201Lec09.

PPTX

Long
Long -- Lived
Lived Assets
Assets

Property, Plant &

Equipment (PP&E)
Have physical substance
Used in business (not
just investment)
Not for sale to
customers

Intangible Assets
Consist of:
legal rights
processes
name recognition
patient lists
contracts
licenses
goodwill
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GAAP
GAAPrules
rules and
andissues
issues regarding
regardingLong
LongLived
LivedAssets
Assets
Purchase - companies must record plant assets at cost.
Cost consists of all expenditures necessary to acquire an
asset and make it ready for use.
Improvements, called capital expenditures,
are added to the asset account. Extend

life, efficiency or capacity

Repairs, maintenance and recurring
are expensed immediately.

costs
Called

revenue expenditures.
Record Depreciation or Amortization Expense
each year if asset has a limited life.

Determining
Determiningthe
theCost
Cost of
of Plant
PlantAssets
Assets

Land

(not land improvements. See later)

Debit the land account for costs such as:

1) the cash purchase price,
2) closing costs such as title and attorneys fees,
3) real estate brokers commissions, and
4) Accrued property taxes and other liens on the land
assumed by the purchaser.
5) Costs to prepare the land for use such as grading,
filling, clearing, razing net of salvage proceeds
Land has unlimited life so NO depreciation expense

Determining
Determiningthe
theCost
Cost of
of Plant
PlantAssets
Assets

Land Improvements
Limited useful lives.
Expense (depreciate) the cost of land improvements
over their useful lives.
Examples are driveways,
parking lots, fences,
landscaping, and
underground sprinklers.

Determining
Determiningthe
theCost
Cost of
of Plant
PlantAssets
Assets

Buildings

Purchase costs:
Purchase price, closing costs (attorneys fees, title
insurance, etc.) and real estate brokers commission.
Remodeling and replacing roof, floors, electrical wiring, and
plumbing.

Construction costs:
Contract price plus payments for architects fees, building
permits, interest and taxes during construction period and
excavation costs.
Chuck Co.
Internatio
nal
headquart
ers

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5

Determining
Determiningthe
theCost
Cost of
of Plant
PlantAssets
Assets

Equipment

Debit the equipment account for costs such as:

cash purchase price
sales taxes
freight charges
insurance during transit paid by the purchaser
expenditures required in assembling, installing, and
testing the unit
Reduce by rebates

Determining
Determiningthe
theCost
Cost of
of Plant
PlantAssets
Assets
Stays on balance sheet at cost less accumulated

depreciation (called book value).

This is

NOT intended to equal MARKET value.

One exception, if permanent decline (called impairment)
then write down asset to market value.
Spread cost over useful life to depreciation expense.
Not a valuation but rather an allocation
Gain or loss will be recorded when disposed.

Depreciation
Depreciation rules
rulesin
in general
general
GAAP allows choice of several depreciation methods.
- Choose separate method for each asset category
Goal is to reflect best measure of assets
contribution to operations over its useful life.

- Depreciable Cost = Portion of asset that will be

depreciated = Cost less salvage value*
*Salvage value is estimated value at end of assets useful life*
*Useful life is estimated time asset will be used in your business

Method used for taxes is different than on books!

Called MACRS (Modified Accelerated Cost Recovery System)

Depreciation
Depreciation Methods
Methods-- SL
SL
A
N
N
U
A
L

E
X
P
E
N
S
E
Y E A R OF ASSET LIFE

I.

STRAIGHT LINE (SL) formula:

Base

(Cost - Salvage value ) x

Rate

1/(useful life)

Expense is same amount for each year.

Depreciation
Depreciation Methods
Methods-- DDB
DDB
A
N
N
U
A
L

E
X
P
E
N
S
E
Y E A R OF ASSET LIFE

II. DOUBLE DECLINING BALANCE (DDB) formula:

Base

(Cost Accum Depreciation) x

Rate

2 / (useful life)

Considered an accelerated method since more

depreciation in early years that later ones.

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Depreciation
Depreciation Methods
Methods-- Units
Units
A
N
N
U
A
L

E
X
P
E
N
S
E

Up/Down - Depends on usage

YEAR OF ASSET LIFE

III. UNITS OF ACTIVITY(Units) formula:

Base

Rate

(Current Units Used) x (Unit Rate*)

*Unit Rate = Cost - Salvage value
Life in Units

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Example: Depreciation calculations

Chuck Co. purchased a small delivery truck on Jan 1, 2012.
Cost
$30,000
Expected salvage value
$3,000
Estimated useful life in years
5
Estimated useful life in miles 100,000
Required: Compute depreciation using the following.
(a) Straight-Line.
(b) Units-of-Activity.
(c) Declining Balance.

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Example: (a) Straight Line

Year

Depreciable
Cost
x

Rate =

Annual
Expense

Accum.
Deprec.

