Transcript Financial Accounting and Accounting Standards

Financial
Accounting,
Seventh Edition
Chapter
9
Plant Assets,
Natural
Resources, and
Intangible
Assets
Slide
9-1
Section 1 – Plant Assets
Plant assets include land, land improvements, buildings,
and equipment (machinery, furniture, tools).
Major characteristics include:
“Used in operations” and not for resale.
Possess physical substance.
Long-term in nature and usually depreciated.
Referred to as property, plant, and equipment; plant and
equipment; and fixed assets.
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9-2
Depreciation
Depreciation is the process of allocating the
cost of a plant asset to expense in the
accounting periods in a systematic and
rational manner benefiting from its use.
Income Statement
Balance Sheet
Acquisition
Cost
(Unused)
Cost
Allocation
Expense
(Used)
Cost (of an asset) Less Accumulated Depreciation = BOOK VALUE
BOOK VALUE
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9-3

MARKET VALUE
Depreciation
Factors in Computing Depreciation
Actual Cost
Estimated
Useful Life
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9-4
Estimated
Salvage Value
Depreciation
Depreciation Methods
Objective is to select the method that best measures
an asset’s contribution to revenue over its useful life.
Examples include:
(1) Straight-line method.
(2) Units-of-Activity method.
(3) Declining-balance method.
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9-5
Straight Line Depreciation Method
Depreciation
=
Expense for Period
Cost - Salvage Value
Useful life in periods
On January 1, 2012, an equipment was
purchased for $50,000 cash. The
equipment has an estimated useful life
of 5 years and an estimated salvage
value of $5,000. Record the journal
entry for Depreciation on December
31, 2012.
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9-6
Straight Line Depreciation Method
Depreciation
=
Expense for Period
Cost - Salvage Value
Useful life in periods
December 31, 2010:
Depreciation expense . . . . . . . . . . . . . . . . .
9,000
Accumulated Depreciation . . . . . . . . . . . . . .
Slide
9,000
9-7
Straight Line Depreciation Method
Year
2012
2013
2014
2015
2016
Depreciation
Expense
(debit)
Accumulated
Depreciation
(credit)
Accumulated
Depreciation
$
$
$
$
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9-8
9,000
9,000
9,000
9,000
9,000
45,000
$
9,000
9,000
9,000
9,000
9,000
45,000
9,000
18,000
27,000
36,000
45,000
Book
Value
$ 50,000
41,000
32,000
23,000
14,000
5,000
Units-of-Activity Depreciation Method
Step 1:
Depreciation =
Per Unit
Step 2:
Depreciation
Expense
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9-9
=
Cost - Salvage Value
Total Units of Production
Number of
Depreciation
× Units Produced
Per Unit
in the Period
Units-of-Activity Depreciation Method
On January 1, 2012, an 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 2012, what
is the amount of depreciation expense?
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9-10
Units-of-Activity Depreciation Method
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9-11
Units-of-Activity Depreciation Method
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9-12
Year
Units
2012
2013
2014
2015
2016
22,000
28,000
32,000
18,000
100,000
Depreciation
Expense
Accumulated
Depreciation
$
$
$
9,900
12,600
14,400
8,100
45,000
9,900
22,500
22,500
36,900
45,000
Book
Value
$ 50,000
40,100
27,500
27,500
13,100
5,000
Declining Balance Depreciation Method
Depreciation
Expense
Early Years
High
Later Years
Low
Repair
Expense
Low
High
Early years’ total expense approximates
later years’ total expense.
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9-13
Double Declining Balance Depreciation Method
On January 1, 2012, equipment was purchased for
$50,000 cash. The equipment has an estimated useful
life of 5 years, and a salvage value of $5,000.
Slide
9-14
Double Declining Balance Depreciation Method
Slide
9-15
Double Declining Balance Depreciation Method
Year
2012
2013
2014
2015
2016
Depreciation
Expense
Accumulated
Depreciation
$
$
$
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9-16
20,000
12,000
7,200
4,320
2,592
46,112
20,000
32,000
39,200
43,520
46,112
Book
Value
$ 50,000
30,000
18,000
10,800
6,480
3,888
Double Declining Balance Depreciation Method
What would happen if Salvage Value is $15,000?
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9-17
Knowledge Check:
A company purchased a cash register on
January 1 for $5,400. This register has a
useful life of 10 years and a salvage value
of $400. What would be the depreciation
expense for the second-year of its useful
life using the double-declining-balance
method?
1.
2.
3.
4.
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9-18
$ 800.
$ 864.
$1,000.
$1,080.
Comparing Depreciation Methods
Annual Production
Depreciation
Annual SL
Depreciation
$10,000
$8,000
$6,000
$4,000
$2,000
P2
$0
1
2
3
Life in Years
4
5
$16,000
$14,000
$12,000
$10,000
$8,000
$6,000
$4,000
$2,000
$0
1
2
Annual DDB
Depreciation
$20,000
$15,000
$10,000
$5,000
$0
1
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9-19
2
3
Life in Years
4
3
Life in Years
5
4
5
Which method of Depreciation should a company choose?
