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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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Presentation Transcript
slide1

10

  • C H A P T E R

Investments in Property,

Plant, and Equipment

and in Intangible Assets

learning objective 1
Learning Objective 1
  • Identify the two major categories of long-term operating assets: property, plant, and equipment and intangible assets.
learning objective 2
Learning Objective 2
  • Understand the factors important in deciding whether to acquire a long-term operating asset.
learning objective 3
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.
assets acquired by purchase
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.

assets acquired by purchase11
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.

match lease terms
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

operating lease
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.

capital lease
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.

classifying leases

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?

assets acquired by self construction
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

acquisition of several assets at once define the terms below
Acquisition of SeveralAssets at Once— Define the Terms Below
  • Basket Purchase

Relative Fair Market Value Method

example basket purchase
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

learning objective 4
Learning Objective 4
  • Compute straight-line and units-of-production depreciation expense for plant and equipment.
define these depreciation terms
Define these Depreciation Terms
  • Depreciation
  • Book Value
  • Salvage Value
methods of depreciation
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.
example depreciation methods
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.
what is the formula for the straight line method

Annual Depreciation

Expense

=

Make the Journal Entry

Do the calculation.

=

=

What is the Formula for theStraight-Line Method?
what is the formula for the units of production method

Per Unit

Depreciation

=

Make the Journal Entry

Depreciation

Expense

=

Do the calculation.

Depreciation

Expense

=

=

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

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
more depreciation terms defined
More Depreciation TermsDefined.
  • Natural Resources
  • Depletion
slide29

Example: Depletion

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.

learning objective 5
Learning Objective 5
  • Account for repairs and improvements of property, plant, and equipment.
expenditures on existing assets
Expenditures on Existing Assets
  • Ordinary expenditures
  • Capitalized expenditures
learning objective 6
Learning Objective 6
  • Identify whether a long-term operating asset has suffered a decline in value and record the decline.
what is the impairment test

Book value

(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?
learning objective 7
Learning Objective 7
  • Record the discarding and selling of property, plant, and equipment.
slide35

Discarding 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?

slide36

Discarding 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 pays $300 to have the conveyor dismantled and removed, what is the appropriate entry?

slide37

Selling 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 scraps the conveyor after only 4 years of service, there will be a loss of $3,300. What is the appropriate journal entry?

slide38

Selling 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 the conveyor is sold for $600 after 5 full years of service, what is the appropriate journal entry?

slide39

Selling 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 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.

learning objective 8
Learning Objective 8
  • Account for the acquisition and amortization of intangible assets and understand the special difficulties associated with accounting for intangibles.
what are intangible assets
What are Intangible Assets?
  • Rights and privileges that are
  • Amortization
amortizing a patent

Calculate the amortization for each of the eight years.

Benefit

Amortizing a Patent

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

PATENT

goodwill
Goodwill

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.

slide45

Inventory $750,000

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:

slide46

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.

learning objective 9
Learning Objective 9
  • Use the fixed asset turnover ratio as a measure of how efficiently a company is using its property, plant, and equipment.
expanded material learning objective 10
Expanded MaterialLearning Objective 10
  • Compute declining-balance and sum-of-the-years’-digits depreciation expense for plant and equipment.
accelerated depreciation define each term
Accelerated DepreciationDefine each term.
  • Declining-Balance Method
  • Sum-of-the-Years’-Digits Method (SYD)
accelerated depreciation methods

Double-Declining Balance

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.

expanded material learning objective 11
Expanded MaterialLearning Objective 11
  • Account for changes in depreciation estimates.
change in estimates
Change in Estimates

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.

this completes chapter 10
This completes Chapter 10

You Can't Talk Yourself Out of

A Problem You Behaved

Yourself Into.

Dr. Stephen Covey