Book
Value

2012

$ 27,000 *

20% *

$ 5,400

$ 5,400

$ 24,600

2013

27,000

20

5,400

10,800

19,200

2014

27,000

20

5,400

16,200

13,800

2015

27,000

20

5,400

21,600

8,400

2016

27,000

20

5,400

27,000

3,000

* $30,000 cost less $3,000 estimated salvage value

* 1 / 5 years times 100 (to convert to percent)

Cost
30,000
-Acc Depr (5,400)

Variation: Assume the delivery truck was purchased on 4/1/12.

2012 depreciation = $5,400 x 9/12 = $4,050.
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Example: (b) Double Declining Balance

Cost less

2 x SL

2012

30,000

40%

2013

18,000

2014

Year

Accum Depr x Rate =

Annual
Expense

Accum.
Deprec.

Book
Value

$ 12,000

$ 12,000

$ 18,000

40

7,200

19,200

10,800

10,800

40

4,320

23,520

6,480

2015

6,480

40

2,592

26,112

3,888

2016

3,888

40

27,000

3,000

888*

* Annual expense in last year limited. Book value cant be lower than estimated salvage value.

Variation: Assume the delivery truck was purchased on 4/1/12.

2012 depreciation = $12,000 x 9/12 = $9,000.

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Example: (c) Units

Year

Miles
Used

Rate Per
Mile
=

2012

15,000 *

$ 0.27*

2013

30,000 *

2014

Annual
Expense

Accum.
Deprec.

Book
Value

$ 4,050

$ 4,050

$ 25,950

0.27

8,100

12,150

17,850

20,000 *

0.27

5,400

17,550

12,450

2015

25,000 *

0.27

6,750

24,300

5,700

2016

10,000 *

0.27

2,700

27,000

3,000

* Assume these additional facts.

* ($30,000 3,000) / 100,000 units = 27 cents per mile

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GAAP
GAAPRule
Rulerequiring
requiring Revised
Reviseddepreciation
depreciationAmount
Amount

Recompute depreciation expense for

future periods for improvements that
modify useful life/salvage or
if you later discover that original
useful life or salvage estimates

were

inaccurate.
Use Book Value at date of change

Fix
Or pair
Re ily
Da

instead of Cost and Revised Life (and/or

salvage) in depreciation calculations.

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Example:
Original Cost = 250,000, Salvage = 50,000, Life =
10 Years, SL used.
After 4 years, revise total life to 6 years
Revised salvage = 0.
Years 1, 2, 3, 4 : Depreciation Expense = (250,000 - 50,000) / 10
= 20,000 per year.
Years 5, 6:

Depreciation Expense

= [(Book Value) - New Salvage ] / (Remaining life)

= [(250,000-80,000) - 0] / (6-4)
= 85,000 per year.
Total: 4 x 20,000 + 2 x 85,000 = 250,000

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Recording
Recordinggain
gainor
orloss
losson
onDISPOSAL
DISPOSAL

Sale or discarding of Plant Assets

Compare the book value*of the asset with the
proceeds (if any) received from the sale.
If proceeds exceed the book value,
record a credit to gain on disposal.
If proceeds are less than the book value,
record a debit to loss on disposal.

* If disposed in the middle of the year, record

depreciation expense for the partial year
before the disposal.

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Example: Disposals
Assume that Chuck Co in the previous example sells the truck
at the end of 2013 for cash of $20,000. Also assume straight
line depreciation was elected. (accumulated = $10,800)
Cash

20,000

Accumulated depreciation

10,800

Trucks

30,000

Gain on disposal

800

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Example: Disposals
Variation: Assume that the sales price was instead only
$10,000.

Cash

10,000

Accumulated depreciation
Loss on disposal
Trucks
30,000

10,800
9,200

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Intangible
IntangibleAssets
Assets

Patents: Exclusive right to make and sell

Copyrights: Like patent for artistic work
Trademark: Protect name, phrase, jingle
Franchise/license: Contract to use above

Goodwill
License
Trademark
Franchise
Patent
Copyright

Goodwill: Extra value of ongoing business

Research & Development (R&D): costs incurred
in creating intangibles

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GAAP
GAAPrules
rulesand
andissues
issuesregarding
regardingIntangibles
Intangibles

Capitalize (record as asset) only cost of purchase, filing

and legal fees in acquiring or defending in court.
Amortize (typically straight line) asset over useful life.

- Debit Amortization Expense and credit Asset Account

- Goodwill and trademarks have unlimited life (No amortization.)

- Impairment rule applies to all intangibles

R & D is to be treated as EXPENSE (Not capitalized.)

-Theory is its impossible to track how much results in

asset or is used up.
Examples: advertising, trial
and error product research.

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Miscellaneous
Miscellaneous

Lease versus Buy Assets

- Cash flow differences
Typically lower up front cost for lease, lower monthly payments

- Income statement difference

Rent expense or Depreciation + interest expense

- Balance sheet difference

Assets and liabilities not reported with lease

Example:
Lease
Buy
Assets $1,000,000
$11,000,000
Liabilities
100,000
10,100,000
Debt/assets

10%

91.8%
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Miscellaneous
Miscellaneous

Return on Asset Ratio indicates the amount of net

income generated by each dollar of assets.

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Miscellaneous
Miscellaneous

Asset Turnover Ratio indicates how efficiently a

company uses its assets to generate sales.

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