

Removing accumulateddepreciation (debit).

Removing the asset cost (credit).

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Discarding plant assets l.jpg

If Cash > BV, record a gain (credit). expense the item.

If Cash < BV, record a loss (debit).

If Cash = BV, no gain or loss.

Recording again (credit)

or loss (debit).

Discarding Plant Assets

Journalize disposal by:

Update depreciation to the date of disposal.

Recording cashreceived (debit)or paid (credit).

Removing accumulateddepreciation (debit).

Removing the asset cost (credit).

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Disposal of Assets expense the item.

On September 30, 2009, Evans Company sells a machine that originally cost $100,000 for $60,000 cash. The machine was placed in service on January 1, 2006. It was depreciated using the straight-line method with an estimated salvage value of $20,000 and a useful life of 10 years.

1. UPDATE DEPRECIATION (Partial Year)

2. CALCULATE BV = (Cost – AD)

3. CALCULATE GAIN (LOSS) = (Cash – BV)

4. JOURNALIZE DISPOSAL

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Disposal of Assets expense the item.

1. Update depreciation to the date of disposal

Annual Depreciation ($100,000 - $20,000) ÷ 10 Yrs. = $8,000

Depreciation to September 30, 2009:9/12 × $8,000 = $6,000

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2. Determine Book Value of Asset expense the item.

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If Cash > BV, record a gain (credit). expense the item.

If Cash < BV, record a loss (debit).

If Cash = BV, no gain or loss.

3. Determine Gain or Loss on Disposal

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Record the Disposal (Journalize) expense the item.

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Exercise 16 expense the item.

Exercise 17


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Natural Resources: expense the item. Cost Determination and Depletion

Natural Resources —assets that are physically consumed when used.Example: Timber, mineral deposits, and oil and gas fields. Since they are consumed when used, they are also called wasting assets.


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Natural Resources: expense the item. Cost Determination and Depletion

Cost Determination and Depletion

1. Natural resources are recorded at cost, which includes all expenditures necessary to acquire the resource and prepare it for its intended use.

2. Depletion is the process of allocating the cost of a natural resource to the period when it is consumed.

3. Natural resources are reported on the balance sheet at cost less accumulated depletion.

4. The depletion expense per period is based on theunits extracted.


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Step 1: expense the item.

Depletion

Per Unit

Cost - Salvage Value

Total Units of Capacity

=

Step 2:

Units Extracted and Sold in Period

Depletion

Expense

Depletion

Per Unit

×

=

Natural Resources:Cost Determination and Depletion

P5

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Depletion of Natural Resources expense the item.

P5

Apex Mining acquired a tract of land containing ore deposits. Total costs of acquisition and development were $1,000,000 and Apex estimates the land contained 40,000 tons of ore. During the first year of operations Apex extracted and sold 13,000 tons of ore.

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Depletion expense l.jpg

Depletion expense the item.

Per Unit

$1,000,000 - $0

40,000 tons

=

= $25 per ton

Depletion Expense

P5

Step 1:

Step 2:

=

Depletion

Expense

$25 per ton × 13,000 Tons = $325,000

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Depletion of Natural Resources expense the item.

Plant Assets Used in Extracting: When the usefulness of plant assets used in extracting resources is directly related to the depletion of the natural resource,

its cost is depreciated using the units-of-production method in proportion to the depletion of the natural resource.


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Intangible Assets expense the item.

P6

Noncurrent assetswithout physicalsubstance.

Often provideexclusive rightsor privileges.

IntangibleAssets

Usually acquired for operational use.

Useful life isoften difficultto determine.

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Patents expense the item.

Copyrights

Leaseholds

Leasehold Improvements

Franchises & Licenses

Goodwill

Trademarks & Trade Names

Record at current cash equivalent cost, including purchase price, legal fees, and filing fees.

Cost Determination and Amortization

P6

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Types of Intangibles expense the item.

Patents

The exclusive right granted to its owner to manufacture and sell a patented item or use a process for 20 years. A patent is generally amortized, using the straight-line method, over its useful life not to exceed 20 years.

Matrix, Inc. purchased a patent for $10,000. The patent is expected to have a useful life of 10 years.

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Leaseholds expense the item.

The rights the lessor grants to the lessee under the terms of a lease. Most leases have a determinable life.

Types of Intangibles

P6

Copyrights

The exclusive right to publish and sell a musical, literary, or artistic work during the life of the creator plus 70 years.

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Franchises and Licenses expense the item.

The right granted by a company or the government to deliver a product or service under specified conditions.

Types of Intangibles

P6

Leasehold Improvements

A lessee may pay for alterations or improvements to the leased property such as partitions, painting, and storefronts. These costs are usually amortized over the term of the lease.

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Types of Intangibles expense the item.

P6

Trademarks and Trade Names

A symbol, name, phrase, or jingle identified with a company, product, or service. Indefinite life.

Cost of developing, maintaining, or enhancing the value of the trademark or trade name (eg. Advertising)is charged to expense.

Purchased trademark is an asset.

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Goodwill expense the item.

P6

Goodwill

Occurs when onecompany buysanother company.

Only purchased goodwill is an intangible asset.

Goodwill is not amortized. It is testedeach year to determine if there has beenany impairment in carrying value.

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Other Intangibles: expense the item.

-Software, -Covenant not-to-compete, -Customer lists, etc.


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Net Sales expense the item.

Average Total Assets

Total Asset

Turnover

=

Total Asset Turnover

A2

Provides information about a company’s efficiency in using its assets.

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