Year
2012
2013
2014
2015
2016
Str. Line
Depreciation
Expense
DDB
Depreciation
Expense
$
$
$
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9-20
9,000
9,000
9,000
9,000
9,000
45,000
$
20,000
12,000
7,200
4,320
1,480
45,000
Knowledge Check:
The straight-line depreciation
method and the double-decliningbalance depreciation method:
1.
2.
3.
4.
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9-21
Yield the same depreciation expense each
year.
Yield the same book value each year
Yield the same total depreciation over an
asset's useful life.
Are the only acceptable methods of
depreciation for financial reporting.
Depreciation and Income Taxes
Depreciation and Income Taxes
IRS does not require taxpayer to use the same
depreciation method on the tax return that is used in
preparing financial statements.
IRS requires the straight-line method or a special
accelerated-depreciation method called the Modified
Accelerated Cost Recovery System (MACRS).
MACRS is NOT acceptable under GAAP.
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9-22
Change in Estimates for Depreciation
Predicted
salvage value
Predicted
useful life
So depreciation
is an estimate.
Over the life of an asset, new information may
come to light that indicates the
original estimates were inaccurate.
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9-23
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. On January 1, 2012, the useful life
was revised to 8 years total (5 years remaining).
Calculate depreciation expense for the year
ended December 31, 2012, using the
straight-line method.
Book value at
date of change
–
Salvage value at
date of change
Remaining useful life at date of change
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9-24
Change in Estimates for Depreciation
Slide
9-25
Knowledge Check Question:
When originally purchased, a vehicle had an
estimated useful life of 8 years. The vehicle cost
$23,000 and its estimated salvage value was
$1,500. After 4 years of straight-line
depreciation, the asset's total estimated useful
life was revised from 8 years to 6 years and
there was no change in the estimated salvage
value. The depreciation expense in year 5 equals:
1.
2.
3.
4.
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9-26
$ 5,375.00.
$ 2,687.50.
$ 5,543.75.
$10,750.00.
Let us analyze Financial Statements!
Compare the partial balance sheets of the following 3 companies
and rank them in order of their asset’s average age? (All amounts
are in millions of dollars)
Company A
Company B
Company C
Total Property, Plant
and Equipment
19,231
8,130
3,273
Less: Accumulated
Depreciation
(10,962)
(3,285)
(882)
Net Prop. Plant &
Equipment
$8,269
$4,845
$2,391
Slide
9-27
Disposal of Plant Assets
Companies dispose of plant assets in three ways —
Retirement, Sale, or Exchange (appendix).
Record depreciation up to the date of disposal.
Eliminate asset by (1) debiting Accumulated Depreciation, and
(2) crediting the asset account.
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9-28
Disposal of Plant Assets
Update depreciation
to the date of disposal.
Journalize disposal by:
Recording cash
received (debit)
or paid (credit).
Removing accumulated
depreciation (debit).
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9-29
Recording a
gain (credit)
or loss (debit).
Removing the
asset cost (credit).
Disposal of Plant Assets
If Cash > BV, record a gain (credit).
Update depreciation
If Cash <toBV,
loss (debit).
the record
date of adisposal.
If Cash = BV, no gain or loss.
Journalize disposal by:
Recording cash
received (debit)
or paid (credit).
Removing accumulated
depreciation (debit).
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9-30
Recording a
gain (credit)
or loss (debit).
Removing the
asset cost (credit).
Disposal of Plant Assets
Evans Company placed a machine in service
on January 1, 2008. The machine cost
$100,000, and was depreciated using
the straight-line method with an
estimated salvage value of $20,000 and
a useful life of 10 years. The company’s
accounting period ends on December 31.
On September 30, 2012, the machine
was sold for $60,000 cash.
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9-31
Update Depreciation to the Date of Disposal
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9-32
Determine Book Value of Asset
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9-33
Determine Gain or Loss on Disposal
If Cash > BV, record a gain (credit).
If Cash < BV, record a loss (debit).
If Cash = BV, no gain or loss.
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9-34
Determine Gain or Loss on Disposal
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9-35
Disposal of Plant Assets
Evans Company placed a machine in service on
January 1, 2008. The machine cost
$100,000, and was depreciated using the
straight-line method with an estimated
salvage value of $20,000 and a useful life of
10 years. The company’s accounting period
ends on December 31. On September 30,
2012, the machine was sold for $65,000
cash.
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9-36
Knowledge Check Question:
Bronco Company sold an equipment for
cash of $40,500. Accumulated
depreciation on the sale date was
$34,000 and a loss of $1,800 was
recognized on the sale. What was the
original cost of the asset?
1.
2.
3.
4.
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9-37
$72,700
$75,900
$76,300
$42,300
Section 2 – Natural Resources
Natural resources consist of standing timber and
underground deposits of oil, gas, and minerals.
Distinguishing characteristics:
Physically extracted in operations.
