Long-Term Assets

Conceptual Learning Objectives

C1: Explain the cost principle for
computing the cost of plant assets.
C2: Explain depreciation for partial years
and changes in estimates.
C3: Distinguish between revenue and
capital expenditures and account
for them.

8-2

Analytical Learning Objectives

A1: Compute total asset turnover and
apply it to analyze a companys use
of assets.

8-3

Procedural Learning Objectives

P1: Compute and record depreciation using the
straight-line, units-of-production, and decliningbalance methods.
P2: Account for asset disposal through discarding or
selling an asset.
P3: Account for natural resource assets and their
depletion.
P4: Account for intangible assets.
P5: Appendix 8A Account for asset exchanges (see
text for details).
8-4

C1

Plant Assets
Tangible in Nature

Actively Used in Operations

Expected to Benefit Future Periods

Called Property, Plant & Equipment

8-5

C1

Plant Assets
Decl
ine in
asse
over
t valu
its u
e
sefu
l life

Acquisition
Acquisition
1.
1. Compute
Compute cost
cost

2.
2.
3.
3.

Use
Use
Allocate
Allocate cost
cost to
to periods
periods
benefited
benefited
Account
Account for
for subsequent
subsequent
expenditures
expenditures

Disposal
Disposal
4.
4. Record
Record disposal
disposal

8-6

C1

Land, Land Improvements, and

Buildings
Land is not a depreciable asset.
Land Improvements are. (Examples include: parking
lots, lighting, parking meters, etc.)

The cost of buildings may include:

Cost of purchase or
construction

Title fees
Attorney fees

Brokerage
fees
Taxes

8-7

C1

Machinery and Equipment

Purchase
price

Taxes

Transportation
charges
Installing,
assembling, and
testing

Insurance while
in transit
8-8

C1

Lump-Sum Asset Purchase

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

On
On January
January 1,
1, Matrix,
Matrix, Inc. purchased
purchased land and
and a building for
$200,000
$200,000 cash.
cash. The
The appraised
appraised values
values of
of each were:
building
building == $162,500
$162,500
land
land == $$ 87,500
87,500

How much of the $200,000 purchase price will be

allocated to the building and land accounts?
8-9

C1

Lump-Sum Asset Purchase

8-10

P1

Depreciation

Depreciation is the process of allocating

the cost of a plant asset to expense in the
accounting periods benefiting from its use.
Balance Sheet

Acquisition
Cost
(Amount yet to
be depreciated)

Income Statement
Cost
Allocation

Expense
(Amount
depreciated)

8-11

Factors in Computing
Depreciation

P1

The calculation of depreciation requires

three factors for each asset:
1.

Cost

2.

Salvage value

3.

Useful life
8-12

P1

Depreciation Methods

1.

Straight-line

2.

Units-of-production

3.

Declining-balance

8-13

P1

Straight-Line Method

Depreciation
=
expense for period
Depreciation
expense per year =

Cost - Salvage value

Useful life
$50,000 - $5,000
= $9,000
5 years

8-14

P1

Straight-Line Method

Salvage
Salvage Value
Value == book
book
value
value in
in the
the last
last year.
year.

Depreciation
=
Rate

(100% 5 years)

= 20% per year

8-15

P1

Units-of-Production Method
Step 1:
Depreciation
per unit

Step 2:
Depreciation
expense

Cost - Salvage value

Total units of production

Number of
Depreciation units produced
per unit
in the period

8-16

P1

Units-of-Production Method
On December 31, 2012, 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 2013, what
is the amount of depreciation expense?

8-17

P1

Units-of-Production Method

Step 1:
Depreciation =
per unit

$50,000 - $5,000
100,000 units

= $.45 per unit

Step 2:
Depreciation
= $.45 per unit 22,000 units = $9,900
expense

8-18

P1

Units-of-Production Method

Maximum amount
that can be taken!

No depreciation expense if the equipment is idle

8-19

P1

Declining-Balance Method
Depreciation
Expense
Early Years
High
Later Years

Low

Repairs
Expense
Low
High

Early years total expense approximates

later years total expense.

8-20

P1

Double-Declining-Balance Method
Step 1:
Straight-line
= 100 % Useful life = 100% 5 = 20%
rate
Step 2:
Double-decliningbalance rate = 2 Straight-line rate = 2 20% =
40%
Step 3:
Depreciation Double-decliningBeginning period
=

expense
balance rate
book value
40% $50,000 = $20,000 for 2013
8-21

P1

Double-Declining-Balance Method

(1st YEAR)
2013 Depreciation Expense:
40% $50,000 = $20,000
(2nd YEAR)
2014 Depreciation Expense:
40% ($50,000 - $20,000) = $12,000
Cost Accumulated Depreciation = Book Value
$50,000 -

$20,000

= $30,000 BV
8-22

P1

Double-Declining-Balance Method

Below salvage value!