Replaceable only by an act of nature.
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9-38
Section 2 – Natural Resources
Cost - price needed to acquire the resource and
prepare it for its intended use.
Depletion - allocation of the cost to expense in a rational
and systematic manner over the resource’s useful life.
Depletion is to natural resources as depreciation is to
plant assets.
Companies generally use units-of-activity method.
Depletion generally is a function of the units
extracted.
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9-39
Natural Resources
Total cost,
including
exploration and
development,
is charged to
depletion expense
over periods
benefited.
Extracted from
the natural
environment
and reported
at cost less
accumulated
depletion.
Examples: oil, coal, gold
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9-40
Cost of Depletion of Natural Resources
Step 1:
Depletion
Per Unit
=
Step 2:
Depletion
Expense
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9-41
=
Cost - Salvage Value
Total Units of Capacity
Depletion
Per Unit
×
Units
Extracted and
Sold in Period
Cost of Depletion of Natural Resources
Chevy Oil and Gas Company acquired a tract of
land containing crude oil deposits. Total costs of
acquisition and development were $100,000,000.
The company estimates the land contains 800,000
barrels of oil, and that the land will have a
salvage value of $20,000,000 when the mine is
stripped . During the first year of operations, they
extracted and sold 13,000 barrels of crude.
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9-42
Cost of Depletion of Natural Resources
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9-43
Section 3 – Intangible Assets
Intangible assets are rights, privileges, and competitive
advantages that do not possess physical substance.
Intangible assets are categorized as having either a
limited life or an indefinite life.
Common types of intangibles:
Patents
Copyrights
Franchises or licenses
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9-44
Trademarks and trade
names
Goodwill
Accounting for Intangible Assets
Valuation
Purchased Intangibles:
Recorded at cost.
Includes all costs necessary to make the intangible
asset ready for its intended use.
Internally Created Intangibles:
Generally expensed.
Only capitalize direct costs incurred in perfecting title
to the intangible, such as legal costs.
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9-45
Accounting for Intangible Assets
Illustration: Assume that National Labs purchases a patent
at a cost of $60,000. National estimates the useful life of
the patent to be eight years. National records the annual
amortization as follows.
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9-46
Accounting for Intangible Assets
Goodwill
Includes exceptional management, desirable location,
good customer relations, skilled employees, high-quality
products, etc.
Only recorded when an entire business is purchased.
Goodwill is recorded as the excess of ...
purchase price over the FMV of the identifiable net
assets acquired.
Internally created goodwill should not be capitalized.
Goodwill is NOT amortized, but tested for impairment
at the end of every year.
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9-47
Goodwill Example
Excerpted from Form 10-K for MICROSOFT, Inc.
For the Fiscal Year Ended June 30, 2012
NOTE 9 — BUSINESS COMBINATIONS
On October 13, 2011, we acquired all of the issued and outstanding
shares of Skype Global S.á r.l. (“Skype”), a leading global provider of
software applications and related Internet communications products
based in Luxembourg, for $8.6 billion, primarily in cash. The major
classes of assets and liabilities to which we allocated the purchase
price were goodwill of $7.1 billion, identifiable intangible assets of
$1.6 billion, and unearned revenue of $222 million. The goodwill
recognized in connection with the acquisition is primarily attributable
to our expectation of extending Skype’s brand and the reach of its
networked platform, while enhancing Microsoft’s existing portfolio of
Slide
real-time communications products and services.
9-48
Knowledge Check Question:
In 2006, YOUTUBE Company’s Net Assets
had a market value of $60 million, but
Google Inc paid $1,200 million to purchase
YOUTUBE. At the end of 2012, Google
makes assessment of the market value of
YOUTUBE to be $3,000 million. In 2012,
Google must record an impairment expense
of:
1.
2.
3.
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9-49
4.
$2,940 million
$1,800 million
$1,140 million
$0
Statement Presentation and Analysis
Illustration: In its 2012 Balance Sheet, Microsoft Corporation
reported a beginning balance of total assets of $108,704 million,
and ending balance of $121,271 million. Microsoft’s net sales
revenue for the year was $73,723 million. Determine the Asset
Turnover Ratio for Microsoft Corporation.
Net Sales
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9-50
÷
Average Total
Assets
Asset Turnover
Ratio
=
The following data was reported by MICROSOFT, APPLE
and WALMART.
Sales Revenue
$ 73,723
$108,249
$446,950
Total Assets,
Ending Balance
$108,704
$75,183
$180,702
Total Assets,
Beg. Balance
$121,271
$116,371
$193,406
Asset Turnover
Ratio
0.64
1.13
2.39
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The following data was reported by MICROSOFT, APPLE
and WALMART.
Sales Revenue
$ 73,723
$108,249
$446,950
Property, Plant
and Equipment,
Ending Balance
$8,269
$7,777
$112,324
Property, Plant
and Equipment,
Beg. Balance
$8,162
$4,768
$107,878
PPE Turnover
Ratio
8.97
17.26
4.06
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End of Chapter 9
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