8-23

P1

Double-Declining-Balance Method

$45,000- 43,520 = $1,480

We
We usually
usually must
must force
force depreciation
depreciation expense
expense in
in the
the
last
last year
year so
so that
that book
book value
value equals
equals salvage
salvage value
value.
8-24

Annual DDB
Depreciation

Annual Units of Production

Depreciation

Annual SL
Depreciation

P1

Comparing Depreciation
Methods

Life in Years
Life in Years

Life in Years
8-25

P1

Depreciation for Tax Reporting

Most corporations use the Modified
Accelerated Cost Recovery System
(MACRS) for tax purposes.
MACRS depreciation provides for rapid
write-off of an assets cost in order to
stimulate new investment.

8-26

C2

Partial-Year Depreciation
Calculate the straight-line depreciation on
December 31, 2013, for equipment purchased
on June 30, 2013. The equipment cost $75,000,
has a useful life of 10 years and an estimated
salvage value of $5,000.
Depreciation
Depreciation for
for 12
12 mos.
mos. == ($75,000
($75,000 -- $5,000)
$5,000) 10
10
== $7,000
$7,000 for
for all
all 2013
2013
Partial
Partial year
year (July
(July 11 -- December
December 31):
31):
6
Depreciation
= $3,500
Depreciation for
for 66 mos.
mos. == $7,000
$7,000 6//12
12 mos.
mos. = $3,500
8-27

C2

Change in Estimates for

Depreciation

On January 1, 2013, equipment was purchased at

a cost of $30,000, has a useful life of 10 years, and
no salvage value. Three years later, at the start of
2016, the useful life was revised to eight years
total (five years remaining).
Calculate depreciation expense for the year ended
December 31, 2016, using the straight-line method.

Book value at
date of change

Salvage value at
date of change

Remaining useful life at date of change

8-28

C2

Change in Estimates for

Depreciation

8-29

P1

Reporting Depreciation

8-30

C3

Additional Expenditures

Note:
Note: IfIf the
the amounts
amounts involved
involved are
are not
not

material,
material, most
most companies
companies expense
expense the
the item.
item.
8-31

C3

Revenue and Capital

Expenditures

8-32

P2

Disposals of Plant Assets

Update depreciation
to the date of disposal
Journalize disposal by:

Recording cash
received (debit)
or paid (credit)
Removing accumulated
depreciation (debit)

Recording a
gain (credit)
or loss (debit)
Removing the
asset cost (credit)
8-33

P2

Disposals of Plant Assets

If Cash received
> BV,depreciation
record a gain (credit)
Update

to the
date
of disposal.
If Cash received
< BV,
record
a loss (debit)
If Cash received = BV, no gain or loss

Journalize disposal by:

Recording cash
received (debit)
Removing accumulated
depreciation (debit)

Recording a
gain (credit)
or loss (debit)
Removing the
asset cost (credit)

8-34

P2

Disposals of Plant Assets

On September 30, 2013, Evans Company sells a machine that
originally cost $100,000 for $60,000 cash. The machine was placed
in service on January 1, 2010. It was depreciated using the
straight-line method with an estimated salvage value of $20,000
and a useful life of 10 years.

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

Depreciation to September 30, 2013: 9/12 $8,000 = $6,000

8-35

P2

Determine Book Value of Asset

8-36

P2

Determine Gain or Loss on

Disposal
If Cash received > BV, record a gain (credit)
If Cash received < BV, record a loss (debit)
If Cash received = BV, no gain or loss

8-37

P2

Recording the Sale of

a Plant Asset

8-38

P3

Natural Resources:
Cost Determination and Depletion
Step 1:
Depletion
per unit

Cost - Salvage value

Total units of capacity

Step 2:
Depletion
expense

Depletion
per unit

Units extracted

and sold in
period

8-39

P3

Depletion of Natural Resources

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.

8-40

P3

Depletion Expense

Step 1:
Depletion
per unit

$1,000,000 - $0
40,000 tons

$25 per ton

Step 2:
Depletion =
$25 per ton
expense

13,000 tons = $325,000

8-41

P4

Intangible Assets

Noncurrent
Noncurrent assets
assets
without
without physical
physical
substance
substance

Often
Often provide
provide
exclusive
exclusive rights
rights
or
or privileges
privileges

Intangible
Assets
Useful
Useful life
life is
is
often
often difficult
difficult
to
to determine
determine

Usually
Usually acquired
acquired
for
for operational
operational
use
use
8-42

P4

Cost Determination and

Amortization
An intangible
asset is recorded
at cost when
purchased.

o
o
o
o
o
o
o

Patents
Copyrights
Leaseholds
Leasehold improvements
Franchises & licenses
Goodwill
Trademarks & trade
names

8-43

P4

Types of Intangibles
Patents

The exclusive right granted to its owner to manufacture and sell

a patented item or use a process for 20 years. A patents cost 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.

8-44

P4

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

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

8-45

P4

Types of Intangibles
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.

Franchises and Licenses

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

Trademarks and Trade Names

A symbol, name, phrase, or jingle identified with a
company, product, or service.
8-46

P4

Goodwill

Goodwill
Occurs when one
company buys
another company

Only purchased
goodwill is an
intangible asset

Goodwill is not amortized. It is tested

each year to determine if there has been
any impairment in book (carrying) value.
8-47

A1

Total Asset Turnover

Total asset
turnover

Net sales
Average total assets

Provides
Provides information
information about
about aa companys
companys
efficiency
efficiency in
in using
using its
its assets
assets

8-48

End of Chapter 8

8-49